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 June 30, ~~2021~~2022


☐			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 ~~81,455,672~~81,952,276 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on July 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 June 30, ~~2021~~2022 and December 31, ~~2020~~2021			3
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021			4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income ~~(Loss)~~ for the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, ~~2021~~2022 and ~~2020~~2021			6
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, ~~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			1920
Item 3. Quantitative and Qualitative Disclosures About Market Risk			26
Item 4. Controls and Procedures			2627

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			28
Item 1A. Risk Factors			2728
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			2729
Item 5. Other Information			29
Item 6. Exhibits			2730

Signature			2831

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)
		June 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	139,878	$	171,899	Cash and cash equivalents	$	109,275	$	159,965
Marketable securities	Marketable securities	271,459		293,269		Marketable securities	187,613		202,814
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	411,337		465,168		Total cash, cash equivalents, and marketable securities	296,888		362,779
Accounts receivable	Accounts receivable	166,226		215,827		Accounts receivable	171,556		182,717
Unbilled receivables	Unbilled receivables	236,451		207,155		Unbilled receivables	201,130		226,714
Other current assets	Other current assets	96,215		88,760		Other current assets	70,633		68,008
Total current assets	Total current assets	910,229		976,910		Total current assets	740,207		840,218
Unbilled receivables	Unbilled receivables	144,065		113,278		Unbilled receivables	115,901		129,789
Goodwill	Goodwill	82,173		79,231		Goodwill	81,717		81,923
Other long-term assets	Other long-term assets	466,103		434,843		Other long-term assets	320,557		541,601
Total assets	Total assets	$	1,602,570	$	1,604,262	Total assets	$	1,258,382	$	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	$	22,931	$	24,028	Accounts payable	$	21,465	$	15,281
Accrued expenses	Accrued expenses	64,093		59,261		Accrued expenses	63,120		63,890
Accrued compensation and related expenses	Accrued compensation and related expenses	84,900		123,012		Accrued compensation and related expenses	73,945		120,946
Deferred revenue	Deferred revenue	242,194		232,865		Deferred revenue	269,121		275,844
Other current liabilities	Other current liabilities	16,126		20,969		Other current liabilities	7,800		9,443
Total current liabilities	Total current liabilities	430,244		460,135		Total current liabilities	435,451		485,404
Convertible senior notes, net	Convertible senior notes, net	589,092		518,203		Convertible senior notes, net	592,161		590,722
Operating lease liabilities	Operating lease liabilities	42,063		59,053		Operating lease liabilities	84,170		87,818
Other long-term liabilities	Other long-term liabilities	18,703		24,699		Other long-term liabilities	12,821		13,499
Total liabilities	Total liabilities	1,080,102		1,062,090		Total liabilities	1,124,603		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; 81,456 and 80,890 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively		815		809
Preferred stock, 1,000 shares authorized; none issued						Preferred stock, 1,000 shares authorized; none issued	—		—
Common stock, 200,000 shares authorized; 81,940 and 81,712 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively						Common stock, 200,000 shares authorized; 81,940 and 81,712 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively	819		817
Additional paid-in capital	Additional paid-in capital	147,670		204,432		Additional paid-in capital	170,251		145,810
Retained earnings		375,069		339,879
(Accumulated deficit) retained earnings						(Accumulated deficit) retained earnings	(15,140)		276,449
Accumulated other comprehensive (loss)	Accumulated other comprehensive (loss)	(1,086)		(2,948)		Accumulated other comprehensive (loss)	(22,151)		(6,988)
Total stockholders’ equity	Total stockholders’ equity	522,468		542,172		Total stockholders’ equity	133,779		416,088
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,602,570	$	1,604,262	Total liabilities and stockholders’ equity	$	1,258,382	$	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 June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Revenue	Revenue									Revenue
Software license		$	116,892	$	53,323	$	233,853	$	147,239
Maintenance		78,782		72,222		154,343		145,917
Pega Cloud		73,293		48,838		141,151		92,304
Subscription services										Subscription services	$	171,832	$	152,075	$	341,865	$	295,494
Subscription license										Subscription license	41,600		104,296		179,133		215,805
Perpetual license										Perpetual license	2,266		12,596		9,706		18,048
Consulting	Consulting	56,735		52,992		109,854		107,506		Consulting	58,639		56,735		119,940		109,854
Total revenue	Total revenue	325,702		227,375		639,201		492,966		Total revenue	274,337		325,702		650,644		639,201
Cost of revenue	Cost of revenue									Cost of revenue
Software license		656		979		1,306		1,663
Maintenance		4,995		5,591		10,781		11,167
Pega Cloud		24,051		18,988		46,608		36,521
Subscription services										Subscription services	36,533		29,046		68,563		57,389
Subscription license										Subscription license	673		585		1,295		1,205
Perpetual license										Perpetual license	36		71		70		101
Consulting	Consulting	54,829		51,133		108,283		106,868		Consulting	57,873		54,829		113,384		108,283
Total cost of revenue	Total cost of revenue	84,531		76,691		166,978		156,219		Total cost of revenue	95,115		84,531		183,312		166,978
Gross profit	Gross profit	241,171		150,684		472,223		336,747		Gross profit	179,222		241,171		467,332		472,223
Operating expenses	Operating expenses									Operating expenses
Selling and marketing	Selling and marketing	156,423		127,607		305,162		263,631		Selling and marketing	157,198		156,423		319,434		305,162
Research and development	Research and development	64,395		58,869		126,837		117,596		Research and development	74,341		64,395		145,831		126,837
General and administrative	General and administrative	19,161		15,655		37,431		31,285		General and administrative	32,723		19,161		68,487		37,431
Total operating expenses	Total operating expenses	239,979		202,131		469,430		412,512		Total operating expenses	264,262		239,979		533,752		469,430
Income (loss) from operations		1,192		(51,447)		2,793		(75,765)
Foreign currency transaction (loss) gain		(403)		4,256		(5,501)		(1,691)
(Loss) income from operations										(Loss) income from operations	(85,040)		1,192		(66,420)		2,793
Foreign currency transaction gain (loss)										Foreign currency transaction gain (loss)	1,713		(403)		4,589		(5,501)
Interest income	Interest income	236		242		389		849		Interest income	309		236		516		389
Interest expense	Interest expense	(1,959)		(5,529)		(3,839)		(7,835)		Interest expense	(1,944)		(1,959)		(3,890)		(3,839)
Gain on capped call transactions		26,309		19,419		7,192		827
(Loss) income on capped call transactions										(Loss) income on capped call transactions	(18,945)		26,309		(49,505)		7,192
Other income, net	Other income, net	0		0		106		1,374		Other income, net	3,785		—		6,526		106
Income (loss) before (benefit from) income taxes		25,375		(33,059)		1,140		(82,241)
(Benefit from) income taxes		(11,916)		(12,319)		(29,534)		(36,129)
Net income (loss)		$	37,291	$	(20,740)	$	30,674	$	(46,112)
Earnings (loss) per share
(Loss) income before provision for (benefit from) income taxes										(Loss) income before provision for (benefit from) income taxes	(100,122)		25,375		(108,184)		1,140
Provision for (benefit from) income taxes										Provision for (benefit from) income taxes	186,174		(11,916)		178,491		(29,534)
Net (loss) income										Net (loss) income	$	(286,296)	$	37,291	$	(286,675)	$	30,674
(Loss) earnings per share										(Loss) earnings per share
Basic	Basic	$	0.46	$	(0.26)	$	0.38	$	(0.58)	Basic	$	(3.50)	$	0.46	$	(3.51)	$	0.38
Diluted	Diluted	$	0.43	$	(0.26)	$	0.36	$	(0.58)	Diluted	$	(3.50)	$	0.43	$	(3.51)	$	0.36
Weighted-average number of common shares outstanding	Weighted-average number of common shares outstanding									Weighted-average number of common shares outstanding
Basic	Basic	81,316		80,224		81,161		80,016		Basic	81,847		81,316		81,764		81,161
Diluted	Diluted	90,320		80,224		86,006		80,016		Diluted	81,847		90,320		81,764		86,006

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Three Months Ended
June 30, Six Months Ended
June 30,
2021 2020 2021 2020
Net income (loss) $ 37,291 $ (20,740) $ 30,674 $ (46,112)
Other comprehensive income, net of tax
Unrealized gain on available-for-sale securities 121 0 1,131 100
Foreign currency translation adjustments 1,461 2,028 731 1,514
Total other comprehensive income, net of tax $ 1,582 $ 2,028 $ 1,862 $ 1,614
Comprehensive income (loss) $ 38,873 $ (18,712) $ 32,536 $ (44,498)


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (in thousands)
	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net (loss) income	$	(286,296)	$	37,291	$	(286,675)	$	30,674
Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on available-for-sale securities	(1,149)		121		(927)		1,131
Foreign currency translation adjustments	(11,466)		1,461		(14,236)		731
Total other comprehensive (loss) income, net of tax	$	(12,615)	$	1,582	$	(15,163)	$	1,862
Comprehensive (loss) income	$	(298,911)	$	38,873	$	(301,838)	$	32,536

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
		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
Repurchase of common stock		(23)	—		(2,199)				—		—				(2,199)
Issuance of common stock for stock compensation plans		349	3		(14,085)				—		—				(14,082)
Issuance of common stock under the employee stock purchase plan		18	—		1,403				—		—				1,403
Stock-based compensation		—	—		25,674				—��		—				25,674
Cash dividends declared ($0.03 per share)		—	—		—				(2,413)		—				(2,413)
Other comprehensive income		—	—		—				—		2,028				2,028
Net (loss)		—	—		—				(20,740)		—				(20,740)
June 30, 2020		80,420	$	804	$	207,103			$	359,989	$	(11,614)			$	556,282

																		Common Stock						Additional Paid-In Capital				Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive (Loss)		Total Stockholders’ Equity
																		Number of Shares			Amount
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	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	—			—			(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
Repurchase of common stock	Repurchase of common stock	(81)	(1)		(10,245)				—		—				(10,246)		Repurchase of common stock	(81)			(1)			(10,245)				—		—		(10,246)
Issuance of common stock for stock compensation plans	Issuance of common stock for stock compensation plans	267	3		(16,199)				—		—				(16,196)		Issuance of common stock for stock compensation plans	267			3			(16,199)				—		—		(16,196)
Issuance of common stock under the employee stock purchase plan	Issuance of common stock under the employee stock purchase plan	24	1		2,858				—		—				2,859		Issuance of common stock under the employee stock purchase plan	24			1			2,858				—		—		2,859
Stock-based compensation	Stock-based compensation	—	—		30,698				—		—				30,698		Stock-based compensation	—			—			30,698				—		—		30,698
Cash dividends declared ($0.03 per share)	Cash dividends declared ($0.03 per share)	—	—		—				(2,445)		—				(2,445)		Cash dividends declared ($0.03 per share)	—			—			—				(2,445)		—		(2,445)
Other comprehensive income	Other comprehensive income	—	—		—				—		1,582				1,582		Other comprehensive income	—			—			—				—		1,582		1,582
Net income	Net income	—	—		—				37,291		—				37,291		Net income	—			—			—				37,291		—		37,291
June 30, 2021	June 30, 2021	81,456	$	815	$	147,670			$	375,069	$	(1,086)			$	522,468	June 30, 2021	81,456			$	815		$	147,670			$	375,069	$	(1,086)	$	522,468

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
Repurchase of common stock																	Repurchase of common stock	(38)			—			(1,925)				—		—		(1,925)
Issuance of common stock for stock compensation plans																	Issuance of common stock for stock compensation plans	117			1			(3,252)				—		—		(3,251)
Issuance of common stock under the employee stock purchase plan																	Issuance of common stock under the employee stock purchase plan	59			—			2,357				—		—		2,357
Stock-based compensation																	Stock-based compensation	—			—			31,300				—		—		31,300
Cash dividends declared ($0.03 per share)																	Cash dividends declared ($0.03 per share)	—			—			—				(2,459)		—		(2,459)
Other comprehensive (loss)																	Other comprehensive (loss)	—			—			—				—		(12,615)		(12,615)
Net (loss)																	Net (loss)	—			—			—				(286,296)		—		(286,296)
June 30, 2022																	June 30, 2022	81,940			$	819		$	170,251			$	(15,140)	$	(22,151)	$	133,779

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)
		Six Months Ended June 30,					Six Months Ended June 30,
		2021		2020			2022		2021
Operating activities	Operating activities					Operating activities
Net income (loss)		$	30,674	$	(46,112)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities
Net (loss) income						Net (loss) income	$	(286,675)	$	30,674
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities						Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities
Stock-based compensation	Stock-based compensation	60,788		48,831		Stock-based compensation	59,527		60,788
(Gain) on capped call transactions		(7,192)		(827)
Deferred income taxes	Deferred income taxes	(28,232)		(18,399)		Deferred income taxes	169,105		(28,232)
Loss (gain) on capped call transactions						Loss (gain) on capped call transactions	49,505		(7,192)
Amortization of deferred commissions	Amortization of deferred commissions	21,202		16,061		Amortization of deferred commissions	28,155		21,202
Amortization of debt discount and issuance costs		1,348		6,033
Lease expense						Lease expense	7,832		5,792
Amortization of intangible assets and depreciation	Amortization of intangible assets and depreciation	15,504		10,134		Amortization of intangible assets and depreciation	8,175		15,504
Amortization of investments		1,988		0
Foreign currency transaction loss		5,501		1,691
Foreign currency transaction (gain) loss						Foreign currency transaction (gain) loss	(4,589)		5,501
Other non-cash	Other non-cash	(4,869)		6,445		Other non-cash	(3,479)		3,543
Change in operating assets and liabilities, net	Change in operating assets and liabilities, net	(77,302)		(45,056)		Change in operating assets and liabilities, net	(32,625)		(88,170)
Cash provided by (used in) operating activities		19,410		(21,199)
Cash (used in) provided by operating activities						Cash (used in) provided by operating activities	(5,069)		19,410
Investing activities	Investing activities					Investing activities
Purchases of investments	Purchases of investments	(51,601)		(1,769)		Purchases of investments	(38,489)		(51,601)
Proceeds from maturities and called investments	Proceeds from maturities and called investments	68,798		0		Proceeds from maturities and called investments	34,912		68,798
Sales of investments	Sales of investments	2,450		1,424		Sales of investments	14,839		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	(922)		(4,993)
Investment in property and equipment	Investment in property and equipment	(4,161)		(19,059)		Investment in property and equipment	(11,863)		(4,161)
Cash provided by (used in) investing activities		10,493		(19,404)
Cash (used in) provided by investing activities						Cash (used in) provided by investing activities	(1,523)		10,493
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	5,146		1,403		Proceeds from employee stock purchase plan	4,803		5,146
Dividend payments to stockholders	Dividend payments to stockholders	(4,865)		(4,793)		Dividend payments to stockholders	(4,908)		(4,865)

Common stock repurchases	Common stock repurchases	(60,998)		(44,890)		Common stock repurchases	(41,086)		(60,998)
Cash (used in) provided by financing activities		(60,717)		485,293
Cash (used in) financing activities						Cash (used in) financing activities	(41,191)		(60,717)
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	(1,207)		(942)		Effect of exchange rate changes on cash and cash equivalents	(2,907)		(1,207)
Net (decrease) increase in cash and cash equivalents		(32,021)		443,748
Net (decrease) in cash and cash equivalents						Net (decrease) in cash and cash equivalents	(50,690)		(32,021)
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	$	139,878	$	512,111	Cash and cash equivalents, end of period	$	109,275	$	139,878

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. These 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.

~~NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS~~

~~Convertible debt~~

~~In August 2020,~~Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, after adoption, entities will no longer separately present in stockholders’ equity an embedded conversion feature for such debt. Additionally, the debt discount resulting from separating the embedded conversion feature will no longer be amortized intocurrent year’s presentation. Such reclassifications did not affect total revenues, operating 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.~~net income.

NOTE 3.2. MARKETABLE SECURITIES


		June 30, 2021								December 31, 2020									June 30, 2022								December 31, 2021
(in thousands)	(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Government debt	Government debt	$	2,000	$	0	$	0	$	2,000	$	39,996	$	0	$	(8)	$	39,988	Government debt	$	2,989	$	—	$	(60)	$	2,929	$	2,000	$	—	$	(10)	$	1,990
Corporate debt	Corporate debt	269,649		20		(210)		269,459		253,345		88		(152)		253,281		Corporate debt	188,350		—		(3,666)		184,684		201,659		2		(837)		200,824
		$	271,649	$	20	$	(210)	$	271,459	$	293,341	$	88	$	(160)	$	293,269		$	191,339	$	—	$	(3,726)	$	187,613	$	203,659	$	2	$	(847)	$	202,814

As of June 30, ~~2021,~~2022, marketable securities’ maturities ranged from July ~~2021~~2022 to ~~May~~November 2024, with a weighted-average remaining maturity of ~~approximately 1.3~~0.9 years.

~~PEGASYSTEMS INC.~~

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

NOTE 4.3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables


(in thousands)	(in thousands)	June 30, 2021		December 31, 2020		(in thousands)	June 30, 2022		December 31, 2021
Accounts receivable	Accounts receivable	$	166,226	$	215,827	Accounts receivable	$	171,556	$	182,717
Unbilled receivables	Unbilled receivables	236,451		207,155		Unbilled receivables	201,130		226,714
Long-term unbilled receivables	Long-term unbilled receivables	144,065		113,278		Long-term unbilled receivables	115,901		129,789
		$	546,742	$	536,260		$	488,587	$	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)	(Dollars in thousands)	June 30, 2021				(Dollars in thousands)	June 30, 2022
1 year or less	1 year or less	$	236,451	62	%	1 year or less	$	201,130	63	%
1-2 years	1-2 years	88,350		23	%	1-2 years	78,813		25	%
2-5 years	2-5 years	55,715		15	%	2-5 years	37,088		12	%
		$	380,516	100	%		$	317,031	100	%

Unbilled receivables by contract effective date:


(Dollars in thousands)	(Dollars in thousands)	June 30, 2021				(Dollars in thousands)	June 30, 2022
2022						2022	$	81,887	26	%
2021	2021	$	140,395	37	%	2021	142,578		45	%
2020	2020	131,618		34	%	2020	56,283		18	%
2019	2019	55,282		15	%	2019	19,928		6	%
2018		26,688		7	%
2017 and prior		26,533		7	%
2018 and prior						2018 and prior	16,355		5	%
		$	380,516	100	%		$	317,031	100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Major clients

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


	June 30, ~~2021~~2022	December 31, ~~2020~~2021
Client A
13Accounts receivable	*	1	%
Unbilled receivables	*	15	%
Total receivables	*	10	%

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

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)	(in thousands)	June 30, 2021		December 31, 2020		(in thousands)	June 30, 2022		December 31, 2021
Contract assets (1)	Contract assets (1)	$	14,031	$	15,296	Contract assets (1)	$	12,149	$	12,530
Long-term contract assets (2)	Long-term contract assets (2)	10,097		7,777		Long-term contract assets (2)	12,983		10,643
		$	24,128	$	23,073		$	25,132	$	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)	(in thousands)	June 30, 2021		December 31, 2020		(in thousands)	June 30, 2022		December 31, 2021
Deferred revenue	Deferred revenue	$	242,194	$	232,865	Deferred revenue	$	269,121	$	275,844
Long-term deferred revenue (1)	Long-term deferred revenue (1)	6,041		8,991		Long-term deferred revenue (1)	5,417		5,655
		$	248,235	$	241,856		$	274,538	$	281,499

(1) Included in other long-term liabilities.

The change in deferred revenue in the six months ended June 30, ~~2021~~2022 was primarily due to new billings in advance of revenue recognition offset by ~~$172.1~~$205.0 million of revenue recognized during the period that was included in deferred revenue as of December 31, ~~2020.~~2021.

NOTE 4. DEFERRED COMMISSIONS


(in thousands)	June 30, 2022		December 31, 2021
Deferred commissions (1)	$	123,067	$	135,911

(1) Included in other long-term assets.


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2022		2021		2022		2021
Amortization of deferred commissions (1)	$	10,934	$	9,706	$	28,155	$	21,202

(1) Included in selling and marketing expense.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~NOTE 5. DEFERRED COMMISSIONS~~
(in thousands) June 30, 2021 December 31, 2020
Deferred commissions (1)
$ 109,803 $ 108,624

~~(1) Included in other long-term assets.~~

Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2021 2020 2021 2020
Amortization of deferred commissions (1)
$ 9,706 $ 7,564 $ 21,202 $ 16,061

~~(1) Included in selling and marketing expense.~~

NOTE 6.5. GOODWILL AND OTHER INTANGIBLES

Goodwill

Change in goodwill:


		Six Months Ended June 30,					Six Months Ended June 30,
(in thousands)	(in thousands)	2021		2020		(in thousands)	2022		2021
January 1,	January 1,	$	79,231	$	79,039	January 1,	$	81,923	$	79,231
Acquisition	Acquisition	2,701		0		Acquisition	—		2,701
Currency translation adjustments	Currency translation adjustments	241		(364)		Currency translation adjustments	(206)		241
June 30,	June 30,	$	82,173	$	78,675	June 30,	$	81,717	$	82,173

Intangibles

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


			June 30, 2021								June 30, 2022
(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	$	63,186	$	(56,638)	$	6,548	Client-related	4-10 years	$	63,082	$	(57,944)	$	5,138
Technology	Technology	2-10 years	67,142		(57,644)		9,498		Technology	2-10 years	68,064		(60,211)		7,853
Other	Other	1-5 years	5,361		(5,361)		0		Other	1-5 years	5,361		(5,361)		—
			$	135,689	$	(119,643)	$	16,046			$	136,507	$	(123,516)	$	12,991

(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 June 30,				Six Months Ended June 30,
(in thousands)	2022		2021			2022		2021
Cost of revenue	$	683	$	629		$	1,312	$	1,258
Selling and marketing	342		373			685		746

	$	1,025	$	1,002		$	1,997	$	2,004

Future estimated intangibles assets amortization:


(in thousands)	June 30, 2022
Remainder of 2022	$	2,098
2023	3,925
2024	3,156
2025	2,611
2026	874
2027	327
	$	12,991

NOTE 6. OTHER ASSETS AND LIABILITIES

Other current assets


(in thousands)	June 30, 2022		December 31, 2021
Income tax receivables	$	22,982	$	25,691
Contract assets	12,149		12,530
Other	35,502		29,787
	$	70,633	$	68,008

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Amortization of intangible assets:~~
Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2021 2020 2021 2020
Cost of revenue $ 629 $ 647 $ 1,258 $ 1,294
Selling and marketing 373 370 746 740
$ 1,002 $ 1,017 $ 2,004 $ 2,034
Other long-term assets

~~Future estimated intangibles assets amortization:~~
(in thousands) June 30, 2021
2021 $ 1,983
2022 3,886
2023 3,618
2024 2,849
2025 2,509
2026 and thereafter 1,201
$ 16,046


(in thousands)	June 30, 2022		December 31, 2021
Deferred income taxes	$	6,092	$	180,656
Deferred commissions	123,067		135,911
Right of use assets	80,646		87,521
Capped call transactions	10,459		59,964
Property and equipment	34,886		26,837
Venture investments	16,073		7,648
Intangible assets	12,991		14,063
Contract assets	12,983		10,643
Other	23,360		18,358
	$	320,557	$	541,601

Other current liabilities


(in thousands)	June 30, 2022		December 31, 2021
Operating lease liabilities	$	5,341	$	6,989
Dividends payable	2,459		2,454
	$	7,800	$	9,443

Other long-term liabilities


(in thousands)	June 30, 2022		December 31, 2021
Deferred revenue	$	5,417	$	5,655
Other	7,404		7,844
	$	12,821	$	13,499

NOTE 7. LEASES

~~Headquarters lease~~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, which ~~is being~~was amortized over the remaining lease term. ~~Upon modification,~~The exit accelerated depreciation on the ~~Company~~related leasehold improvements and reduced ~~its~~the Company’s future lease liabilities by $21.1 million and ~~accelerated depreciation related~~right of use assets by $20.3 million. On March 31, 2021 the Company leased office space at One Main Street, Cambridge, Massachusetts, to serve as its corporate headquarters. 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 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
June 30, Six Months Ended
June 30,
(in thousands) 2021 2020 2021 2020
Fixed lease costs (1)
$ (3,972) $ 4,943 $ (3,672) $ 9,761
Short-term lease costs 515 371 974 826
Variable lease costs 1,340 969 2,727 2,247
$ (2,117) $ 6,283 $ 29 $ 12,834


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2022		2021			2022		2021
Fixed lease costs (1)	$	4,965	$	(3,972)		$	10,059	$	(3,672)
Short-term lease costs	787		515			1,594		974
Variable lease costs	727		1,340			1,491		2,727
	$	6,479	$	(2,117)		$	13,144	$	29

(1) The ~~decrease in~~lower fixed lease costs in ~~three and~~the six months ended June 30, 2021 was due to the modification of the ~~Headquarters Lease.~~corporate headquarters lease.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Right of use assets and lease liabilities


(in thousands)	(in thousands)	June 30, 2021		December 31, 2020		(in thousands)	June 30, 2022		December 31, 2021
Right of use assets (1)	Right of use assets (1)	$	51,058	$	67,651	Right of use assets (1)	$	80,646	$	87,521
Lease liabilities (2)		$	13,682	$	18,541
Long-term lease liabilities		$	42,063	$	59,053
Operating lease liabilities (2)						Operating lease liabilities (2)	$	5,341	$	6,989
Long-term operating lease liabilities						Long-term operating lease liabilities	$	84,170	$	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:
June 30, 2021 December 31, 2020
Weighted-average remaining lease term 4.9 years 4.7 years
Weighted-average discount rate (1)
4.6 % 5.4 %


	June 30, 2022		December 31, 2021
Weighted-average remaining lease term	7.5 years		7.7 years
Weighted-average discount rate (1)	4.2	%	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.

~~PEGASYSTEMS INC.~~

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

Maturities of lease liabilities:


(in thousands)	(in thousands)	June 30, 2021		(in thousands)	June 30, 2022
Remainder of 2021		$	8,783
2022		13,888
Remainder of 2022				Remainder of 2022	$	(401)
2023	2023	13,300		2023	18,837
2024	2024	10,021		2024	16,290
2025	2025	6,913		2025	14,118
2026	2026	2,653		2026	10,507
Thereafter		7,170
2027 and thereafter				2027 and thereafter	47,910
Total lease payments	Total lease payments	62,728		Total lease payments	107,261
Less: imputed interest (1)	Less: imputed interest (1)	(6,983)		Less: imputed interest (1)	(17,750)
		$	55,745		$	89,511

(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


		Six Months Ended June 30,					Six Months Ended June 30,
(in thousands)	(in thousands)	2021		2020		(in thousands)	2022		2021
Cash paid for leases	Cash paid for leases	$	11,605	$	10,945	Cash paid for leases	$	7,296	$	11,605
Right of use assets recognized for new leases and amendments (non-cash)	Right of use assets recognized for new leases and amendments (non-cash)	$	10,160	$	10,077	Right of use assets recognized for new leases and amendments (non-cash)	$	2,223	$	10,160

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:

•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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

•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 June 30, ~~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.

~~PEGASYSTEMS INC.~~

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

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 value of 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.

Carrying value of the Notes:
(in thousands) June 30, 2021 December 31, 2020
Principal $ 600,000 $ 600,000
Unamortized debt discount 0 (71,222)
Unamortized issuance costs (10,908) (10,575)
Convertible senior notes, net $ 589,092 $ 518,203
Conversion options $ — $ 84,120
Issuance costs 0 (2,037)
Deferred taxes 0 (20,479)
Additional paid-in capital $ 0 $ 61,604


(in thousands)	June 30, 2022		December 31, 2021
Principal	$	600,000	$	600,000
Unamortized issuance costs	(7,839)		(9,278)
Convertible senior notes, net	$	592,161	$	590,722

Interest expense related to the Notes:
Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2021 2020 2021 2020
Contractual interest expense (0.75% coupon) $ 1,125 $ 1,125 $ 2,250 $ 1,575
Amortization of debt discount 0 3,757 0 5,253
Amortization of issuance costs 675 558 1,348 780
$ 1,800 $ 5,440 $ 3,598 $ 7,608

~~PEGASYSTEMS INC.~~

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


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2022		2021		2022		2021
Contractual interest expense (0.75% coupon)	$	1,125	$	1,125	$	2,250	$	2,250
Amortization of issuance costs	720		675		1,439		1,348
	$	1,845	$	1,800	$	3,689	$	3,598

The effective interest rate for the Notes:
Six Months Ended
June 30,
2021 2020
Weighted-average effective interest rate 1.2 % 4.3 %


	Six Months Ended June 30,
	2022		2021
Weighted-average effective interest rate	1.2	%	1.2	%

Future payments of principal and contractual interest:


		June 30, 2021							June 30, 2022
(in thousands)	(in thousands)	Principal		Interest		Total		(in thousands)	Principal		Interest		Total
2021		$	0	$	2,250	$	2,250
2022		0		4,500		4,500
Remainder of 2022								Remainder of 2022	$	—	$	2,250	$	2,250
2023	2023	0		4,500		4,500		2023	—		4,500		4,500
2024	2024	0		4,500		4,500		2024	—		4,500		4,500
2025	2025	600,000		1,488		601,488		2025	600,000		2,250		602,250
		$	600,000	$	17,238	$	617,238		$	600,000	$	13,500	$	613,500

Capped call transactions

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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 long-term assets and remeasured to fair value ~~at the end of~~ each reporting period, resulting in a non-operating gain or loss.

Change in capped call transactions:


		Six Months Ended June 30,					Six Months Ended June 30,
(in thousands)	(in thousands)	2021		2020		(in thousands)	2022		2021
January 1,	January 1,	$	83,597	$	0	January 1,	$	59,964	$	83,597
Issuance		0		51,900
Fair value adjustment	Fair value adjustment	7,192		827		Fair value adjustment	(49,505)		7,192
June 30,	June 30,	$	90,789	$	52,727	June 30,	$	10,459	$	90,789

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. 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 ~~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 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 June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had 0no outstanding borrowings under the Credit Facility.

~~PEGASYSTEMS INC.~~

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

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.

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 use~~model uses 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:


		June 30, 2021								December 31, 2020									June 30, 2022								December 31, 2021
(in thousands)	(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents	Cash equivalents	$	4,650	$	0	$	0	$	4,650	$	42,339	$	14,000	$	0	$	56,339	Cash equivalents	$	1,127	$	—	$	—	$	1,127	$	3,216	$	—	$	—	$	3,216
Marketable securities	Marketable securities	$	0	$	271,459	$	0	$	271,459	$	0	$	293,269	$	0	$	293,269	Marketable securities	$	—	$	187,613	$	—	$	187,613	$	—	$	202,814	$	—	$	202,814
Capped Call Transactions (1)	Capped Call Transactions (1)	$	0	$	90,789	$	0	$	90,789	$	0	$	83,597	$	0	$	83,597	Capped Call Transactions (1)	$	—	$	10,459	$	—	$	10,459	$	—	$	59,964	$	—	$	59,964
Venture investments (1) (2)	Venture investments (1) (2)	$	0	$	0	$	9,779	$	9,779	$	0	$	0	$	8,345	$	8,345	Venture investments (1) (2)	$	—	$	—	$	16,073	$	16,073	$	—	$	—	$	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)

Changes in venture investments:


		Six Months Ended June 30,					Six Months Ended June 30,
(in thousands)	(in thousands)	2021		2020		(in thousands)	2022		2021
January 1,	January 1,	$	8,345	$	4,871	January 1,	$	7,648	$	8,345
New investments	New investments	500		1,769		New investments	400		500
Sales of investments	Sales of investments	(400)		(1,424)		Sales of investments	(165)		(400)
Changes in foreign exchange rates	Changes in foreign exchange rates	14		(50)		Changes in foreign exchange rates	(290)		14
Changes in fair value:	Changes in fair value:					Changes in fair value:
included in other income	included in other income	100		1,374		included in other income	5,978		100
included in other comprehensive income	included in other comprehensive income	1,220		100		included in other comprehensive income	2,502		1,220
June 30,	June 30,	$	9,779	$	6,640	June 30,	$	16,073	$	9,779

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 ~~$726.2~~$482.5 million as of June 30, ~~2021~~2022 and ~~$706.5~~$642.0 million as of December 31, ~~2020.~~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.~~

~~PEGASYSTEMS INC.~~

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

NOTE 10. REVENUE

Geographic revenue


		Three Months Ended June 30,								Six Months Ended June 30,									Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in thousands)	(Dollars in thousands)	2021				2020				2021				2020				(Dollars in thousands)	2022				2021					2022				2021
U.S.	U.S.	$	189,297	58	%	$	142,811	63	%	$	383,865	60	%	$	315,228	63	%	U.S.	$	147,725	54	%	$	189,297	58	%		$	364,997	55	%	$	383,865	60	%
Other Americas	Other Americas	14,058		4	%	8,930		4	%	25,959		4	%	24,272		5	%	Other Americas	16,261		6	%	14,058		4	%		62,012		10	%	25,959		4	%
United Kingdom (“U.K.”)	United Kingdom (“U.K.”)	32,553		10	%	21,259		9	%	60,765		10	%	43,096		9	%	United Kingdom (“U.K.”)	28,831		11	%	32,553		10	%		59,763		9	%	60,765		10	%
Europe (excluding U.K.), Middle East, and Africa	Europe (excluding U.K.), Middle East, and Africa	45,798		14	%	34,878		15	%	97,457		15	%	66,816		14	%	Europe (excluding U.K.), Middle East, and Africa	45,238		16	%	45,798		14	%		94,374		15	%	97,457		15	%
Asia-Pacific	Asia-Pacific	43,996		14	%	19,497		9	%	71,155		11	%	43,554		9	%	Asia-Pacific	36,282		13	%	43,996		14	%		69,498		11	%	71,155		11	%
		$	325,702	100	%	$	227,375	100	%	$	639,201	100	%	$	492,966	100	%		$	274,337	100	%	$	325,702	100	%		$	650,644	100	%	$	639,201	100	%

Revenue streams
Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2021 2020 2021 2020
Perpetual license $ 12,596 $ 9,057 $ 18,048 $ 12,716
Term license 104,296 44,266 215,805 134,523
Revenue recognized at a point in time 116,892 53,323 233,853 147,239
Maintenance 78,782 72,222 154,343 145,917
Pega Cloud 73,293 48,838 141,151 92,304
Consulting 56,735 52,992 109,854 107,506
Revenue recognized over time 208,810 174,052 405,348 345,727
$ 325,702 $ 227,375 $ 639,201 $ 492,966


											Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	(in thousands)	Three Months Ended June 30,				Six Months Ended June 30,				(in thousands)	2022		2021		2022		2021
		2021		2020		2021		2020
Perpetual license										Perpetual license	2,266		12,596		$	9,706	$	18,048
Subscription license										Subscription license	41,600		104,296		179,133		215,805
Revenue recognized at a point in time										Revenue recognized at a point in time	43,866		116,892		188,839		233,853
Maintenance										Maintenance	78,326		78,782		158,042		154,343
Pega Cloud	Pega Cloud	$	73,293	$	48,838	$	141,151	$	92,304	Pega Cloud	93,506		73,293		183,823		141,151
Client Cloud		$	183,078	$	116,488	$	370,148	$	280,440
Maintenance		78,782		72,222		154,343		145,917
Term license		104,296		44,266		215,805		134,523
Subscription (1)		256,371		165,326		511,299		372,744
Perpetual license		12,596		9,057		18,048		12,716
Consulting	Consulting	56,735		52,992		109,854		107,506		Consulting	58,639		56,735		119,940		109,854
		$	325,702	$	227,375	$	639,201	$	492,966
Revenue recognized over time										Revenue recognized over time	230,471		208,810		461,805		405,348
Total revenue										Total revenue	$	274,337	$	325,702	$	650,644	$	639,201

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

~~Remaining performance obligations ("Backlog")~~

~~Expected future revenue on existing non-cancellable contracts:~~
June 30, 2021
(Dollars in thousands) Perpetual license Term license Maintenance Pega Cloud Consulting Total
1 year or less $ 6,707 $ 46,146 $ 214,645 $ 281,793 $ 17,863 $ 567,154 56 %
1-2 years 234 15,708 59,164 194,841 2,675 272,622 26 %
2-3 years 0 909 36,076 88,855 762 126,602 12 %
Greater than 3 years 0 255 26,564 37,246 693 64,758 6 %
$ 6,941 $ 63,018 $ 336,449 $ 602,735 $ 21,993 $ 1,031,136 100 %

June 30, 2020
(Dollars in thousands) Perpetual license Term license Maintenance Pega Cloud Consulting Total
1 year or less $ 8,120 $ 53,550 $ 186,618 $ 191,187 $ 21,923 $ 461,398 57 %
1-2 years 1,700 6,187 40,153 140,860 1,986 190,886 23 %
2-3 years 0 6,460 20,671 88,273 631 116,035 14 %
Greater than 3 years 0 646 10,517 37,071 626 48,860 6 %
$ 9,820 $ 66,843 $ 257,959 $ 457,391 $ 25,166 $ 817,179 100 %


	Three Months Ended June 30,			Six Months Ended June 30,
(in thousands)	2022	2021		2022		2021
Pega Cloud	93,506		73,293	$	183,823	$	141,151
Maintenance	78,326		78,782	158,042		154,343
Subscription services	171,832		152,075	341,865		295,494
Subscription license	41,600		104,296	179,133		215,805
Subscription	213,432		256,371	520,998		511,299
Perpetual license	2,266		12,596	9,706		18,048
Consulting	58,639		56,735	119,940		109,854
	274,337		325,702	$	650,644	$	639,201

1615

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Remaining performance obligations ("Backlog")

Expected future revenue from existing non-cancellable contracts:

As of June 30, 2022:


(Dollars in thousands)	Subscription services				Subscription license		Perpetual license		Consulting		Total
	Maintenance		Pega Cloud
1 year or less	$	204,974	$	320,102	$	46,810	$	6,681	$	32,159	$	610,726	54	%
1-2 years	57,862		200,135		10,711		4,505		7,919		281,132		25	%
2-3 years	28,403		96,861		2,126		2,252		2,574		132,216		12	%
Greater than 3 years	18,447		81,069		1,680		—		424		101,620		9	%
	$	309,686	$	698,167	$	61,327	$	13,438	$	43,076	$	1,125,694	100	%

As of June 30, 2021:


(Dollars in thousands)	Subscription services				Subscription license		Perpetual license		Consulting		Total
	Maintenance		Pega Cloud
1 year or less	$	214,645	$	281,793	$	46,146	$	6,707	$	17,863	$	567,154	56	%
1-2 years	59,164		194,841		15,708		234		2,675		272,622		26	%
2-3 years	36,076		88,855		909		—		762		126,602		12	%
Greater than 3 years	26,564		37,246		255		—		693		64,758		6	%
	$	336,449	$	602,735	$	63,018	$	6,941	$	21,993	$	1,031,136	100	%

Major clients

Clients accounting for 10% or more of the Company’s total revenue:
Three Months Ended
June 30, Six Months Ended
June 30,
(Dollars in thousands) 2021 2020 2021 2020
Total revenue $ 325,702 $ 227,375 $ 639,201 $ 492,966
Client A 13 % * * *

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


	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2022		2021			2022		2021
Total revenue	$	274,337	$	325,702		$	650,644	$	639,201
Client A	*		13		%	*		*

NOTE 11. STOCK-BASED COMPENSATION

Expense
Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2021 2020 2021 2020
Cost of revenue $ 5,849 $ 5,384 $ 11,774 $ 10,536
Selling and marketing 14,748 11,592 28,468 21,310
Research and development 6,343 5,805 13,113 11,302
General and administrative 3,748 2,874 7,433 5,683
$ 30,688 $ 25,655 $ 60,788 $ 48,831
Income tax benefit $ (6,192) $ (5,107) $ (12,183) $ (9,689)


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2022		2021		2022		2021
Cost of revenue	$	6,579	$	5,849	$	12,957	$	11,774
Selling and marketing	12,633		14,748		23,591		28,468
Research and development	7,355		6,343		14,701		13,113
General and administrative	4,733		3,748		8,278		7,433
	$	31,300	$	30,688	$	59,527	$	60,788
Income tax benefit	$	(543)	$	(6,192)	$	(905)	$	(12,183)

As of June 30, ~~2021,~~2022, the Company had ~~$157.3~~$195.7 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of ~~2.2~~2.1 years.

Grants


		Six Months Ended June 30, 2021				Six Months Ended June 30, 2022
(in thousands)	(in thousands)	Shares	Total Fair Value		(in thousands)	Shares	Total Fair Value
RSUs		753	$	97,483
Restricted stock units					Restricted stock units	1,237	$	104,059
Non-qualified stock options	Non-qualified stock options	1,368	$	51,594	Non-qualified stock options	4,351	$	99,506

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12. INCOME TAXES

Effective income tax rate

Three Months Ended
June 30, Six Months Ended
June 30,
(Dollars in thousands) 2021 2020 2021 2020
(Benefit from) income taxes $ (11,916) $ (12,319) $ (29,534) $ (36,129)
Effective income tax benefit rate 0 0 (2,591) % 44 %


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2022		2021		2022			2021
Provision for (benefit from) income taxes	$	186,174	$	(11,916)	$	178,491		$	(29,534)
Effective income tax rate (benefit rate)	0		0		165		%	(2,591)		%

The change in the effective income tax ~~benefit~~ rate (benefit rate) in the six months ended June 30, 2022 was primarily due to the ~~impact~~recognition of ~~discrete~~a $191.9 million valuation allowance on the Company’s deferred tax ~~items~~assets.

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. Future realization of deferred tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods. The Company’s deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income based on historical and projected information. On a ~~proportionately larger~~quarterly basis, the Company reassess the need for a valuation allowance on its existing net deferred tax assets by tax-paying jurisdiction, weighing positive and negative evidence to assess its recoverability. In making such a determination, the Company considers all available and objectively verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, committed contractual backlog (“Backlog”), projected future taxable income ~~(loss) before income taxes in the prior period. The most significant discrete items were excess tax benefits from stock-based compensation and~~inclusive of the impact of ~~changes in statutory tax rates applicable~~enacted legislation, tax-planning strategies, and results of recent operations. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified.

As of June 30, 2022, the Company’s Backlog balance was not sufficient to recover our ~~U.K.-based~~net deferred tax assets. The Backlog balance and other unsettled circumstances, impacting the Company’s operations, reduced the Backlog’s weight as objectively verifiable positive evidence to generate sufficient taxable income to recover its net deferred tax assets. These unsettled circumstances include growing and extended geopolitical turmoil, increasing inflation, and an uncertain global economic outlook.

As of June 30, 2022 the combination of the above factors caused the Company to conclude there is no longer sufficient objectively verifiable positive evidence to support that it is more likely than not the Company will generate sufficient future taxable income to recover the Company’s net deferred tax assets. Accordingly, the Company recorded a valuation allowance of $191.9 million in income tax expense during the three months ended June 30, 2022.

NOTE 13. (LOSS) EARNINGS ~~(LOSS)~~ PER SHARE

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

~~PEGASYSTEMS INC.~~

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

Calculation of (loss) earnings ~~(loss)~~ per share:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except per share amounts)	(in thousands, except per share amounts)	2021		2020		2021		2020		(in thousands, except per share amounts)	2022		2021			2022		2021
Net income (loss)		$	37,291	$	(20,740)	$	30,674	$	(46,112)
Net (loss) income										Net (loss) income	$	(286,296)	$	37,291		$	(286,675)	$	30,674
Weighted-average common shares outstanding	Weighted-average common shares outstanding	81,316		80,224		81,161		80,016		Weighted-average common shares outstanding	81,847		81,316			81,764		81,161
Earnings (loss) per share, basic		$	0.46	$	(0.26)	$	0.38	$	(0.58)
(Loss) earnings per share, basic										(Loss) earnings per share, basic	$	(3.50)	$	0.46		$	(3.51)	$	0.38

Net income (loss)		$	37,291	$	(20,740)	$	30,674	$	(46,112)
Net (loss) income										Net (loss) income	$	(286,296)	$	37,291		$	(286,675)	$	30,674
Interest expense associated with convertible debt instruments, net of tax	Interest expense associated with convertible debt instruments, net of tax	1,351		0		0		0		Interest expense associated with convertible debt instruments, net of tax	—		1,351			—		—
Numerator for diluted EPS	Numerator for diluted EPS	$	38,642	$	(20,740)	$	30,674	$	(46,112)	Numerator for diluted EPS	$	(286,296)	$	38,642		$	(286,675)	$	30,674
Weighted-average effect of dilutive securities:	Weighted-average effect of dilutive securities:									Weighted-average effect of dilutive securities:
Convertible debt ~~(1)~~	Convertible debt ~~(1)~~	4,443		0		0		0		Convertible debt ~~(1)~~	—		4,443			—		—
Stock options	Stock options	3,266		0		3,416		0		Stock options	—		3,266			—		3,416
RSUs	RSUs	1,295		0		1,429		0		RSUs	—		1,295			—		1,429
Effect of dilutive securities ~~(2)~~	Effect of dilutive securities ~~(2)~~	9,004		0		4,845		0		Effect of dilutive securities ~~(2)~~	—		9,004			—		4,845
Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	90,320		80,224		86,006		80,016		Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	81,847		90,320			81,764		86,006
Earnings (loss) per share, diluted		$	0.43	$	(0.26)	$	0.36	$	(0.58)
(Loss) earnings per share, diluted										(Loss) earnings per share, diluted	$	(3.50)	$	0.43		$	(3.51)	$	0.36

Outstanding anti-dilutive stock options and RSUs (4)	Outstanding anti-dilutive stock options and RSUs (4)	19		5,929		22		5,939		Outstanding anti-dilutive stock options and RSUs (4)	3,569		19			3,873		22

(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.

~~(2) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.~~

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(3) The Company’s Capped Call Transactions ~~convert to~~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 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) earnings ~~(loss)~~ per share. These awards may be dilutive in the future.

NOTE 14. ~~SUBSEQUENT EVENTS~~COMMITMENTS AND CONTINGENCIES

~~On July 6,~~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 June 30, 2022 and December 31, 2021, the Company ~~entered into~~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. These motions were heard on July 15, 2022 and no decision has been rendered as of the date of this filing. 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 in the Circuit Court of Fairfax County, Virginia (the “Court”) titled Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). On May 9, 2022, the jury rendered its verdict finding that the Company had misappropriated one or more of Appian’s trade secrets, that the Company had violated the Virginia Computer Crimes Act, and that the trade secret misappropriation was willful and malicious. The jury awarded damages in the amount of $2,036,860,045 for trade secret misappropriation and $1.00 for the violation of the Virginia Computer Crimes Act. Since the jury rendering its verdict, the Company and Appian have filed post-trial motions with the court. On May 26, 2022, the Company filed a motion for judicial investigation of juror misconduct. Appian filed its opposition on June 17, 2022. A hearing on that motion is scheduled for July 28, 2022. On June 8, 2022, the Company filed a motion to set aside the verdict, Appian filed a response with the court on July 8, 2022, and the Company filed a reply to Appian’s filing on July 22, 2022. Also on June 8, 2022, Appian filed a motion for attorneys’ fees and costs and for post-judgment interest, seeking an ~~office space lease (the “Lease”) for 131 thousand square feet~~award of attorneys’ fees in ~~Waltham, Massachusetts. The lease term~~the amount of approximately ~~11 years~~$22.6 million, costs in the amount of approximately $4.2 million, and post-judgment interest at the rate of 6% per annum. The Company filed its opposition to that motion on July 8, 2022. Appian filed a reply brief on July 22, 2022. The Court has not yet set a date for a hearing on the motions filed on June 8, 2022. As of the date of this Quarterly Report on Form 10-Q, the court has not yet ruled on the post-trial motions or entered a judgment in this matter. The Company intends to appeal any judgment against it, if such a judgment is ~~expected~~entered. The Company continues to ~~commence~~believe that it did not misappropriate any alleged trade secrets and that its sales of the Company’s products at issue were not caused by, or the result of, any alleged misappropriation of trade secrets. The Company is unable to reasonably estimate possible damages because of, among other things, uncertainty as to the outcome of post-trial motions, any appellate proceedings, and/or any potential new trial resulting from the post-trial motions or the appellate proceedings.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on ~~August 1, 2021 (the “Lease Commencement Date”)~~Behalf of All Others Similarly Situated v. Pegasystems Inc., ~~subject to certain adjustments~~Alan Trefler, and Kenneth Stillwell

On May 19, 2022, a lawsuit was filed against the Company, the Company’s chief executive officer and the Company’s chief operating and financial officer in the United States District Court for the ~~initial occupancy date.~~Eastern District of Virginia Alexandria Division, captioned City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:22-cv-00578-LMB-IDD). The ~~annual rent equals~~complaint generally alleges, among other things, that the ~~base rent plus~~defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder and that the individual defendants violated Section 20(a) of the Exchange Act, in each case by allegedly making materially false and/or misleading statements, as well as allegedly failing to disclose material adverse facts about the Company’s ~~portion~~business, operations, and prospects, which caused the Company’s securities to trade at artificially inflated prices. The complaint seeks unspecified damages on behalf of ~~building operating costs~~a class of purchasers of the Company’s securities between May 29, 2020 and ~~real estate taxes for~~May 9, 2022. The Company believes the ~~year. Rent first becomes payable on August 1, 2022, subject~~claims brought against the defendants are without merit, and intends to ~~adjustment based on~~vigorously defend against these claims. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the ~~Lease Commencement Date. Base rent for~~stage of the ~~first year is $6 million~~lawsuit, the Company’s belief that the claims are without merit, and ~~will increase by 3% annually. In addition,~~there being no specified quantum of damages sought in the ~~Company will receive an improvement allowance from the landlord of $11.8 million.~~complaint.

1819

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, intellectual property rights claims and other related claims by third parties against us, including related costs, damages, and other relief that may be granted against us;

•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 ~~from~~due to new information, future events, or otherwise.

The forward-looking statements ~~contained~~ in this Quarterly Report represent our views as of July ~~28, 2021.~~27, 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~~2000 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 ~~2023, we~~2024, our operating results may ~~experience lower revenue growth and lower operating cash flow growth or negative cash flow.~~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 June 30, ~~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 22% since June 30, 2020~~

•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.~~subscription transition.

* Foreign currency exchange rate changes contributed 3-4% to total ACV growth in 2021.

2021

Remaining performance obligations (“Backlog”) ~~| Increased 26% since June 30, 2020~~

•

Reconciliation of GAAP Backlog ~~represents expected future revenue on existing non-cancellable contracts.~~and Constant Currency Backlog


(in millions)	Q2 2022		1 Year Growth Rate
Backlog - GAAP	$	1,126	9	%
Impact of changes in foreign exchange rates	57		6	%
Backlog - Constant Currency	$	1,183	15	%

~~Year~~Note: Constant currency Backlog is calculated by applying foreign exchange rates for the earliest period shown to ~~date Pega Cloud revenue | Increased 53% since~~all periods. The above constant currency measures reflect foreign exchange rates applicable as of Q2 2021. We believe that non-GAAP financial measures help investors understand our core operating results and prospects, consistent with how management measures and forecasts our performance without the ~~six months ended June 30, 2020~~

•~~Pega Cloud revenue is revenue~~effect of often one-time charges and other items outside our normal operations. The supplementary non-GAAP financial measures are not meant to be superior to or a substitute for financial measures prepared under U.S. ~~GAAP for cloud contracts.~~

GAAP.

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 Accounting Policies” in Item 8.

~~There have been no significant changes other than those disclosed~~We recorded a valuation allowance of $191.9 million in ~~“Note 2. New Accounting Pronouncements”~~income tax expense during the three months ended June 30, 2022. See "Note 12. Income Taxes" in Part I, Item 1 of this Quarterly Report ~~on Form 10-Q~~for additional information. There have been no other significant changes 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. Revenue from~~as revenue is recognized differently for subscription services, which includes Pega Cloud and maintenance, than license sales. Revenue from subscription service 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
June 30, Change Six Months Ended
June 30, Change
2021 2020 2021 2020
Pega Cloud $ 73,293 23 % $ 48,838 21 % $ 24,455 50 % $ 141,151 22 % $ 92,304 19 % $ 48,847 53 %
Client Cloud $ 183,078 56 % $ 116,488 52 % $ 66,590 57 % $ 370,148 58 % $ 280,440 57 % $ 89,708 32 %
Maintenance 78,782 24 % 72,222 33 % 6,560 9 % 154,343 24 % 145,917 30 % 8,426 6 %
Term license 104,296 32 % 44,266 19 % 60,030 136 % 215,805 34 % 134,523 27 % 81,282 60 %
Subscription (1)
$ 256,371 79 % $ 165,326 73 % 91,045 55 % 511,299 80 % 372,744 76 % 138,555 37 %
Perpetual license 12,596 4 % 9,057 4 % 3,539 39 % 18,048 3 % 12,716 3 % 5,332 42 %
Consulting 56,735 17 % 52,992 23 % 3,743 7 % 109,854 17 % 107,506 21 % 2,348 2 %
$ 325,702 100 % $ 227,375 100 % $ 98,327 43 % $ 639,201 100 % $ 492,966 100 % $ 146,235 30 %

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


(Dollars in thousands)	Three Months Ended June 30,								Change				Six Months Ended June 30,								Change
	2022				2021								2022				2021
Pega Cloud	$	93,506	34	%	$	73,293	23	%	$	20,213	28	%	$	183,823	28	%	$	141,151	22	%	$	42,672	30	%
Maintenance	78,326		29	%	78,782		24	%	(456)		(1)	%	158,042		24	%	154,343		24	%	3,699		2	%
Subscription services	171,832		63	%	152,075		47	%	19,757		13	%	341,865		52	%	295,494		46	%	46,371		16	%
Subscription license	41,600		15	%	104,296		32	%	(62,696)		(60)	%	179,133		28	%	215,805		34	%	(36,672)		(17)	%
Subscription	213,432		78	%	256,371		79	%	(42,939)		(17)	%	520,998		80	%	511,299		80	%	9,699		2	%
Perpetual license	2,266		1	%	12,596		4	%	(10,330)		(82)	%	9,706		1	%	18,048		3	%	(8,342)		(46)	%
Consulting	58,639		21	%	56,735		17	%	1,904		3	%	119,940		19	%	109,854		17	%	10,086		9	%
	$	274,337	100	%	$	325,702	100	%	$	(51,365)	(16)	%	$	650,644	100	%	$	639,201	100	%	$	11,443	2	%

The ~~total~~ revenue changes in the three and six months ended June 30, ~~2021~~2022 generally 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. Under multi-year committed maintenance arrangements, a larger portion of the total contract value is recognized as maintenance revenue over the contract term rather than as term license revenue upon the effectiveness of the license rights. In the three months ended June 30, 2021, multi-year committed maintenance contributed $4.3 million to maintenance revenue growth and reduced term revenue growth by $15.4 million. In the six months ended June 30, 2021, multi-year committed maintenance contributed $7.8 million to maintenance revenue growth and reduced term revenue growth by $20.9 million.

•~~Maintenance renewal rates of higher than 90%.~~

•The ~~increases~~decreases in ~~term~~subscription license revenue in the three and six months ended June 30, 2021 were driven by a large, existing customer that expanded their use of our software, renewed an existing multi-year contract, and extended the term of the agreement earlier in the year than anticipated.

•~~The increases in perpetual license revenue~~2022 were primarily due to several large ~~perpetual~~software license contracts recognized in revenue in the three and six months ended June 30, 2021.

•The increases in consulting revenue in the three and six months ended June 30, ~~2021~~2022 were primarily due to increases in consultant billable ~~hours. 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
June 30, Change Six Months Ended
June 30, Change
(Dollars in thousands) 2021 2020 2021 2020
Software license $ 116,236 99 % $ 52,344 98 % $ 63,892 122 % $ 232,547 99 % $ 145,576 99 % $ 86,971 60 %
Maintenance 73,787 94 % 66,631 92 % 7,156 11 % 143,562 93 % 134,750 92 % 8,812 7 %
Pega Cloud 49,242 67 % 29,850 61 % 19,392 65 % 94,543 67 % 55,783 60 % 38,760 69 %
Consulting 1,906 3 % 1,859 4 % 47 3 % 1,571 1 % 638 1 % 933 146 %
$ 241,171 74 % $ 150,684 66 % $ 90,487 60 % $ 472,223 74 % $ 336,747 68 % $ 135,476 40 %

•


(Dollars in thousands)	Three Months Ended June 30,								Change				Six Months Ended June 30,								Change
	2022				2021								2022				2021
Pega Cloud	$	62,259	67	%	$	49,242	67	%	$	13,017	26	%	$	125,677	68	%	$	94,543	67	%	$	31,134	33	%
Maintenance	73,040		93	%	73,787		94	%	(747)		(1)	%	147,625		93	%	143,562		93	%	4,063		3	%
Subscription services	135,299		79	%	123,029		81	%	12,270		10	%	273,302		80	%	238,105		81	%	35,197		15	%
Subscription license	40,927		98	%	103,711		99	%	(62,784)		(61)	%	177,838		99	%	214,600		99	%	(36,762)		(17)	%
Subscription	176,226		83	%	226,740		88	%	(50,514)		(22)	%	451,140		87	%	452,705		89	%	(1,565)		—	%
Perpetual license	2,230		98	%	12,525		99	%	(10,295)		(82)	%	9,636		99	%	17,947		99	%	(8,311)		(46)	%
Consulting	766		1	%	1,906		3	%	(1,140)		(60)	%	6,556		5	%	1,571		1	%	4,985		317	%
	$	179,222	65	%	$	241,171	74	%	$	(61,949)	(26)	%	$	467,332	72	%	$	472,223	74	%	$	(4,891)	(1)	%

* not meaningful

The ~~changes~~decreases in gross profit and gross profit percent in the three and six months ended June 30, ~~2021~~2022 were primarily due to ~~our~~decreases in subscription license revenue.

•The increase in Pega Cloud ~~Transition, revenue growth, and~~gross profit percent in the six months ended June 30, 2022 was primarily due to cost-efficiency gains as Pega Cloud grows and scales.

•The decrease in consulting gross profit percent in the three months ended June 30, 2022 was due to a decrease in consultant utilization rates. The increase in consulting gross profit percent in the six months ended June 30, 2022 was due to an increase in consultant realization rates in North America.

Operating expenses
(Dollars in thousands) Three Months Ended
June 30, Change Six Months Ended
June 30, Change
2021 2020 2021 2020
% of Revenue % of Revenue % of Revenue % of Revenue
Selling and marketing $ 156,423 48 % $ 127,607 56 % $ 28,816 23 % $ 305,162 48 % $ 263,631 53 % $ 41,531 16 %
Research and development $ 64,395 20 % $ 58,869 26 % $ 5,526 9 % $ 126,837 20 % $ 117,596 24 % $ 9,241 8 %
General and administrative $ 19,161 6 % $ 15,655 7 % $ 3,506 22 % $ 37,431 6 % $ 31,285 6 % $ 6,146 20 %


(Dollars in thousands)	Three Months Ended June 30,								Change				Six Months Ended June 30,								Change
	2022				2021								2022				2021
			% of Revenue				% of Revenue								% of Revenue				% of Revenue
Selling and marketing	$	157,198	57	%	$	156,423	48	%	$	775	—	%	$	319,434	49	%	$	305,162	48	%	$	14,272	5	%
Research and development	$	74,341	27	%	$	64,395	20	%	$	9,946	15	%	$	145,831	22	%	$	126,837	20	%	$	18,994	15	%
General and administrative	$	32,723	12	%	$	19,161	6	%	$	13,562	71	%	$	68,487	11	%	$	37,431	6	%	$	31,056	83	%

•The ~~increases~~increase in selling and marketing in the ~~three and~~ six months ended June 30, ~~2021 were~~2022 was primarily due to ~~increases~~an increase in employee travel and entertainment of $5.6 million and an increase in compensation and benefits of $22.6 million and $48.0 million, attributable to increases in headcount and equity compensation. The increase in headcount reflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts.$3.8 million.

•The increases in research and development in the three and six months ended June 30, ~~2021~~2022 were primarily due to increases in compensation and benefits of ~~$7.2~~$6.4 million and ~~$11.8~~$12.1 million, attributable to increases in headcount and ~~equity~~incentive compensation. The increases in headcount reflects additional investments in developing our solutions.

•The increases in general and administrative in the three and six months ended June 30, ~~2021~~2022 were primarily due to increases ~~in compensation and benefits~~ of ~~$2.2~~$8.2 million and ~~$3.5~~$23.6 million ~~attributable~~in legal fees and related expenses arising from litigation proceedings outside the ordinary course of business. We have incurred and expect to ~~increases~~continue to incur additional expenses for these proceedings in ~~headcount~~2022. See "Note 14. Commitments and ~~equity compensation,~~Contingencies" in Part I, Item 1 and ~~increases~~“Risk Factors” in ~~professional services fees~~Part II, Item 1A of ~~$1.8 million~~this Quarterly Report for additional information.

Other income and ~~$3.4 million.~~expenses


(Dollars in thousands)	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
	2022		2021						2022		2021
Foreign currency transaction gain (loss)	$	1,713	$	(403)	$	2,116	*		$	4,589	$	(5,501)	$	10,090	*
Interest income	309		236		73		31	%	516		389		127		33	%
Interest expense	(1,944)		(1,959)		15		1	%	(3,890)		(3,839)		(51)		(1)	%
(Loss) income on capped call transactions	(18,945)		26,309		(45,254)		*		(49,505)		7,192		(56,697)		*
Other income, net	3,785		—		3,785		*		6,526		106		6,420		6,057	%
	$	(15,082)	$	24,183	$	(39,265)	*		$	(41,764)	$	(1,653)	$	(40,111)	(2,427)	%

* not meaningful

•~~In February 2021, we agreed to accelerate our exit from our Cambridge, Massachusetts headquarters to October 1, 2021,~~The increases in exchange for a one-time payment from our landlord of $18 million. This agreement was the primary contributor to decreases in facilities expenses of $2.1 million and $3.3 million in selling and marketing, $2.4 million and $3.6 million in research and development, and $1.1 million and $1.6 million in general and administrative,foreign currency transaction gain (loss) in the three and six months ended June 30, ~~2021.~~

~~Other income (expense), net~~
(Dollars in thousands) Three Months Ended
June 30, Change Six Months Ended
June 30, Change
2021 2020 2021 2020
Foreign currency transaction (loss) gain $ (403) $ 4,256 $ (4,659) * $ (5,501) $ (1,691) $ (3,810) (225) %
Interest income 236 242 (6) (2) % 389 849 (460) (54) %
Interest expense (1,959) (5,529) 3,570 65 % (3,839) (7,835) 3,996 51 %
Gain on capped call transactions 26,309 19,419 6,890 35 % 7,192 827 6,365 770 %
Other income, net — — — * 106 1,374 (1,268) (92) %

$ 24,183 $ 18,388 $ 5,795 32 % $ (1,653) $ (6,476) $ 4,823 74 %

* not meaningful

•~~The changes in foreign currency transaction (loss) gain in the three and six months ended June 30, 2021~~2022 were 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 ~~decreases~~increases in interest income in the three and six months ended June 30, ~~2021~~2022 were primarily due to ~~declines~~increases in market interest rates.

•The decreases in interest expense in the three and six months ended June 30, 2021 were 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
June 30, Change Six Months Ended
June 30, Change
(in thousands) 2021 2020 2021 2020
Contractual interest expense (0.75% coupon) $ 1,125 $ 1,125 $ — $ 2,250 $ 1,575 $ 675
Amortization of debt discount — 3,757 (3,757) — 5,253 (5,253)
Amortization of issuance costs 675 558 117 1,348 780 568
$ 1,800 $ 5,440 $ (3,640) $ 3,598 $ 7,608 $ (4,010)

•~~The increases in the gain~~(loss) income on capped call transactions in the three and six months ended June 30, ~~2021,~~2022, were due to fair value adjustments ~~driven by increases~~for our capped call transactions. See "Note 9. Fair Value Measurements" in ~~our stock price.~~Part I, Item 1 of this Quarterly Report for additional information.

•The ~~decrease~~increases in other income, net in the three and six months ended June 30, ~~2021, was~~2022 were due to ~~larger fair value adjustments~~gains on ~~equity securities held in~~ our venture investments ~~portfolio in the six months ended June 30, 2020.~~portfolio.

~~(Benefit~~Provision for (benefit from) income taxes
Three Months Ended
June 30, Six Months Ended
June 30,
(Dollars in thousands) 2021 2020 2021 2020
(Benefit from) income taxes $ (11,916) $ (12,319) $ (29,534) $ (36,129)
Effective income tax benefit rate (2,591) % 44 %


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2022		2021		2022			2021
Provision for (benefit from) income taxes	$	186,174	$	(11,916)	$	178,491		$	(29,534)
Effective income tax rate (benefit rate)					165		%	(2,591)		%

During the six months ended June 30, ~~2021,~~2022, the change in our effective income tax ~~benefit~~ rate (benefit rate) was primarily due to the ~~impact~~recognition of ~~discrete tax items~~a $191.9 million valuation allowance on a proportionately larger income (loss) before income taxes in the prior period. The most significant discrete items were excess tax benefits from stock-based compensation and the impact of changes in statutory tax rates applicable to our ~~U.K.-based~~ deferred tax assets. See "Note 12. Income Taxes" in Part I, Item 1 of this Quarterly Report for additional information.

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 our stock compensation awards we grant, and award holders' exercise behavior.

LIQUIDITY AND CAPITAL RESOURCES


		Six Months Ended June 30,					Six Months Ended June 30,
(in thousands)	(in thousands)	2021		2020		(in thousands)	2022		2021
Cash provided by (used in):	Cash provided by (used in):					Cash provided by (used in):
Operating activities	Operating activities	$	19,410	$	(21,199)	Operating activities	$	(5,069)	$	19,410
Investing activities	Investing activities	10,493		(19,404)		Investing activities	(1,523)		10,493
Financing activities	Financing activities	(60,717)		485,293		Financing activities	(41,191)		(60,717)
Effect of exchange rates on cash and cash equivalents	Effect of exchange rates on cash and cash equivalents	(1,207)		(942)		Effect of exchange rates on cash and cash equivalents	(2,907)		(1,207)
Net (decrease) increase in cash and cash equivalents		$	(32,021)	$	443,748
Net (decrease) in cash and cash equivalents						Net (decrease) in cash and cash equivalents	$	(50,690)	$	(32,021)


(in thousands)	(in thousands)	June 30, 2021		December 31, 2020		(in thousands)	June 30, 2022		December 31, 2021
Held by U.S. entities	Held by U.S. entities	$	306,754	$	399,138	Held by U.S. entities	$	223,116	$	274,813
Held by foreign entities	Held by foreign entities	104,583		66,030		Held by foreign entities	73,772		87,966
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	$	411,337	$	465,168	Total cash, cash equivalents, and marketable securities	$	296,888	$	362,779

We believe that our current cash, cash flow from operations, ~~and~~ borrowing capacity, and ability to engage in capital market transactions 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 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 the timing of~~impacting our billings and cash ~~collections. Pega Cloud, term~~collections, as the timing of billings and cash 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 (used in) provided by ~~(used in)~~ operating activities in the six months ended June 30, ~~2021~~2022 was primarily due to ~~a significant increase~~our subscription transition and increased costs as we made investments in ~~client collections.~~

~~Corporate headquarters~~

research and development and selling and marketing activities to support future growth. In February 2021, we agreed to accelerate our exit from our existing Cambridge, Massachusetts corporate 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~~six months ended June 30, 2022 we incurred $28.0 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. On March 31, 2021 we leased office space at One Main Street, Cambridge, Massachusetts, to serve as our future corporate headquarters. The approximately 4.5 year lease includes base rent of approximately $2 million per year.

~~New Waltham Office~~

~~On July 6, 2021, we entered into an office space lease (the “Lease”)~~Quarterly Report for 131 thousand square feet in Waltham, Massachusetts. The lease term of approximately 11 years is expected to commence on August 1, 2021 (the “Lease Commencement Date”), subject to certain adjustments for the initial occupancy date. The annual rent equals the base rent plus our portion of building operating costs and real estate taxes. Rent first becomes payable on August 1, 2022, subject to adjustment based on the Lease Commencement Date. Base rent for the first year is $6 million and will increase by 3% annually. In addition, we will receive an improvement allowance from the landlord of $11.8 million.

additional information.

Investing activities

The change in cash (used in) provided by ~~(used in)~~ investing activities in the six months ended June 30, ~~2021~~2022 was primarily driven by our investments in financial instruments, an ~~acquisition,~~ ~~and a decrease~~increase in office space related capital ~~expenditures.~~expenditures, and an acquisition in 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 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 June 30, ~~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)	Six Months Ended June 30, ~~2021~~2022
December 31, ~~2020~~2021	$	~~37,726~~22,583
Authorizations (1)	~~38,467~~60,000
Repurchases (2)	~~(19,392)~~(24,508)
June 30, ~~2021~~2022	$	~~56,801~~58,075

(1) On June ~~8, 2021,~~2, 2022, 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.~~2023.

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

Common stock repurchases
Six Months Ended
June 30,
2021 2020
(in thousands) Shares Amount Shares Amount
Tax withholdings for net settlement of equity awards 328 $ 41,706 411 $ 37,093
Stock repurchase program 151 19,392 110 8,199
479 $ 61,098 521 $ 45,292


	Six Months Ended June 30,
	2022			2021
(in thousands)	Shares	Amount		Shares	Amount
Repurchases paid	279	$	24,508	148	$	18,992
Repurchases unpaid at period end	—	—		3	400
Stock repurchase program	279	24,508		151	19,392
Tax withholdings for net settlement of equity awards	196	15,379		328	41,706
	475	$	39,887	479	$	61,098

During the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, instead of receiving cash from the equity holders, we withheld shares with a value of ~~$27.8~~$8.3 million and ~~$31.2~~$27.8 million, respectively, for the exercise price of options. These amounts 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.


		Six Months Ended June 30,					Six Months Ended June 30,
(in thousands)	(in thousands)	2021		2020		(in thousands)	2022		2021
Dividend payments to stockholders	Dividend payments to stockholders	$	4,865	$	4,793	Dividend payments to stockholders	$	4,908	$	4,865

Contractual obligations

As of June 30, ~~2021,~~2022, our contractual obligations were:


		Payments due by period																	Payments due by period
(in thousands)	(in thousands)	2021		2022		2023		2024		2025		2026 and thereafter		Other		Total		(in thousands)	Remainder of 2022		2023		2024		2025		2026		2027 and thereafter		Other		Total
Convertible senior notes (1)	Convertible senior notes (1)	$	2,250	$	4,500	$	4,500	$	4,500	$	601,488	$	—	$	—	$	617,238	Convertible senior notes (1)	$	2,250	$	4,500	$	4,500	$	602,250	$	—	$	—	$	—	$	613,500
Purchase obligations (2)	Purchase obligations (2)	28,215		60,242		12,539		1,938		429		—		—		103,363		Purchase obligations (2)	16,741		15,822		10,507		13,511		13,750		—		—		70,331
Operating lease obligations ~~(3)~~	Operating lease obligations ~~(3)~~	8,783		13,888		13,300		10,021		6,913		9,823		—		62,728		Operating lease obligations ~~(3)~~	(401)		18,837		16,290		14,118		10,507		47,910		—		107,261
Liability for uncertain tax positions ~~(4)~~(3)	Liability for uncertain tax positions ~~(4)~~(3)	—		—		—		—		—		—		1,665		1,665		Liability for uncertain tax positions ~~(4)~~(3)	—		—		—		—		—		—		1,269		1,269
		$	39,248	$	78,630	$	30,339	$	16,459	$	608,830	$	9,823	$	1,665	$	784,994		$	18,590	$	39,159	$	31,297	$	629,879	$	24,257	$	47,910	$	1,269	$	792,361

(1) Includes principal and interest.

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

(3) ~~Excludes the Waltham lease, which we entered into on July 6, 2021. See "Note 14. Subsequent Events" in Item 1 of this Quarterly Report for additional information.~~

~~(4)~~ We are unable to reasonably estimate the timing of ~~the~~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:


		Six Months Ended June 30,					Six Months Ended June 30,
		2021		2020			2022		2021
(Decrease) increase in revenue	(Decrease) increase in revenue	(4)	%	(3)	%	(Decrease) increase in revenue	(3)	%	(4)	%
(Decrease) increase in net income		(1)	%	(15)	%
Increase (decrease) in net income						Increase (decrease) in net income	3	%	(1)	%

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:


		Six Months Ended June 30,					Six Months Ended June 30,
(in thousands)	(in thousands)	2021		2020		(in thousands)	2022		2021
Foreign currency gain (loss)	Foreign currency gain (loss)	$	(5,676)	$	8,932	Foreign currency gain (loss)	$	(7,185)	$	(5,676)

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 June 30, ~~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 June 30, ~~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 June 30, ~~2021~~2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

2627

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in Note 14. Commitments and Contingencies, in Part I, Item 1 of this Quarterly Report is incorporated herein by reference and updates the description of our pending legal proceedings, as described in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 16, 2022 and in our Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission on April 28, 2022.

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 and in our Quarterly Report on Form 10-Q filed with the SEC on April 28, 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, 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 our Quarterly Report filed with the SEC on April 28, 2022, 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.

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.

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, 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 our Quarterly Report filed with the SEC on April 28, 2022, 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. Notwithstanding the jury having rendered a verdict in the litigation pending in Virginia, we are unable to reasonably estimate possible damages in that matter because, among other things, of the uncertainty as to the outcome of post-trial motions, appellate proceedings, and/or any potential new trial resulting from the post-trial motions and appellate proceedings. If we are ultimately unsuccessful in prevailing in the matter in the entirety or having the ultimate verdict be substantially reduced, we may be required to incur debt or otherwise engage in capital market transactions to finance the final judgment, together with interest and any awards of attorneys’ fees and costs. In addition, if we do not timely satisfy the judgment within 60 days following the expiration of the right to appeal, there may be an acceleration of liabilities under our Convertible Senior Notes and our credit facility. While we continue to believe that we have the financial strength to pay these amounts if it ever becomes necessary, it is possible that we may not be able to engage in these activities on desirable terms, which could have a material adverse effect on our business, financial condition, and operating results.

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

Issuer purchases of equity securities

Common stock repurchased in the three months ended June 30, ~~2021:~~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)
April 1, 2021 - April 30, 2021 53 $ 125.24 25 $ 25,430
May 1, 2021 - May 31, 2021 96 121.41 25 $ 22,431
June 1, 2021 - June 30, 2021 204 126.99 31 $ 56,801
353 $ 125.20 81


(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)
April 1, 2022 - April 30, 2022	22	$	77.42	—	$	—
May 1, 2022 - May 31, 2022	24	65.46		—	$	—
June 1, 2022 - June 30, 2022	81	51.31		38	$	58,075
	127	$	58.43	38

(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 ~~8, 2021,~~2, 2022, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, ~~2022~~2023 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

On July 25, 2022, we entered into an amendment (the “Amendment”) to our $100 million senior secured revolving credit agreement with PNC Bank, National Association (“PNC”). The Amendment increased certain sub-limits to provide additional flexibility under the Credit Agreement, amongst other changes.

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

ITEM 6. EXHIBITS

Exhibit No.

Description

Incorporation by Reference

Filed Herewith

Exhibit No.

Description

Incorporation by Reference

Filed Herewith

Form

Exhibit

Filing Date

Form

Exhibit

Filing Date

3.1

Restated Articles of Organization of the Registrant and Amendments thereto

10-Q

3.1

November 4, 2014

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

3.2

Amended and Restated Bylaws of Pegasystems Inc.

8-K

3.2

June 15, 2020

10.1

Sublease, dated March 31, 2021 for Office Space at One Main Street, Cambridge, MA

10.1

Fifth Amendment to Loan Documents between Pegasystems Inc. and PNC Bank, National Association.

10.2**

Lease between Pegasystems Inc. and 275 Wyman LLC

8-K

10.1

July 9, 2021

31.1

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

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.

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.

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.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.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document.

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Label Linkbase Document.

101.LAB

Inline XBRL Taxonomy Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Presentation 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)

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 permitted under SEC rules and regulations.

2730

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:	July ~~28, 2021~~27, 2022	By:	/s/ KENNETH STILLWELL
			Kenneth Stillwell
			Chief Operating Officer and Chief Financial Officer
			(Principal Financial Officer)