What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-04-28 compared with 2021-10-27 · 182 added, 235 removed, 429 unchanged (49% of the section changed)

3 unchanged sentences

(in thousands)

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Current assets:

23 unchanged sentences

Total liabilities 1,131,812 1,177,443

Commitments and contingencies (Note 14)

Stockholders’ equity:

2 unchanged sentences

81,802 and 81,712 shares issued and outstanding at

September 30, 2021 and December 31, 2020, respectively

March 31, 2022 and December 31, 2021, respectively

Additional paid-in capital 141,771 145,810

8 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Pega Cloud $ 78,369 $ 54,776 $ 219,520 $ 147,080

Maintenance 83,188 74,670 237,531 220,587

Software license 38,295 39,784 272,148 187,023

Subscription services $ 170,033 $ 143,419

Subscription license 137,533 111,509

Perpetual license 7,440 5,452

Consulting 61,301 53,119

1 unchanged sentence

Cost of revenue

Pega Cloud 25,524 19,717 72,132 56,238

Maintenance 5,293 5,478 16,074 16,645

Software license 656 691 1,962 2,354

Subscription services 32,030 28,343

Subscription license 622 620

Perpetual license 34 30

Consulting 55,511 53,454

6 unchanged sentences

Total operating expenses 269,490 229,451

(Loss) from operations ( 65,337 ) ( 61,832 ) ( 62,544 ) ( 137,597 )

Income from operations 18,620 1,601

Foreign currency transaction gain (loss) 2,876 ( 5,098 )

1 unchanged sentence

Interest expense ( 1,946 ) ( 1,880 )

(Loss) income on capped call transactions ( 14,735 ) 18,989 ( 7,543 ) 19,816

(Loss) on capped call transactions ( 30,560 ) ( 19,117 )

Other income, net 2,741 106

13 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Net (loss) $ ( 379 ) $ ( 6,617 )

Other comprehensive (loss) income, net of tax

Unrealized gain (loss) on available-for-sale securities 53 ( 166 ) 1,184 ( 66 )

Unrealized gain on available-for-sale securities 222 1,010

Foreign currency translation adjustments ( 2,770 ) ( 730 )

9 unchanged sentences

December 31, 2020 80,890 $ 809 $ 204,432 $ 339,879 $ ( 2,948 ) $ 542,172

Equity component of convertible senior notes, net — — 61,604 — — 61,604

Repurchase of common stock ( 87 ) ( 1 ) ( 5,999 ) — — ( 6,000 )

Issuance of common stock for stock compensation plans 564 6 ( 23,017 ) — — ( 23,011 )

Stock-based compensation — — 23,199 — — 23,199

Cash dividends declared ($ 0.03 per share)

— — — ( 2,405 ) — ( 2,405 )

Other comprehensive (loss) — — — — ( 414 ) ( 414 )

Net (loss) — — — ( 25,372 ) — ( 25,372 )

March 31, 2020 80,076 $ 801 $ 196,310 $ 383,142 $ ( 13,642 ) $ 566,611

Repurchase of common stock ( 23 ) — ( 2,199 ) — — ( 2,199 )

Issuance of common stock for stock compensation plans 349 3 ( 14,085 ) — — ( 14,082 )

Issuance of common stock under the employee stock purchase plan 18 — 1,403 — — 1,403

Stock-based compensation — — 25,674 — — 25,674

Cash dividends declared ($ 0.03 per share)

— — — ( 2,413 ) — ( 2,413 )

Other comprehensive income — — — — 2,028 2,028

Net (loss) — — — ( 20,740 ) — ( 20,740 )

June 30, 2020 80,420 $ 804 $ 207,103 $ 359,989 $ ( 11,614 ) $ 556,282

Repurchase of common stock ( 94 ) ( 1 ) ( 10,628 ) — — ( 10,629 )

Issuance of common stock for stock compensation plans 371 4 ( 22,524 ) — — ( 22,520 )

Stock-based compensation — — 27,931 — — 27,931

Cash dividends declared ($ 0.03 per share)

— — — ( 2,422 ) — ( 2,422 )

Other comprehensive (loss) — — — — ( 53 ) ( 53 )

Net (loss) — — — ( 19,267 ) — ( 19,267 )

September 30, 2020 80,697 $ 807 $ 201,882 $ 338,300 $ ( 11,667 ) $ 529,322

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share amounts)

Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss)

Stockholders’ Equity

of Shares Amount

December 31, 2020 80,890 $ 809 $ 204,432 $ 339,879 $ ( 2,948 ) $ 542,172

Cumulative-effect adjustment from adoption of ASU 2020-06 , net

9 unchanged sentences

March 31, 2021 81,246 $ 812 $ 140,558 $ 340,223 $ ( 2,668 ) $ 478,925

Repurchase of common stock ( 81 ) ( 1 ) ( 10,245 ) — — ( 10,246 )

Issuance of common stock for stock compensation plans 267 3 ( 16,199 ) — — ( 16,196 )

Issuance of common stock under the employee stock purchase plan 24 1 2,858 — — 2,859

Stock-based compensation — — 30,698 — — 30,698

Cash dividends declared ($ 0.03 per share)

— — — ( 2,445 ) — ( 2,445 )

Other comprehensive income — — — — 1,582 1,582

Net income — — — 37,291 — 37,291

June 30, 2021 81,456 $ 815 $ 147,670 $ 375,069 $ ( 1,086 ) $ 522,468

December 31, 2021 81,712 $ 817 $ 145,810 $ 276,449 $ ( 6,988 ) $ 416,088

Repurchase of common stock ( 242 ) ( 2 ) ( 22,581 ) — — ( 22,583 )

6 unchanged sentences

Net (loss) — — — ( 379 ) — ( 379 )

September 30, 2021 81,670 $ 817 $ 148,098 $ 316,150 $ ( 5,433 ) $ 459,632

March 31, 2022 81,802 $ 818 $ 141,771 $ 273,615 $ ( 9,536 ) $ 406,668

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(in thousands)

Nine Months Ended

September 30,

Three Months Ended

Operating activities

Net (loss) $ ( 379 ) $ ( 6,617 )

Adjustments to reconcile net (loss) to cash (used in) operating activities

Adjustments to reconcile net (loss) to cash provided by operating activities

Stock-based compensation 28,227 30,100

Loss (gain) on capped call transactions 7,543 ( 19,816 )

Deferred income taxes ( 9,295 ) ( 15,068 )

Loss on capped call transactions 30,560 19,117

Amortization of deferred commissions 17,221 11,496

Amortization of debt discount and issuance costs 2,025 10,405

Lease expense 3,919 3,238

Amortization of intangible assets and depreciation 4,171 7,006

Amortization of investments 2,916 252

Foreign currency transaction loss (gain) 4,983 ( 2,545 )

Foreign currency transaction (gain) loss ( 2,876 ) 5,098

Other non-cash ( 1,100 ) 1,634

Change in operating assets and liabilities, net ( 55,332 ) ( 34,354 )

Cash (used in) operating activities ( 5,321 ) ( 26,257 )

Cash provided by operating activities 15,116 21,650

Investing activities

4 unchanged sentences

Investment in property and equipment ( 6,657 ) ( 1,784 )

Cash provided by (used in) investing activities 42,730 ( 210,701 )

Cash (used in) provided by investing activities ( 6,082 ) 15,489

Financing activities

Proceeds from issuance of convertible senior notes — 600,000

Purchase of capped calls related to convertible senior notes — ( 51,900 )

Payment of debt issuance costs — ( 14,527 )

Proceeds from employee stock purchase plan 2,446 2,288

1 unchanged sentence

Common stock repurchases ( 35,910 ) ( 34,655 )

Cash (used in) provided by financing activities ( 91,431 ) 449,630

Cash (used in) financing activities ( 35,918 ) ( 34,794 )

Effect of exchange rate changes on cash and cash equivalents ( 310 ) ( 1,536 )

9 unchanged sentences

Securities and Exchange Commission (“SEC”) regarding interim financial reporting.

Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements.

These financial statements should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2020.

Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021.

In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.

All intercompany transactions and balances were eliminated in consolidation.

The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2021.

NEW ACCOUNTING PRONOUNCEMENTS

Convertible debt

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity.

The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature.

As a result, after adoption, entities will no longer separately present in stockholders’ equity an embedded conversion feature for such debt.

Additionally, the debt discount resulting from separating the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life.

Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, “Derivatives and Hedging”, or (2) a convertible debt instrument was issued at a substantial premium.

The standard also requires the convertible instruments’ impact on diluted earnings per share (“EPS”) be determined using the if-converted method.

The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021.

Upon adoption, the book value of the Company’s Convertible Senior Notes (the “Notes”) increased by $ 69.5 million to $ 587.7 million, and retained earnings increased by $ 9.4 million.

The retained earnings adjustment reflects the tax effected difference between the value of the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.

Debt" for additional information.

The operating results for the interim periods presented do not necessarily indicate the expected results for the full year 2022.

Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the current year presentation.

Such reclassifications did not affect total revenues, operating income, or net income.

MARKETABLE SECURITIES

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

(in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value

2 unchanged sentences

$ 202,371 $ 7 $ ( 2,977 ) $ 199,401 $ 203,659 $ 2 $ ( 847 ) $ 202,814

As of September 30, 2021, marketable securities’ maturities ranged from October 2021 to September 2024, with a weighted-average remaining maturity of 1.2 years.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of March 31, 2022, marketable securities’ maturities ranged from April 2022 to September 2024, with a weighted-average remaining maturity of 1.02 years.

RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

(in thousands)

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Accounts receivable $ 171,181 $ 182,717

6 unchanged sentences

(Dollars in thousands)

September 30, 2021

March 31, 2022

1 year or less $ 226,052 62 %

4 unchanged sentences

(Dollars in thousands)

September 30, 2021

March 31, 2022

2022 $ 72,143 20 %

4 unchanged sentences

$ 362,027 100 %

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Major clients

Clients accounting for 10% or more of the Company’s total receivables:

September 30, 2021 December 31, 2020

Client A 12 % *

* Client accounted for less than 10% of total receivables.

March 31, 2022 December 31, 2021

Accounts receivable 4 % 1 %

Unbilled receivables 15 % 15 %

Total receivables 11 % 10 %

Contract assets

Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as completing a related performance obligation.

(in thousands)

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Contract assets (1)

2 unchanged sentences

10,292 10,643

$ 22,057 $ 23,173

(1) Included in other current assets.

3 unchanged sentences

(in thousands)

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Deferred revenue $ 290,873 $ 275,844

2 unchanged sentences

(1) Included in other long-term liabilities.

The change in deferred revenue in the nine months ended September 30, 2021 was primarily due to new billings in advance of revenue recognition, offset by $ 212.0 million of revenue recognized that was included in deferred revenue as of December 31, 2020.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The change in deferred revenue in the three months ended March 31, 2022 was primarily due to new billings in advance of revenue recognition and $ 124.9 million of revenue recognized during the period that was included in deferred revenue as of December 31, 2021.

DEFERRED COMMISSIONS

(in thousands)

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Deferred commissions (1)

2 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2022 2021

2 unchanged sentences

(1) Included in selling and marketing expense .

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

GOODWILL AND OTHER INTANGIBLES

Change in goodwill:

Nine Months Ended

September 30,

Three Months Ended

(in thousands)

2 unchanged sentences

Currency translation adjustments 108

September 30, $ 81,954

March 31, $ 82,031

Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.

September 30, 2021

March 31, 2022

(in thousands) Useful Lives Cost Accumulated Amortization Net Book Value (1)

15 unchanged sentences

(1) Included in other long-term assets.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amortization of intangible assets:

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2022 2021

Cost of revenue

$ 629 $ 647 $ 1,887 $ 1,940

Selling and marketing

$ 972 $ 1,002

$ 1,002 $ 1,018 $ 3,006 $ 3,051

Future estimated intangibles assets amortization:

(in thousands)

September 30, 2021

2026 and thereafter 1,201

March 31, 2022

Remainder of 2022 $ 2,914

OTHER ASSETS AND LIABILITIES

Other current assets

(in thousands) March 31, 2022 December 31, 2021

Income tax receivables $ 27,679 $ 25,691

Contract assets 11,765 12,530

Other 34,964 29,787

$ 74,408 $ 68,008

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other long-term assets

(in thousands) March 31, 2022 December 31, 2021

Deferred income taxes $ 188,155 $ 180,656

Deferred commissions 125,220 135,911

Right of use assets 87,212 87,521

Capped call transactions 29,404 59,964

Property and equipment 28,603 26,837

Intangible assets 13,091 14,063

Contract assets 10,292 10,643

Other 34,684 26,006

$ 516,661 $ 541,601

Other current liabilities

(in thousands) March 31, 2022 December 31, 2021

Operating lease liabilities $ 4,855 $ 6,989

Dividends payable 2,454 2,454

$ 7,309 $ 9,443

Other long-term liabilities

(in thousands) March 31, 2022 December 31, 2021

Deferred revenue $ 6,612 $ 5,655

Other 8,046 7,844

$ 14,658 $ 13,499

Corporate headquarters

In February 2021, the Company agreed to accelerate its exit from its corporate headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $ 18 million, which was amortized over the remaining lease term.

The accelerated exit from this lease reduced our future lease liabilities by $ 21.1 million and accelerated corporate headquarters-related depreciation.

In February 2021, the Company agreed to accelerate its exit from its previous corporate headquarters to October 1, 2021, in exchange for a one-time payment from its landlord of $ 18 million, which was amortized over the remaining lease term.

The exit accelerated depreciation on the related leasehold improvements and reduced the Company’s future lease liabilities by $ 21.1 million and right of use assets by $ 20.3 million.

On March 31, 2021 the Company leased office space at One Main Street, Cambridge, Massachusetts, to serve as its corporate headquarters.

5 unchanged sentences

Rent first becomes payable on August 1, 2022.

Base rent for the first year is approximately $ 6 million and will increase by 3 percent annually.

Base rent for the first year is approximately $ 6 million and will increase by 3 % annually.

In addition, the Company will receive an improvement allowance from the landlord of up to $ 11.8 million.

1 unchanged sentence

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2022 2021

4 unchanged sentences

$ 6,663 $ 2,146

(1) The decrease in fixed lease costs in three and nine months ended September 30, 2021 was due to the modification of the corporate headquarters lease.

(1) The lower fixed lease costs in the three months ended March 31, 2021 was due to the modification of the corporate headquarters lease.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Right of use assets and lease liabilities

(in thousands) September 30, 2021 December 31, 2020

(in thousands) March 31, 2022 December 31, 2021

Right of use assets (1)

6 unchanged sentences

(2) Included in other current liabilities.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Weighted-average remaining lease term and discount rate for the Company’s leases were:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Weighted-average remaining lease term 7.5 years 7.7 years

4 unchanged sentences

Maturities of lease liabilities:

(in thousands) September 30, 2021

(in thousands) March 31, 2022

Remainder of 2022 $ 3,887

Thereafter 48,515

2027 and thereafter 48,381

Total lease payments 114,742

2 unchanged sentences

Cash flow information

Nine Months Ended

September 30,

Three Months Ended

(in thousands) 2022 2021

12 unchanged sentences

Before September 1, 2024, noteholders may convert their Notes in the following circumstances:

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

• During any calendar quarter beginning after June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter.

1 unchanged sentence

• Upon certain corporate events or distributions or if the Company calls any Notes for redemption, noteholders may convert before the close of business on the business day immediately before the related redemption date (or, if the Company fails to pay the redemption price in full on the redemption date, until the Company pays the redemption price).

As of September 30, 2021, the Notes were not eligible for conversion.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of March 31, 2022, the Notes were not eligible for conversion.

Repurchase rights

2 unchanged sentences

A Fundamental Change relates to mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.

Impact of the Notes

The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021.

The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature.

New Accounting Pronouncements" for additional information.

Until January 1, 2021, the Notes were separated into liability and equity components.

• The initial carrying amount of the liability component was calculated by measuring a similar debt instrument’s fair value that does not have an associated conversion feature.

The excess of the Notes’ principal amount over the initial carrying amount of the liability component, the debt discount, was amortized as interest expense over the Notes’ contractual term.

• The equity component was recorded as an increase to additional paid-in capital and not remeasured.

Upon adoption of ASU 2020-06, the book value of the Notes increased by $ 69.5 million to $ 587.7 million, and retained earnings increased by $ 9.4 million.

Carrying value of the Notes:

(in thousands) September 30, 2021 December 31, 2020

(in thousands) March 31, 2022 December 31, 2021

Principal $ 600,000 $ 600,000

Unamortized debt discount — ( 71,222 )

Unamortized issuance costs ( 8,560 ) ( 9,278 )

Convertible senior notes, net $ 591,440 $ 590,722

Conversion options $ — $ 84,120

Issuance costs — ( 2,037 )

Deferred taxes — ( 20,479 )

Additional paid-in capital $ — $ 61,604

Interest expense related to the Notes:

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2022 2021

1 unchanged sentence

$ 1,125 $ 1,125

Amortization of debt discount

— 3,807 — 9,060

Amortization of issuance costs

$ 1,844 $ 1,798

$ 1,802 $ 5,497 $ 5,400 $ 13,105

PEGASYSTEMS INC.

1 unchanged sentence

The effective interest rate for the Notes:

Nine Months Ended

September 30,

Three Months Ended

Weighted-average effective interest rate 1.2 % 1.2 %

Future payments of principal and contractual interest:

September 30, 2021

March 31, 2022

(in thousands) Principal Interest Total

4 unchanged sentences

$ 600,000 $ 13,500 $ 613,500

$ 600,000 $ 14,988 $ 614,988

Capped call transactions

In February 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions.

The Capped Call Transactions cover 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s common stock.

The Capped Call Transactions cover approximately 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s common stock.

The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $ 196.44 .

The cap price of the Capped Call Transactions is subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including mergers and tender offers.

The cap price of the Capped Call Transactions is subject to adjustment upon specified extraordinary events affecting the Company, including mergers and tender offers.

The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated following the governing documents, may not represent a fair value measurement.

The Capped Call Transactions are classified as other long-term assets and remeasured to fair value at the end of each reporting period, resulting in a non-operating gain or loss.

The Capped Call Transactions are classified as other long-term assets and remeasured to fair value each reporting period, resulting in a non-operating gain or loss.

Change in capped call transactions:

Nine Months Ended

September 30,

Three Months Ended

(in thousands) 2022 2021

January 1, $ 59,964 $ 83,597

Issuance — 51,900

Fair value adjustment ( 30,560 ) ( 19,117 )

September 30, $ 76,054 $ 71,716

March 31, $ 29,404 $ 64,480

Credit facility

In November 2019, and as amended as of February 2020, July 2020, and September 2020, the Company entered into a five-year $ 100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association.

The Company may use borrowings to finance working capital needs and for general corporate purposes.

In November 2019, and as since amended, the Company entered into a five-year $ 100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association.

The Company may use borrowings for general corporate purposes and to finance working capital needs.

Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $ 200 million.

1 unchanged sentence

The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions.

The Company is also required to comply with financial covenants, including:

• Beginning with the fiscal quarter ended September 30, 2020 and ending with the fiscal quarter ended December 31, 2021, at least $ 200 million in cash and investments held by Pegasystems Inc.

• Beginning with the quarter ended March 31, 2022, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.

As of September 30, 2021 and December 31, 2020, the Company had no outstanding borrowings under the Credit Facility.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company is required to comply with financial covenants, including:

• Beginning with the fiscal quarter ended March 31, 2022 and ending with the fiscal quarter ended December 31, 2022, Pegasystems Inc.

must maintain at least $ 200 million in cash, investments, and availability under the Revolving Credit Loan.

• Beginning with the quarter ended March 31, 2023, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up for certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.

As of March 31, 2022 and December 31, 2021, the Company had no outstanding borrowings under the Credit Facility.

FAIR VALUE MEASUREMENTS

2 unchanged sentences

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows:

4 unchanged sentences

The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model.

The valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield.

The valuation model use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield.

The Company applies judgment when determining expected volatility.

The Company considers both historical and implied volatility levels of the underlying equity security.

The Company’s venture investments are recorded at fair value based on valuation methods, including observable public companies and transaction prices and unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.

The Company’s venture investments are recorded at fair value based on multiple valuation methods, including observable public companies and transaction prices and unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.

Assets and liabilities measured at fair value on a recurring basis:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

(in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

8 unchanged sentences

Changes in venture investments:

Nine Months Ended

September 30,

Three Months Ended

(in thousands) 2022 2021

6 unchanged sentences

included in other comprehensive income 2,502 1,220

September 30, $ 9,713 $ 7,927

March 31, $ 12,830 $ 9,756

The carrying value of certain other financial instruments, including receivables and accounts payable, approximates fair value due to these items’ short maturity.

Fair value of the Notes

The Notes’ fair value (inclusive of the conversion feature embedded in the Notes) was $ 676.2 million as of September 30, 2021 and $ 706.5 million as of December 31, 2020.

The Notes’ fair value (including the conversion feature embedded in the Notes) was $ 573.0 million as of March 31, 2022 and $ 642.0 million as of December 31, 2021.

The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 2 in the fair value hierarchy.

Debt" for additional information.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Geographic revenue

Three Months Ended

September 30, Nine Months Ended

September 30,

(Dollars in thousands)

$ 217,272 58 % $ 194,568 62 %

$ 132,016 52 % $ 120,971 53 % $ 515,881 58 % $ 436,199 61 %

Other Americas 45,751 12 % 11,901 4 %

3 unchanged sentences

$ 376,307 100 % $ 313,499 100 %

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenue streams

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands)

2021 2020 2021 2020

Pega Cloud $ 78,369 $ 54,776 $ 219,520 $ 147,080

Perpetual license $ 7,440 $ 5,452

Subscription license 137,533 111,509

Revenue recognized at a point in time 144,973 116,961

Maintenance 79,716 75,561

Pega Cloud 90,317 67,858

Consulting 61,301 53,119

Revenue recognized over time 231,334 196,538

Perpetual license 2,874 3,852 20,922 16,568

Term license 35,421 35,932 251,226 170,455

Revenue recognized at a point in time 38,295 39,784 272,148 187,023

$ 256,268 $ 225,951 $ 895,469 $ 718,917

(in thousands) Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Total revenue $ 376,307 $ 313,499

Three Months Ended

(in thousands) 2022 2021

Pega Cloud $ 90,317 $ 67,858

Client Cloud 118,609 110,602 488,757 391,042

Maintenance 79,716 75,561

Term license 35,421 35,932 251,226 170,455

Cloud subscription (1)

196,978 165,378 708,277 538,122

Subscription services 170,033 143,419

Subscription license 137,533 111,509

Subscription 307,566 254,928

Perpetual license 7,440 5,452

1 unchanged sentence

$ 376,307 $ 313,499

(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).

Remaining performance obligations ("Backlog")

Expected future revenue from existing non-cancellable contracts:

As of September 30, 2021:

Pega Cloud Client Cloud Consulting Total

(Dollars in thousands) Maintenance Term license Perpetual license

As of March 31, 2022:

(Dollars in thousands) Subscription services Subscription

license Perpetual

license Consulting Total

Maintenance Pega Cloud

1 year or less

5 unchanged sentences

$ 349,082 $ 689,484 $ 67,719 $ 14,038 $ 56,014 $ 1,176,337 100 %

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of September 30, 2020:

Pega Cloud Client Cloud Consulting Total

(Dollars in thousands) Maintenance Term license Perpetual license

As of March 31, 2021:

(Dollars in thousands) Subscription services Subscription

license Perpetual

license Consulting Total

Maintenance Pega Cloud

1 year or less

5 unchanged sentences

$ 322,637 $ 564,316 $ 58,331 $ 10,278 $ 24,248 $ 979,810 100 %

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

STOCK-BASED COMPENSATION

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2022 2021

4 unchanged sentences

Research and development

6,231 5,765 19,343 17,066

General and administrative

$ 28,227 $ 30,100

$ 28,695 $ 27,925 $ 89,483 $ 76,755

Income tax benefit

$ ( 5,311 ) $ ( 5,991 )

As of September 30, 2021, the Company had $ 131.7 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.1 years.

Nine Months Ended

September 30, 2021

As of March 31, 2022, the Company had $ 200.8 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.3 years.

Three Months Ended

March 31, 2022

(in thousands) Shares Total Fair Value

5 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(Dollars in thousands) 2022 2021

1 unchanged sentence

Effective income tax benefit rate 95 % 73 %

The change in the effective income tax benefit rate was primarily due to the impact of discrete tax items on a proportionately larger (loss) before income taxes in the nine months ended September 30, 2020.

The most significant discrete items were excess tax benefits from stock-based compensation and the impact of changes in statutory tax rates applicable to our U.K.-based deferred tax assets.

As of September 30, 2021 and December 31, 2020, the Company’s deferred tax assets were $ 157.9 million and $ 88.1 million, respectively.

The change in the effective income tax benefit rate was primarily due to the impact of discrete tax items which were proportionately larger on a lower loss before income taxes.

Stock-based compensation increases the variability of our effective tax rates.

The impact of stock-based compensation on a given period depends on our profitability, the attributes of the stock compensation awards the Company grants, and award holders' exercise behavior.

(LOSS) PER SHARE

1 unchanged sentence

Diluted (loss) per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, and convertible senior notes.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Calculation of (loss) per share:

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands, except per share amounts) 2022 2021

7 unchanged sentences

Outstanding anti-dilutive stock options and RSUs (4)

5,815 6,622 6,136 6,166

(1) The shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period.

If the outstanding conversion options were fully exercised, the Company would issue an additional 4.4 million shares.

(1) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.

(3) The Company’s Capped Call Transactions convert to 4.4 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible).

(2) The shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period.

If the outstanding conversion options were fully exercised, the Company would issue an additional approximately 4.4 million shares.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(3) The Company’s Capped Call Transactions represent the equivalent of approximately 4.4 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible).

2 unchanged sentences

These awards may be dilutive in the future.

COMMITMENTS AND CONTINGENCIES

Leases" for additional information.

Legal Proceedings

In addition to the matters below, the Company is, or may become, involved in a variety of claims, demands, suits, investigations, and proceedings that arise from time to time relating to matters incidental to the ordinary course of the Company’s business, including actions concerning contracts, intellectual property, employment, benefits, and securities matters.

Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources, and other factors.

In addition, as the Company is a party to ongoing litigation, it is at least reasonably possible that our estimates will change in the near term and the effect may be material.

As of March 31, 2022 and December 31, 2021, the Company has no accrued losses for litigation.

Pegasystems Inc.

& Business Process Management Inc.

On July 3, 2019, the Company filed suit in Massachusetts federal court against Appian Corp.

(“Appian”) and Business Process Management, Inc.

(“BPM”) relating to a BPM “Market Report” that Appian had used to promote itself against the Company.

Pegasystems Inc.

& Business Process Management Inc., No.

1:19-cv-11461 (D.

On April 15, 2022, each of the parties filed motions for summary judgment with the court.

The Company continues to believe the counterclaims brought by Appian against the Company are without merit, and the Company intends to vigorously pursue its claims against Appian and defend against the counterclaims brought against the Company in this matter.

The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the Company’s belief that the damages claimed by Appian fail to satisfy the required legal standard, the status of the proceeding, and due to the uncertainty as to how a jury may rule if this ultimately proceeds to trial.

Pegasystems Inc.

& Youyong Zou

As previously reported, the Company is a defendant in litigation brought by Appian that is currently being tried in Virginia (the “Court”) titled Appian Corp.

Pegasystems Inc.

& Youyong Zou, No.

2020-07216 (Fairfax Cty.

The jury trial began on March 21, 2022.

On April 13, 2022, Appian withdrew its claim against the Company for tortious interference with business expectancy.

On that same day, in the course of making determinations on various motions, the Court stated that if the jury finds that the Company misappropriated information that constituted Appian trade secrets and finds that the Company incorporated those trade secrets into the Company’s products or the Company’s marketing materials, the burden will then shift to the Company to prove that the sales Appian seeks as damages were not the result of the alleged misappropriation and use of the alleged trade secrets.

This legal standard has not previously been adopted by the Virginia courts.

The Company continues to believe that its sales of the products at issue were not caused by, or the result of, the alleged misappropriation of trade secrets, and is submitting evidence to the jury to that effect.

The Company is unable to reasonably estimate possible damages because, among other things, of the uncertainty as to how a jury may decide and the parties’ existing grounds for appeal based on rulings to date in the proceeding.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements