UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q


☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the quarterly period ended ~~March 31,~~June 30, 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 Main Street, Cambridge, MA 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 ~~81,818,454~~81,952,276 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on ~~April~~July 19, 2022.

Table of Contents

PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of ~~March 31,~~June 30, 2022 and December 31, 2021			3
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended ~~March 31,~~June 30, 2022 and 2021			4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended ~~March 31,~~June 30, 2022 and 2021			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021			6
Unaudited Condensed Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 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			2526
Item 4. Controls and Procedures			2627

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			2728
Item 1A. Risk Factors			2728
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			2829
Item 5. Other Information			2829
Item 6. Exhibits			2930

Signature			3031

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)					PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
		March 31, 2022		December 31, 2021			June 30, 2022		December 31, 2021
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	132,771	$	159,965	Cash and cash equivalents	$	109,275	$	159,965
Marketable securities	Marketable securities	199,401		202,814		Marketable securities	187,613		202,814
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	332,172		362,779		Total cash, cash equivalents, and marketable securities	296,888		362,779
Accounts receivable	Accounts receivable	171,181		182,717		Accounts receivable	171,556		182,717
Unbilled receivables	Unbilled receivables	226,052		226,714		Unbilled receivables	201,130		226,714
Other current assets	Other current assets	74,408		68,008		Other current assets	70,633		68,008
Total current assets	Total current assets	803,813		840,218		Total current assets	740,207		840,218
Unbilled receivables	Unbilled receivables	135,975		129,789		Unbilled receivables	115,901		129,789
Goodwill	Goodwill	82,031		81,923		Goodwill	81,717		81,923
Other long-term assets	Other long-term assets	516,661		541,601		Other long-term assets	320,557		541,601
Total assets	Total assets	$	1,538,480	$	1,593,531	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	$	18,628	$	15,281	Accounts payable	$	21,465	$	15,281
Accrued expenses	Accrued expenses	63,401		63,890		Accrued expenses	63,120		63,890
Accrued compensation and related expenses	Accrued compensation and related expenses	54,804		120,946		Accrued compensation and related expenses	73,945		120,946
Deferred revenue	Deferred revenue	290,873		275,844		Deferred revenue	269,121		275,844
Other current liabilities	Other current liabilities	7,309		9,443		Other current liabilities	7,800		9,443
Total current liabilities	Total current liabilities	435,015		485,404		Total current liabilities	435,451		485,404
Convertible senior notes, net	Convertible senior notes, net	591,440		590,722		Convertible senior notes, net	592,161		590,722
Operating lease liabilities	Operating lease liabilities	90,699		87,818		Operating lease liabilities	84,170		87,818
Other long-term liabilities	Other long-term liabilities	14,658		13,499		Other long-term liabilities	12,821		13,499
Total liabilities	Total liabilities	1,131,812		1,177,443		Total liabilities	1,124,603		1,177,443
Commitments and contingencies (Note 14)	Commitments and contingencies (Note 14)	0		0		Commitments and contingencies (Note 14)	0		0
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued	Preferred stock, 1,000 shares authorized; none issued	—		—		Preferred stock, 1,000 shares authorized; none issued	—		—
Common stock, 200,000 shares authorized; 81,802 and 81,712 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively		818		817
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	141,771		145,810		Additional paid-in capital	170,251		145,810
Retained earnings		273,615		276,449
(Accumulated deficit) retained earnings						(Accumulated deficit) retained earnings	(15,140)		276,449
Accumulated other comprehensive (loss)	Accumulated other comprehensive (loss)	(9,536)		(6,988)		Accumulated other comprehensive (loss)	(22,151)		(6,988)
Total stockholders’ equity	Total stockholders’ equity	406,668		416,088		Total stockholders’ equity	133,779		416,088
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,538,480	$	1,593,531	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 March 31,				Three Months Ended June 30,						Six Months Ended June 30,
				2022			2021			2022		2021		2022		2021
Revenue	Revenue								Revenue
Subscription services	Subscription services			$	170,033		$	143,419	Subscription services	$	171,832	$	152,075	$	341,865	$	295,494
Subscription license	Subscription license			137,533			111,509		Subscription license	41,600		104,296		179,133		215,805
Perpetual license	Perpetual license			7,440			5,452		Perpetual license	2,266		12,596		9,706		18,048
Consulting	Consulting			61,301			53,119		Consulting	58,639		56,735		119,940		109,854
Total revenue	Total revenue			376,307			313,499		Total revenue	274,337		325,702		650,644		639,201
Cost of revenue	Cost of revenue								Cost of revenue
Subscription services	Subscription services			32,030			28,343		Subscription services	36,533		29,046		68,563		57,389
Subscription license	Subscription license			622			620		Subscription license	673		585		1,295		1,205
Perpetual license	Perpetual license			34			30		Perpetual license	36		71		70		101
Consulting	Consulting			55,511			53,454		Consulting	57,873		54,829		113,384		108,283
Total cost of revenue	Total cost of revenue			88,197			82,447		Total cost of revenue	95,115		84,531		183,312		166,978
Gross profit	Gross profit			288,110			231,052		Gross profit	179,222		241,171		467,332		472,223
Operating expenses	Operating expenses								Operating expenses
Selling and marketing	Selling and marketing			162,236			148,739		Selling and marketing	157,198		156,423		319,434		305,162
Research and development	Research and development			71,490			62,442		Research and development	74,341		64,395		145,831		126,837
General and administrative	General and administrative			35,764			18,270		General and administrative	32,723		19,161		68,487		37,431
Total operating expenses	Total operating expenses			269,490			229,451		Total operating expenses	264,262		239,979		533,752		469,430
Income from operations				18,620			1,601
(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)			2,876			(5,098)		Foreign currency transaction gain (loss)	1,713		(403)		4,589		(5,501)
Interest income	Interest income			207			153		Interest income	309		236		516		389
Interest expense	Interest expense			(1,946)			(1,880)		Interest expense	(1,944)		(1,959)		(3,890)		(3,839)
(Loss) on capped call transactions				(30,560)			(19,117)
(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			2,741			106		Other income, net	3,785		—		6,526		106
(Loss) before (benefit from) income taxes				(8,062)			(24,235)
(Benefit from) income taxes				(7,683)			(17,618)
Net (loss)				$	(379)		$	(6,617)
(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			$	0.00		$	(0.08)	Basic	$	(3.50)	$	0.46	$	(3.51)	$	0.38
Diluted	Diluted			$	0.00		$	(0.08)	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			81,680			81,004		Basic	81,847		81,316		81,764		81,161
Diluted	Diluted			81,680			81,004		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 (LOSS)
(in thousands)
Three Months Ended
March 31,
2022 2021
Net (loss) $ (379) $ (6,617)
Other comprehensive (loss) income, net of tax
Unrealized gain on available-for-sale securities 222 1,010
Foreign currency translation adjustments (2,770) (730)
Total other comprehensive (loss) income, net of tax $ (2,548) $ 280
Comprehensive (loss) $ (2,927) $ (6,337)


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				Common Stock						Additional Paid-In Capital				Retained Earnings (Accumulated Deficit)				Accumulated Other Comprehensive (Loss)				Total Stockholders’ Equity
		Number of Shares	Amount								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)
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 under the employee stock purchase plan																			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
Cash dividends declared ($0.03 per share)																			Cash dividends declared ($0.03 per share)	—			—			—				(2,445)				—				(2,445)
Other comprehensive income																			Other comprehensive income	—			—			—				—				1,582				1,582
Net income																			Net income	—			—			—				37,291				—				37,291
June 30, 2021																			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		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)			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 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			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			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)			Cash dividends declared ($0.03 per share)	—			—			—				(2,455)				—				(2,455)
Other comprehensive (loss)	Other comprehensive (loss)	—	—		—				—			(2,548)				(2,548)			Other comprehensive (loss)	—			—			—				—				(2,548)				(2,548)
Net (loss)	Net (loss)	—	—		—				(379)			—				(379)			Net (loss)	—			—			—				(379)				—				(379)
March 31, 2022	March 31, 2022	81,802	$	818	$	141,771			$	273,615		$	(9,536)			$	406,668		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)
		Three Months Ended March 31,					Six Months Ended June 30,
		2022		2021			2022		2021
Operating activities	Operating activities					Operating activities
Net (loss)		$	(379)	$	(6,617)
Adjustments to reconcile net (loss) to cash provided by 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	28,227		30,100		Stock-based compensation	59,527		60,788
Deferred income taxes	Deferred income taxes	(9,295)		(15,068)		Deferred income taxes	169,105		(28,232)
Loss on capped call transactions		30,560		19,117
Loss (gain) on capped call transactions						Loss (gain) on capped call transactions	49,505		(7,192)
Amortization of deferred commissions	Amortization of deferred commissions	17,221		11,496		Amortization of deferred commissions	28,155		21,202
Lease expense	Lease expense	3,919		3,238		Lease expense	7,832		5,792
Amortization of intangible assets and depreciation	Amortization of intangible assets and depreciation	4,171		7,006		Amortization of intangible assets and depreciation	8,175		15,504
Foreign currency transaction (gain) loss	Foreign currency transaction (gain) loss	(2,876)		5,098		Foreign currency transaction (gain) loss	(4,589)		5,501
Other non-cash	Other non-cash	(1,100)		1,634		Other non-cash	(3,479)		3,543
Change in operating assets and liabilities, net	Change in operating assets and liabilities, net	(55,332)		(34,354)		Change in operating assets and liabilities, net	(32,625)		(88,170)
Cash provided by operating activities		15,116		21,650
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	(33,690)		(21,051)		Purchases of investments	(38,489)		(51,601)
Proceeds from maturities and called investments	Proceeds from maturities and called investments	20,915		40,867		Proceeds from maturities and called investments	34,912		68,798
Sales of investments	Sales of investments	13,350		2,450		Sales of investments	14,839		2,450
Payments for acquisitions, net of cash acquired	Payments for acquisitions, net of cash acquired	—		(4,993)		Payments for acquisitions, net of cash acquired	(922)		(4,993)
Investment in property and equipment	Investment in property and equipment	(6,657)		(1,784)		Investment in property and equipment	(11,863)		(4,161)
Cash (used in) provided by investing activities	Cash (used in) provided by investing activities	(6,082)		15,489		Cash (used in) provided by investing activities	(1,523)		10,493
Financing activities	Financing activities					Financing activities

Proceeds from employee stock purchase plan	Proceeds from employee stock purchase plan	2,446		2,288		Proceeds from employee stock purchase plan	4,803		5,146
Dividend payments to stockholders	Dividend payments to stockholders	(2,454)		(2,427)		Dividend payments to stockholders	(4,908)		(4,865)

Common stock repurchases	Common stock repurchases	(35,910)		(34,655)		Common stock repurchases	(41,086)		(60,998)
Cash (used in) financing activities	Cash (used in) financing activities	(35,918)		(34,794)		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	(310)		(1,536)		Effect of exchange rate changes on cash and cash equivalents	(2,907)		(1,207)
Net (decrease) increase in cash and cash equivalents		(27,194)		809
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	159,965		171,899		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	$	132,771	$	172,708	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 and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021.

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

All intercompany transactions and balances were eliminated in consolidation. The operating results for the interim periods presented do not necessarily indicate the expected results for the full year 2022.

Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the current ~~year~~year’s presentation. Such reclassifications did not affect total revenues, operating income, or net income.

NOTE 2. MARKETABLE SECURITIES


		March 31, 2022								December 31, 2021									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	$	—	$	(47)	$	1,953	$	2,000	$	—	$	(10)	$	1,990	Government debt	$	2,989	$	—	$	(60)	$	2,929	$	2,000	$	—	$	(10)	$	1,990
Corporate debt	Corporate debt	200,371		7		(2,930)		197,448		201,659		2		(837)		200,824		Corporate debt	188,350		—		(3,666)		184,684		201,659		2		(837)		200,824
		$	202,371	$	7	$	(2,977)	$	199,401	$	203,659	$	2	$	(847)	$	202,814		$	191,339	$	—	$	(3,726)	$	187,613	$	203,659	$	2	$	(847)	$	202,814

As of ~~March 31,~~June 30, 2022, marketable securities’ maturities ranged from ~~April~~July 2022 to ~~September~~November 2024, with a weighted-average remaining maturity of ~~1.02~~0.9 years.

NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables


(in thousands)	(in thousands)	March 31, 2022		December 31, 2021		(in thousands)	June 30, 2022		December 31, 2021
Accounts receivable	Accounts receivable	$	171,181	$	182,717	Accounts receivable	$	171,556	$	182,717
Unbilled receivables	Unbilled receivables	226,052		226,714		Unbilled receivables	201,130		226,714
Long-term unbilled receivables	Long-term unbilled receivables	135,975		129,789		Long-term unbilled receivables	115,901		129,789
		$	533,208	$	539,220		$	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)	March 31, 2022				(Dollars in thousands)	June 30, 2022
1 year or less	1 year or less	$	226,052	62	%	1 year or less	$	201,130	63	%
1-2 years	1-2 years	88,003		25	%	1-2 years	78,813		25	%
2-5 years	2-5 years	47,972		13	%	2-5 years	37,088		12	%
		$	362,027	100	%		$	317,031	100	%

Unbilled receivables by contract effective date:


(Dollars in thousands)	(Dollars in thousands)	March 31, 2022				(Dollars in thousands)	June 30, 2022
2022	2022	$	72,143	20	%	2022	$	81,887	26	%
2021	2021	163,869		45	%	2021	142,578		45	%
2020	2020	77,585		21	%	2020	56,283		18	%
2019	2019	27,163		8	%	2019	19,928		6	%
2018 and prior	2018 and prior	21,267		6	%	2018 and prior	16,355		5	%
		$	362,027	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:
March 31, 2022 December 31, 2021
Client A
Accounts receivable 4 % 1 %
Unbilled receivables 15 % 15 %
Total receivables 11 % 10 %


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

* Client accounted for less than 10% of 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 the completion of a related performance obligation.


(in thousands)	(in thousands)	March 31, 2022		December 31, 2021		(in thousands)	June 30, 2022		December 31, 2021
Contract assets (1)	Contract assets (1)	$	11,765	$	12,530	Contract assets (1)	$	12,149	$	12,530
Long-term contract assets (2)	Long-term contract assets (2)	10,292		10,643		Long-term contract assets (2)	12,983		10,643
		$	22,057	$	23,173		$	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)	March 31, 2022		December 31, 2021		(in thousands)	June 30, 2022		December 31, 2021
Deferred revenue	Deferred revenue	$	290,873	$	275,844	Deferred revenue	$	269,121	$	275,844
Long-term deferred revenue (1)	Long-term deferred revenue (1)	6,612		5,655		Long-term deferred revenue (1)	5,417		5,655
		$	297,485	$	281,499		$	274,538	$	281,499

(1) Included in other long-term liabilities.

The change in deferred revenue in the ~~three~~six months ended ~~March 31,~~June 30, 2022 was primarily due to new billings in advance of revenue recognition ~~and $124.9~~offset by $205.0 million of revenue recognized during the period that was included in deferred revenue as of December 31, 2021.

NOTE 4. DEFERRED COMMISSIONS


(in thousands)	(in thousands)	March 31, 2022		December 31, 2021		(in thousands)	June 30, 2022		December 31, 2021
Deferred commissions (1)	Deferred commissions (1)	$	125,220	$	135,911	Deferred commissions (1)	$	123,067	$	135,911

(1) Included in other long-term assets.


		Three Months Ended March 31,			Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	(in thousands)		2022			2021		(in thousands)	2022		2021		2022		2021
Amortization of deferred commissions (1)	Amortization of deferred commissions (1)		$	17,221		$	11,496	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. GOODWILL AND OTHER INTANGIBLES

Goodwill

Change in goodwill:


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


	Six Months Ended June 30,
(in thousands)	2022		2021
January 1,	$	81,923	$	79,231
Acquisition	—		2,701
Currency translation adjustments	(206)		241
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.


			March 31, 2022								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	$	63,142	$	(57,662)	$	5,480	Client-related	4-10 years	$	63,082	$	(57,944)	$	5,138
Technology	Technology	2-10 years	67,142		(59,531)		7,611		Technology	2-10 years	68,064		(60,211)		7,853
Other	Other	1-5 years	5,361		(5,361)		—		Other	1-5 years	5,361		(5,361)		—
			$	135,645	$	(122,554)	$	13,091			$	136,507	$	(123,516)	$	12,991

(1) Included in other long-term assets.


		December 31, 2021
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)
Client-related	4-10 years	$	63,165	$	(57,342)	$	5,823
Technology	2-10 years	67,142		(58,902)		8,240
Other	1-5 years	5,361		(5,361)		—
		$	135,668	$	(121,605)	$	14,063

(1) Included in other long-term assets.

Amortization of intangible assets:


		Three Months Ended March 31,			Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	(in thousands)		2022			2021		(in thousands)	2022			2021		2022		2021
Cost of revenue	Cost of revenue		$	629		$	629	Cost of revenue	$	683		$	629	$	1,312	$	1,258
Selling and marketing	Selling and marketing		343			373		Selling and marketing	342			373		685		746

			$	972		$	1,002		$	1,025		$	1,002	$	1,997	$	2,004

Future estimated intangibles assets amortization:


(in thousands)	(in thousands)	March 31, 2022		(in thousands)	June 30, 2022
Remainder of 2022	Remainder of 2022	$	2,914	Remainder of 2022	$	2,098
2023	2023	3,618		2023	3,925
2024	2024	2,849		2024	3,156
2025	2025	2,509		2025	2,611
2026	2026	874		2026	874
2027	2027	327		2027	327
		$	13,091		$	12,991

NOTE 6. OTHER ASSETS AND LIABILITIES

Other current assets


(in thousands)	(in thousands)	March 31, 2022		December 31, 2021		(in thousands)	June 30, 2022		December 31, 2021
Income tax receivables	Income tax receivables	$	27,679	$	25,691	Income tax receivables	$	22,982	$	25,691
Contract assets	Contract assets	11,765		12,530		Contract assets	12,149		12,530
Other	Other	34,964		29,787		Other	35,502		29,787
		$	74,408	$	68,008		$	70,633	$	68,008

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other long-term assets


(in thousands)	(in thousands)	March 31, 2022		December 31, 2021		(in thousands)	June 30, 2022		December 31, 2021
Deferred income taxes	Deferred income taxes	$	188,155	$	180,656	Deferred income taxes	$	6,092	$	180,656
Deferred commissions	Deferred commissions	125,220		135,911		Deferred commissions	123,067		135,911
Right of use assets	Right of use assets	87,212		87,521		Right of use assets	80,646		87,521
Capped call transactions	Capped call transactions	29,404		59,964		Capped call transactions	10,459		59,964
Property and equipment	Property and equipment	28,603		26,837		Property and equipment	34,886		26,837
Venture investments						Venture investments	16,073		7,648
Intangible assets	Intangible assets	13,091		14,063		Intangible assets	12,991		14,063
Contract assets	Contract assets	10,292		10,643		Contract assets	12,983		10,643
Other	Other	34,684		26,006		Other	23,360		18,358
		$	516,661	$	541,601		$	320,557	$	541,601

Other current liabilities


(in thousands)	(in thousands)	March 31, 2022		December 31, 2021		(in thousands)	June 30, 2022		December 31, 2021
Operating lease liabilities	Operating lease liabilities	$	4,855	$	6,989	Operating lease liabilities	$	5,341	$	6,989
Dividends payable	Dividends payable	2,454		2,454		Dividends payable	2,459		2,454
		$	7,309	$	9,443		$	7,800	$	9,443

Other long-term liabilities


(in thousands)	(in thousands)	March 31, 2022		December 31, 2021		(in thousands)	June 30, 2022		December 31, 2021
Deferred revenue	Deferred revenue	$	6,612	$	5,655	Deferred revenue	$	5,417	$	5,655
Other	Other	8,046		7,844		Other	7,404		7,844
		$	14,658	$	13,499		$	12,821	$	13,499

NOTE 7. LEASES

Corporate headquarters

In February 2021, the Company agreed to accelerate its exit from its previous corporate headquarters to October 1, 2021, in exchange for a one-time payment from its landlord of $18 million, which was amortized over the remaining lease term. The exit accelerated depreciation on the related leasehold improvements and reduced the Company’s future lease liabilities by $21.1 million and right of use assets by $20.3 million. On March 31, 2021 the Company leased office space at One Main Street, Cambridge, Massachusetts, to serve as its corporate headquarters. 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
March 31,
(in thousands) 2022 2021
Fixed lease costs (1)
$ 5,093 $ 300
Short-term lease costs 806 459
Variable lease costs 764 1,387
$ 6,663 $ 2,146


	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 lower fixed lease costs in the ~~three~~six months ended ~~March 31,~~June 30, 2021 was due to the modification of the corporate headquarters lease.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Right of use assets and lease liabilities


(in thousands)	(in thousands)	March 31, 2022		December 31, 2021		(in thousands)	June 30, 2022		December 31, 2021
Right of use assets (1)	Right of use assets (1)	$	87,212	$	87,521	Right of use assets (1)	$	80,646	$	87,521
Operating lease liabilities (2)	Operating lease liabilities (2)	$	4,855	$	6,989	Operating lease liabilities (2)	$	5,341	$	6,989
Long-term operating lease liabilities	Long-term operating lease liabilities	$	90,699	$	87,818	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:
March 31, 2022 December 31, 2021
Weighted-average remaining lease term 7.5 years 7.7 years
Weighted-average discount rate (1)
4.3 % 4.4 %


	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.

Maturities of lease liabilities:


(in thousands)	(in thousands)	March 31, 2022		(in thousands)	June 30, 2022
Remainder of 2022	Remainder of 2022	$	3,887	Remainder of 2022	$	(401)
2023	2023	20,317		2023	18,837
2024	2024	17,141		2024	16,290
2025	2025	14,352		2025	14,118
2026	2026	10,664		2026	10,507
2027 and thereafter	2027 and thereafter	48,381		2027 and thereafter	47,910
Total lease payments	Total lease payments	114,742		Total lease payments	107,261
Less: imputed interest (1)	Less: imputed interest (1)	(19,188)		Less: imputed interest (1)	(17,750)
		$	95,554		$	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


		Three Months Ended March 31,					Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2022		2021
Cash paid for leases	Cash paid for leases	$	3,650	$	6,716	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)	$	3,854	$	714	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 due before maturity. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning on September 1, 2020.

Conversion rights

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

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

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

~~PEGASYSTEMS INC.~~

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

•During any calendar quarter 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 ~~March 31,~~June 30, 2022, the Notes were not eligible for conversion.

Repurchase rights

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

If certain corporate events that constitute a “Fundamental Change” occur, each noteholder will have the right to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or a multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. A Fundamental Change relates to mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.

Carrying value of the Notes:


(in thousands)	(in thousands)	March 31, 2022		December 31, 2021		(in thousands)	June 30, 2022		December 31, 2021
Principal	Principal	$	600,000	$	600,000	Principal	$	600,000	$	600,000
Unamortized issuance costs	Unamortized issuance costs	(8,560)		(9,278)		Unamortized issuance costs	(7,839)		(9,278)
Convertible senior notes, net	Convertible senior notes, net	$	591,440	$	590,722	Convertible senior notes, net	$	592,161	$	590,722

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

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


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

Future payments of principal and contractual interest:


		March 31, 2022							June 30, 2022
(in thousands)	(in thousands)	Principal		Interest		Total		(in thousands)	Principal		Interest		Total
Remainder of 2022	Remainder of 2022	$	—	$	2,250	$	2,250	Remainder of 2022	$	—	$	2,250	$	2,250
2023	2023	—		4,500		4,500		2023	—		4,500		4,500
2024	2024	—		4,500		4,500		2024	—		4,500		4,500
2025	2025	600,000		2,250		602,250		2025	600,000		2,250		602,250
		$	600,000	$	13,500	$	613,500		$	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 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 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 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 each reporting period, resulting in a non-operating gain or loss.

Change in capped call transactions:


		Three Months Ended March 31,					Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2022		2021
January 1,	January 1,	$	59,964	$	83,597	January 1,	$	59,964	$	83,597
Fair value adjustment	Fair value adjustment	(30,560)		(19,117)		Fair value adjustment	(49,505)		7,192
March 31,		$	29,404	$	64,480
June 30,						June 30,	$	10,459	$	90,789

Credit facility

In November 2019, and as since amended, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. The Company may use borrowings for general corporate purposes and to finance working capital needs. Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $200 million. 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 required to comply with financial covenants, including:

•Beginning with the fiscal quarter ended March 31, 2022 and ending with the fiscal quarter ended December 31, 2022, Pegasystems Inc. must maintain at least $200 million in cash, investments, and availability under the Revolving Credit Loan.

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

As of ~~March 31,~~June 30, 2022 and December 31, 2021, the Company had no outstanding borrowings under the Credit Facility.

NOTE 9. FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis

The Company records its cash equivalents, marketable securities, Capped Call Transactions, and venture investments at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.

~~PEGASYSTEMS INC.~~

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

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

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

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

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

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


		March 31, 2022								December 31, 2021									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	$	19,626	$	—	$	—	$	19,626	$	3,216	$	—	$	—	$	3,216	Cash equivalents	$	1,127	$	—	$	—	$	1,127	$	3,216	$	—	$	—	$	3,216
Marketable securities	Marketable securities	$	—	$	199,401	$	—	$	199,401	$	—	$	202,814	$	—	$	202,814	Marketable securities	$	—	$	187,613	$	—	$	187,613	$	—	$	202,814	$	—	$	202,814
Capped Call Transactions (1)	Capped Call Transactions (1)	$	—	$	29,404	$	—	$	29,404	$	—	$	59,964	$	—	$	59,964	Capped Call Transactions (1)	$	—	$	10,459	$	—	$	10,459	$	—	$	59,964	$	—	$	59,964
Venture investments (1) (2)	Venture investments (1) (2)	$	—	$	—	$	12,830	$	12,830	$	—	$	—	$	7,648	$	7,648	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:


		Three Months Ended March 31,					Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2022		2021
January 1,	January 1,	$	7,648	$	8,345	January 1,	$	7,648	$	8,345
New investments	New investments	—		500		New investments	400		500
Sales of investments	Sales of investments	—		(400)		Sales of investments	(165)		(400)
Changes in foreign exchange rates	Changes in foreign exchange rates	(61)		(9)		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	2,741		100		included in other income	5,978		100
included in other comprehensive income	included in other comprehensive income	2,502		1,220		included in other comprehensive income	2,502		1,220
March 31,		$	12,830	$	9,756
June 30,						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’ short maturity.

Fair value of the Notes

The Notes’ fair value (including the conversion feature embedded in the Notes) was ~~$573.0~~$482.5 million as of ~~March 31,~~June 30, 2022 and $642.0 million as of December 31, 2021. The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 2 in the fair value hierarchy.

NOTE 10. REVENUE

Geographic revenue


		Three Months Ended March 31,					Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in thousands)	(Dollars in thousands)		2022			2021		(Dollars in thousands)		2022						2021				2022				2021
U.S.	U.S.			$	217,272	58	%	$	194,568		62	%	U.S.	$	147,725	54	%	$	189,297	58	%	$	364,997	55	%	$	383,865	60	%
Other Americas	Other Americas			45,751		12	%	11,901			4	%	Other Americas	16,261		6	%	14,058		4	%	62,012		10	%	25,959		4	%
United Kingdom (“U.K.”)	United Kingdom (“U.K.”)			30,932		8	%	28,212			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			49,136		13	%	51,659			16	%	Europe (excluding U.K.), Middle East, and Africa	45,238		16	%	45,798		14	%	94,374		15	%	97,457		15	%
Asia-Pacific	Asia-Pacific			33,216		9	%	27,159			9	%	Asia-Pacific	36,282		13	%	43,996		14	%	69,498		11	%	71,155		11	%
				$	376,307	100	%	$	313,499		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)	2022		2021		2022		2021
Perpetual license	2,266		12,596		$	9,706	$	18,048
Subscription license	41,600		104,296		179,133		215,805
Revenue recognized at a point in time	43,866		116,892		188,839		233,853
Maintenance	78,326		78,782		158,042		154,343
Pega Cloud	93,506		73,293		183,823		141,151
Consulting	58,639		56,735		119,940		109,854
Revenue recognized over time	230,471		208,810		461,805		405,348
Total revenue	$	274,337	$	325,702	$	650,644	$	639,201


	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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Revenue streams~~
Three Months Ended
March 31,
(in thousands) 2022 2021
Perpetual license $ 7,440 $ 5,452
Subscription license 137,533 111,509
Revenue recognized at a point in time 144,973 116,961
Maintenance 79,716 75,561
Pega Cloud 90,317 67,858
Consulting 61,301 53,119
Revenue recognized over time 231,334 196,538
Total revenue $ 376,307 $ 313,499

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

Remaining performance obligations ("Backlog")

Expected future revenue from existing non-cancellable contracts:

As of ~~March 31,~~June 30, 2022:


(Dollars in thousands)	(Dollars in thousands)	Subscription services				Subscription license				Perpetual license			Consulting		Total				(Dollars in thousands)		Subscription services						Subscription license				Perpetual license				Consulting				Total
		Maintenance		Pega Cloud								Maintenance									Pega Cloud
1 year or less	1 year or less	$	228,984	$	329,857			$	47,428				$	7,281	$	40,661			$	654,211		55	%	1 year or less	$	204,974			$	320,102			$	46,810			$	6,681			$	32,159		$	610,726	54	%
1-2 years	1-2 years	63,870		208,875		16,111				4,505			10,955		304,316		26	%	1-2 years		57,862				200,135		10,711				4,505				7,919				281,132		25		%
2-3 years	2-3 years	33,617		106,156		2,422				2,252			3,876		148,323		13	%	2-3 years		28,403				96,861		2,126				2,252				2,574				132,216		12		%
Greater than 3 years	Greater than 3 years	22,611		44,596		1,758				—			522		69,487		6	%	Greater than 3 years		18,447				81,069		1,680				—				424				101,620		9		%
		$	349,082	$	689,484	$	67,719			$	14,038		$	56,014	$	1,176,337	100	%			$	309,686			$	698,167	$	61,327			$	13,438			$	43,076			$	1,125,694	100		%

As of ~~March 31,~~June 30, 2021:


(Dollars in thousands)	(Dollars in thousands)	Subscription services				Subscription license				Perpetual license			Consulting		Total				(Dollars in thousands)		Subscription services						Subscription license				Perpetual license				Consulting				Total
		Maintenance		Pega Cloud								Maintenance									Pega Cloud
1 year or less	1 year or less	$	220,100	$	252,104			$	41,025				$	9,649	$	21,068			$	543,946		55	%	1 year or less	$	214,645			$	281,793			$	46,146			$	6,707			$	17,863		$	567,154	56	%
1-2 years	1-2 years	52,366		187,456		9,874				629			914		251,239		26	%	1-2 years		59,164				194,841		15,708				234				2,675				272,622		26		%
2-3 years	2-3 years	33,337		91,861		7,055				—			1,756		134,009		14	%	2-3 years		36,076				88,855		909				—				762				126,602		12		%
Greater than 3 years	Greater than 3 years	16,834		32,895		377				—			510		50,616		5	%	Greater than 3 years		26,564				37,246		255				—				693				64,758		6		%
		$	322,637	$	564,316	$	58,331			$	10,278		$	24,248	$	979,810	100	%			$	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)	2022		2021			2022		2021
Total revenue	$	274,337	$	325,702		$	650,644	$	639,201
Client A	*		13		%	*		*

~~PEGASYSTEMS INC.~~

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

NOTE 11. STOCK-BASED COMPENSATION

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


	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 ~~March 31,~~June 30, 2022, the Company had ~~$200.8~~$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 ~~2.3~~2.1 years.

Grants


		Three Months Ended March 31, 2022				Six Months Ended June 30, 2022
(in thousands)	(in thousands)	Shares	Total Fair Value		(in thousands)	Shares	Total Fair Value
Restricted stock units	Restricted stock units	1,096	$	94,538	Restricted stock units	1,237	$	104,059
Non-qualified stock options	Non-qualified stock options	2,212	$	60,514	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
March 31,
(Dollars in thousands) 2022 2021
(Benefit from) income taxes $ (7,683) $ (17,618)
Effective income tax benefit rate 95 % 73 %


	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 recognition of a $191.9 million valuation allowance on the Company’s deferred tax 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 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 inclusive of the impact of ~~discrete~~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 net deferred tax ~~items which were proportionately larger on a lower loss before~~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 ~~taxes.~~to recover its net deferred tax assets. These unsettled circumstances include growing and extended geopolitical turmoil, increasing inflation, and an uncertain global economic outlook.

~~Stock-based compensation increases~~As of June 30, 2022 the ~~variability of our effective tax rates. The impact of stock-based compensation on a given period depends on our profitability, the attributes~~combination of the ~~stock compensation awards~~above factors caused the Company ~~grants, and award holders' exercise behavior.~~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 PER SHARE

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

Calculation of (loss) earnings per share:


		Three Months Ended March 31,			Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except per share amounts)	(in thousands, except per share amounts)		2022			2021		(in thousands, except per share amounts)	2022			2021		2022		2021
Net (loss)			$	(379)		$	(6,617)
Net (loss) income								Net (loss) income	$	(286,296)		$	37,291	$	(286,675)	$	30,674
Weighted-average common shares outstanding	Weighted-average common shares outstanding		81,680			81,004		Weighted-average common shares outstanding	81,847			81,316		81,764		81,161
(Loss) per share, basic			$	0.00		$	(0.08)
(Loss) earnings per share, basic								(Loss) earnings per share, basic	$	(3.50)		$	0.46	$	(3.51)	$	0.38

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

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		—		—
Numerator for diluted EPS								Numerator for diluted EPS	$	(286,296)		$	38,642	$	(286,675)	$	30,674
Weighted-average effect of dilutive securities:								Weighted-average effect of dilutive securities:
Convertible debt								Convertible debt	—			4,443		—		—
Stock options								Stock options	—			3,266		—		3,416
RSUs								RSUs	—			1,295		—		1,429
Effect of dilutive securities								Effect of dilutive securities	—			9,004		—		4,845
Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	Weighted-average common shares outstanding, assuming dilution (1) (2) (3)		81,680			81,004		Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	81,847			90,320		81,764		86,006
(Loss) per share, diluted			$	0.00		$	(0.08)
(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)		4,178			6,465		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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(3) The Company’s Capped Call Transactions represent the equivalent of approximately 4.4 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible). The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The 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 per share. These awards may be dilutive in the future.

NOTE 14. COMMITMENTS AND CONTINGENCIES

Commitments

See "Note 7. Leases" for additional information.

Legal Proceedings

In addition to the matters below, the Company is, or may become, involved in a variety of claims, demands, suits, investigations, and proceedings that arise from time to time relating to matters incidental to the ordinary course of the Company’s business, including actions concerning contracts, intellectual property, employment, benefits, and securities matters. Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources, and other factors.

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

As of ~~March 31,~~June 30, 2022 and December 31, 2021, the Company has no accrued losses for litigation.

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

On July 3, 2019, the Company filed suit in Massachusetts federal court against Appian Corp. (“Appian”) and Business Process Management, Inc. (“BPM”) relating to a BPM “Market Report” that Appian had used to promote itself against the Company. Pegasystems Inc. v. Appian Corp. & Business Process Management Inc., No. 1:19-cv-11461 (D. Mass). On April 15, 2022, each of the parties filed motions for summary judgment with the ~~court.~~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 ~~that is currently being tried~~ in the Circuit Court of Fairfax County, Virginia (the “Court”) titled Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). ~~The jury trial began on March 21, 2022.~~ On ~~April 13,~~May 9, 2022, ~~Appian withdrew its claim against the Company for tortious interference with business expectancy. On that same day, in the course of making determinations on various motions, the Court stated that if~~ the jury ~~finds~~rendered its verdict finding that the Company had misappropriated ~~information that constituted Appian~~one or more of Appian’s trade secrets, ~~and finds~~ that the Company ~~incorporated those~~had violated the Virginia Computer Crimes Act, and that the trade ~~secrets into~~secret misappropriation was willful and malicious. The jury awarded damages in the ~~Company’s products or~~amount of $2,036,860,045 for trade secret misappropriation and $1.00 for the ~~Company’s marketing materials,~~violation of the ~~burden will then shift to~~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 ~~prove~~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 award of attorneys’ fees in the amount of approximately $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 ~~sales Appian seeks as damages were not the result~~motions filed on June 8, 2022. As of the ~~alleged misappropriation and use~~date of this Quarterly Report on Form 10-Q, the ~~alleged trade secrets. This legal standard~~court has not ~~previously been adopted by~~yet ruled on the ~~Virginia courts.~~post-trial motions or entered a judgment in this matter. The Company intends to appeal any judgment against it, if such a judgment is entered. The Company continues to 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, ~~the~~any alleged misappropriation of trade ~~secrets, and is submitting evidence to the jury to that effect.~~ secrets. The Company is unable to reasonably estimate possible damages because of, among other things, ~~of the~~ uncertainty as to ~~how~~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 Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell

On May 19, 2022, a ~~jury may decide~~lawsuit was filed against the Company, the Company’s chief executive officer and the ~~parties’ existing grounds for appeal based on rulings to date~~Company’s chief operating and financial officer in the ~~proceeding.~~United States District Court for the 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 complaint generally alleges, among other things, that the 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 business, operations, and prospects, which caused the Company’s securities to trade at artificially inflated prices. The complaint seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between May 29, 2020 and May 9, 2022. The Company believes the claims brought against the defendants are without merit, and intends to 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 stage of the lawsuit, the Company’s belief that the claims are without merit, and there being no specified quantum of damages sought in the 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 ongoing COVID-19 pandemic and the 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;

•foreign currency exchange rates;

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

•security breaches and security flaws;

•our ability to protect our intellectual property rights, costs associated with defending such rights, ~~as well as~~ intellectual property rights claims and other related claims by third ~~parties;~~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, 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 due to new information, future events, or otherwise.

The forward-looking statements in this Quarterly Report represent our views as of ~~April 28,~~July 27, 2022.

BUSINESS OVERVIEW

We develop, market, license, host, and support enterprise software that helps organizations simplify business complexity. Our powerful low-code platform for workflow automation and AI-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows. With Pega, our clients can leverage our intelligent technology and scalable architecture to accelerate their digital transformation. In addition, our client success teams, world-class partners, and clients themselves leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively.

Our target clients are Global ~~3000~~2000 organizations and government agencies that require solutions to distinguish themselves in the markets they serve. Our solutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. Along with our partners, we deliver solutions tailored to our clients’ specific industry needs.

Subscription transition

We are transitioning our business to sell software primarily through subscription arrangements. Until we fully complete our subscription transition, which we expect will occur in ~~2023,~~2024, our ~~revenue and~~ operating ~~cash flow~~results may be impacted. Operating performance and the actual mix of revenue and new arrangements in 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, 2021 for additional information.

1920

Coronavirus (“COVID-19”)

As of ~~March 31,~~June 30, 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, 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 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 21% since March 31, 2021~~

ACV 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 subscription license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance. ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our subscription transition.

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

2021

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

~~Expected future revenue from existing non-cancellable contracts:~~

Reconciliation of GAAP Backlog 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	%

Note: Constant currency Backlog is calculated by applying foreign exchange rates for the earliest period shown to 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 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.

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 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, 2021:

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

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

We recorded a valuation allowance of $191.9 million in 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 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, 2021.

RESULTS OF OPERATIONS

Revenue

Subscription transition

We are transitioning our business to sell software primarily through subscription arrangements. This transition has impacted revenue growth as revenue is recognized differently for subscription services, which includes Pega Cloud and maintenance, than license sales. Revenue from ~~Pega Cloud and maintenance~~subscription service arrangements is typically recognized over the contract term, while revenue from license sales is recognized when the license rights become effective, typically upfront.


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended March 31,					Change		(Dollars in thousands)		Three Months Ended June 30,										Change				Six Months Ended June 30,										Change
			2022	2021								(Dollars in thousands)	2022				2021						Change				2022					2021					Change
Pega Cloud	Pega Cloud				$	90,317	24	%	$	67,858			%	$	22,459	33	%	Pega Cloud	$	93,506	34	%			23	%		$	20,213	28	%		$	183,823	28	%			22	%	$	42,672	30	%
Maintenance	Maintenance				79,716		21	%	75,561			23	%	4,155		5	%	Maintenance	78,326		29	%	78,782		24	%		(456)		(1)	%		158,042		24	%	154,343		24	%	3,699		2	%
Subscription services	Subscription services				170,033		45	%	143,419			45	%	26,614		19	%	Subscription services	171,832		63	%	152,075		47	%		19,757		13	%		341,865		52	%	295,494		46	%	46,371		16	%
Subscription license	Subscription license				137,533		37	%	111,509			36	%	26,024		23	%	Subscription license	41,600		15	%	104,296		32	%		(62,696)		(60)	%		179,133		28	%	215,805		34	%	(36,672)		(17)	%
Subscription	Subscription				307,566		82	%	254,928			81	%	52,638		21	%	Subscription	213,432		78	%	256,371		79	%		(42,939)		(17)	%		520,998		80	%	511,299		80	%	9,699		2	%
Perpetual license	Perpetual license				7,440		2	%	5,452			2	%	1,988		36	%	Perpetual license	2,266		1	%	12,596		4	%		(10,330)		(82)	%		9,706		1	%	18,048		3	%	(8,342)		(46)	%
Consulting	Consulting				61,301		16	%	53,119			17	%	8,182		15	%	Consulting	58,639		21	%	56,735		17	%		1,904		3	%		119,940		19	%	109,854		17	%	10,086		9	%
					$	376,307	100	%	$	313,499		100	%	$	62,808	20	%		$	274,337	100	%	$	325,702	100	%		$	(51,365)	(16)	%		$	650,644	100	%	$	639,201	100	%	$	11,443	2	%

The revenue changes in the three and six months ended ~~March 31,~~June 30, 2022 generally reflect the impact of our subscription transition. Other factors impacting our revenue include:

•The ~~increase~~decreases in ~~perpetual~~subscription license revenue in the three and six months ended ~~March 31,~~June 30, 2022 ~~was~~were primarily due to several large software license ~~rights becoming effective~~contracts recognized in revenue in the three and six months ended ~~March 31, 2022 related to software license contracts entered into in prior years.~~June 30, 2021.

•The ~~increase~~increases in consulting revenue in the three and six months ended ~~March 31,~~June 30, 2022 ~~was~~were primarily due to ~~an increase~~increases in consultant billable hours in North America.

Gross profit


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended March 31,					Change		(Dollars in thousands)		Three Months Ended June 30,										Change				Six Months Ended June 30,										Change
			2022	2021								(Dollars in thousands)	2022				2021						Change				2022					2021					Change
Pega Cloud	Pega Cloud				$	63,418	70	%	$	45,301			%	$	18,117	40	%	Pega Cloud	$	62,259	67	%			67	%		$	13,017	26	%		$	125,677	68	%			67	%	$	31,134	33	%
Maintenance	Maintenance				74,585		94	%	69,775			92	%	4,810		7	%	Maintenance	73,040		93	%	73,787		94	%		(747)		(1)	%		147,625		93	%	143,562		93	%	4,063		3	%
Subscription services	Subscription services				138,003		81	%	115,076			80	%	22,927		20	%	Subscription services	135,299		79	%	123,029		81	%		12,270		10	%		273,302		80	%	238,105		81	%	35,197		15	%
Subscription license	Subscription license				136,911		100	%	110,889			99	%	26,022		23	%	Subscription license	40,927		98	%	103,711		99	%		(62,784)		(61)	%		177,838		99	%	214,600		99	%	(36,762)		(17)	%
Subscription	Subscription				274,914		89	%	225,965			89	%	48,949		22	%	Subscription	176,226		83	%	226,740		88	%		(50,514)		(22)	%		451,140		87	%	452,705		89	%	(1,565)		—	%
Perpetual license	Perpetual license				7,406		100	%	5,422			99	%	1,984		37	%	Perpetual license	2,230		98	%	12,525		99	%		(10,295)		(82)	%		9,636		99	%	17,947		99	%	(8,311)		(46)	%
Consulting	Consulting				5,790		9	%	(335)			(1)	%	6,125		*		Consulting	766		1	%	1,906		3	%		(1,140)		(60)	%		6,556		5	%	1,571		1	%	4,985		317	%
					$	288,110	77	%	$	231,052		74	%	$	57,058	25	%		$	179,222	65	%	$	241,171	74	%		$	(61,949)	(26)	%		$	467,332	72	%	$	472,223	74	%	$	(4,891)	(1)	%

* not meaningful

•The ~~increases~~decreases in gross profit and gross profit percent in the three and six months ended ~~March 31,~~June 30, 2022 were primarily due to decreases in subscription license revenue.

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

•The ~~increase~~decrease in consulting gross profit percent in the three months ended ~~March 31,~~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)	(Dollars in thousands)	Three Months Ended March 31,					Change		(Dollars in thousands)		Three Months Ended June 30,															Change								Six Months Ended June 30,														Change
			2022	2021								(Dollars in thousands)	2022							2021											Change					2022							2021								Change
							% of Revenue						% of Revenue
(Dollars in thousands)																			(Dollars in thousands)					% of Revenue										% of Revenue														% of Revenue								% of Revenue
	Selling and marketing				$	162,236	43	%	$	148,739			47	%			$	13,497				9		%	$	157,198		57	%				$	156,423	48		%			$	775	—		%			$	319,434	49	%			$	305,162	48		%			$	14,272	5	%
	Research and development				$	71,490	19	%	$	62,442		20	%		$	9,048		14			%	$	74,341		27		%			$		64,395		20	%			$	9,946		15	%			$	145,831		22	%		$	126,837		20	%			$	18,994		15	%
General and administrative	General and administrative				$	35,764	10	%	$	18,270		6	%		$	17,494		96		%	General and administrative		$	32,723		12		%			$	19,161		6	%			$	13,562		71	%			$	68,487		11	%		$	37,431		6	%			$	31,056		83	%

•The increase in selling and marketing in the ~~three~~six months ended ~~March 31,~~June 30, 2022 was primarily due to an increase in ~~compensation~~employee travel and ~~benefits~~entertainment of ~~$8.9~~$5.6 million and an increase in ~~employee travel~~compensation and ~~entertainment~~benefits of ~~$2.6~~$3.8 million.

•The ~~increase~~increases in research and development in the three and six months ended ~~March 31,~~June 30, 2022 ~~was~~were primarily due to ~~an increase~~increases in compensation and benefits of ~~$5.7~~$6.4 million and $12.1 million, attributable to increases in headcount and incentive compensation. The ~~increase~~increases in headcount reflects additional investments in developing our ~~solutions, particularly for Pega Cloud.~~solutions.

•The ~~increase~~increases in general and administrative in the three and six months ended ~~March 31,~~June 30, 2022 ~~was~~were primarily due to ~~an increase~~increases of ~~$15.4~~$8.2 million and $23.6 million in legal fees and related expenses arising from litigation proceedings outside the ordinary course of business. We have incurred and expect to continue to incur additional expenses for these proceedings in 2022. See "Note 14. Commitments and Contingencies" in Part I, Item 1 and “Risk Factors” in Part II, Item 1A of this Quarterly Report for additional information.

Other income and expenses


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended March 31,				Change			(Dollars in thousands)	Three Months Ended June 30,									Change				Six Months Ended June 30,						Change
			2022	2021							(Dollars in thousands)		2022				2021					Change			2022		2021					Change
Foreign currency transaction gain (loss)	Foreign currency transaction gain (loss)			$	2,876		$	(5,098)						*		Foreign currency transaction gain (loss)	$	1,713		$	(403)		$	2,116	*		$	4,589		$	(5,501)		$	10,090	*
Interest income	Interest income			207			153				54			35	%	Interest income	309			236			73		31	%	516			389			127		33	%
Interest expense	Interest expense			(1,946)			(1,880)				(66)			(4)	%	Interest expense	(1,944)			(1,959)			15		1	%	(3,890)			(3,839)			(51)		(1)	%
(Loss) on capped call transactions				(30,560)			(19,117)				(11,443)			(60)	%
(Loss) income on capped call transactions																(Loss) income on capped call transactions	(18,945)			26,309			(45,254)		*		(49,505)			7,192			(56,697)		*
Other income, net	Other income, net			2,741			106				2,635			2,486	%	Other income, net	3,785			—			3,785		*		6,526			106			6,420		6,057	%
				$	(26,682)		$	(25,836)			$	(846)		(3)	%		$	(15,082)		$	24,183		$	(39,265)	*		$	(41,764)		$	(1,653)		$	(40,111)	(2,427)	%

* not meaningful

•The ~~increase~~increases in foreign currency transaction gain (loss) in the three and six months ended ~~March 31,~~June 30, 2022 ~~was~~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 ~~increase~~increases in interest income in the three and six months ended ~~March 31,~~June 30, 2022 ~~was~~were primarily due to increases in market interest rates.

•The ~~increase~~decreases in ~~the~~ (loss) income on capped call transactions in the three and six months ended ~~March 31,~~June 30, 2022, ~~was~~were due to fair value adjustments for our capped call transactions. See "Note 9. Fair Value Measurements" in Part I, Item 1 of this Quarterly Report for additional information.

•The ~~increase~~increases in other income, net in the three and six months ended ~~March 31,~~June 30, 2022 ~~was~~were due to ~~fair value adjustments~~gains on ~~equity securities held in~~ our venture investments ~~portfolio in the three months ended March 31, 2021.~~portfolio.

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


	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 ~~three~~six months ended ~~March 31,~~June 30, 2022, the change in our effective income tax ~~benefit~~ rate (benefit rate) was primarily due to the ~~impact~~recognition of ~~discrete tax items which were proportionately larger on~~ a ~~lower loss before income taxes.~~

~~Stock-based compensation increases the variability of our effective tax rates. The impact~~$191.9 million valuation allowance on our ~~effective~~deferred tax ~~rate~~assets. See "Note 12. Income Taxes" in ~~each period depends on our profitability and the tax deductions from our stock compensation activity, which depend upon our stock price and the award holders' exercise behavior.~~Part I, Item 1 of this Quarterly Report for additional information.

LIQUIDITY AND CAPITAL RESOURCES


		Three Months Ended March 31,					Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2022		2021
Cash provided by (used in):	Cash provided by (used in):					Cash provided by (used in):
Operating activities	Operating activities	$	15,116	$	21,650	Operating activities	$	(5,069)	$	19,410
Investing activities	Investing activities	(6,082)		15,489		Investing activities	(1,523)		10,493
Financing activities	Financing activities	(35,918)		(34,794)		Financing activities	(41,191)		(60,717)
Effect of exchange rates on cash and cash equivalents	Effect of exchange rates on cash and cash equivalents	(310)		(1,536)		Effect of exchange rates on cash and cash equivalents	(2,907)		(1,207)
Net (decrease) increase in cash and cash equivalents		$	(27,194)	$	809
Net (decrease) in cash and cash equivalents						Net (decrease) in cash and cash equivalents	$	(50,690)	$	(32,021)


(in thousands)	(in thousands)	March 31, 2022		December 31, 2021		(in thousands)	June 30, 2022		December 31, 2021
Held by U.S. entities	Held by U.S. entities	$	251,554	$	274,813	Held by U.S. entities	$	223,116	$	274,813
Held by foreign entities	Held by foreign entities	80,618		87,966		Held by foreign entities	73,772		87,966
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	$	332,172	$	362,779	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 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 needed to support our operations. We may utilize available funds or seek additional external financing if we require additional capital resources.

If it becomes necessary to repatriate foreign funds, we may have to pay U.S. and foreign taxes upon repatriation. 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 transitioning our business to sell software primarily through subscription arrangements. This transition has impacted and is expected to continue impacting our billings and cash collections, as the timing of billings and cash collections generally differs between our subscription and perpetual license arrangements. Subscription licenses and services are generally billed and collected over the contract term, while perpetual license arrangements usually are billed and collected upfront when the license rights become effective.

The change in cash (used in) provided by operating activities in the ~~three~~six months ended ~~March 31,~~June 30, 2022 was primarily due to our subscription transition and increased costs as we made investments in ~~our Pega Cloud offering~~research and development and selling and marketing activities to support future growth. In addition, in the ~~three~~six months ended ~~March 31,~~June 30, 2022 we incurred ~~$17.4~~$28.0 million in legal fees and related expenses arising from proceedings that originated outside of 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 Quarterly Report for additional information.

Investing activities

The change in cash (used in) provided by investing activities in the ~~three~~six months ended ~~March 31,~~June 30, 2022 was primarily driven by our investments in financial instruments, an increase in office space related capital 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, which mature on March 1, 2025.


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

In November 2019, and as since amended, we entered into a five-year $100 million senior secured revolving credit agreement with PNC Bank, National Association. As of ~~March 31,~~June 30, 2022, we had no outstanding borrowings under the Credit Facility. See "Note 8. Debt" in Part I, Item 1 of this Quarterly Report for additional information.

Stock repurchase program

Changes in the remaining stock repurchase authority:


(in thousands)	~~Three~~Six Months Ended ~~March 31,~~June 30, 2022
December 31, 2021	$	22,583
Authorizations (1)	—60,000
Repurchases (2)	~~(22,583)~~(24,508)
~~March 31,~~June 30, 2022	$	—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) All purchases under this program have been made on the open market.

Common stock repurchases


		Three Months Ended March 31,							Six Months Ended June 30,
		2022			2021				2022			2021
(in thousands)	(in thousands)	Shares	Amount		Shares	Amount		(in thousands)	Shares	Amount		Shares	Amount
Repurchases paid	Repurchases paid	242	$	22,583	67	$	8,846	Repurchases paid	279	$	24,508	148	$	18,992
Repurchases unpaid at period end	Repurchases unpaid at period end	—	—		3	300		Repurchases unpaid at period end	—	—		3	400
Stock repurchase program	Stock repurchase program	242	22,583		70	9,146		Stock repurchase program	279	24,508		151	19,392
Tax withholdings for net settlement of equity awards	Tax withholdings for net settlement of equity awards	141	12,128		197	25,509		Tax withholdings for net settlement of equity awards	196	15,379		328	41,706
		383	$	34,711	267	$	34,655		475	$	39,887	479	$	61,098

During the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, instead of receiving cash from the equity holders, we withheld shares with a value of ~~$6.1~~$8.3 million and ~~$10.1~~$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 without prior notice.


		Three Months Ended March 31,					Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2022		2021
Dividend payments to stockholders	Dividend payments to stockholders	$	2,454	$	2,427	Dividend payments to stockholders	$	4,908	$	4,865

Contractual obligations

As of ~~March 31,~~June 30, 2022, our contractual obligations were:


		Payments due by period																	Payments due by period
(in thousands)	(in thousands)	Remainder of 2022		2023		2024		2025		2026		2027 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	$	602,250	$	—	$	—	$	—	$	613,500	Convertible senior notes (1)	$	2,250	$	4,500	$	4,500	$	602,250	$	—	$	—	$	—	$	613,500
Purchase obligations (2)	Purchase obligations (2)	49,936		14,311		9,198		13,072		13,750		—		—		100,267		Purchase obligations (2)	16,741		15,822		10,507		13,511		13,750		—		—		70,331
Operating lease obligations	Operating lease obligations	3,887		20,317		17,141		14,352		10,664		48,381		—		114,742		Operating lease obligations	(401)		18,837		16,290		14,118		10,507		47,910		—		107,261
Liability for uncertain tax positions (3)	Liability for uncertain tax positions (3)	—		—		—		—		—		—		1,705		1,705		Liability for uncertain tax positions (3)	—		—		—		—		—		—		1,269		1,269
		$	56,073	$	39,128	$	30,839	$	629,674	$	24,414	$	48,381	$	1,705	$	830,214		$	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.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Foreign currency exposure

Translation risk

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

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


		Three Months Ended March 31,					Six Months Ended June 30,
		2022		2021			2022		2021
(Decrease) increase in revenue	(Decrease) increase in revenue	(3)	%	(4)	%	(Decrease) increase in revenue	(3)	%	(4)	%
Increase (decrease) in net income	Increase (decrease) in net income	186	%	20	%	Increase (decrease) in net income	3	%	(1)	%

Remeasurement risk

We 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, cash equivalents, receivables, and intercompany balances held by our U.K. subsidiary, a British pound functional entity.

A hypothetical 10% strengthening in the British pound exchange rate in comparison to the Australian dollar, Euro, and U.S. dollar would have resulted in the following impact:
Three Months Ended
March 31,
(in thousands) 2022 2021
Foreign currency gain (loss) $ (7,937) $ (7,522)


	Six Months Ended June 30,
(in thousands)	2022		2021
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 ~~March 31,~~June 30, 2022. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of ~~March 31,~~June 30, 2022.

(b) Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended ~~March 31,~~June 30, 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 ~~following~~ information ~~contains an update to~~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, ~~with Appian Corp.,~~ as described in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 16, ~~2022.~~

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

~~On July 3, 2019, the Company~~2022 and in our Quarterly Report on Form 10-Q filed suit in Massachusetts federal court against Appian Corp. (“Appian”) and Business Process Management, Inc. (“BPM”) relating to a BPM “Market Report” that Appian had used to promote itself against the Company. ~~Pegasystems Inc. v. Appian Corp. & Business Process Management Inc., No. 1:19-cv-11461 (D. Mass). On April 15, 2022, each of the parties filed motions for summary judgment~~ with the ~~court. The Company continues to believe the counterclaims brought by Appian against the Company are without merit,~~U.S. Securities and the Company intends to vigorously pursue its claims against Appian and defend against the counterclaims brought against the Company in this matter. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the Company’s belief that the damages claimed by Appian fail to satisfy the required legal standard, the status of the proceeding, and due to the uncertainty as to how a jury may rule if this ultimately proceeds to trial.

~~Appian Corp. v. Pegasystems Inc. & Youyong Zou~~

~~As previously reported, the Company is a defendant in litigation brought by Appian that is currently being tried in Virginia (the “Court”) titled~~ ~~Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). The jury trial began~~Exchange Commission on ~~March 21,~~April 28, 2022. On April 13, 2022, Appian withdrew its claim against the Company for tortious interference with business expectancy. On that same day, in the course of making determinations on various motions, the Court stated that if the jury finds that the Company misappropriated information that constituted Appian trade secrets and finds that the Company incorporated those trade secrets into the Company’s products or the Company’s marketing materials, the burden will then shift to the Company to prove that the sales Appian seeks as damages were not the result of the alleged misappropriation and use of the alleged trade secrets. This legal standard has not previously been adopted by the Virginia courts. The Company continues to believe that its sales of the products at issue were not caused by, or the result of, the alleged misappropriation of trade secrets, and is submitting evidence to the jury to that effect. The Company is unable to reasonably estimate possible damages because, among other things, of the uncertainty as to how a jury may decide and the parties’ existing grounds for appeal based on rulings to date in the proceeding.

ITEM 1A. RISK FACTORS

The 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 the risk factors identified in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 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. We are currently party to litigation with Appian Corp. - see Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report, and Part I, Item 3 “Legal Proceedings” and Note 19 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of our Annual Report filed with the SEC on February 16, 2022.

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

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 ~~March 31,~~June 30, 2022:
(in thousands, except per share amounts)
Total Number of Shares Purchased (1) (2)
Average
Price Paid
per Share (1) (2)
Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2)
Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs (2)
January 1, 2022 - January 31, 2022 118 $ 99.46 101 $ 12,584
February 1, 2022 - February 28, 2022 141 90.97 103 $ 3,085
March 1, 2022 - March 31, 2022 196 82.52 38 $ —
455 $ 89.54 242


(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

~~Effective on March 31,~~On July 25, 2022, we entered into an amendment (the “Amendment”) to our $100 million senior secured revolving credit agreement ~~(the “Credit Agreement”)~~ with PNC Bank, National Association (“PNC”). The Amendment ~~modifies the financial covenants as reflected in Note 8. Debt of Part I, Item 1 of this Quarterly Report on Form 10-Q and transitions~~increased certain sub-limits to provide additional flexibility under the Credit Agreement, ~~from the U.S. dollar London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) for floating rate loan commitments under the Credit Agreement.~~

amongst other changes.

The description ~~of the Credit Agreement~~ contained herein is qualified in its entirety by reference to the ~~Credit Agreement,~~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**

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

10.1

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

31.1

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

31.1

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 allowed under SEC rules and regulations.

2930

SIGNATURE

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


		Pegasystems Inc.

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