UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q


☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the quarterly period ended March 31, 2022

~~For the quarterly period ended March 31, 2021~~


☐			Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-11859

____________________________

PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter)

____________________________

Massachusetts

04-2787865

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

One ~~Rogers~~Main Street, Cambridge, MA ~~02142-1209~~02142

(Address of principal executive offices, including zip code)

(617) 374-9600

(Registrant’s telephone number, including area code)

____________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value per share	PEGA	NASDAQ Global Select Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were ~~81,281,726~~81,818,454 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on April 19, ~~2021.~~2022.

Table of Contents

PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of March 31, ~~2021~~2022 and December 31, ~~2020~~2021			3
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021			4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021			6
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021			7
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			1819
Item 3. Quantitative and Qualitative Disclosures About Market Risk			2425
Item 4. Controls and Procedures			2526

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			27
Item 1A. Risk Factors			2627
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			2628
Item 5. Other Information			28
Item 6. Exhibits			2629

Signature			2730

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)					PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
		March 31, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	172,708	$	171,899	Cash and cash equivalents	$	132,771	$	159,965
Marketable securities	Marketable securities	269,650		293,269		Marketable securities	199,401		202,814
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	442,358		465,168		Total cash, cash equivalents, and marketable securities	332,172		362,779
Accounts receivable	Accounts receivable	159,324		215,827		Accounts receivable	171,181		182,717
Unbilled receivables	Unbilled receivables	228,603		207,155		Unbilled receivables	226,052		226,714
Other current assets	Other current assets	91,868		88,760		Other current assets	74,408		68,008
Total current assets	Total current assets	922,153		976,910		Total current assets	803,813		840,218
Unbilled receivables	Unbilled receivables	108,048		113,278		Unbilled receivables	135,975		129,789
Goodwill	Goodwill	82,037		79,231		Goodwill	82,031		81,923
Other long-term assets	Other long-term assets	416,265		434,843		Other long-term assets	516,661		541,601
Total assets	Total assets	$	1,528,503	$	1,604,262	Total assets	$	1,538,480	$	1,593,531
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	24,426	$	24,028	Accounts payable	$	18,628	$	15,281
Accrued expenses	Accrued expenses	59,765		59,261		Accrued expenses	63,401		63,890
Accrued compensation and related expenses	Accrued compensation and related expenses	59,490		123,012		Accrued compensation and related expenses	54,804		120,946
Deferred revenue	Deferred revenue	244,170		232,865		Deferred revenue	290,873		275,844
Other current liabilities	Other current liabilities	16,599		20,969		Other current liabilities	7,309		9,443
Total current liabilities	Total current liabilities	404,450		460,135		Total current liabilities	435,015		485,404
Convertible senior notes, net	Convertible senior notes, net	588,418		518,203		Convertible senior notes, net	591,440		590,722
Operating lease liabilities	Operating lease liabilities	36,471		59,053		Operating lease liabilities	90,699		87,818
Other long-term liabilities	Other long-term liabilities	20,239		24,699		Other long-term liabilities	14,658		13,499
Total liabilities	Total liabilities	1,049,578		1,062,090		Total liabilities	1,131,812		1,177,443
Commitments and contingencies (Note 14)						Commitments and contingencies (Note 14)	0		0
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, 1,000 shares authorized; NaN issued		0		0
Common stock, 200,000 shares authorized; 81,246 and 80,890 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively		812		809
Preferred stock, 1,000 shares authorized; none issued						Preferred stock, 1,000 shares authorized; none issued	—		—
Common stock, 200,000 shares authorized; 81,802 and 81,712 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively						Common stock, 200,000 shares authorized; 81,802 and 81,712 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively	818		817
Additional paid-in capital	Additional paid-in capital	140,558		204,432		Additional paid-in capital	141,771		145,810
Retained earnings	Retained earnings	340,223		339,879		Retained earnings	273,615		276,449
Accumulated other comprehensive (loss)	Accumulated other comprehensive (loss)	(2,668)		(2,948)		Accumulated other comprehensive (loss)	(9,536)		(6,988)
Total stockholders’ equity	Total stockholders’ equity	478,925		542,172		Total stockholders’ equity	406,668		416,088
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,528,503	$	1,604,262	Total liabilities and stockholders’ equity	$	1,538,480	$	1,593,531

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)		PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
		Three Months Ended March 31,							Three Months Ended March 31,
				2021		2020				2022		2021
Revenue	Revenue							Revenue
Software license				$	116,961	$	93,916
Maintenance				75,561		73,695
Pega Cloud				67,858		43,466
Subscription services								Subscription services		$	170,033	$	143,419
Subscription license								Subscription license		137,533		111,509
Perpetual license								Perpetual license		7,440		5,452
Consulting	Consulting			53,119		54,514		Consulting		61,301		53,119
Total revenue	Total revenue			313,499		265,591		Total revenue		376,307		313,499
Cost of revenue	Cost of revenue							Cost of revenue
Software license				650		684
Maintenance				5,786		5,576
Pega Cloud				22,557		17,533
Subscription services								Subscription services		32,030		28,343
Subscription license								Subscription license		622		620
Perpetual license								Perpetual license		34		30
Consulting	Consulting			53,454		55,735		Consulting		55,511		53,454
Total cost of revenue	Total cost of revenue			82,447		79,528		Total cost of revenue		88,197		82,447
Gross profit	Gross profit			231,052		186,063		Gross profit		288,110		231,052
Operating expenses	Operating expenses							Operating expenses
Selling and marketing	Selling and marketing			148,739		136,024		Selling and marketing		162,236		148,739
Research and development	Research and development			62,442		58,727		Research and development		71,490		62,442
General and administrative	General and administrative			18,270		15,630		General and administrative		35,764		18,270
Total operating expenses	Total operating expenses			229,451		210,381		Total operating expenses		269,490		229,451
Income (loss) from operations				1,601		(24,318)
Foreign currency transaction (loss)				(5,098)		(5,947)
Income from operations								Income from operations		18,620		1,601
Foreign currency transaction gain (loss)								Foreign currency transaction gain (loss)		2,876		(5,098)
Interest income	Interest income			153		607		Interest income		207		153
Interest expense	Interest expense			(1,880)		(2,306)		Interest expense		(1,946)		(1,880)
(Loss) on capped call transactions	(Loss) on capped call transactions			(19,117)		(18,592)		(Loss) on capped call transactions		(30,560)		(19,117)
Other income, net	Other income, net			106		1,374		Other income, net		2,741		106
(Loss) before (benefit from) income taxes	(Loss) before (benefit from) income taxes			(24,235)		(49,182)		(Loss) before (benefit from) income taxes		(8,062)		(24,235)
(Benefit from) income taxes	(Benefit from) income taxes			(17,618)		(23,810)		(Benefit from) income taxes		(7,683)		(17,618)
Net (loss)	Net (loss)			$	(6,617)	$	(25,372)	Net (loss)		$	(379)	$	(6,617)
(Loss) per share	(Loss) per share							(Loss) per share
Basic	Basic			$	(0.08)	$	(0.32)	Basic		$	0.00	$	(0.08)
Diluted	Diluted			$	(0.08)	$	(0.32)	Diluted		$	0.00	$	(0.08)
Weighted-average number of common shares outstanding	Weighted-average number of common shares outstanding							Weighted-average number of common shares outstanding
Basic	Basic			81,004		79,808		Basic		81,680		81,004
Diluted	Diluted			81,004		79,808		Diluted		81,680		81,004

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)		PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)
		Three Months Ended March 31,							Three Months Ended March 31,
				2021		2020				2022		2021
Net (loss)	Net (loss)			$	(6,617)	$	(25,372)	Net (loss)		$	(379)	$	(6,617)
Other comprehensive income (loss), net of tax
Other comprehensive (loss) income, net of tax								Other comprehensive (loss) income, net of tax
Unrealized gain on available-for-sale securities	Unrealized gain on available-for-sale securities			1,010		100		Unrealized gain on available-for-sale securities		222		1,010
Foreign currency translation adjustments	Foreign currency translation adjustments			(730)		(514)		Foreign currency translation adjustments		(2,770)		(730)
Total other comprehensive income (loss), net of tax				280		(414)
Total other comprehensive (loss) income, net of tax								Total other comprehensive (loss) income, net of tax		$	(2,548)	$	280
Comprehensive (loss)	Comprehensive (loss)			$	(6,337)	$	(25,786)	Comprehensive (loss)		$	(2,927)	$	(6,337)

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)																		PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
		Common Stock			Additional Paid-In Capital				Retained Earnings			Accumulated Other Comprehensive (Loss)				Total Stockholders’ Equity				Common Stock					Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss)			Total Stockholders’ Equity
		Number of Shares	Amount								Number of Shares								Amount
December 31, 2019		79,599	$	796			$	140,523						$	410,919			$	(13,228)		$	539,010
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

December 31, 2020	December 31, 2020	80,890	$	809	$	204,432			$	339,879		$	(2,948)			$	542,172		December 31, 2020	80,890			$	809		$	204,432		$	339,879		$	(2,948)		$	542,172
Cumulative-effect adjustment from adoption of ASU 2020-06, net		—	—		(61,604)				9,399			—				(52,205)
Cumulative-effect adjustment from adoption of ASU 2020-06, net																			Cumulative-effect adjustment from adoption of ASU 2020-06, net	—			—		(61,604)			9,399			—			(52,205)
Repurchase of common stock	Repurchase of common stock	(70)	(1)		(9,145)				—			—				(9,146)			Repurchase of common stock	(70)			(1)		(9,145)			—			—			(9,146)
Issuance of common stock for stock compensation plans	Issuance of common stock for stock compensation plans	402	4		(25,513)				—			—				(25,509)			Issuance of common stock for stock compensation plans	402			4		(25,513)			—			—			(25,509)
Issuance of common stock under the employee stock purchase plan	Issuance of common stock under the employee stock purchase plan	24	—		2,288				—			—				2,288			Issuance of common stock under the employee stock purchase plan	24			—		2,288			—			—			2,288
Stock-based compensation	Stock-based compensation	—	—		30,100				—			—				30,100			Stock-based compensation	—			—		30,100			—			—			30,100
Cash dividends declared ($0.03 per share)	Cash dividends declared ($0.03 per share)	—	—		—				(2,438)			—				(2,438)			Cash dividends declared ($0.03 per share)	—			—		—			(2,438)			—			(2,438)
Other comprehensive income	Other comprehensive income	—	—		—				—			280				280			Other comprehensive income	—			—		—			—			280			280
Net (loss)	Net (loss)	—	—		—				(6,617)			—				(6,617)			Net (loss)	—			—		—			(6,617)			—			(6,617)
March 31, 2021	March 31, 2021	81,246	$	812	$	140,558			$	340,223		$	(2,668)			$	478,925		March 31, 2021	81,246			$	812	$	140,558		$	340,223		$	(2,668)		$	478,925

December 31, 2021																			December 31, 2021	81,712			$	817	$	145,810		$	276,449		$	(6,988)		$	416,088
Repurchase of common stock																			Repurchase of common stock	(242)			(2)		(22,581)			—			—			(22,583)
Issuance of common stock for stock compensation plans																			Issuance of common stock for stock compensation plans	297			3		(12,131)			—			—			(12,128)
Issuance of common stock under the employee stock purchase plan																			Issuance of common stock under the employee stock purchase plan	35			—		2,446			—			—			2,446
Stock-based compensation																			Stock-based compensation	—			—		28,227			—			—			28,227
Cash dividends declared ($0.03 per share)																			Cash dividends declared ($0.03 per share)	—			—		—			(2,455)			—			(2,455)
Other comprehensive (loss)																			Other comprehensive (loss)	—			—		—			—			(2,548)			(2,548)
Net (loss)																			Net (loss)	—			—		—			(379)			—			(379)
March 31, 2022																			March 31, 2022	81,802			$	818	$	141,771		$	273,615		$	(9,536)		$	406,668

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)					PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
		Three Months Ended March 31,					Three Months Ended March 31,
		2021		2020			2022		2021
Operating activities	Operating activities					Operating activities
Net (loss)	Net (loss)	$	(6,617)	$	(25,372)	Net (loss)	$	(379)	$	(6,617)
Adjustments to reconcile net (loss) to cash provided by (used in) operating activities
Adjustments to reconcile net (loss) to cash provided by operating activities						Adjustments to reconcile net (loss) to cash provided by operating activities
Stock-based compensation	Stock-based compensation	30,100		23,175		Stock-based compensation	28,227		30,100
Deferred income taxes						Deferred income taxes	(9,295)		(15,068)
Loss on capped call transactions	Loss on capped call transactions	19,117		18,592		Loss on capped call transactions	30,560		19,117
Deferred income taxes		(15,068)		(9,231)
Amortization of deferred commissions	Amortization of deferred commissions	11,496		8,497		Amortization of deferred commissions	17,221		11,496
Amortization of debt discount and issuance costs		673		1,719
Lease expense						Lease expense	3,919		3,238
Amortization of intangible assets and depreciation	Amortization of intangible assets and depreciation	7,006		4,919		Amortization of intangible assets and depreciation	4,171		7,006
Amortization of investments		1,019		0
Foreign currency transaction loss		5,098		5,947
Foreign currency transaction (gain) loss						Foreign currency transaction (gain) loss	(2,876)		5,098
Other non-cash	Other non-cash	(556)		2,478		Other non-cash	(1,100)		1,634
Change in operating assets and liabilities, net	Change in operating assets and liabilities, net	(30,618)		(49,047)		Change in operating assets and liabilities, net	(55,332)		(34,354)
Cash provided by (used in) operating activities		21,650		(18,323)
Cash provided by operating activities						Cash provided by operating activities	15,116		21,650
Investing activities	Investing activities					Investing activities
Purchases of investments	Purchases of investments	(21,051)		(1,490)		Purchases of investments	(33,690)		(21,051)
Proceeds from maturities and called investments	Proceeds from maturities and called investments	40,867		0		Proceeds from maturities and called investments	20,915		40,867
Sales of investments	Sales of investments	2,450		1,424		Sales of investments	13,350		2,450
Payments for acquisitions, net of cash acquired	Payments for acquisitions, net of cash acquired	(4,993)		0		Payments for acquisitions, net of cash acquired	—		(4,993)
Investment in property and equipment	Investment in property and equipment	(1,784)		(12,496)		Investment in property and equipment	(6,657)		(1,784)
Cash provided by (used in) investing activities		15,489		(12,562)
Cash (used in) provided by investing activities						Cash (used in) provided by investing activities	(6,082)		15,489
Financing activities	Financing activities					Financing activities
Proceeds from issuance of convertible senior notes		0		600,000
Purchase of capped calls related to convertible senior notes		0		(51,900)
Payment of debt issuance costs		0		(14,527)

Proceeds from employee stock purchase plan	Proceeds from employee stock purchase plan	2,288		0		Proceeds from employee stock purchase plan	2,446		2,288
Dividend payments to stockholders	Dividend payments to stockholders	(2,427)		(2,388)		Dividend payments to stockholders	(2,454)		(2,427)

Common stock repurchases	Common stock repurchases	(34,655)		(29,011)		Common stock repurchases	(35,910)		(34,655)
Cash (used in) provided by financing activities		(34,794)		502,174
Cash (used in) financing activities						Cash (used in) financing activities	(35,918)		(34,794)
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	(1,536)		(1,510)		Effect of exchange rate changes on cash and cash equivalents	(310)		(1,536)
Net increase in cash and cash equivalents		809		469,779
Net (decrease) increase in cash and cash equivalents						Net (decrease) increase in cash and cash equivalents	(27,194)		809
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	171,899		68,363		Cash and cash equivalents, beginning of period	159,965		171,899
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	172,708	$	538,142	Cash and cash equivalents, end of period	$	132,771	$	172,708

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. 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. The 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, ~~2020.~~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~~do not necessarily ~~indicative of~~indicate the expected results ~~expected~~ for the full year ~~2021.~~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.

NOTE 2. ~~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 the separation of 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.

~~See "Note 8. Debt" for additional information.~~

~~NOTE 3.~~ MARKETABLE SECURITIES

March 31, 2021 December 31, 2020
(in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value
Government debt $ 13,000 $ 1 $ 0 $ 13,001 $ 39,996 $ 0 $ (8) $ 39,988
Corporate debt 257,003 15 (369) 256,649 253,345 88 (152) 253,281
$ 270,003 $ 16 $ (369) $ 269,650 $ 293,341 $ 88 $ (160) $ 293,269


	March 31, 2022								December 31, 2021
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Government debt	$	2,000	$	—	$	(47)	$	1,953	$	2,000	$	—	$	(10)	$	1,990
Corporate debt	200,371		7		(2,930)		197,448		201,659		2		(837)		200,824
	$	202,371	$	7	$	(2,977)	$	199,401	$	203,659	$	2	$	(847)	$	202,814

As of March 31, ~~2021,~~2022, marketable securities’ maturities ranged from April ~~2021~~2022 to ~~January~~September 2024, with a weighted-average remaining maturity of ~~approximately 1.4~~1.02 years.

NOTE 4.3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables

(in thousands) March 31, 2021 December 31, 2020
Accounts receivable $ 159,324 $ 215,827
Unbilled receivables 228,603 207,155
Long-term unbilled receivables 108,048 113,278
$ 495,975 $ 536,260

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~


(in thousands)	March 31, 2022		December 31, 2021
Accounts receivable	$	171,181	$	182,717
Unbilled receivables	226,052		226,714
Long-term unbilled receivables	135,975		129,789
	$	533,208	$	539,220

Unbilled receivables

Unbilled receivables are client-committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.

Unbilled receivables by expected billing date:


(Dollars in thousands)	March 31, 2022
1 year or less	$	226,052	62	%
1-2 years	88,003		25	%
2-5 years	47,972		13	%
	$	362,027	100	%

(Dollars in thousands) March 31, 2021
1 year or less $ 228,603 68 %
1-2 years 80,688 24 %
2-5 years 27,360 8 %
$ 336,651 100 %

Unbilled receivables by contract effective date:


(Dollars in thousands)	March 31, 2022
2022	$	72,143	20	%
2021	163,869		45	%
2020	77,585		21	%
2019	27,163		8	%
2018 and prior	21,267		6	%
	$	362,027	100	%

(Dollars in thousands) March 31, 2021
2021 $ 46,625 14 %
2020 163,226 48 %
2019 63,600 19 %
2018 28,885 9 %
2017 and prior 34,315 10 %
$ 336,651 100 %

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Major clients

~~No client represented~~Clients accounting for 10% or more of the Company’s total ~~receivables as of March 31, 2021 or December 31, 2020.~~receivables:


	March 31, 2022		December 31, 2021
Client A
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~~the completion of a related performance obligation.

(in thousands) March 31, 2021 December 31, 2020
Contract assets (1)
$ 13,454 $ 15,296
Long-term contract assets (2)
7,284 7,777
$ 20,738 $ 23,073


(in thousands)	March 31, 2022		December 31, 2021
Contract assets (1)	$	11,765	$	12,530
Long-term contract assets (2)	10,292		10,643
	$	22,057	$	23,173

(1) Included in other current assets. (2) Included in other long-term assets.

Deferred revenue

Deferred revenue consists of billings and payments received in advance of revenue recognition.

(in thousands) March 31, 2021 December 31, 2020
Deferred revenue $ 244,170 $ 232,865
Long-term deferred revenue (1)
7,565 8,991
$ 251,735 $ 241,856


(in thousands)	March 31, 2022		December 31, 2021
Deferred revenue	$	290,873	$	275,844
Long-term deferred revenue (1)	6,612		5,655
	$	297,485	$	281,499

(1) Included in other long-term liabilities.

The change in deferred revenue in the three months ended March 31, ~~2021~~2022 was primarily due to new billings in advance of revenue recognition ~~offset by $107.0~~and $124.9 million of revenue recognized during the period that was included in deferred revenue as of December 31, ~~2020.~~2021.

NOTE 5.4. DEFERRED COMMISSIONS

(in thousands) March 31, 2021 December 31, 2020
Deferred commissions (1)
$ 103,474 $ 108,624


(in thousands)	March 31, 2022		December 31, 2021
Deferred commissions (1)	$	125,220	$	135,911

(1) Included in other long-term assets.


		Three Months Ended March 31,						Three Months Ended March 31,
(in thousands)	(in thousands)		2021		2020		(in thousands)		2022		2021
Amortization of deferred commissions (1)	Amortization of deferred commissions (1)		$	11,496	$	8,497	Amortization of deferred commissions (1)		$	17,221	$	11,496

(1) Included in selling and marketing expense.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6.5. GOODWILL AND OTHER INTANGIBLES

Goodwill

Change in goodwill:

Three Months Ended
March 31,
(in thousands) 2021 2020
January 1, $ 79,231 $ 79,039
Acquisition 2,701 0
Currency translation adjustments 105 (541)
March 31, $ 82,037 $ 78,498


	Three Months Ended March 31,
(in thousands)	2022
January 1,	$	81,923
Acquisition	—
Currency translation adjustments	108
March 31,	$	82,031

Intangibles

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

March 31, 2021
(in thousands) Useful Lives Cost Accumulated Amortization
Net Book Value (1)
Client-related 4-10 years $ 63,180 $ (56,260) $ 6,920
Technology 2-10 years 67,142 (57,014) 10,128
Other 1-5 years 5,361 (5,361) 0
$ 135,683 $ (118,635) $ 17,048


		March 31, 2022
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)
Client-related	4-10 years	$	63,142	$	(57,662)	$	5,480
Technology	2-10 years	67,142		(59,531)		7,611
Other	1-5 years	5,361		(5,361)		—
		$	135,645	$	(122,554)	$	13,091

(1) Included in other long-term assets.


			December 31, 2020								December 31, 2021
(in thousands)	(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)		(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)
Client-related	Client-related	4-10 years	$	63,168	$	(55,877)	$	7,291	Client-related	4-10 years	$	63,165	$	(57,342)	$	5,823
Technology	Technology	2-10 years	64,843		(56,386)		8,457		Technology	2-10 years	67,142		(58,902)		8,240
Other	Other	1-5 years	5,361		(5,361)		0		Other	1-5 years	5,361		(5,361)		—
			$	133,372	$	(117,624)	$	15,748			$	135,668	$	(121,605)	$	14,063

(1) Included in other long-term assets.

Amortization of intangible assets:


		Three Months Ended March 31,						Three Months Ended March 31,
(in thousands)	(in thousands)		2021		2020		(in thousands)		2022		2021
Cost of revenue	Cost of revenue		$	629	$	647	Cost of revenue		$	629	$	629
Selling and marketing	Selling and marketing		373		371		Selling and marketing		343		373

			$	1,002	$	1,018			$	972	$	1,002

Future estimated intangibles assets amortization:


(in thousands)	March 31, 2022
Remainder of 2022	$	2,914
2023	3,618
2024	2,849
2025	2,509
2026	874
2027	327
	$	13,091

(in thousands) March 31, 2021
2021 $ 2,985
2022 3,886
2023 3,618
2024 2,849
2025 2,509
2026 and thereafter 1,201
$ 17,048

NOTE 6. 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

NOTE 7. LEASES

Corporate headquarters

In February 2021, the Company agreed to accelerate its exit from its ~~Cambridge, Massachusetts~~previous corporate headquarters to October 1, 2021, in exchange for a one-time payment from ~~the Company’s~~its landlord of $18 ~~million. Upon modification,~~million, which was amortized over the ~~Company~~remaining lease term. The exit accelerated depreciation on the related leasehold improvements and reduced ~~its~~the Company’s future lease liabilities by $21.1 million and ~~accelerated depreciation~~right of ~~property, plant,~~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. The 4.5 year lease includes a base rent of $2 million per year.

New Waltham Office

On July 6, 2021, the Company entered into an office space lease for 131 thousand square feet in Waltham, Massachusetts. The lease term of 11 years began on August 1, 2021. The annual rent equals the base rent plus a portion of building operating costs and ~~equipment related~~real estate taxes. Rent first becomes payable on August 1, 2022. 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. This lease increased the Company’s lease liabilities and lease-related right of use assets by $42.1 million on August 1, 2021.

Expense


	Three Months Ended March 31,
(in thousands)		2022		2021
Fixed lease costs (1)		$	5,093	$	300
Short-term lease costs		806		459
Variable lease costs		764		1,387
		$	6,663	$	2,146

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

~~Expense~~

PEGASYSTEMS INC.

Three Months Ended
March 31,
(in thousands) 2021 2020
Fixed lease costs $ 300 $ 4,818
Short-term lease costs 459 455
Variable lease costs 1,387 1,278
$ 2,146 $ 6,551
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Right of use assets and lease liabilities

(in thousands) March 31, 2021 December 31, 2020
Right of use assets (1)
$ 44,330 $ 67,651
Lease liabilities (2)
$ 14,161 $ 18,541
Long-term lease liabilities $ 36,471 $ 59,053


(in thousands)	March 31, 2022		December 31, 2021
Right of use assets (1)	$	87,212	$	87,521
Operating lease liabilities (2)	$	4,855	$	6,989
Long-term operating lease liabilities	$	90,699	$	87,818

(1) Represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets.

(2) Included in other current liabilities.

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

March 31, 2021 December 31, 2020
Weighted-average remaining lease term 5.1 years 4.7 years
Weighted-average discount rate (1)
4.7 % 5.4 %


	March 31, 2022		December 31, 2021
Weighted-average remaining lease term	7.5 years		7.7 years
Weighted-average discount rate (1)	4.3	%	4.4	%

(1) The rates implicit in most of the Company’s leases are not readily determinable. Therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over the lease term in a similar economic environment.

Maturities of lease liabilities:


~~(in thousands)~~	~~March 31, 2021~~
~~1 year or less~~	$	~~13,216~~
~~1-2 years~~	~~11,538~~
~~2-3 years~~	~~10,896~~
~~3-4 years~~	~~7,571~~
~~Greater than 4 years~~	~~14,274~~
~~Total lease payments~~	~~57,495~~
~~Less: imputed interest~~ ~~(1)~~	~~(6,863)~~
	$	~~50,632~~


(in thousands)	March 31, 2022
Remainder of 2022	$	3,887
2023	20,317
2024	17,141
2025	14,352
2026	10,664
2027 and thereafter	48,381
Total lease payments	114,742
Less: imputed interest (1)	(19,188)
	$	95,554

(1) Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement unless the discount rate is updated due to a lease reassessment event.

Cash flow information


	Three Months Ended March 31,
(in thousands)	2022		2021
Cash paid for leases	$	3,650	$	6,716
Right of use assets recognized for new leases and amendments (non-cash)	$	3,854	$	714

Three Months Ended
March 31,
(in thousands) 2021 2020
Cash paid for leases $ 6,716 $ 5,520
Right of use assets recognized for new leases and amendments (non-cash) $ 714 $ 551

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

NOTE 8. DEBT

Convertible senior notes and capped calls

Convertible senior notes

In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal of $600 million, due March 1, 2025, in a private placement. No principal payments are ~~required~~due before maturity. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning on September 1, 2020.

Conversion rights

The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of $135.05 per share of common stock. The Company will settle conversions by paying or delivering cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate. The conversion rate will be adjusted upon certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions.

Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election.

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 ~~commencing~~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.

•During the 5 consecutive business days immediately after any 5 consecutive trading day period (the “Measurement Period”), if the trading price per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share of common stock on such trading day and the conversion rate on such trading day.

•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 March 31, ~~2021,~~2022, the Notes were not eligible for ~~conversion at the noteholders’ election.~~conversion.

Repurchase rights

On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s common stock exceeded 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice.

If certain corporate events that constitute a “Fundamental Change” occur, each noteholder will have the right to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or a multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. 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. See "Note 2. 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~~Carrying value of the ~~Company’s Convertible Senior Notes (the “Notes”) increased by $69.5 million~~Notes:


(in thousands)	March 31, 2022		December 31, 2021
Principal	$	600,000	$	600,000
Unamortized issuance costs	(8,560)		(9,278)
Convertible senior notes, net	$	591,440	$	590,722

Interest expense related 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.~~Notes:


	Three Months Ended March 31,
(in thousands)		2022		2021
Contractual interest expense (0.75% coupon)		$	1,125	$	1,125
Amortization of issuance costs		719		673
		$	1,844	$	1,798

1213

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Carrying value of~~The effective interest rate for the Notes:

(in thousands) March 31, 2021 December 31, 2020
Principal $ 600,000 $ 600,000
Unamortized debt discount 0 (71,222)
Unamortized issuance costs (11,582) (10,575)
Convertible senior notes, net $ 588,418 $ 518,203
Conversion options $ 0 $ 84,120
Issuance costs 0 (2,037)
Deferred taxes 0 (20,479)
Additional paid-in capital $ 0 $ 61,604


	Three Months Ended March 31,
	2022		2021
Weighted-average effective interest rate	1.2	%	1.2	%

~~Interest expense related to the Notes:~~

Three Months Ended
March 31,
(in thousands) 2021 2020
Contractual interest expense (0.75% coupon) $ 1,125 $ 450
Amortization of debt discount 0 1,497
Amortization of issuance costs 673 222
$ 1,798 $ 2,169
Weighted-average effective interest rate 1.2 % 4.3 %

Future payments of principal and contractual interest:

March 31, 2021
(in thousands) Principal Interest Total
2021 $ 0 $ 2,250 $ 2,250
2022 0 4,500 4,500
2023 0 4,500 4,500
2024 0 4,500 4,500
2025 600,000 1,488 601,488
$ 600,000 $ 17,238 $ 617,238


	March 31, 2022
(in thousands)	Principal		Interest		Total
Remainder of 2022	$	—	$	2,250	$	2,250
2023	—		4,500		4,500
2024	—		4,500		4,500
2025	600,000		2,250		602,250
	$	600,000	$	13,500	$	613,500

Capped call transactions

In February 2020, the Company entered into privately negotiated capped call transactions ~~(“Capped~~(the “Capped Call Transactions”) with certain financial institutions. 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 ~~generally~~ expected to reduce common stock dilution and/or offset any potential cash payments the Company ~~is required to~~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 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 ~~in accordance with~~following the governing documents, may not represent a fair value measurement. The Capped Call Transactions are classified as ~~“other~~other long-term ~~assets”~~assets and remeasured to fair value ~~at the end of~~ each reporting period, resulting in a non-operating gain or loss.

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

Change in capped call transactions:

Three Months Ended
March 31,
(in thousands) 2021 2020
January 1, $ 83,597 $ 0
Issuance 0 51,900
Fair value adjustment (19,117) (18,592)
March 31, $ 64,480 $ 33,308


	Three Months Ended March 31,
(in thousands)	2022		2021
January 1,	$	59,964	$	83,597
Fair value adjustment	(30,560)		(19,117)
March 31,	$	29,404	$	64,480

Credit facility

In November 2019, and as since 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 (“PNC”).~~Association. The Company may use borrowings for general corporate purposes and to finance working capital ~~needs and for general corporate purposes.~~needs. Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $200 million. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. 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 ~~on September 30, 2020~~March 31, 2022 and ending with the fiscal quarter ended December 31, ~~2021~~2022, Pegasystems Inc. must maintain at least $200 million in cash, investments, and ~~investments held by Pegasystems Inc.~~availability under the Revolving Credit Loan.

•Beginning with the quarter ended on March 31, ~~2022~~2023, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up ~~in the event of~~for certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.

As of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had 0no outstanding borrowings under the Credit Facility.

NOTE 9. FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis

The Company records its cash equivalents, marketable securities, Capped Call Transactions, and venture investments at fair value on a recurring basis. 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:

•Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities;

•Level 2 - significant other inputs that are observable either directly or indirectly; and

•Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and minimize unobservable inputs when determining fair value.

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~~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 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:

March 31, 2021 December 31, 2020
(in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Cash equivalents $ 26,657 $ 0 $ 0 $ 26,657 $ 42,339 $ 14,000 $ 0 $ 56,339
Marketable securities $ 0 $ 269,650 $ 0 $ 269,650 $ 0 $ 293,269 $ 0 $ 293,269
Capped Call Transactions (1)
$ 0 $ 64,480 $ 0 $ 64,480 $ 0 $ 83,597 $ 0 $ 83,597
Venture investments (1) (2)
$ 0 $ 0 $ 9,756 $ 9,756 $ 0 $ 0 $ 8,345 $ 8,345


	March 31, 2022								December 31, 2021
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents	$	19,626	$	—	$	—	$	19,626	$	3,216	$	—	$	—	$	3,216
Marketable securities	$	—	$	199,401	$	—	$	199,401	$	—	$	202,814	$	—	$	202,814
Capped Call Transactions (1)	$	—	$	29,404	$	—	$	29,404	$	—	$	59,964	$	—	$	59,964
Venture investments (1) (2)	$	—	$	—	$	12,830	$	12,830	$	—	$	—	$	7,648	$	7,648

(1) Included in other long-term assets. (2) Investments in privately-held companies.

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~Change~~Changes in venture investments:

Three Months Ended
March 31,
(in thousands) 2021 2020
January 1, $ 8,345 $ 4,871
New investments 500 1,490
Sales of investments (400) (1,424)
Changes in foreign exchange rates (9) (73)
Changes in fair value:
included in other income 100 1,374
included in other comprehensive income 1,220 100
March 31, $ 9,756 $ 6,338


	Three Months Ended March 31,
(in thousands)	2022		2021
January 1,	$	7,648	$	8,345
New investments	—		500
Sales of investments	—		(400)
Changes in foreign exchange rates	(61)		(9)
Changes in fair value:
included in other income	2,741		100
included in other comprehensive income	2,502		1,220
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’ ~~relatively~~ short maturity.

Fair value of the Notes

The Notes’ fair value ~~(inclusive of~~(including the conversion feature embedded in the Notes) was ~~$665.9~~$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. ~~See "Note 8. Debt" for additional information.~~

NOTE 10. REVENUE

Geographic revenue

Three Months Ended
March 31,
(Dollars in thousands) 2021 2020
U.S. $ 194,568 62 % $ 172,417 65 %
Other Americas 11,901 4 % 15,342 6 %
United Kingdom (“U.K.”) 28,212 9 % 21,837 8 %
Europe (excluding U.K.), Middle East, and Africa 51,659 16 % 31,938 12 %
Asia-Pacific 27,159 9 % 24,057 9 %
$ 313,499 100 % $ 265,591 100 %

~~Revenue streams~~

Three Months Ended
March 31,
(in thousands) 2021 2020
Perpetual license $ 5,452 $ 3,659
Term license 111,509 90,257
Revenue recognized at a point in time 116,961 93,916
Maintenance 75,561 73,695
Pega Cloud 67,858 43,466
Consulting 53,119 54,514
Revenue recognized over time 196,538 171,675
$ 313,499 $ 265,591


	Three Months Ended March 31,
(Dollars in thousands)		2022			2021
U.S.			$	217,272	58	%	$	194,568	62	%
Other Americas			45,751		12	%	11,901		4	%
United Kingdom (“U.K.”)			30,932		8	%	28,212		9	%
Europe (excluding U.K.), Middle East, and Africa			49,136		13	%	51,659		16	%
Asia-Pacific			33,216		9	%	27,159		9	%
			$	376,307	100	%	$	313,499	100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands) Three Months Ended
March 31,
2021 2020
Pega Cloud $ 67,858 $ 43,466
Maintenance 75,561 73,695
Term license 111,509 90,257
Subscription (1)
254,928 207,418
Perpetual license 5,452 3,659
Consulting 53,119 54,514
$ 313,499 $ 265,591
Revenue streams


	Three Months Ended March 31,
(in thousands)		2022		2021
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
Total revenue		$	376,307	$	313,499

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


	Three Months Ended March 31,
(in thousands)		2022			2021
Pega Cloud			$	90,317		$	67,858
Maintenance			79,716			75,561
Subscription services			170,033			143,419
Subscription license			137,533			111,509
Subscription			307,566			254,928
Perpetual license			7,440			5,452
Consulting			61,301			53,119
			$	376,307		$	313,499

Remaining performance obligations ("Backlog")

Expected future revenue onfrom existing non-cancellable contracts:

March 31, 2021
(Dollars in thousands) Perpetual license Term license Maintenance Pega Cloud Consulting Total
1 year or less $ 9,649 $ 41,025 $ 220,100 $ 252,104 $ 21,068 $ 543,946 55 %
1-2 years 629 9,874 52,366 187,456 914 251,239 26 %
2-3 years 0 7,055 33,337 91,861 1,756 134,009 14 %
Greater than 3 years 0 377 16,834 32,895 510 50,616 5 %
$ 10,278 $ 58,331 $ 322,637 $ 564,316 $ 24,248 $ 979,810 100 %
As of March 31, 2022:


(Dollars in thousands)	Subscription services				Subscription license		Perpetual license		Consulting		Total
	Maintenance		Pega Cloud
1 year or less	$	228,984	$	329,857	$	47,428	$	7,281	$	40,661	$	654,211	55	%
1-2 years	63,870		208,875		16,111		4,505		10,955		304,316		26	%
2-3 years	33,617		106,156		2,422		2,252		3,876		148,323		13	%
Greater than 3 years	22,611		44,596		1,758		—		522		69,487		6	%
	$	349,082	$	689,484	$	67,719	$	14,038	$	56,014	$	1,176,337	100	%

As of March 31, 2021:


(Dollars in thousands)	Subscription services				Subscription license		Perpetual license		Consulting		Total
	Maintenance		Pega Cloud
1 year or less	$	220,100	$	252,104	$	41,025	$	9,649	$	21,068	$	543,946	55	%
1-2 years	52,366		187,456		9,874		629		914		251,239		26	%
2-3 years	33,337		91,861		7,055		—		1,756		134,009		14	%
Greater than 3 years	16,834		32,895		377		—		510		50,616		5	%
	$	322,637	$	564,316	$	58,331	$	10,278	$	24,248	$	979,810	100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020
(Dollars in thousands) Perpetual license Term license Maintenance Pega Cloud Consulting Total
1 year or less $ 3,995 $ 30,962 $ 205,083 $ 174,277 $ 18,945 $ 433,262 58 %
1-2 years 2,168 5,088 34,633 125,473 1,215 168,577 22 %
2-3 years 0 6,504 19,411 81,187 107 107,209 14 %
Greater than 3 years 0 635 10,596 33,537 10 44,778 6 %
$ 6,163 $ 43,189 $ 269,723 $ 414,474 $ 20,277 $ 753,826 100 %

NOTE 11. STOCK-BASED COMPENSATION

Expense

Three Months Ended
March 31,
(in thousands) 2021 2020
Cost of revenue $ 5,925 $ 5,152
Selling and marketing 13,720 9,718
Research and development 6,770 5,496
General and administrative 3,685 2,809
$ 30,100 $ 23,175
Income tax benefit $ (5,991) $ (4,582)


	Three Months Ended March 31,
(in thousands)		2022		2021
Cost of revenue		$	6,378	$	5,925
Selling and marketing		10,958		13,720
Research and development		7,346		6,770
General and administrative		3,545		3,685
		$	28,227	$	30,100
Income tax benefit		$	(5,311)	$	(5,991)

As of March 31, ~~2021,~~2022, the Company had ~~$183.4~~$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.

Grants


	Three Months Ended March 31, 2022
(in thousands)	Shares	Total Fair Value
Restricted stock units	1,096	$	94,538
Non-qualified stock options	2,212	$	60,514

Three Months Ended
March 31, 2021
(in thousands) Shares Total Fair Value
RSUs 684 $ 89,291
Non-qualified stock options 1,248 $ 47,380

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

NOTE 12. INCOME TAXES

Effective income tax rate


		Three Months Ended March 31,								Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)		2021			2020			(Dollars in thousands)		2022			2021
(Benefit from) income taxes	(Benefit from) income taxes		$	(17,618)		$	(23,810)		(Benefit from) income taxes		$	(7,683)		$	(17,618)
Effective income tax benefit rate	Effective income tax benefit rate		73		%	48		%	Effective income tax benefit rate		95		%	73		%

The ~~increase~~change in the ~~Company’s~~ effective income tax benefit rate was primarily due to ~~excess~~the impact of discrete tax ~~benefits from stock-based compensation and fair value adjustments for the capped call transactions,~~items which were ~~proportionally~~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.

NOTE 13. (LOSS) PER SHARE

Basic (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. 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.

Calculation of (loss) per share:

Three Months Ended
March 31,
(in thousands, except per share amounts) 2021 2020
Net (loss) $ (6,617) $ (25,372)
Weighted-average common shares outstanding 81,004 79,808
(Loss) per share, basic $ (0.08) $ (0.32)
Net (loss) $ (6,617) $ (25,372)
Weighted-average common shares outstanding, assuming dilution (1) (2) (3)
81,004 79,808
(Loss) per share, diluted $ (0.08) $ (0.32)
Outstanding anti-dilutive stock options and RSUs (4)
6,465 5,948


	Three Months Ended March 31,
(in thousands, except per share amounts)		2022		2021
Net (loss)		$	(379)	$	(6,617)
Weighted-average common shares outstanding		81,680		81,004
(Loss) per share, basic		$	0.00	$	(0.08)

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







Weighted-average common shares outstanding, assuming dilution (1) (2) (3)		81,680		81,004
(Loss) per share, diluted		$	0.00	$	(0.08)

Outstanding anti-dilutive stock options and RSUs (4)		4,178		6,465

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

(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 ~~cover~~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). The Capped Call Transactions are ~~generally~~ expected to reduce common stock dilution and/or offset any potential cash payments the Company ~~is required to~~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 Capped Call Transactions are excluded from weighted-average common shares outstanding, assuming dilution, in all periods as their effect would be anti-dilutive.

(4) Outstanding stock options and RSUs that were anti-dilutive under the treasury stock method in the period were excluded from the computation of diluted (loss) per share. These awards may be dilutive in the future.

NOTE 14. COMMITMENTS AND CONTINGENCIES

Commitments

See "Note 7. 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. v. Appian Corp. & 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. v. Appian Corp. & Business Process Management Inc., No. 1:19-cv-11461 (D. Mass). 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.

Appian Corp. v. 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. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). 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.

1718

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions identify forward-looking statements, which are based on current expectations and assumptions.

Forward-looking statements deal with future events and are subject to risks and uncertainties that are difficult to predict, including, but not limited to:

•our future financial performance and business plans;

•the adequacy of our liquidity and capital resources;

•the continued payment of our quarterly dividends;

•the timing of revenue recognition;

•management of our transition to a more subscription-based business model;

•variation in demand for our products and services, including among clients in the public sector;

•reliance on key personnel;

•global economic and political conditions and uncertainty, including continued impacts from the ~~impact of actual or threatened public health emergencies, such as~~ongoing COVID-19 pandemic and the ~~Coronavirus (“COVID-19”);~~war in Ukraine;

•reliance on third-party service providers, including hosting providers;

•compliance with our debt obligations and covenants;

•the potential impact of our convertible senior notes and Capped Call Transactions;

•~~reliance on key personnel;~~

•~~the relocation of our corporate headquarters;~~

•~~the continued uncertainties in the global economy;~~

•foreign currency exchange rates;

•the potential legal and financial liabilities and damage to our reputation ~~damage~~ due to cyber-attacks;

•security breaches and security flaws;

•our ability to protect our intellectual property rights, ~~and~~ costs associated with defending such ~~rights;~~rights, as well as intellectual property rights claims and other related claims by third parties;

•our client retention rate; and

•management of our growth.

These risks and others that may cause actual results to differ materially from those expressed in such forward-looking statements are described further in Part I of our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, Part II of this Quarterly Report on Form 10-Q, and other filings we make with the U.S. Securities and Exchange Commission (“SEC”).

Except as required by applicable law, we do not undertake and expressly disclaim any obligation to update or revise these forward-looking statements publicly, whether ~~as the result of~~due to new information, future events, or otherwise.

The forward-looking statements ~~contained~~ in this Quarterly Report represent our views as of April 28, ~~2021.~~2022.

BUSINESS OVERVIEW

We develop, market, license, host, and support enterprise software ~~applications~~ that ~~help~~helps organizations simplify business complexity. Our ~~intelligent technology~~powerful low-code platform for workflow automation and ~~scalable architecture~~AI-powered decisioning enables the world’s leading brands and government agencies to ~~solve problems quickly~~hyper-personalize customer experiences, streamline customer service, and ~~transform for tomorrow. Our clients are able to make better decisions~~automate mission-critical business processes and ~~get work done using real-time artificial intelligence (“AI”) and intelligent automation on applications built on the low-code, cloud-native~~workflows. With Pega, ~~Platform™, enabling~~ our clients can leverage our intelligent technology and scalable architecture to ~~streamline service, increase customer lifetime value, and boost efficiency. Our consulting and~~accelerate their digital transformation. In addition, our client success teams, ~~along with our~~ world-class partners, and clients themselves leverage our Pega Express™ methodology ~~and low code to allow clients~~ to design and deploy ~~critical~~mission-critical applications quickly and collaboratively.

Our target clients are Global 3000 organizations and government agencies that require ~~applications~~solutions to ~~differentiate~~distinguish themselves in the markets they serve. Our ~~applications~~solutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. WeAlong with our partners, we deliver ~~applications~~solutions tailored to our clients’ specific industry needs.

~~Cloud Transition~~Subscription transition

We are ~~in the process of~~ transitioning our business to sell software primarily through subscription ~~arrangements, particularly Pega Cloud.~~arrangements. Until we ~~substantially~~fully complete our ~~Cloud Transition,~~subscription transition, which we ~~anticipate~~expect will occur in ~~late 2022 or early~~ 2023, ~~we may experience lower~~our revenue ~~growth~~ and ~~lower~~ operating cash flow ~~growth or negative cash flow.~~may be impacted. Operating performance and the actual mix of revenue and new arrangements in ~~a given~~each period can fluctuate based on client preferences for our perpetual and subscription offerings. See the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 for additional information.

Coronavirus (“COVID-19”)

As of March 31, ~~2021,~~2022, COVID-19 has not had a material impact on our results of operations or financial condition. See “Coronavirus (“COVID-19”)” in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 for additional information.

Ukraine

Our direct financial exposure to Ukraine, Russia, and Belarus is not material.

In 2021, before Russia's invasion of Ukraine, we made a business decision to stop pursuing new clients in Russia and closed our local office. For the year ended December 31, 2021 total revenue from clients located in Ukraine, Russia, and Belarus was less than $4.0 million. However, the ultimate impact of Russia’s invasion of Ukraine on our business will depend on future developments, including the duration and spread of the conflict, the impact on our people, partners, clients, and vendors in neighboring countries, and globally, all of which are uncertain and unpredictable.

Performance metrics

We ~~utilize~~use performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including:

Annual contract value (“ACV”) | Increased ~~20%~~21% since March 31, ~~2020~~2021

•ACV ~~as reported,~~ represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate ACV for ~~term~~subscription license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance. ~~Client Cloud ACV is composed of maintenance ACV and term license ACV.~~ ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our ~~Cloud Transition. Reported amounts have not been adjusted for changes in foreign exchange rates.~~ subscription transition.

Foreign currency exchange rate changes ~~contributed 3%~~were a 1% to ~~total~~2% headwind to ACV growth insince March 31, 2021.

1920

Remaining performance obligations (“Backlog”) | Increased ~~30%~~20% since March 31, ~~2020~~2021

•~~Backlog represents expected~~Expected future revenue onfrom existing non-cancellable ~~contracts.~~contracts:

~~Year to date Pega Cloud revenue | Increased 56% since the three months ended March 31, 2020~~

•~~Pega Cloud revenue is revenue under U.S. GAAP for cloud contracts.~~

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared following accounting principles generally accepted in the United States and the rules and regulations of the SEC for interim financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future given the available information.

For more information ~~regarding~~about our critical accounting policies, we encourage you to read the discussion in the following locations in our Annual Report on Form 10-K for the year ended December 31, ~~2020:~~

2021:

•“Critical Accounting Estimates and Significant Judgments” in Item 7; and

•“Note 2. ~~“Significant~~Significant Accounting Policies” in Item 8.

There have been no significant changes ~~other than those disclosed in “Note 2. New Accounting Pronouncements” in Item 1 of this Quarterly Report on Form 10-Q~~ to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

RESULTS OF OPERATIONS

Revenue

~~Cloud Transition~~Subscription transition

We are ~~in the process of~~ transitioning our business to sell software primarily through subscription ~~arrangements, particularly Pega Cloud. Revenue~~arrangements. This transition has impacted revenue growth ~~has been slower because of this transition.~~as revenue is recognized differently for subscription services than license sales. Revenue from Pega Cloud and maintenance arrangements is typically recognized over the contract ~~term. In contrast,~~term, while revenue from license sales is recognized when the license rights become effective, typically upfront.

(Dollars in thousands) Three Months Ended
March 31, Change
2021 2020
Pega Cloud $ 67,858 22 % $ 43,466 16 % $ 24,392 56 %
Maintenance 75,561 23 % 73,695 28 % 1,866 3 %
Term license 111,509 36 % 90,257 34 % 21,252 24 %
Subscription (1)
254,928 81 % 207,418 78 % 47,510 23 %
Perpetual license 5,452 2 % 3,659 1 % 1,793 49 %
Consulting 53,119 17 % 54,514 21 % (1,395) (3) %
$ 313,499 100 % $ 265,591 100 % $ 47,908 18 %

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


(Dollars in thousands)	Three Months Ended March 31,					Change
		2022	2021
Pega Cloud				$	90,317	24	%	$	67,858	22	%	$	22,459	33	%
Maintenance				79,716		21	%	75,561		23	%	4,155		5	%
Subscription services				170,033		45	%	143,419		45	%	26,614		19	%
Subscription license				137,533		37	%	111,509		36	%	26,024		23	%
Subscription				307,566		82	%	254,928		81	%	52,638		21	%
Perpetual license				7,440		2	%	5,452		2	%	1,988		36	%
Consulting				61,301		16	%	53,119		17	%	8,182		15	%
				$	376,307	100	%	$	313,499	100	%	$	62,808	20	%

The ~~total~~ revenue ~~change~~changes in the three months ended March 31, ~~2021~~2022 generally ~~reflects~~reflect the impact of our ~~Cloud Transition.~~subscription transition. Other factors impacting our revenue include:

•An increasing portion of our term license contracts include multi-year committed maintenance periods instead of annually renewable maintenance periods. Under multi-year committed maintenance arrangements, a larger portion of the total contract value is recognized as maintenanceThe increase in perpetual revenue ~~over the contract term rather than as term license revenue upon the effectiveness of the license rights. In~~in the three months ended March 31, ~~2021, multi-year committed maintenance contributed $3.4 million~~2022 was primarily due to ~~maintenance revenue growth and reduced term revenue growth by $5.5 million.~~

•~~Maintenance renewal rates of higher than 90%.~~license rights becoming effective in the three months ended March 31, 2022 related to software license contracts entered into in prior years.

•The ~~decrease~~increase in consulting revenue in the three months ended March 31, ~~2021~~2022 was primarily due to ~~a decrease~~an increase in consultant billable travel expenses as a result of COVID-19. As part of our long-term strategy, we intend to continue growing and leveraging our ecosystem of partners on implementation projects, potentially reducing our future consulting revenue growth.hours in North America.

Gross profit


		Three Months Ended March 31,					Change
(Dollars in thousands)	(Dollars in thousands)		2021	2020							(Dollars in thousands)							Three Months Ended March 31,		Change
Software license					$	116,311	99	%	$	93,232		%	$	23,079	25	%
(Dollars in thousands)																	(Dollars in thousands)		2022		2021					Change
																					$	63,418	$	45,301					67	%	$	18,117	40	%
Maintenance	Maintenance				69,775		92	%	68,119		92	%	1,656		2	%	Maintenance				74,585		94		%		69,775		92	%	4,810		7	%
Pega Cloud					45,301		67	%	25,933		60	%	19,368		75	%
Subscription services																	Subscription services				138,003		81		%		115,076		80	%	22,927		20	%
Subscription license																	Subscription license				136,911		100		%		110,889		99	%	26,022		23	%
Subscription																	Subscription				274,914		89		%		225,965		89	%	48,949		22	%
Perpetual license																	Perpetual license				7,406		100		%		5,422		99	%	1,984		37	%
Consulting	Consulting				(335)		(1)	%	(1,221)		(2)	%	886		73	%	Consulting				5,790		9		%		(335)		(1)	%	6,125		*
					$	231,052	74	%	$	186,063	70	%	$	44,989	24	%					$	288,110	77		%		$	231,052	74	%	$	57,058	25	%

* not meaningful

•The ~~changes~~increases in gross profit and gross profit percent in the three months ended March 31, ~~2021~~2022 were primarily due to the impact of our ~~Cloud Transition,~~subscription transition, revenue growth, and cost-efficiency gains as Pega Cloud grows and scales.

•The increase in consulting gross profit percent in the three months ended March 31, ~~2021~~2022 was ~~primarily~~ due to an increase in consultant utilization. Consultant utilization is impacted by several factors, including the timing and scope of new implementation projects and the extent of our involvement compared to our consulting partners and enabled clients.realization rates in North America.

Operating expenses


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended March 31,					Change		(Dollars in thousands)							Three Months Ended March 31,				Change
			2021	2020							(Dollars in thousands)							2022	2021		Change
							% of Revenue					% of Revenue										% of Revenue				% of Revenue
Selling and marketing	Selling and marketing				$	148,739	47	%	$	136,024	51	%	$	12,715	9	%	Selling and marketing					$	162,236	43	%	$	148,739	47	%	$	13,497	9	%
Research and development	Research and development				$	62,442	20	%	$	58,727	22	%	$	3,715	6	%	Research and development					$	71,490	19	%	$	62,442	20	%	$	9,048	14	%
General and administrative	General and administrative				$	18,270	6	%	$	15,630	6	%	$	2,640	17	%	General and administrative					$	35,764	10	%	$	18,270	6	%	$	17,494	96	%

•The increase in selling and marketing in the three months ended March 31, ~~2021~~2022 was primarily due to an increase in compensation and benefits of ~~$25.4~~$8.9 million ~~attributable to increases~~and an increase in ~~headcount and equity compensation, partially offset by decreases in~~employee travel and entertainment of $6.0 million and sales and marketing events of $7.9 million due to COVID-19. The increase in headcount reflect our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts.$2.6 million.

•The increase in research and development in the three months ended March 31, ~~2021~~2022 was primarily due to an increase in compensation and benefits of ~~$4.6~~$5.7 million, attributable to increases in headcount and ~~equity~~incentive compensation. The increase in headcount reflects additional investments in developing our solutions, particularly for Pega Cloud.

•The increase in general and administrative in the three months ended March 31, ~~2021~~2022 was primarily due to an increase ~~in compensation and benefits~~ of ~~$1.1 million, attributable to increases in headcount and equity compensation, and an increase in professional services fees of $1.6 million.~~

•In February 2021, we agreed to accelerate our exit from our Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million. This agreement was the primary contributor to a decrease in facilities expense of $2.1$15.4 million in ~~selling~~legal fees and ~~marketing, $1.7 million~~related expenses arising from proceedings outside the ordinary course of business. We have incurred and expect to continue to incur additional expenses for these proceedings in ~~research~~2022. See "Note 14. Commitments and ~~development,~~Contingencies" in Part I, Item 1 and ~~$0.3 million~~“Risk Factors” in ~~general and administrative in the three months ended March 31, 2021.~~Part II, Item 1A of this Quarterly Report for additional information.

Other income ~~(expense), net~~and expenses


(Dollars in thousands)	Three Months Ended March 31,				Change
		2022	2021
Foreign currency transaction gain (loss)			$	2,876		$	(5,098)	$	7,974	*
Interest income			207			153		54		35	%
Interest expense			(1,946)			(1,880)		(66)		(4)	%
(Loss) on capped call transactions			(30,560)			(19,117)		(11,443)		(60)	%
Other income, net			2,741			106		2,635		2,486	%
			$	(26,682)		$	(25,836)	$	(846)	(3)	%

(Dollars in thousands) Three Months Ended
March 31, Change
2021 2020
Foreign currency transaction (loss) $ (5,098) $ (5,947) $ 849 14 %
Interest income 153 607 (454) (75) %
Interest expense (1,880) (2,306) 426 18 %
(Loss) on capped call transactions (19,117) (18,592) (525) (3) %
Other income, net 106 1,374 (1,268) (92) %

$ (25,836) $ (24,864) $ (972) (4) %
* not meaningful

•The ~~change~~increase in foreign currency transaction gain (loss) in the three months ended March 31, ~~2021~~2022 was primarily due to the impact of fluctuations in foreign currency exchange rates associated with our foreign currency-denominated cash, receivables, and intercompany balances held by our subsidiary in the United Kingdom.

•The ~~decrease~~increase in interest income in the three months ended March 31, ~~2021~~2022 was primarily due to ~~a decrease~~increases in market interest rates.

•The decrease in interest expense in the three months ended March 31, 2021 was primarily due to our adoption of ASU 2020-06 on January 1, 2021. See "Note 2. New Accounting Pronouncements" in Item 1 of this Quarterly Report for additional information.

~~Interest expense related to the Notes:~~

Three Months Ended
March 31, Change
(in thousands) 2021 2020
Contractual interest expense (0.75% coupon) $ 1,125 $ 450 $ 675
Amortization of debt discount — 1,497 (1,497)
Amortization of issuance costs 673 222 451
$ 1,798 $ 2,169 $ (371)

•The increase in the (loss) on capped call transactions in the three months ended March 31, ~~2021~~2022, was due to fair value ~~adjustments.~~adjustments for our capped call transactions. See "Note 9. Fair Value Measurements" in Part I, Item 1 of this Quarterly Report for additional information.

•The ~~decrease~~increase in other income, net in the three months ended March 31, ~~2021~~2022, was due to ~~an increase~~fair value adjustments on equity securities held in ~~the value of~~ our venture investments portfolio in the three months ended March 31, ~~2020.~~2021.

(Benefit from) income taxes

Three Months Ended
March 31,
(Dollars in thousands) 2021 2020
(Benefit from) income taxes $ (17,618) $ (23,810)
Effective income tax benefit rate 73 % 48 %


	Three Months Ended March 31,
(Dollars in thousands)		2022			2021
(Benefit from) income taxes		$	(7,683)		$	(17,618)
Effective income tax benefit rate		95		%	73		%

During the three months ended March 31, ~~2021,~~2022, the ~~increase~~change in our effective income tax benefit rate was primarily due to ~~excess~~the impact of discrete tax ~~benefits from stock-based compensation and fair value adjustments for the capped call transactions,~~items which were ~~proportionally~~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~~our effective tax rate in each period depends on our profitability and the ~~attributes of~~tax deductions from our stock compensation ~~awards we grant,~~activity, which depend upon our stock price and the award holders' exercise behavior.

LIQUIDITY AND CAPITAL RESOURCES


	Three Months Ended March 31,
(in thousands)	2022		2021
Cash provided by (used in):
Operating activities	$	15,116	$	21,650
Investing activities	(6,082)		15,489
Financing activities	(35,918)		(34,794)
Effect of exchange rates on cash and cash equivalents	(310)		(1,536)
Net (decrease) increase in cash and cash equivalents	$	(27,194)	$	809

Three Months Ended
March 31,
(in thousands) 2021 2020
Cash provided by (used in):
Operating activities $ 21,650 $ (18,323)
Investing activities 15,489 (12,562)
Financing activities (34,794) 502,174
Effect of exchange rates on cash and cash equivalents (1,536) (1,510)
Net increase in cash and cash equivalents $ 809 $ 469,779


(in thousands)	(in thousands)	March 31, 2021		December 31, 2020		(in thousands)	March 31, 2022		December 31, 2021
Held by U.S. entities	Held by U.S. entities	$	342,016	$	399,138	Held by U.S. entities	$	251,554	$	274,813
Held by foreign entities	Held by foreign entities	100,342		66,030		Held by foreign entities	80,618		87,966
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	$	442,358	$	465,168	Total cash, cash equivalents, and marketable securities	$	332,172	$	362,779

We believe that our current cash, cash flow from operations, and borrowing capacity will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 ~~months.~~months and to meet our known long-term cash requirements. Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and the investments ~~required~~needed to support our operations. IfWe may utilize available funds or seek additional external financing if we require additional capital ~~resources to grow our business, we may seek to finance our operations from available funds or additional external financing.~~resources.

If it ~~became~~becomes necessary to repatriate foreign funds, we may ~~be required~~have to pay U.S. and foreign taxes upon repatriation. ~~Due~~However, due to the complexity of income tax laws and regulations, it is impracticable to estimate the amount of taxes we would have to pay.

Operating activities

We are ~~in the process of~~ transitioning our business to sell software primarily through subscription ~~arrangements, particularly Pega Cloud.~~arrangements. This transition has impacted and is expected to continue ~~to impact~~impacting our billings and cash collections, as the timing of billings and cash ~~collections. Pega Cloud, term~~collections generally differs between our subscription and perpetual license arrangements. Subscription licenses and ~~maintenance arrangements~~services are generally billed and collected over the contract term, while perpetual license arrangements usually are ~~generally~~ billed and collected upfront when the license rights become effective. ~~As client preferences shift in favor of Pega Cloud arrangements, we could experience slower operating cash flow growth, or negative cash flow, in the near term.~~

The change in cash provided by ~~(used in)~~ operating activities in the three months ended March 31, ~~2021~~2022 was primarily due to ~~a significant increase~~our subscription transition and increased costs as we made investments in ~~client collections.~~our Pega Cloud offering and selling and marketing activities to support future growth. In February 2021, we agreed to accelerate our exit from our Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which is expected to be paidaddition, in the ~~last quarter~~three months ended March 31, 2022 we incurred $17.4 million in legal fees and related expenses arising from proceedings that originated outside of ~~2021. The accelerated exit from~~the ordinary course of business. We expect to continue to incur additional expenses for these proceedings. See "Note 14. Commitments and Contingencies" in Part I, Item 1 of this ~~lease reduced our future lease liabilities by $21.1 million.~~Quarterly Report for additional information.

Investing activities

The change in cash (used in) provided by ~~(used in)~~ investing activities in the three months ended March 31, ~~2021~~2022 was primarily driven by our investments in financial instruments and an acquisition ~~and a decrease~~ in ~~office space related capital expenditures.~~2021.

Financing activities

Debt financing

In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, ~~due~~which mature on March 1, 2025.


(in thousands)	Amount
Principal	$	600,000
Less: issuance costs	(14,527)
Less: Capped Call Transactions	(51,900)
	$	533,573

In November 2019, and as since amended, ~~as of February 2020, July 2020, and September 2020,~~ we entered into a five-year $100 million senior secured revolving credit agreement with PNC Bank, National Association. As of March 31, ~~2021,~~2022, we had no outstanding borrowings under the Credit Facility. See "Note 8. Debt" in Part I, Item 1 of this Quarterly Report for additional information.

Stock repurchase program

Changes in the remaining stock repurchase authority:


(in thousands)	Three Months Ended March 31, ~~2021~~2022
December 31, ~~2020~~2021	$	~~37,726~~22,583
Authorizations (1)	—
Repurchases ~~(1)~~(2)	~~(9,146)~~(22,583)
March 31, ~~2021~~2022	$	~~28,580~~—

(1) ~~Purchases~~On June 8, 2021, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2022 and increased the remaining common stock repurchase authority to $60 million.

(2) All purchases under this program have been made on the open market.

Common stock repurchases

Three Months Ended
March 31,
2021 2020
(in thousands) Shares Amount Shares Amount
Tax withholdings for net settlement of equity awards 197 $ 25,509 257 $ 23,011
Stock repurchase program 70 9,146 87 6,000
267 $ 34,655 344 $ 29,011


	Three Months Ended March 31,
	2022			2021
(in thousands)	Shares	Amount		Shares	Amount
Repurchases paid	242	$	22,583	67	$	8,846
Repurchases unpaid at period end	—	—		3	300
Stock repurchase program	242	22,583		70	9,146
Tax withholdings for net settlement of equity awards	141	12,128		197	25,509
	383	$	34,711	267	$	34,655

During the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, instead of receiving cash from the equity holders, we withheld shares with a value of ~~$10.1~~$6.1 million and ~~$15.3~~$10.1 million, respectively, for the exercise price of options. These amounts ~~have been excluded from~~are not included in the table above.

Dividends

We intend to pay a quarterly cash dividend of $0.03 per share. However, the Board of Directors may terminate or modify the dividend program ~~at any time~~ without prior notice.


	Three Months Ended March 31,
(in thousands)	2022		2021
Dividend payments to stockholders	$	2,454	$	2,427

Three Months Ended
March 31,
(in thousands) 2021 2020
Dividend payments to stockholders $ 2,427 $ 2,388

Contractual obligations

As of March 31, 2022, our contractual obligations were:


	Payments due by period
(in thousands)	Remainder of 2022		2023		2024		2025		2026		2027 and thereafter		Other		Total
Convertible senior notes (1)	$	2,250	$	4,500	$	4,500	$	602,250	$	—	$	—	$	—	$	613,500
Purchase obligations (2)	49,936		14,311		9,198		13,072		13,750		—		—		100,267
Operating lease obligations	3,887		20,317		17,141		14,352		10,664		48,381		—		114,742
Liability for uncertain tax positions (3)	—		—		—		—		—		—		1,705		1,705
	$	56,073	$	39,128	$	30,839	$	629,674	$	24,414	$	48,381	$	1,705	$	830,214

(1) Includes principal and interest.

(2) Represents the fixed or minimum amounts due under purchase obligations for hosting services and sales and marketing programs.

(3) We are unable to reasonably estimate the timing of this cash outflow due to uncertainties in the timing of the effective settlement of tax positions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk ~~represents~~is the risk of loss from adverse changes in financial market prices and rates.

Foreign currency exposure

Translation risk

Our ~~foreign~~international operations’ operating expenses are primarily denominated in foreign currencies. However, our international sales are also primarily denominated in foreign currencies, which partially offsets our foreign currency exposure.

A hypothetical 10% strengthening in the U.S. dollar against other currencies would have resulted in:

Three Months Ended
March 31,
2021 2020
(Decrease) increase in revenue (4) % (3) %
(Decrease) increase in net income 20 % (14) %


	Three Months Ended March 31,
	2022		2021
(Decrease) increase in revenue	(3)	%	(4)	%
Increase (decrease) in net income	186	%	20	%

Remeasurement risk

We ~~experience fluctuations in~~incur transaction gains and losses from the remeasurement of monetary assets and liabilities denominated in currencies other than the functional currency of the entities in which they are recorded.

We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash, ~~and~~ cash equivalents, receivables, and intercompany ~~receivables and payables~~balances held by our U.K. subsidiary, a British pound functional entity.

A hypothetical 10% strengthening in the British pound exchange rate in comparison to the Australian dollar, Euro, and U.S. dollar would have resulted in the following impact:

Three Months Ended
March 31,
(in thousands) 2021 2020
Foreign currency gain (loss) $ (7,522) $ 7,190


	Three Months Ended March 31,
(in thousands)	2022		2021
Foreign currency gain (loss)	$	(7,937)	$	(7,522)

2425

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of March 31, ~~2021.~~2022. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, ~~2021.~~2022.

(b) Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, ~~2021~~2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

2526

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The following information contains an update to the description of our pending legal proceedings with Appian Corp., as described in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 16, 2022.

Pegasystems Inc. v. Appian Corp. & Business Process Management Inc.

Appian Corp. v. Pegasystems Inc. & Youyong Zou

ITEM 1A. RISK FACTORS

WeThe risk factors set forth below update the risk factors in our Annual Report on Form 10-K filed with the SEC on February 16, 2022.

In addition to the risk factors set forth below, we encourage you to carefully consider ~~carefully~~ the risk factors identified in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, filed with the U.S. Securities and Exchange Commission. These risk factors could materially affect our business, financial condition, and future results, and may cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management.

We face risks related to intellectual property claims or appropriation of our intellectual property rights.

We rely primarily on a combination of patent, copyright, trademark, and trade secrets laws, as well as intellectual property and confidentiality agreements to protect our proprietary rights. We also try to control access to and distribution of our technologies and other proprietary information. We have obtained patents in strategically important global markets relating to the architecture of our systems. We cannot be certain that such patents will not be challenged, invalidated, or circumvented, or that rights granted thereunder, or the claims contained therein will provide us with competitive advantages. Moreover, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our software or to obtain the use of information that we regard as proprietary. Although we generally enter into intellectual property and confidentiality agreements with our employees and strategic partners, despite our efforts our former employees may seek employment with our business partners, clients, or competitors, and there can be no assurance that the confidential nature of our proprietary information will be maintained. In addition, the laws of some foreign countries do not protect our proprietary rights as effectively as they do in the U.S. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology.

Other companies or individuals have obtained proprietary rights covering a variety of designs, processes, and systems. Third parties have claimed and may in the future claim that we have infringed or otherwise violated their intellectual property. We are currently party to litigation with Appian Corp. - see Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report, and Part I, Item 3 “Legal Proceedings” and Note 19 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of our Annual Report filed with the SEC on February 16, 2022.

Although we attempt to limit the amount and type of our contractual liability for infringement or other violation of the proprietary rights of third parties and assert ownership of work product and intellectual property rights as appropriate, there are often exceptions, and limitations may not be applicable and enforceable in all cases. Even if limitations are found to be applicable and enforceable, our liability to our clients for these types of claims could be material given the size of certain of our transactions. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment and delivery delays, require us to enter into royalty or licensing agreements, or preclude us from making and selling the infringing software, if such proprietary rights are found to be valid. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require substantial effort and cost. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our software and may be unable to compete effectively, which could have a material effect upon our business, operating results, and financial condition.

Intellectual property rights claims by third parties are extremely costly to defend, could require us to pay significant damages, and could limit our ability to use certain technologies.

Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks, and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies can dedicate greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. The litigation may involve patent holding companies or other adverse patent owners that have no relevant product revenues and against which our patents may, therefore, provide little or no deterrence. Third parties have claimed and may claim in the future that we have misappropriated, misused, or infringed other parties' intellectual property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property claims. We are currently party to litigation with Appian Corp. - see Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report, and Part I, Item 3 “Legal Proceedings” and Note 19 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of our Annual Report filed with the SEC on February 16, 2022.

Any litigation regarding intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Significant judgments are required for the determination of probability and the range of the outcomes in any legal dispute, and the estimates are based only on the information available to us at the time. Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods which may have a material impact on our results of operations and financial position. Intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from manufacturing or licensing certain of our products, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments to our customers. Any of these could seriously harm our business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer purchases of equity securities

Common stock repurchased in the three months ended March 31, ~~2021:~~

(in thousands, except per share amounts)
Total Number of Shares Purchased (1) (2)
Average
Price Paid
per Share (1) (2)
Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2)
Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs (2)
January 1, 2021 - January 31, 2021 29 $ 134.92 21 $ 34,877
February 1, 2021 - February 28, 2021 81 140.75 20 $ 32,028
March 1, 2021 - March 31, 2021 234 125.62 29 $ 28,580
344 $ 129.95 70
2022:


(in thousands, except per share amounts)	Total Number of Shares Purchased (1) (2)	Average Price Paid per Share (1) (2)		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2)	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs (2)
January 1, 2022 - January 31, 2022	118	$	99.46	101	$	12,584
February 1, 2022 - February 28, 2022	141	90.97		103	$	3,085
March 1, 2022 - March 31, 2022	196	82.52		38	$	—
	455	$	89.54	242

(1) Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts.

(2) On June ~~15, 2020,~~8, 2021, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, ~~2021~~2022 and increased the remaining stock repurchase authority to $60 million. See "Liquidity and Capital Resources" in Part I, Item 2 of this Quarterly Report for additional information.

ITEM 5. OTHER INFORMATION

Effective on March 31, 2022, we entered into an amendment (the “Amendment”) to our $100 million senior secured revolving credit agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”). The Amendment modifies the financial covenants as reflected in Note 8. Debt of Part I, Item 1 of this Quarterly Report on Form 10-Q and transitions the Credit Agreement from the U.S. dollar London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) for floating rate loan commitments under the Credit Agreement.

The description of the Credit Agreement contained herein is qualified in its entirety by reference to the Credit Agreement, a copy of which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.

ITEM 6. EXHIBITS


~~Exhibit No.~~						~~Description~~
~~3.1~~						~~Restated Articles of Organization of the Registrant and Amendments thereto. (Filed as Exhibit 3.1 to the Registrant’s September 30, 2014 Form 10-Q and incorporated herein by reference.)~~
~~3.2~~						~~Amended and Restated Bylaws of Pegasystems Inc. (Filed as Exhibit 3.2 to the Registrant’s June 15, 2020 Form 8-K and incorporated herein by reference.)~~
~~31.1+~~						~~Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.~~
~~31.2+~~						~~Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.~~
~~32++~~						~~Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.~~
~~101.INS~~						~~Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.~~
~~101.SCH~~						~~Inline XBRL Taxonomy Extension Schema Document.~~
~~101.CAL~~						~~Inline XBRL Taxonomy Calculation Linkbase Document.~~
~~101.DEF~~						~~Inline XBRL Taxonomy Extension Definition Linkbase Document.~~
~~101.LAB~~						~~Inline XBRL Taxonomy Label Linkbase Document.~~
~~101.PRE~~						~~Inline XBRL Taxonomy Presentation Linkbase Document.~~
~~104~~						~~Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)~~

~~+ Filed herewith.~~

Exhibit No.

Description

Incorporation by Reference

Filed Herewith

Form

Exhibit

Filing Date

3.1

Restated Articles of Organization of the Registrant and Amendments thereto

10-Q

3.1

November 4, 2014

3.2

Amended and Restated Bylaws of Pegasystems Inc.

8-K

3.2

June 15, 2020

10.1**

Amendment to Loan Documents, effective March 31, 202 2 , between Pegasystems Inc. and PNC Bank, National Association.

31.1

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.

31.2

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.

32++

Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

++ Indicates that the exhibit is being furnished with this report and is not filed as a part of it.

** Certain portions of this exhibit are considered confidential and have been omitted as allowed under SEC rules and regulations.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Pegasystems Inc.

Dated:	April 28, ~~2021~~2022	By:	/s/ KENNETH STILLWELL
			Kenneth Stillwell
			Chief Operating Officer and Chief Financial Officer
			(Principal Financial Officer)


	Three Months Ended March 31, 2021
(in thousands)	Shares	Total Fair Value
RSUs	684	$	89,291
Non-qualified stock options	1,248	$	47,380