UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q


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

For the quarterly period ended ~~June 30, 2020~~March 31, 2021


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

Commission File Number: 1-11859

____________________________

PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter)

____________________________

Massachusetts

04-2787865

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

One Rogers Street, Cambridge, MA 02142-1209

(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 ~~80,415,254~~81,281,726 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on ~~July 14, 2020.~~April 19, 2021.

Table of Contents

PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020			3
Unaudited Condensed Consolidated Statements of Operations for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~			4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~			6
Unaudited Condensed Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~			7
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			1618
Item 3. Quantitative and Qualitative Disclosures About Market Risk			2224
Item 4. Controls and Procedures			2325

PART II - OTHER INFORMATION

Item 1A. Risk Factors			2426
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			2726
Item 6. Exhibits			2826

Signature			2927

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

~~PEGASYSTEMS INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS~~

~~(in thousands)~~


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)						PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
		June 30, 2020		December 31, 2019			March 31, 2021		December 31, 2020
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	512,111	$	68,363	Cash and cash equivalents	$	172,708	$	171,899

Marketable securities						Marketable securities	269,650		293,269
Total cash, cash equivalents, and marketable securities						Total cash, cash equivalents, and marketable securities	442,358		465,168
Accounts receivable	Accounts receivable	181,686		199,720		Accounts receivable	159,324		215,827
Unbilled receivables	Unbilled receivables	198,253		180,219		Unbilled receivables	228,603		207,155
Other current assets	Other current assets	77,889		57,308		Other current assets	91,868		88,760
Total current assets	Total current assets	969,939		505,610		Total current assets	922,153		976,910
Unbilled receivables	Unbilled receivables	109,308		121,736		Unbilled receivables	108,048		113,278
Goodwill	Goodwill	78,675		79,039		Goodwill	82,037		79,231
Other long-term assets	Other long-term assets	338,363		278,427		Other long-term assets	416,265		434,843
Total assets	Total assets	$	1,496,285	$	984,812	Total assets	$	1,528,503	$	1,604,262
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	18,426	$	17,475	Accounts payable	$	24,426	$	24,028
Accrued expenses	Accrued expenses	44,228		48,001		Accrued expenses	59,765		59,261
Accrued compensation and related expenses	Accrued compensation and related expenses	78,834		104,126		Accrued compensation and related expenses	59,490		123,012
Deferred revenue	Deferred revenue	195,996		190,080		Deferred revenue	244,170		232,865
Other current liabilities	Other current liabilities	18,613		18,273		Other current liabilities	16,599		20,969
Total current liabilities	Total current liabilities	356,097		377,955		Total current liabilities	404,450		460,135
Convertible senior notes, net	Convertible senior notes, net	509,423		—		Convertible senior notes, net	588,418		518,203
Operating lease liabilities	Operating lease liabilities	53,057		52,610		Operating lease liabilities	36,471		59,053
Other long-term liabilities	Other long-term liabilities	21,426		15,237		Other long-term liabilities	20,239		24,699
Total liabilities	Total liabilities	940,003		445,802		Total liabilities	1,049,578		1,062,090
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, 1,000 shares authorized; NaN issued	Preferred stock, 1,000 shares authorized; NaN issued	—		—		Preferred stock, 1,000 shares authorized; NaN issued	0		0
Common stock, 200,000 shares authorized; 80,420 and 79,599 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		804		796
Common stock, 200,000 shares authorized; 81,246 and 80,890 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively						Common stock, 200,000 shares authorized; 81,246 and 80,890 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively	812		809
Additional paid-in capital	Additional paid-in capital	207,103		140,523		Additional paid-in capital	140,558		204,432
Retained earnings	Retained earnings	359,989		410,919		Retained earnings	340,223		339,879
Accumulated other comprehensive (loss)	Accumulated other comprehensive (loss)	(11,614)		(13,228)		Accumulated other comprehensive (loss)	(2,668)		(2,948)
Total stockholders’ equity	Total stockholders’ equity	556,282		539,010		Total stockholders’ equity	478,925		542,172
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,496,285	$	984,812	Total liabilities and stockholders’ equity	$	1,528,503	$	1,604,262

See notes to unaudited condensed consolidated financial statements.

~~PEGASYSTEMS INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~(in thousands, except per share amounts)~~


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)										PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
		Three Months Ended June 30,						Six Months Ended June 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Revenue	Revenue									Revenue
Software license	Software license	$	53,323	$	44,274	$	147,239	$	107,538	Software license	$	116,961	$	93,916
Maintenance	Maintenance	72,222		69,329		145,917		137,035		Maintenance	75,561		73,695
Pega Cloud	Pega Cloud	48,838		31,699		92,304		59,457		Pega Cloud	67,858		43,466
Consulting	Consulting	52,992		60,290		107,506		114,108		Consulting	53,119		54,514
Total revenue	Total revenue	227,375		205,592		492,966		418,138		Total revenue	313,499		265,591
Cost of revenue	Cost of revenue									Cost of revenue
Software license	Software license	979		928		1,663		2,306		Software license	650		684
Maintenance	Maintenance	5,591		6,292		11,167		12,627		Maintenance	5,786		5,576
Pega Cloud	Pega Cloud	18,988		16,647		36,521		29,945		Pega Cloud	22,557		17,533
Consulting	Consulting	51,133		53,213		106,868		106,639		Consulting	53,454		55,735
Total cost of revenue	Total cost of revenue	76,691		77,080		156,219		151,517		Total cost of revenue	82,447		79,528
Gross profit	Gross profit	150,684		128,512		336,747		266,621		Gross profit	231,052		186,063
Operating expenses	Operating expenses									Operating expenses
Selling and marketing	Selling and marketing	127,607		116,962		263,631		225,827		Selling and marketing	148,739		136,024
Research and development	Research and development	58,869		49,714		117,596		100,310		Research and development	62,442		58,727
General and administrative	General and administrative	15,655		14,174		31,285		26,850		General and administrative	18,270		15,630
Total operating expenses	Total operating expenses	202,131		180,850		412,512		352,987		Total operating expenses	229,451		210,381
(Loss) from operations		(51,447)		(52,338)		(75,765)		(86,366)
Foreign currency transaction gain (loss)		4,256		2,105		(1,691)		(1,607)
Income (loss) from operations										Income (loss) from operations	1,601		(24,318)
Foreign currency transaction (loss)										Foreign currency transaction (loss)	(5,098)		(5,947)
Interest income	Interest income	242		544		849		1,267		Interest income	153		607
Interest expense	Interest expense	(5,529)		—		(7,835)		—		Interest expense	(1,880)		(2,306)
Gain on capped call transactions		19,419		—		827		—
(Loss) on capped call transactions										(Loss) on capped call transactions	(19,117)		(18,592)
Other income, net	Other income, net	—		55		1,374		55		Other income, net	106		1,374
(Loss) before (benefit from) income taxes	(Loss) before (benefit from) income taxes	(33,059)		(49,634)		(82,241)		(86,651)		(Loss) before (benefit from) income taxes	(24,235)		(49,182)
(Benefit from) income taxes	(Benefit from) income taxes	(12,319)		(17,338)		(36,129)		(25,638)		(Benefit from) income taxes	(17,618)		(23,810)
Net (loss)	Net (loss)	$	(20,740)	$	(32,296)	$	(46,112)	$	(61,013)	Net (loss)	$	(6,617)	$	(25,372)
(Loss) per share	(Loss) per share									(Loss) per share
Basic	Basic	$	(0.26)	$	(0.41)	$	(0.58)	$	(0.77)	Basic	$	(0.08)	$	(0.32)
Diluted	Diluted	$	(0.26)	$	(0.41)	$	(0.58)	$	(0.77)	Diluted	$	(0.08)	$	(0.32)
Weighted-average number of common shares outstanding	Weighted-average number of common shares outstanding									Weighted-average number of common shares outstanding
Basic	Basic	80,224		78,987		80,016		78,787		Basic	81,004		79,808
Diluted	Diluted	80,224		78,987		80,016		78,787		Diluted	81,004		79,808

See notes to unaudited condensed consolidated financial statements.

~~PEGASYSTEMS INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)~~

~~(in thousands)~~


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)										PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)
		Three Months Ended June 30,						Six Months Ended June 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Net (loss)	Net (loss)	$	(20,740)	$	(32,296)	$	(46,112)	$	(61,013)	Net (loss)	$	(6,617)	$	(25,372)
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax									Other comprehensive income (loss), net of tax
Unrealized gain on available-for-sale securities	Unrealized gain on available-for-sale securities	—		238		100		612		Unrealized gain on available-for-sale securities	1,010		100
Foreign currency translation adjustments	Foreign currency translation adjustments	2,028		(409)		1,514		1,218		Foreign currency translation adjustments	(730)		(514)
Total other comprehensive income (loss), net of tax	Total other comprehensive income (loss), net of tax	2,028		(171)		1,614		1,830		Total other comprehensive income (loss), net of tax	280		(414)
Comprehensive (loss)	Comprehensive (loss)	$	(18,712)	$	(32,467)	$	(44,498)	$	(59,183)	Comprehensive (loss)	$	(6,337)	$	(25,786)

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)																										PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
		Common Stock					Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)				Total Stockholders’ Equity	Common Stock				Additional Paid-In Capital		Retained Earnings				Accumulated Other Comprehensive (Loss)			Total Stockholders’ Equity
		Number of Shares	Amount															Number of Shares										Total Stockholders’ Equity
December 31, 2018		78,526	$	785	$	123,205	$	510,863	$	(13,322)	$	621,531
December 31, 2019													December 31, 2019	79,599		$	796	$	140,523	$	410,919			$	(13,228)				$	539,010
Equity component of convertible senior notes, net													Equity component of convertible senior notes, net	—		—		61,604		—		—				61,604
Repurchase of common stock	Repurchase of common stock	(144)	(1)		(7,586)		—		—		(7,587)		Repurchase of common stock	(87)		(1)		(5,999)		—		—				(6,000)
Issuance of common stock for share-based compensation plans		514	5		(14,843)		—		—		(14,838)
Stock-based compensation		—	—		18,406		—		—		18,406
Cash dividends declared ($0.03 per share)		—	—		—		(2,367)		—		(2,367)
Other comprehensive income		—	—		—		—		2,001		2,001
Net (loss)		—	—		—		(28,717)		—		(28,717)
March 31, 2019		78,896	789		119,182		479,779		(11,321)		588,429
Repurchase of common stock		(88)	(1)		(6,301)		—		—		(6,302)
Issuance of common stock for share-based compensation plans		320	3		(11,217)		—		—		(11,214)
Issuance of common stock under the employee stock purchase plan		16	—		1,103		—		—		1,103
Issuance of common stock for stock compensation plans													Issuance of common stock for stock compensation plans	564		6		(23,017)		—		—				(23,011)
Stock-based compensation	Stock-based compensation	—	—		20,113		—		—		20,113		Stock-based compensation	—		—		23,199		—		—				23,199
Cash dividends declared ($0.03 per share)	Cash dividends declared ($0.03 per share)	—	—		—		(2,375)		—		(2,375)		Cash dividends declared ($0.03 per share)	—		—		—		(2,405)		—				(2,405)
Other comprehensive (loss)	Other comprehensive (loss)	—	—		—		—		(171)		(171)		Other comprehensive (loss)	—		—		—		—		(414)				(414)
Net (loss)	Net (loss)	—	—		—		(32,296)		—		(32,296)		Net (loss)	—		—		—		(25,372)		—				(25,372)
June 30, 2019		79,144	$	791	$	122,880	$	445,108	$	(11,492)	$	557,287
March 31, 2020													March 31, 2020	80,076		$	801	$	196,310	$	383,142	$	(13,642)			$	566,611

December 31, 2019		79,599	$	796	$	140,523	$	410,919	$	(13,228)	$	539,010
Equity component of convertible senior notes, net		—	—		61,604		—		—		61,604
Repurchase of common stock		(87)	(1)		(5,999)		—		—		(6,000)
Issuance of common stock for share-based compensation plans		564	6		(23,017)		—		—		(23,011)
Stock-based compensation		—	—		23,199		—		—		23,199
Cash dividends declared ($0.03 per share)		—	—		—		(2,405)		—		(2,405)
Other comprehensive (loss)		—	—		—		—		(414)		(414)
Net (loss)		—	—		—		(25,372)		—		(25,372)
March 31, 2020		80,076	801		196,310		383,142		(13,642)		566,611
Repurchase of common stock		(23)	—		(2,199)		—		—		(2,199)
Issuance of common stock for share-based compensation plans		349	3		(14,085)		—		—		(14,082)
Issuance of common stock under the employee stock purchase plan		18	—		1,403		—		—		1,403
Stock-based compensation		—	—		25,674		—		—		25,674
Cash dividends declared ($0.03 per share)		—	—		—		(2,413)		—		(2,413)
Other comprehensive income		—	—		—		—		2,028		2,028
Net (loss)		—	—		—		(20,740)		—		(20,740)
June 30, 2020		80,420	$	804	$	207,103	$	359,989	$	(11,614)	$	556,282

December 31, 2020													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)
Repurchase of common stock													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 under the employee stock purchase plan													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
Cash dividends declared ($0.03 per share)													Cash dividends declared ($0.03 per share)	—		—		—		(2,438)		—				(2,438)
Other comprehensive income													Other comprehensive income	—		—		—		—		280				280
Net (loss)													Net (loss)	—		—		—		(6,617)		—				(6,617)
March 31, 2021													March 31, 2021	81,246		$	812	$	140,558	$	340,223	$	(2,668)			$	478,925

See notes to unaudited condensed consolidated financial statements.

~~PEGASYSTEMS INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(in thousands)~~


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)						PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
		Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019			2021		2020
Operating activities	Operating activities					Operating activities
Net (loss)	Net (loss)	$	(46,112)	$	(61,013)	Net (loss)	$	(6,617)	$	(25,372)
Adjustments to reconcile net (loss) to cash (used in) provided by operating activities
Adjustments to reconcile net (loss) to cash provided by (used in) operating activities						Adjustments to reconcile net (loss) to cash provided by (used in) operating activities
Stock-based compensation	Stock-based compensation	48,831		38,397		Stock-based compensation	30,100		23,175
(Gain) on capped call transactions		(827)		—
Loss on capped call transactions						Loss on capped call transactions	19,117		18,592
Deferred income taxes	Deferred income taxes	(18,399)		(190)		Deferred income taxes	(15,068)		(9,231)
Amortization of deferred commissions	Amortization of deferred commissions	16,061		14,179		Amortization of deferred commissions	11,496		8,497
Lease expense		7,819		6,718
Amortization of debt discount and issuance costs	Amortization of debt discount and issuance costs	6,033		—		Amortization of debt discount and issuance costs	673		1,719
Amortization of intangible assets and depreciation	Amortization of intangible assets and depreciation	10,134		12,268		Amortization of intangible assets and depreciation	7,006		4,919
Amortization of investments	Amortization of investments	—		623		Amortization of investments	1,019		0
Foreign currency transaction loss	Foreign currency transaction loss	1,691		1,607		Foreign currency transaction loss	5,098		5,947
Other non-cash	Other non-cash	(1,374)		(40)		Other non-cash	(556)		2,478
Change in operating assets and liabilities, net	Change in operating assets and liabilities, net	(45,056)		(4,829)		Change in operating assets and liabilities, net	(30,618)		(49,047)
Cash (used in) provided by operating activities		(21,199)		7,720
Cash provided by (used in) operating activities						Cash provided by (used in) operating activities	21,650		(18,323)
Investing activities	Investing activities					Investing activities
Purchases of investments	Purchases of investments	(1,769)		(10,497)		Purchases of investments	(21,051)		(1,490)
Proceeds from maturities and called investments	Proceeds from maturities and called investments	—		13,545		Proceeds from maturities and called investments	40,867		0
Sales of investments	Sales of investments	1,424		29,965		Sales of investments	2,450		1,424
Payments for acquisitions, net of cash acquired	Payments for acquisitions, net of cash acquired	—		(10,921)		Payments for acquisitions, net of cash acquired	(4,993)		0
Investment in property and equipment	Investment in property and equipment	(19,059)		(4,882)		Investment in property and equipment	(1,784)		(12,496)
Cash (used in) provided by investing activities		(19,404)		17,210
Cash provided by (used in) investing activities						Cash provided by (used in) investing activities	15,489		(12,562)
Financing activities	Financing activities					Financing activities
Proceeds from issuance of convertible senior notes	Proceeds from issuance of convertible senior notes	600,000		—		Proceeds from issuance of convertible senior notes	0		600,000
Purchase of capped calls related to convertible senior notes	Purchase of capped calls related to convertible senior notes	(51,900)		—		Purchase of capped calls related to convertible senior notes	0		(51,900)
Payment of debt issuance costs	Payment of debt issuance costs	(14,527)		—		Payment of debt issuance costs	0		(14,527)
Dividend payments to shareholders		(4,793)		(4,730)
Proceeds from employee stock purchase plan						Proceeds from employee stock purchase plan	2,288		0
Dividend payments to stockholders						Dividend payments to stockholders	(2,427)		(2,388)

Common stock repurchases	Common stock repurchases	(43,487)		(39,637)		Common stock repurchases	(34,655)		(29,011)
Cash provided by (used in) financing activities		485,293		(44,367)
Cash (used in) provided by financing activities						Cash (used in) provided by financing activities	(34,794)		502,174
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	(942)		515		Effect of exchange rate changes on cash and cash equivalents	(1,536)		(1,510)
Net increase (decrease) in cash and cash equivalents		443,748		(18,922)
Net increase in cash and cash equivalents						Net increase in cash and cash equivalents	809		469,779
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	68,363		114,422		Cash and cash equivalents, beginning of period	171,899		68,363
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	512,111	$	95,500	Cash and cash equivalents, end of period	$	172,708	$	538,142

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements. The financial statements ~~and~~ should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

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 ~~have been~~were eliminated in consolidation. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year ~~2020.~~2021.

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

~~Financial instruments~~Convertible debt

In ~~June 2016,~~August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2016-13, “Financial~~2020-06, “Accounting for Convertible Instruments ~~- Credit Losses (Topic 326): Measurement~~and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of ~~Credit Losses on Financial Instruments,” which requires measurement~~liabilities and ~~recognition of expected credit losses~~equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation model for ~~financial assets measured at amortized cost, including accounts receivable, upon initial recognition of that financial asset using~~convertible instruments with a ~~forward-looking expected loss model, rather than~~cash conversion feature. As a result, after adoption, entities will no longer separately present in stockholders’ equity an ~~incurred loss model. Credit losses relating to available-for-sale~~embedded conversion feature for such debt. Additionally, the debt ~~securities should be recorded through an allowance for credit losses when~~discount resulting from the ~~fair value is below the amortized cost~~separation of the ~~asset, removing~~embedded conversion feature will no longer be amortized into income as interest expense over the ~~concept of “other-than-temporary” impairments.~~ instrument’s life. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. The standard also requires the convertible instruments’ impact on diluted earnings per share (“EPS”) be determined using the if-converted method.

The Company adopted ~~this standard effective~~ASU 2020-06 using the modified retrospective approach on January 1, ~~2020. The~~2021. Upon adoption, the book value of ~~this standard did not have a material effect on~~ the Company’s ~~financial position or results~~Convertible Senior Notes (the “Notes”) increased by $69.5 million to $587.7 million, and retained earnings increased by $9.4 million. The retained earnings adjustment reflects the tax effected difference between the value of ~~operations.~~the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.

See "Note 8. Debt" for additional information.

NOTE 3. MARKETABLE SECURITIES


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

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

NOTE 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables

(in thousands) June 30, 2020 December 31, 2019
Accounts receivable $ 181,686 $ 199,720
Unbilled receivables 198,253 180,219
Long-term unbilled receivables 109,308 121,736
$ 489,247 $ 501,675

Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time. They are expected to be billed in the future as follows:

(Dollars in thousands) June 30, 2020
1 year or less $ 198,253 64 %
1-2 years 91,929 30 %
2-5 years 17,379 6 %
$ 307,561 100 %

~~Unbilled receivables based upon contract effective date:~~

(Dollars in thousands) June 30, 2020
2020 $ 75,893 25 %
2019 100,671 32 %
2018 46,700 15 %
2017 38,899 13 %
2016 and prior 45,398 15 %
$ 307,561 100 %

~~Major clients~~

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


	~~June 30, 2020~~		~~December 31, 2019~~
~~Client A~~	11	%	*

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


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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Unbilled receivables

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

Unbilled receivables by expected billing date:


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

Unbilled receivables by contract effective date:


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

Major clients

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

Contract assets ~~and deferred revenue~~

(in thousands) June 30, 2020 December 31, 2019
Contract assets ⁽¹⁾
$ 5,323 $ 5,558
Long-term contract assets ⁽²⁾
4,903 5,420
$ 10,226 $ 10,978
Deferred revenue $ 195,996 $ 190,080
Long-term deferred revenue ⁽³⁾
6,587 5,407
$ 202,583 $ 195,487

~~(1) Included in other current assets. (2) Included in other long-term assets. (3) Included in other long-term liabilities.~~

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


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

(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. ~~Contract assets and deferred revenue are netted at the contract level for each reporting period.~~


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

(1) Included in other long-term liabilities.

The change in deferred revenue in the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 was primarily due to new billings in advance of revenue recognition ~~partially~~ offset by ~~$136.8~~$107.0 million of revenue recognized ~~during the period~~ that was included in deferred revenue atas of December 31, ~~2019.~~2020.

4.NOTE 5. DEFERRED COMMISSIONS


(in thousands)	(in thousands)	June 30, 2020		December 31, 2019		(in thousands)	March 31, 2021		December 31, 2020
Deferred commissions ⁽¹⁾	Deferred commissions ⁽¹⁾	$	84,770	$	85,314	Deferred commissions (1)	$	103,474	$	108,624

(1) Included in other long-term assets.


		Three Months Ended June 30,						Six Months Ended June 30,					Three Months Ended March 31,
(in thousands)	(in thousands)	2020		2019		2020		2019		(in thousands)	2021		2020
Amortization of deferred commissions ⁽¹⁾	Amortization of deferred commissions ⁽¹⁾	$	7,564	$	5,878	$	16,061	$	14,179	Amortization of deferred commissions (1)	$	11,496	$	8,497

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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6. GOODWILL AND OTHER INTANGIBLES

Goodwill

Change in goodwill:


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

Intangibles

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


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

(1) Included in other long-term assets.


		December 31, 2020
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)
Client-related	4-10 years	$	63,168	$	(55,877)	$	7,291
Technology	2-10 years	64,843		(56,386)		8,457
Other	1-5 years	5,361		(5,361)		0
		$	133,372	$	(117,624)	$	15,748

(1) Included in other long-term assets.

Amortization of intangible assets:


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

		$	1,002	$	1,018

Future estimated intangibles assets amortization:


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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7. LEASES

Corporate headquarters

In February 2021, the Company agreed to accelerate its exit from its Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from the Company’s landlord of $18 million. Upon modification, the Company reduced its lease liabilities by $21.1 million and accelerated depreciation of property, plant, and equipment related to the corporate headquarters.

Expense


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

Right of use assets and lease liabilities


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

(1) Represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets. (2) Included in other current liabilities.

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


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

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

Maturities of lease liabilities:


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

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

Cash flow information


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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8. DEBT

Convertible senior notes and capped calls

Convertible senior notes

In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal ~~amount~~ of $600 million, due March 1, 2025, in a private placement. ~~The proceeds from the Notes were used or are anticipated to be used for the Capped Call Transactions (described below), working capital, and other general corporate purposes. There are no required~~No principal payments ~~prior to the maturity of the Notes.~~are required 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.

~~Proceeds from the Notes and Capped Call Transactions:~~


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

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 ~~approximately~~ $135.05 per share of common stock. The Company will settle conversions by paying or delivering ~~as applicable,~~ 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 ~~the occurrence of~~ certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions.

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

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

•During any calendar quarter commencing after ~~the calendar quarter ending on~~ June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds ~~one hundred and thirty percent (130%)~~130% of the conversion price for each of at least ~~twenty (20)~~20 trading days (whether or not consecutive) during the ~~thirty (30)~~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 ~~the occurrence of~~ certain corporate events or distributions or if the Company calls ~~all or~~ any Notes for redemption, ~~then the noteholder of any Note~~noteholders may convert ~~such Note at any time~~ 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 ~~due on such redemption date~~ in full ~~at any time~~on the redemption date, until the Company pays ~~such~~the redemption ~~price in full)~~price).

As of ~~June 30, 2020, no~~March 31, 2021, the Notes were not eligible for conversion at the noteholders’ election.

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” ~~(as described below)~~ occur, ~~at any time,~~ each noteholder will have the right ~~at such noteholder’s option,~~ 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 ~~an integral~~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~~Fundamental Change relates to ~~events such as~~ mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.

Impact of the Notes

~~In accounting~~The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021. The standard eliminates the liability and equity separation model for ~~the transaction,~~convertible instruments with a cash conversion feature. See "Note 2. New Accounting Pronouncements" for additional information.

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

•The initial carrying amount of the liability component was calculated by measuring ~~the fair value of~~ a similar debt ~~instrument~~instrument’s fair value that does not have an associated conversion feature. The excess of the Notes’ principal amount ~~of the Notes~~ over the initial carrying amount of the liability component, the debt discount, iswas amortized as interest expense over the Notes’ contractual ~~term of the Notes.~~term.

•The equity component was recorded as an increase to additional paid-in capital and is not ~~remeasured as long as it continues to meet the conditions for equity classification.~~remeasured.

Upon adoption of ASU 2020-06, the book value of the Company’s Convertible Senior Notes (the “Notes”) increased by $69.5 million to $587.7 million, and retained earnings increased by $9.4 million. The ~~Company incurred issuance costs of $14.5 million related to~~retained earnings adjustment reflects the ~~Notes, which were allocated~~tax effected difference between the ~~liability and equity components of the Notes proportionate to the initial carrying amount of the liability and equity components.~~

•~~Issuance costs attributable to the liability component are recorded as an offset to the principal balance~~value of the Notes and ~~are~~the embedded conversion feature before adoption and the combined convertible instrument's amortized ~~as interest expense using the effective interest method over the contractual term of the Notes.~~

•~~Issuance costs attributable to the equity component are recorded as an offset to the equity component in additional paid-in capital and are not amortized.~~

~~Net carrying amount of the liability component:~~


~~(in thousands)~~	~~June 30, 2020~~
~~Principal~~	$	~~600,000~~
~~Unamortized debt discount~~	~~(78,867)~~
~~Unamortized issuance costs~~	~~(11,710)~~
	$	~~509,423~~

~~Net carrying amount of the equity component, included in additional paid-in capital:~~


~~(in thousands)~~	~~June 30, 2020~~
~~Conversion options~~ ⁽¹⁾	$	~~61,604~~

~~(1) Net of issuance costs and taxes.~~

~~Interest expense related to the Notes:~~

Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2020 2019 2020 2019
Contractual interest expense (0.75% coupon) $ 1,125 $ — $ 1,575 $ —
Amortization of debt discount ⁽¹⁾
3,757 — 5,253 —
Amortization of issuance cost ⁽¹⁾
558 — 780 —
$ 5,440 $ — $ 7,608 $ —

~~(1) Amortized based upon an effective interest rate of 4.31%.~~cost after adoption.

1012

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Carrying value of the Notes:


(in thousands)	March 31, 2021		December 31, 2020
Principal	$	600,000	$	600,000
Unamortized debt discount	0		(71,222)
Unamortized issuance costs	(11,582)		(10,575)
Convertible senior notes, net	$	588,418	$	518,203

Conversion options	$	0	$	84,120
Issuance costs	0		(2,037)
Deferred taxes	0		(20,479)
Additional paid-in capital	$	0	$	61,604

Interest expense related to the Notes:


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

Future payments of principal and contractual interest:


		June 30, 2020											March 31, 2021
(in thousands)	(in thousands)	Principal		Interest		Total		(in thousands)	Principal		Interest		Total
2020		$	—	$	2,338	$	2,338
2021	2021	—		4,500		4,500		2021	$	0	$	2,250	$	2,250
2022	2022	—		4,500		4,500		2022	0		4,500		4,500
2023	2023	—		4,500		4,500		2023	0		4,500		4,500
2024	2024	—		4,500		4,500		2024	0		4,500		4,500
2025	2025	600,000		1,488		601,488		2025	600,000		1,488		601,488
		$	600,000	$	21,826	$	621,826		$	600,000	$	17,238	$	617,238

Capped call transactions

In February 2020, the Company entered into privately negotiated capped call transactions (“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 and~~stock. The Capped Call Transactions are generally expected to reduce ~~potential dilution to the~~ common stock ~~upon any conversion of Notes~~dilution and/or offset any potential cash payments the Company is required to make, ~~in excess~~other than for principal and interest, upon conversion of the ~~principal amount of converted~~ Notes, ~~as the case may be,~~ with such reduction and/or offset subject to a ~~cap.~~cap of $196.44. The cap price of the Capped Call Transactions is ~~$196.44,~~ subject to adjustment upon the occurrence of specified extraordinary events affecting ~~us,~~the Company, including ~~merger events~~mergers and tender offers.

The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated in accordance with the governing documents, may not represent a fair value measurement. The Capped Call Transactions are classified as “other long-term assets” and remeasured to fair value at the end of each reporting period, resulting in a non-operating gain or loss.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Change in ~~value of Capped Call Transactions:~~capped call transactions:


~~(in thousands)~~	Six Months Ended June 30, 2020
~~Value at issuance~~	$	~~51,900~~
~~Fair value adjustment~~	~~827~~
~~Balance as of June 30,~~	$	~~52,727~~


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

Credit ~~Facility~~facility

In November 2019, and as amended inas of February 2020, July 2020, and ~~July~~September 2020, the Company entered into a ~~five-year~~five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). The Company may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $200 million.

The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions.

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

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

•Beginning with the quarter ended on March 31, 2022 a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of ~~3.5. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date.~~3.5 to 1.0.

As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company had 0 outstanding borrowings under the Credit Facility.

6.NOTE 9. FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis

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

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

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

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

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

~~PEGASYSTEMS INC.~~

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

The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend ~~yield, as applicable.~~yield. The Company applies judgment ~~in its determination of~~when determining expected volatility. The Company considers both historical and implied volatility levels of the underlying equity ~~security and to a lesser extent historical peer group volatility levels.~~security. The Company’s venture investments are recorded at fair value based on valuation methods, ~~using the~~including observable public companies and transaction ~~price~~prices and ~~other~~ unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.

~~The Company’s assets~~Assets and liabilities measured at fair value on a recurring basis:


		June 30, 2020														December 31, 2019															March 31, 2021				December 31, 2020
(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 ⁽¹⁾	Cash equivalents ⁽¹⁾	$	450,465	$	—	$	—	$	450,465	$	—	$	—	$	—	$	—	Cash equivalents ⁽¹⁾	$	26,657	$	0	$	0	$	26,657	$	42,339	$	14,000	$	0	$	56,339
Capped Call Transactions ^{(2) (3)}		$	—	$	52,727	$	—	$	52,727	$	—	$	—	$	—	$	—
Venture investments ^{(2) (4)}		$	—	$	—	$	6,640	$	6,640	$	—	$	—	$	4,871	$	4,871
Marketable securities																		Marketable securities	$	0	$	269,650	$	0	$	269,650	$	0	$	293,269	$	0	$	293,269
Capped Call Transactions (1)																		Capped Call Transactions (1)	$	0	$	64,480	$	0	$	64,480	$	0	$	83,597	$	0	$	83,597
Venture investments (1) (2)																		Venture investments (1) (2)	$	0	$	0	$	9,756	$	9,756	$	0	$	0	$	8,345	$	8,345

(1) ~~Composed of investments in money market funds. (2)~~ Included in other long-term assets. ~~(3) See "5. Debt" for additional information. (4) Composed of investments~~(2) Investments in privately-held companies.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Change in venture investments:


~~(in thousands)~~	Six Months Ended June 30, 2020
~~December 31, 2019~~	$	~~4,871~~
~~New investments~~	~~1,769~~
~~Sales of investments~~	~~(1,424)~~
~~Changes in foreign exchange rates~~	~~(50)~~
~~Fair value adjustment~~	~~1,474~~
~~June 30, 2020~~	$	~~6,640~~


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

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

Fair value of the Notes

The Notes’ fair value of the Company’s Notes was recorded at $515.9 million upon issuance, which reflected the principal amount of the Notes less the fair value of the conversion feature. The fair value of the debt component was determined based on a discounted cash flow model. The discount rate used reflected both the time value of money and credit risk inherent in the Notes. The carrying value of the Notes will be accreted, over the remaining term to maturity, to their principal value of $600 million.

~~The fair value of the Notes~~ (inclusive of the conversion feature ~~which is~~ embedded in the Notes) was ~~$602~~$665.9 million as of ~~June 30, 2020.~~March 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 ~~has been~~ classified within Level 2 in the fair value hierarchy. See ~~"5.~~"Note 8. Debt" for additional information.

7.NOTE 10. REVENUE

Geographic revenue


		Three Months Ended June 30,															Six Months Ended June 30,												Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)	2020						2019						2020						2019	(Dollars in thousands)					2021					2020
U.S.	U.S.	$	142,811	63	%	$	119,682	59	%	$	315,228	63	%		$	223,673	54	%	U.S.			$	194,568	62	%		$	172,417	65	%
Other Americas	Other Americas	8,930		4	%	8,873		4	%	24,272		5	%		37,702		9	%	Other Americas			11,901		4	%		15,342		6	%
United Kingdom (“U.K.”)	United Kingdom (“U.K.”)	21,259		9	%	16,686		8	%	43,096		9	%		41,235		10	%	United Kingdom (“U.K.”)			28,212		9	%		21,837		8	%
Europe (excluding U.K.), Middle East, and Africa	Europe (excluding U.K.), Middle East, and Africa	34,878		15	%	33,395		16	%	66,816		14	%		67,581		16	%	Europe (excluding U.K.), Middle East, and Africa			51,659		16	%		31,938		12	%
Asia-Pacific	Asia-Pacific	19,497		9	%	26,956		13	%	43,554		9	%		47,947		11	%	Asia-Pacific			27,159		9	%		24,057		9	%
		$	227,375	100	%	$	205,592	100	%	$	492,966	100	%		$	418,138	100	%				$	313,499	100	%		$	265,591	100	%

Revenue streams


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

1215

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Revenue streams~~

Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2020 2019 2020 2019
Perpetual license $ 9,057 $ 19,320 $ 12,716 $ 34,270
Term license 44,266 24,954 134,523 73,268
Revenue recognized at a point in time 53,323 44,274 147,239 107,538
Maintenance 72,222 69,329 145,917 137,035
Pega Cloud 48,838 31,699 92,304 59,457
Consulting 52,992 60,290 107,506 114,108
Revenue recognized over time 174,052 161,318 345,727 310,600
$ 227,375 $ 205,592 $ 492,966 $ 418,138


(in thousands)	(in thousands)	Three Months Ended June 30,									Six Months Ended June 30,				(in thousands)			Three Months Ended March 31,
				2020			2019			2020			2019	(in thousands)			2021		2020
Term license		$	44,266		$	24,954		$	134,523		$	73,268
Pega Cloud	Pega Cloud	48,838			31,699			92,304			59,457		Pega Cloud			$	67,858	$	43,466
Maintenance	Maintenance	72,222			69,329			145,917			137,035		Maintenance			75,561		73,695
Term license													Term license			111,509		90,257
Subscription ⁽¹⁾	Subscription ⁽¹⁾	165,326			125,982			372,744			269,760		Subscription (1)			254,928		207,418
Perpetual license	Perpetual license	9,057			19,320			12,716			34,270		Perpetual license			5,452		3,659
Consulting	Consulting	52,992			60,290			107,506			114,108		Consulting			53,119		54,514
		$	227,375		$	205,592		$	492,966		$	418,138				$	313,499	$	265,591

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

Remaining performance obligations ("Backlog")

Expected future revenue on existing non-cancellable contracts:


		June 30, 2020																																March 31, 2021
(Dollars in thousands)	(Dollars in thousands)	Perpetual license		Term license		Maintenance		Pega Cloud		Consulting		Total						(Dollars in thousands)	Perpetual license			Term license			Maintenance			Pega Cloud			Consulting			Total
1 year or less	1 year or less	$	8,120	$	53,550	$	186,618	$	191,187	$	21,923	$	461,398	57	%	1 year or less	$	9,649		$	41,025		$	220,100		$	252,104		$	21,068		$	543,946	55	%
1-2 years	1-2 years	1,700		6,187		40,153		140,860		1,986		190,886		23	%	1-2 years	629			9,874			52,366			187,456			914			251,239		26	%
2-3 years	2-3 years	—		6,460		20,671		88,273		631		116,035		14	%	2-3 years	0			7,055			33,337			91,861			1,756			134,009		14	%
Greater than 3 years	Greater than 3 years	—		646		10,517		37,071		626		48,860		6	%	Greater than 3 years	0			377			16,834			32,895			510			50,616		5	%
		$	9,820	$	66,843	$	257,959	$	457,391	$	25,166	$	817,179	100	%		$	10,278		$	58,331		$	322,637		$	564,316		$	24,248		$	979,810	100	%


		June 30, 2019																																March 31, 2020
(Dollars in thousands)	(Dollars in thousands)	Perpetual license		Term license		Maintenance		Pega Cloud		Consulting		Total						(Dollars in thousands)	Perpetual license			Term license			Maintenance			Pega Cloud			Consulting			Total
1 year or less	1 year or less	$	8,429	$	38,080	$	173,421	$	124,134	$	16,259	$	360,323	57	%	1 year or less	$	3,995		$	30,962		$	205,083		$	174,277		$	18,945		$	433,262	58	%
1-2 years	1-2 years	915		4,678		12,530		98,842		942		117,907		19	%	1-2 years	2,168			5,088			34,633			125,473			1,215			168,577		22	%
2-3 years	2-3 years	1,306		641		5,801		75,828		227		83,803		13	%	2-3 years	0			6,504			19,411			81,187			107			107,209		14	%
Greater than 3 years	Greater than 3 years	—		185		2,812		63,259		—		66,256		11	%	Greater than 3 years	0			635			10,596			33,537			10			44,778		6	%
		$	10,650	$	43,584	$	194,564	$	362,063	$	17,428	$	628,289	100	%		$	6,163		$	43,189		$	269,723		$	414,474		$	20,277		$	753,826	100	%

NOTE 11. STOCK-BASED COMPENSATION

Expense


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

As of March 31, 2021, the Company had $183.4 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.3 years.

Grants


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

1316

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~8. STOCK-BASED COMPENSATION~~

~~Expense~~

Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2020 2019 2020 2019
Cost of revenues $ 5,384 $ 4,911 $ 10,536 $ 9,430
Selling and marketing 11,592 8,364 21,310 15,738
Research and development 5,805 4,572 11,302 9,132
General and administrative 2,874 2,200 5,683 4,097
$ 25,655 $ 20,047 $ 48,831 $ 38,397
Income tax benefit $ (5,107) $ (4,056) $ (9,689) $ (7,796)

As of June 30, 2020, the Company had $130.3 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.2 years.

~~Grants~~

~~The Company granted the following stock-based compensation awards:~~

Six Months Ended
June 30, 2020
(in thousands) Shares Total Fair Value
RSUs 939 $ 82,823
Non-qualified stock options 1,696 $ 38,551

9.NOTE 12. INCOME TAXES

Effective income tax rate


		Three Months Ended June 30,							Six Months Ended June 30,							Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020			2019			(Dollars in thousands)	2021			2020
(Benefit from) income taxes	(Benefit from) income taxes	$	(12,319)	$	(17,338)	$	(36,129)		$	(25,638)		(Benefit from) income taxes	$	(17,618)		$	(23,810)
Effective income tax rate						44		%	30		%
Effective income tax benefit rate												Effective income tax benefit rate	73		%	48		%

~~During the six months ended June 30, 2020,~~The increase in the Company’s effective income tax benefit rate ~~benefit increased~~was primarily due to ~~the~~ excess tax benefits from stock-based compensation and fair value adjustments for the capped call transactions, which were proportionally larger on a ~~carryback claim benefit as a result of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), partially offset by Global Intangible Low-Taxed Income (“GILTI”).~~lower loss before income taxes.

~~10.~~NOTE 13. (LOSS) PER SHARE

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

~~PEGASYSTEMS INC.~~

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

Calculation of ~~the basic and diluted earnings~~(loss) per share:


		Three Months Ended June 30,						Six Months Ended June 30,					Three Months Ended March 31,
(in thousands, except per share amounts)	(in thousands, except per share amounts)	2020		2019		2020		2019		(in thousands, except per share amounts)	2021		2020
Net (loss)	Net (loss)	$	(20,740)	$	(32,296)	$	(46,112)	$	(61,013)	Net (loss)	$	(6,617)	$	(25,372)
Weighted-average common shares outstanding	Weighted-average common shares outstanding	80,224		78,987		80,016		78,787		Weighted-average common shares outstanding	81,004		79,808
(Loss) per share, basic	(Loss) per share, basic	$	(0.26)	$	(0.41)	$	(0.58)	$	(0.77)	(Loss) per share, basic	$	(0.08)	$	(0.32)

Net (loss)	Net (loss)	$	(20,740)	$	(32,296)	$	(46,112)	$	(61,013)	Net (loss)	$	(6,617)	$	(25,372)

Weighted-average common shares outstanding, assuming dilution ^{(1) (2)}		80,224		78,987		80,016		78,787
Weighted-average common shares outstanding, assuming dilution (1) (2) (3)										Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	81,004		79,808
(Loss) per share, diluted	(Loss) per share, diluted	$	(0.26)	$	(0.41)	$	(0.58)	$	(0.77)	(Loss) per share, diluted	$	(0.08)	$	(0.32)

Outstanding anti-dilutive stock options and RSUs ⁽³⁾⁽⁴⁾	Outstanding anti-dilutive stock options and RSUs ⁽³⁾⁽⁴⁾	5,929		6,253		5,939		5,908		Outstanding anti-dilutive stock options and RSUs ⁽³⁾⁽⁴⁾	6,465		5,948

(1) The Company expects to settle the principal amount of the Notes in cash. As a result, only the amount by which the conversion value exceeds the aggregated principal amount of the Notes is included in the diluted earnings per share computation under the treasury stock method. The conversion spread has a dilutive impact on diluted net income per share when the average market price of the Company’s common stock for a given period exceeds the initial conversion price of $135.05 per share for the Notes. In connection with the Notes’ issuance, the Company entered into Capped Call Transactions, which were not included in calculating the number of diluted shares outstanding, as their effect would have been anti-dilutive.

~~(2)~~ 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 4.4 million shares.

(3) ~~Certain outstanding~~The Company’s Capped Call Transactions cover approximately 4.4 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible). The Capped Call Transactions are generally expected to reduce common stock dilution and/or offset any potential cash payments the Company is required to 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 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 ~~earnings~~(loss) per ~~share because they were anti-dilutive in the period presented.~~share. These awards may be dilutive in the future.

1517

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, ~~intends to,~~ projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions ~~are intended to~~ identify forward-looking statements, which are based on current expectations and assumptions.

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

•our future financial performance and business ~~plans,~~ plans;

•the adequacy of our liquidity and capital ~~resources,~~ resources;

•the continued payment of our quarterly ~~dividends,~~ dividends;

•the timing of revenue ~~recognition,~~ recognition;

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

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

•the impact of actual or threatened public health emergencies, such as the Coronavirus ~~(COVID-19),~~ (“COVID-19”);

•reliance on third-party service ~~providers,~~ providers;

•compliance with our debt obligations and ~~debt covenants,~~ covenants;

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

•reliance on key ~~personnel,~~ personnel;

•the relocation of our corporate headquarters;

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

•foreign currency exchange ~~rates,~~ rates;

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

•security breaches and security ~~flaws,~~ flaws;

•our ability to protect our intellectual property rights and costs associated with defending such ~~rights, maintenance of~~ rights;

•our client retention ~~rate, and~~ rate;

•management of our growth.

These risks and ~~other factors~~others that ~~could~~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, ~~2019,~~2020, 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 ~~publicly~~ update or revise these forward-looking statements publicly, whether as the result of new information, future events, or otherwise.

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

BUSINESS OVERVIEW

We develop, market, license, host, and support enterprise software applications that help organizations simplify business complexity. Our intelligent technology and scalable architecture enables the world’s leading brands and government agencies to solve problems quickly and transform ~~the way they engage with their customers~~for tomorrow. Our clients are able to make better decisions and ~~process~~get work across their enterprise. We also license our low-code Pega Platform™ for rapid application development to clients that wish to build and extend their business applications. Our cloud-architected portfolio of customer engagement and digital process automation applications leveragesdone using real-time artificial intelligence (“AI”)~~, case management,~~ and ~~robotic~~intelligent automation ~~technology,~~on applications built on the low-code, cloud-native Pega Platform™, enabling our ~~unified low-code~~clients to streamline service, increase customer lifetime value, and boost efficiency. Our consulting and client success teams, along with our world-class partners, leverage our Pega ~~Platform, empowering businesses~~Express™ methodology and low code to allow clients to design and deploy critical applications quickly ~~design, extend,~~ and ~~scale their enterprise applications to meet strategic business needs.~~collaboratively.

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

~~COVID-19~~

Cloud Transition

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

Coronavirus (“COVID-19”)

As of ~~June 30, 2020,~~March 31, 2021, COVID-19 has not had a material impact on our results of operations or financial condition.

The ultimate impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the outbreak, impact on our clients and our sales cycles, and impact on our partners, vendors, or employees, all of which are uncertain and unpredictable. Our shift towards subscription-based revenue streams, the industry mix of our clients, our product mix, the fact that many of our clients are well-known and of large size, and the critical nature of our products to our clients may reduce or delay the impact of COVID-19 on our business, however, it is not possible to estimate the ultimate impact that COVID-19 will have on our business. See “Coronavirus (“COVID-19”)” ~~under Item 1A. Risk Factors~~in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information.

Performance metrics

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

Annual contract value (“ACV”) | ~~+21%~~Increased 20% since ~~June 30, 2019~~March 31, 2020

•ACV, as reported, represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate ACV for term license and Pega Cloud ~~contracts is calculated by dividing the contract’s total value by the duration of the contract in years. ACV for maintenance is calculated as maintenance~~contracts. Maintenance revenue for the quarter then ended is multiplied by ~~four.~~four to calculate ACV for maintenance. Client Cloud ACV is composed of maintenance ACV and ~~ACV from~~ term license ~~contracts. We~~ACV. ACV is a performance measure that we believe ~~the presentation of ACV on a constant currency basis enhances the understanding of~~provides useful information to our ~~results, as it provides visibility into the impact of~~management and investors, particularly during our Cloud Transition. Reported amounts have not been adjusted for changes in foreign exchange rates. Foreign currency exchange ~~rates, which are outside of our control. All periods shown reflect foreign currency exchange rates as of June 30, 2020.~~rate changes contributed 3% to total ACV growth in 2021.

1619

Remaining performance obligations (“Backlog”) | ~~+30%~~Increased 30% since ~~June 30, 2019~~March 31, 2020

•Backlog represents ~~contracted~~expected future revenue ~~that has not yet been recognized and includes deferred revenue and~~on existing non-cancellable ~~amounts that are expected to be invoiced and recognized as revenue in future periods.~~contracts.

Year to date Pega Cloud revenue | ~~+55%~~Increased 56% since ~~June 30, 2019~~the three months ended March 31, 2020

•Pega Cloud revenue is revenue ~~as reported~~ under USU.S. GAAP for cloud contracts.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared ~~in accordance with~~following accounting principles generally accepted in the United States ~~(“U.S.”)~~ 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, ~~and~~ expenses, and the related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future given the available information.

For more information regarding 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, ~~2019:~~2020:

•“Critical Accounting Estimates and Significant Judgments” in Item ~~7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;~~7; and

•Note 2. “Significant Accounting Policies” in Item 8. ~~“Financial Statements and Supplementary Data.”~~

There have been no significant changes other than those disclosed in “Note 2. New Accounting Pronouncements” in Item 1 of this Quarterly Report on Form 10-Q to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2019 other than those listed below.~~

~~Capped Call Transactions~~

In February 2020, we entered into privately negotiated capped call transactions (“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 our common stock and are generally expected to reduce potential dilution of our common stock upon any conversion of the Notes. The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable. Management applies judgment in its determination of expected volatility. We consider both historical and implied volatility levels of the underlying equity security and to a lesser extent historical peer group volatility levels.

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

~~See "5. Debt" and “6. Fair Value Measurements” in Item 1 of this Quarterly Report for additional information.~~2020.

RESULTS OF OPERATIONS

Revenue

~~Our license revenue is derived from sales~~Cloud Transition

We are in the process of transitioning our ~~applications and Pega Platform. Our Pega Cloud revenue is derived from our hosted Pega Platform and~~business to sell software ~~applications. We expect our revenue mix to continue to shift in favor of our~~primarily through subscription ~~offerings,~~arrangements, particularly Pega ~~Cloud arrangements, which could result in~~Cloud. Revenue growth has been slower ~~total revenue growth in the near term.~~because of this transition. Revenue from Pega Cloud and maintenance arrangements is ~~generally~~typically recognized over the ~~service period, while~~contract term. In contrast, revenue from ~~term and perpetual~~ license ~~arrangements~~sales is ~~generally~~ recognized ~~upfront~~ when the license rights become ~~effective.~~effective, typically upfront.


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended June 30,															Change									Six Months Ended June 30,											Change		(Dollars in thousands)											Three Months Ended March 31,											Change
				2020						2019													2020										2019			(Dollars in thousands)					2021							2020					Change
Pega Cloud	Pega Cloud	$	48,838	21	%	$	31,699	15	%		$	17,139	54	%	$	92,304			19	%			$	59,457		14	%			$	32,847		55	%	Pega Cloud					$	67,858		22	%			$	43,466		16	%					$	24,392		56	%
Maintenance	Maintenance	72,222		33	%	69,329		34	%		2,893		4	%	145,917		30	%			137,035		33		%			8,882		6		%	Maintenance					75,561		23		%			73,695		28		%			1,866				3		%
Term license	Term license	44,266		19	%	24,954		12	%		19,312		77	%	134,523		27	%			73,268		18		%			61,255		84		%	Term license					111,509		36		%			90,257		34		%			21,252			24		%
Subscription ⁽¹⁾	Subscription ⁽¹⁾	165,326		73	%	125,982		61	%		39,344		31	%	372,744		76	%			269,760		65		%			102,984		38		%	Subscription (1)					254,928		81		%			207,418		78		%			47,510			23		%
Perpetual license	Perpetual license	9,057		4	%	19,320		9	%		(10,263)		(53)	%	12,716		3	%			34,270		8		%			(21,554)		(63)		%	Perpetual license					5,452		2		%			3,659		1		%			1,793			49		%
Consulting	Consulting	52,992		23	%	60,290		30	%		(7,298)		(12)	%	107,506		21	%			114,108		27		%			(6,602)		(6)		%	Consulting					53,119		17		%			54,514		21		%			(1,395)			(3)		%
Total revenue		$	227,375	100	%	$	205,592	100	%		$	21,783	11	%	$	492,966	100	%			$	418,138	100		%			$	74,828	18		%
																																						$	313,499	100		%			$	265,591	100		%			$		47,908		18		%

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

•The ~~increases in~~ total revenue change in the three ~~and six~~ months ended ~~June 30, 2020 were primarily due to the increases in subscription~~March 31, 2021 generally reflects our Cloud Transition. Other factors impacting our revenue ~~partially offset by decreases in perpetual revenue, reflecting the shift in client preferences to subscription arrangements from other types of arrangements.~~include:

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

•Maintenance renewal rates ~~in excess~~ of higher than 90% ~~contributed to the increases in maintenance revenue.~~.

•The ~~decreases~~decrease in consulting revenue in the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 was primarily due to a decrease in billable travel expenses as a result of COVID-19. As part of our long-term strategy, we intend to continue growing and leveraging our ecosystem of partners on implementation projects, potentially reducing our future consulting revenue growth.

Gross profit


	Three Months Ended March 31,					Change
(Dollars in thousands)		2021	2020
Software license				$	116,311	99	%	$	93,232	99	%	$	23,079	25	%
Maintenance				69,775		92	%	68,119		92	%	1,656		2	%
Pega Cloud				45,301		67	%	25,933		60	%	19,368		75	%
Consulting				(335)		(1)	%	(1,221)		(2)	%	886		73	%
				$	231,052	74	%	$	186,063	70	%	$	44,989	24	%

•The changes in gross profit in the three months ended March 31, 2021 were primarily due to ~~decreases in billable hours~~our Cloud Transition, revenue growth, and ~~to a lesser extent due to reductions in billable travel expenses from reduced travel as a result of COVID-19.~~

~~Gross profit~~

Three Months Ended
June 30, Change Six Months Ended
June 30, Change
(Dollars in thousands) 2020 2019 2020 2019
Software license $ 52,344 98 % $ 43,346 98 % $ 8,998 21 % $ 145,576 99 % $ 105,232 98 % $ 40,344 38 %
Maintenance 66,631 92 % 63,037 91 % 3,594 6 % 134,750 92 % 124,408 91 % 10,342 8 %
Pega Cloud 29,850 61 % 15,052 47 % 14,798 98 % 55,783 60 % 29,512 50 % 26,271 89 %
Consulting 1,859 4 % 7,077 12 % (5,218) (74) % 638 1 % 7,469 7 % (6,831) (91) %
$ 150,684 66 % $ 128,512 63 % $ 22,172 17 % $ 336,747 68 % $ 266,621 64 % $ 70,126 26 %

~~The recent shift in our revenue mix toward Pega Cloud arrangements has resulted in slower total gross profit growth~~cost-efficiency gains as Pega Cloud grows and scales. Revenue from Pega Cloud arrangements is generally recognized over the service period, while revenue from term and perpetual license arrangements is generally recognized upfront when the license rights become effective.

•The ~~increases~~increase in consulting gross profit in the three ~~and six~~ months ended ~~June 30, 2020 were~~March 31, 2021 was primarily due to ~~increases~~an increase in ~~term and Pega Cloud revenue, which reflects the shift in client preferences to subscription arrangements from other types of arrangements.~~

~~The increases in the three and six months ended June 30, 2020 in gross profit percent were primarily due to the:~~

•~~increases in the three and six months ended June 30, 2020 in Pega Cloud gross profit percent, driven by cost efficiency gains as Pega Cloud grows and scales, and~~

•decreases in the three and six months ended June 30, 2020 in consulting gross profit percent, primarily due to increases in consulting resource availability in anticipation of future projects. Our consulting resource availabilityconsultant utilization. Consultant utilization is impacted by several factors, including the ~~scope~~timing and ~~timing~~scope of new implementation projects and the extent of our ~~level of~~ involvement ~~in implementation projects~~ compared to our consulting partners and enabled clients. ~~To support our long-term strategy, we intend to grow and increasingly leverage our partners and enabled clients for future implementation projects, which may reduce the future growth rate.~~

Operating expenses


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended June 30,															Change							Six Months Ended June 30,							Change		(Dollars in thousands)										Three Months Ended March 31,						Change
				2020						2019												2020							2019	(Dollars in thousands)					2021						2020				Change
				% of Revenue				% of Revenue											% of Revenue					% of Revenue													% of Revenue						% of Revenue
Selling and marketing	Selling and marketing	$	127,607	56	%	$	116,962	57	%		$	10,645	9	%	$	263,631	53	%		$	225,827	54	%		$	37,804	17	%	Selling and marketing			$	148,739	47		%		$	136,024	51		%		$		12,715	9	%
Research and development	Research and development	$	58,869	26	%	$	49,714	24	%		$	9,155	18	%	$	117,596	24	%		$	100,310	24	%		$	17,286	17	%	Research and development			$	62,442	20		%		$	58,727	22		%		$	3,715	6	%
General and administrative	General and administrative	$	15,655	7	%	$	14,174	7	%		$	1,481	10	%	$	31,285	6	%		$	26,850	6	%		$	4,435	17	%	General and administrative			$	18,270	6		%		$	15,630	6		%		$	2,640	17	%

•The ~~increases~~increase in ~~sales~~selling and marketing in the three ~~and six~~ months ended ~~June 30, 2020 were~~March 31, 2021 was primarily due to ~~increases~~an increase in compensation and benefits of ~~$29.2 million and $51.6~~$25.4 million, attributable to increases in headcount and equity ~~compensation.~~compensation, partially offset by decreases in travel and entertainment of $6.0 million and sales and marketing events of $7.9 million due to COVID-19. The ~~increases~~increase in headcount reflect our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts. These increases were partially offset by decreases in travel and entertainment of $8.1 million and $8.9 million as a result of COVID-19 and decreases in PegaWorld costs as a result of the cancellation of the live event portion. The three months ended June 30, 2020 include a reduction of expenses of $2.8 million due to the favorable settlement of cancellation fees owed to vendors of the live event portion.

•The ~~increases~~increase in research and development in the three ~~and six~~ months ended ~~June 30, 2020 were~~March 31, 2021 was primarily due to ~~increases~~an increase in compensation and benefits of ~~$8.6 million and $15.7~~$4.6 million, attributable to increases in headcount and equity compensation.

•The ~~increases~~increase in general and administrative in the three ~~and six~~ months ended ~~June 30, 2020 were~~March 31, 2021 was primarily due to ~~increases~~an increase in compensation and benefits of ~~$0.8~~$1.1 million, ~~and $2.2 million, attributed~~attributable to increases in headcount and equity ~~compensation.~~compensation, and an increase in professional services fees of $1.6 million.

•

In February 2021, we agreed to accelerate our exit from our Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million. This agreement was the primary contributor to a decrease in facilities expense of $2.1 million in selling and marketing, $1.7 million in research and development, and $0.3 million in general and administrative in the three months ended March 31, 2021.

Other income (expense), net

(Dollars in thousands) Three Months Ended
June 30, Change Six Months Ended
June 30, Change
2020 2019 2020 2019
Foreign currency transaction gain (loss) $ 4,256 $ 2,105 $ 2,151 102 % $ (1,691) $ (1,607) $ (84) (5) %
Interest income 242 544 (302) (56) % $ 849 $ 1,267 (418) (33) %
Interest expense (5,529) — (5,529) * $ (7,835) $ — (7,835) *
Gain on capped call transactions 19,419 — 19,419 * 827 — 827 *
Other income, net — 55 (55) (100) % $ 1,374 $ 55 1,319 2,398 %

$ 18,388 $ 2,704 $ 15,684 580 % $ (6,476) $ (285) $ (6,191) (2,172) %

* not meaningful


(Dollars in thousands)	Three Months Ended March 31,				Change
		2021	2020
Foreign currency transaction (loss)			$	(5,098)		$	(5,947)	$	849	14	%
Interest income			153			607		(454)		(75)	%
Interest expense			(1,880)			(2,306)		426		18	%
(Loss) on capped call transactions			(19,117)			(18,592)		(525)		(3)	%
Other income, net			106			1,374		(1,268)		(92)	%
			$	(25,836)		$	(24,864)	$	(972)	(4)	%

•The ~~changes~~change in foreign currency transaction ~~gain~~ (loss) in the three ~~and six~~ months ended ~~June 30, 2020 were~~March 31, 2021 was primarily due to the impact of fluctuations in foreign currency exchange rates associated with our foreign currency-denominated cash, ~~accounts receivable,~~receivables, and intercompany ~~receivables and payables~~balances held by our subsidiary in the United ~~Kingdom (“U.K.”) subsidiary.~~Kingdom.

•The ~~increases~~decrease in ~~the gain on capped call transactions~~interest income in the three ~~and six~~ months ended ~~June 30, 2020 were~~March 31, 2021 was primarily due to ~~fair value adjustments~~a decrease in market interest rates.

•The decrease in interest expense in the three months ended March 31, 2021 was primarily due to our adoption of ASU 2020-06 on ~~the Capped Call Transactions, entered into in connection with our issuance of the Notes.~~January 1, 2021. See ~~"5. Debt"~~"Note 2. New Accounting Pronouncements" in Item 1 of this Quarterly Report for additional information.

•~~The decreases in interest income in the three and six months ended June 30, 2020 were due~~Interest expense related to the ~~decreases in market interest rates.~~Notes:


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

•The increase in the (loss) on capped call transactions in the three months ended March 31, 2021 was due to fair value adjustments.

•The decrease in other income, net in the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 was due to ~~a gain from~~an increase in the value of our venture investments ~~portfolio.~~

•~~The increases in interest expense~~portfolio in the three ~~and six~~ months ended ~~June 30, 2020 were due to our issuance of $600 million in aggregate principal amount of our convertible senior notes (“Notes”) on February 24,~~March 31, 2020. ~~See "5. Debt" in Item 1 of this Quarterly Report for additional information.~~

~~Interest expense related to the Notes:~~

Three Months Ended
June 30, Change Six Months Ended
June 30, Change
(in thousands) 2020 2019 2020 2019
Contractual interest expense (0.75% coupon) $ 1,125 $ — $ 1,125 $ 1,575 $ — $ 1,575
Amortization of debt discount 3,757 — $ 3,757 5,253 — $ 5,253
Amortization of issuance cost 558 — $ 558 780 — $ 780
$ 5,440 $ — $ 5,440 $ 7,608 $ — $ 7,608

(Benefit from) income taxes

Three Months Ended
June 30, Six Months Ended
June 30,
(Dollars in thousands) 2020 2019 2020 2019
(Benefit from) income taxes $ (12,319) $ (17,338) $ (36,129) $ (25,638)
Effective income tax rate 44 % 30 %

The inclusion of excess tax benefits from stock-based compensation in the provision for income taxes has increased the variability of the effective tax rates in recent periods. This fluctuation may continue in future periods, depending on our future stock price in relation to the fair value of awards, the timing of the vestings of RSU awards, the exercise behavior of our stock option holders, and the total value of future grants of stock-based compensation awards.


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

During the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, the increase in our effective income tax benefit rate ~~benefit increased~~was primarily due to ~~the~~ excess tax benefits from stock-based compensation and fair value adjustments for the capped call transactions, which were proportionally larger on a ~~carryback claim benefit as~~lower loss before income taxes.

Stock-based compensation increases the variability of our effective tax rates. The impact of stock-based compensation on a ~~result~~given period depends on our profitability, the attributes of ~~the Coronavirus Aid, Relief,~~our stock compensation awards we grant, and ~~Economic Security Act (“CARES Act”), partially offset by Global Intangible Low-Taxed Income (“GILTI”).~~award holders' exercise behavior.

LIQUIDITY AND CAPITAL RESOURCES


		Six Months Ended June 30,							Three Months Ended March 31,
(in thousands)	(in thousands)	2020		2019		(in thousands)	2021		2020
Cash provided by (used in):	Cash provided by (used in):					Cash provided by (used in):
Operating activities	Operating activities	$	(21,199)	$	7,720	Operating activities	$	21,650	$	(18,323)
Investing activities	Investing activities	(19,404)		17,210		Investing activities	15,489		(12,562)
Financing activities	Financing activities	485,293		(44,367)		Financing activities	(34,794)		502,174
Effect of exchange rates on cash and cash equivalents	Effect of exchange rates on cash and cash equivalents	(942)		515		Effect of exchange rates on cash and cash equivalents	(1,536)		(1,510)
Net increase (decrease) in cash and cash equivalents		$	443,748	$	(18,922)
Net increase in cash and cash equivalents						Net increase in cash and cash equivalents	$	809	$	469,779


(in thousands)	(in thousands)	June 30, 2020		December 31, 2019		(in thousands)	March 31, 2021		December 31, 2020
Held by U.S. entities	Held by U.S. entities	$	468,237	$	23,437	Held by U.S. entities	$	342,016	$	399,138
Held by foreign entities	Held by foreign entities	43,874		44,926		Held by foreign entities	100,342		66,030
Total cash and cash equivalents		$	512,111	$	68,363
Total cash, cash equivalents, and marketable securities						Total cash, cash equivalents, and marketable securities	$	442,358	$	465,168

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

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

~~Cash (used in) provided by operating~~Operating activities

We are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud. This transition has and is expected to continue to impact our billings and timing of cash collections. Pega Cloud, term license, and maintenance arrangements are generally billed and collected over the contract term, while perpetual license arrangements are generally billed and collected upfront when the license rights become effective. As client preferences ~~continue to~~ shift in favor of Pega Cloud arrangements, we could ~~continue to~~ experience slower operating cash flow growth, or negative cash flow, in the near term. Cash from most Pega Cloud and term arrangements is collected over an average service period of three years, while cash from most perpetual license arrangements is collected upfront, shortly after the license rights become effective.

The primary driver of the decrease in the six months ended June 30, 2020 was the recent shift in our revenue mix toward Pega Cloud arrangements and increased costs as we accelerated investments in our Pega Cloud offering and selling and marketing activities to support future growth.

In the six months ended June 30, 2020, COVID-19 did not have a material impact on our cash flows from operations. See “Coronavirus (“COVID-19”)” under Item 1A. Risk Factors for additional information.

~~Cash (used in) provided by investing activities~~

The change in cash provided by (used in) operating activities in the three months ended March 31, 2021 was primarily due to a significant increase in client collections. In February 2021, we agreed to accelerate our exit from our Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which is expected to be paid in the last quarter of 2021. The accelerated exit from this lease reduced our future lease liabilities by $21.1 million.

Investing activities

The change in cash provided by (used in) investing activities in the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 was primarily driven by investments in ~~property~~financial instruments, an acquisition, and ~~equipment at several of our~~a decrease in office ~~locations.~~space related capital expenditures.

~~Cash provided by (used in) financing~~Financing activities

In February 2020, we issued $600 million in aggregate principal amount of ~~our~~ convertible senior notes ~~(“Notes”)~~ due March 1, ~~2025, which provided proceeds~~2025.

In November 2019, and as ~~follows:~~


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

~~A portion~~amended as of February 2020, July 2020, and September 2020, we entered into a five-year $100 million senior secured revolving credit agreement with PNC Bank, National Association. As of March 31, 2021, we had no outstanding borrowings under the ~~proceeds of the Notes was used to fund the Capped Call Transactions with the remainder to be used for working capital and other general corporate purposes.~~Credit Facility. See ~~"5.~~"Note 8. Debt" in Item 1 of this Quarterly Report for additional information.

~~In November 2019, and as amended in February 2020 and July 2020, we entered into a~~ ~~five~~-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). As of June 30, 2020 and December 31, 2019, we had 0 outstanding borrowings under the Credit Facility.

2123

Stock repurchase program⁽¹⁾

Changes in the remaining stock repurchase authority:


(in thousands)	~~Six~~Three Months Ended ~~June 30,~~March 31, 2021
December 31, ~~2019~~	$	~~45,484~~
~~Authorizations~~ ⁽²⁾	~~20,516~~
~~Repurchases~~	~~(8,199)~~
~~June 30,~~ 2020	$	~~57,801~~37,726

Repurchases (1)	(9,146)
March 31, 2021	$	28,580

⁽¹⁾ Purchases under this program have been made on the open market.⁽²⁾ On June 15, 2020, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2021 and increased the remaining stock repurchase authority to $60 million.

Common stock repurchases


		Six Months Ended June 30,											Three Months Ended March 31,
		2020				2019						2021			2020
(in thousands)	(in thousands)	Shares	Amount		Shares	Amount		(in thousands)	Shares	Amount		Shares	Amount
Tax withholdings for net settlement of equity awards	Tax withholdings for net settlement of equity awards	411	$	37,093	390	$	26,054	Tax withholdings for net settlement of equity awards	197	$	25,509	257	$	23,011
Stock repurchase program ⁽¹⁾	Stock repurchase program ⁽¹⁾	110	8,199		232	13,889		Stock repurchase program ⁽¹⁾	70	9,146		87	6,000
Activity in period ⁽²⁾		521	$	45,292	622	$	39,943
									267	$	34,655	344	$	29,011

⁽¹⁾ ~~Represents activity under our stock repurchase program.~~
⁽²⁾

During the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ instead of receiving cash from the equity holders, we withheld shares with a value of ~~$31.2~~$10.1 million and ~~$23.1~~$15.3 million, respectively, for the exercise price of options. These amounts have been excluded from the table above.

Dividends

Six Months Ended
June 30,
(in thousands) 2020 2019
Dividend payments to shareholders $ 4,793 $ 4,730

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


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

~~Contractual obligations~~

~~As of June 30, 2020, our contractual obligations were:~~

Payments due by period
(in thousands) 2020 2021 2022-2023 2024-2025 2026 and thereafter Other Total
Purchase obligations ⁽¹⁾
$ 43,197 $ 56,689 $ 57,498 $ — $ — $ — $ 157,384
Investment commitments ⁽²⁾
992 706 — — — — 1,698
Liability for uncertain tax positions⁽³⁾
— — — — — 5,250 5,250
Operating lease obligations 9,391 20,414 37,326 7,205 1,735 — 76,071
Total $ 53,580 $ 77,809 $ 94,824 $ 7,205 $ 1,735 $ 5,250 $ 240,403

~~(1) Represents the fixed or minimum amounts due under purchase obligations for hosting services and sales and marketing programs.~~

(2) Represents the maximum funding that would be expected under existing venture investment agreements. Our investment agreements generally allow us to withhold unpaid committed funds at our discretion.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss ~~that may affect us due to~~from adverse changes in financial market prices and rates.

Foreign currency exposure

Translation risk

Our foreign 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 ~~result in the following impact:~~have resulted in:


		Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019			2021		2020
(Decrease) increase in revenue	(Decrease) increase in revenue	(3)	%	(4)	%	(Decrease) increase in revenue	(4)	%	(3)	%
(Decrease) increase in net (loss)		(15)	%	(7)	%
(Decrease) increase in net income						(Decrease) increase in net income	20	%	(14)	%

Remeasurement risk

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

We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash and cash equivalents, ~~accounts receivable, unbilled~~ receivables, and intercompany receivables and payables 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 ~~result~~have resulted in the following impact:


		Six Months Ended June 30,							Three Months Ended March 31,
(in millions)		2020		2019
(in thousands)						(in thousands)	2021		2020
Foreign currency gain (loss)	Foreign currency gain (loss)	$	9	$	(2)	Foreign currency gain (loss)	$	(7,522)	$	7,190

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of ~~June 30, 2020.~~March 31, 2021. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of ~~June 30, 2020.~~March 31, 2021.

(b) Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended ~~June 30, 2020~~March 31, 2021 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

~~COVID-19~~

In response to COVID-19, we have undertaken measures to protect our employees, partners, and clients, including encouraging employees to work remotely. These changes have compelled us to modify some of our control procedures. However, those changes have so far not been material.

2325

PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS

We encourage you to consider carefully ~~consider~~ the risk factors identified ~~below and~~ in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, filed with the Securities and Exchange ~~Commission on February 12, 2020.~~Commission. These risk factors could materially affect our business, financial condition, and future results, and ~~they could~~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.

~~Coronavirus (“COVID-19”)~~

~~Epidemic diseases, such as the recent global COVID-19 outbreak, could harm our business and results of operations.~~

The recent outbreak of a novel coronavirus disease (“COVID-19”), which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemics pose the risk that our employees, partners, and clients may be prevented from conducting business activities at full capacity for an indefinite period, including due to spread of the disease within these groups or due to shutdowns that are requested or mandated by governmental authorities. Moreover, these conditions can affect the rate of IT spending and may adversely affect our clients’ willingness to purchase our solutions, delay prospective clients’ purchasing decisions, reduce the value or duration of their contracts, request concessions including extended payment terms or better pricing, or affect attrition rates, all of which could adversely affect our future sales and operating results. The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption.

We have undertaken measures to protect our employees, partners, and clients, including by adopting a virtual-only meeting format for our annual PegaWorld conference and by encouraging employees to work remotely. There can be no assurance that these measures will be sufficient, however, or that we can implement them without adversely affecting our business operations.

We continue to monitor the situation and may adjust our policies as more information and public health guidance become available. Precautionary measures that have been adopted, or may be adopted in the future, could negatively affect our client success efforts, sales, and marketing efforts, delay and lengthen our sales cycles, or create operational or other challenges, any of which could harm our business and results of operations. In addition, COVID-19 may disrupt our clients’, vendors’, and partners’ operations for an indefinite period, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations, including cash flows.

At this time, it is not possible to estimate the ultimate impact that COVID-19 could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. Furthermore, due to our shift to a renewable model, the effect of COVID-19 may not be fully reflected in our results of operations until future periods. The extent to which COVID-19 impacts our business, operations, and financial results will depend on numerous evolving factors that we may not be able to predict accurately, including:

•~~the duration and scope of the pandemic;~~

•~~governmental, business, and individual actions taken in response to the pandemic and the impact of those actions on global economic activity;~~

•~~the actions taken in response to economic disruption;~~

•~~the impact of business disruptions and reductions in our clients’ business and the resulting impact on their demand for our services and solutions; and~~

•~~our ability to provide our services and solutions, including as a result of our employees or our clients’ employees working remotely and/or closures of offices and facilities.~~

~~Risks related to our Convertible Senior Notes~~

We have a significant amount of debt that may decrease our business flexibility, access to capital, and/or increase our borrowing costs, and we may still incur additional debt in the future, which may adversely affect our operations and financial results.

~~As of June 30, 2020, we had $600 million aggregate principal amount of indebtedness under our Convertible Senior Notes due 2025 (the “Notes”).~~

~~Our indebtedness may:~~

•~~limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, or other business purposes;~~

•~~limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general business purposes;~~

•~~require us to use a substantial portion of our cash flow from operations to make debt service payments;~~

•~~limit our flexibility to plan for, or react to, changes in our business and industry;~~

•~~place us at a competitive disadvantage compared to our less leveraged competitors;~~

•~~dilute the interests of our existing stockholders as a result of issuing shares of our common stock upon the conversion of the Notes; and~~

•~~increase our vulnerability to the impact of adverse economic and industry conditions.~~

Our ability to pay our debt when due or to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary investments in our business. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations which could, in turn, result in that and our other indebtedness becoming immediately payable in full. In addition, we may incur additional debt to meet future financing needs. If we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase.

~~The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.~~

Under certain circumstances, the noteholders may convert their Notes at their option prior to the scheduled maturities. Upon conversion of the Notes, unless we elect to deliver solely shares of our common stock to settle such conversion, we will be obligated to make cash payments. In addition, holders of our Notes will have the right to require us to repurchase their Notes upon the occurrence of a fundamental change (as defined in the indenture, dated as of February 24, 2020, between U.S. Bank National Association, as trustee (the “Trustee”) and us (the “Indenture”)), at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. Although it is our intention and we currently expect to settle the conversion value of the Notes in cash up to the principal amount and any excess in shares, there is a risk that we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or Notes being converted. In addition, our ability to make payments may be limited by law, by regulatory authority, or by agreements governing our future indebtedness. Our failure to repurchase Notes when the Indenture requires the repurchase or to pay any cash payable on future conversions of the Notes as required by the Indenture would constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof. In addition, even if holders of Notes do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

~~The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material impact on our reported financial results.~~

Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20), an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date and the value of the equity component is treated as debt discount for purposes of accounting for the debt component of the Notes. As a result, we will be required to record non-cash interest expense through the amortization of the excess of the face amount over the carrying amount of the expected life of the Notes. We will report larger net losses (or lower net income) in our financial results because ASC 470-20 requires interest to include both the amortization of the debt discount and the instrument’s cash coupon interest rate, which could adversely affect our reported or future financial results, the trading price of our common stock, and the trading price of the Notes.

In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such Notes exceeds their principal amount. Under the treasury stock method, the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, is included in the denominator to calculate diluted earnings per share. We cannot be sure that the accounting standards will continue to permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share could be adversely affected.

~~The Capped Call Transactions may affect the value of the Notes and our common stock.~~

In connection with the Notes’ issuance, we entered into Capped Call Transactions with certain financial institutions (“option counterparties”). The Capped Call Transactions are generally expected to reduce the potential dilution to our common stock upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. From time to time, the option counterparties that are parties to the Capped Call Transactions or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes. This activity could cause a decrease in the market price of our common stock.

~~We are subject to counterparty risk with respect to the Capped Call Transactions.~~

The option counterparties are financial institutions, and we are subject to the risk that one or more of the option counterparties may default or otherwise fail to perform, or may exercise certain rights to terminate, their obligations under the Capped Call Transactions. Our exposure to the credit risk of the option counterparties is not secured by any collateral. Recent global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under such transaction. Our exposure depends on many factors but, generally, our exposure will increase if the market price or the volatility of our common stock increases. In addition, upon a default or other failure to perform, or a termination of obligations, by an option counterparty, we may suffer more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.

~~Provisions in the indenture for the Notes may deter or prevent a business combination that may be favorable to our stockholders.~~

If a fundamental change occurs prior to the maturity date of the Notes, holders of the Notes will have the right, at their option, to require us to repurchase all or a portion of their Notes. In addition, if a “make-whole fundamental change” (as defined in the Indenture) occurs prior to the maturity date, we will in some cases be required to increase the conversion rate of the Notes for a holder that elects to convert its Notes in connection with such make-whole fundamental change.

Furthermore, the Indenture will prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes. These and other provisions in the Indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable to our stockholders.

~~Conversion of the Notes may dilute the ownership interest of existing stockholders.~~

The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares of our common stock upon conversion of any of the Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.

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

Issuer purchases of equity securities

Common stock repurchased in the three months ended ~~June 30, 2020 was:~~March 31, 2021:

(in thousands, except per share amounts)
Total Number of Shares Purchased ^{(1) (2)}
Average
Price Paid
per Share ^{(1) (2)}
Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program ⁽²⁾
Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs ⁽²⁾
April 1, 2020 - April 30, 2020 16 $ 73.07 — $ 39,484
May 1, 2020 - May 31, 2020 155 $ 87.87 — $ 39,484
June 1, 2020 - June 30, 2020 179 $ 97.43 23 $ 57,801
350 $ 92.06 23


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

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

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

ITEM 6. EXHIBITS


Exhibit No.						Description
3.1						Restated Articles of Organization of the Registrant and Amendments thereto. (Filed as Exhibit 3.1 to the Registrant’s September 30, 2014 Form 10-Q and incorporated herein by reference.)
3.2						Amended and Restated Bylaws of Pegasystems Inc. (Filed as Exhibit 3.2 to the Registrant’s June 15, 2020 Form 8-K and incorporated herein by reference.)
~~10.1~~						~~2004 Long-Term Incentive Plan (as amended and restated). (Filed as Exhibit 10.1 to the Registrant’s June 24, 2020 Form 8-K and incorporated herein by reference.)~~
~~10.2+~~						~~Amendment 2 to Loan Documents, dated July 22, 2020, between Pegasystems Inc. and PNC Bank, National Association.~~
10.3+*						~~Offer Letter, dated April 27, 2020, between Pegasystems Inc. and Hayden Stafford~~.
31.1+						Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.
31.2+						Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.
32*32++						Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.
101.INS						Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH						Inline XBRL Taxonomy Extension Schema Document.
101.CAL						Inline XBRL Taxonomy Calculation Linkbase Document.
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB						Inline XBRL Taxonomy Label Linkbase Document.
101.PRE						Inline XBRL Taxonomy Presentation Linkbase Document.
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

+ Filed herewith.

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

* Indicates a management contract or arrangement in which an executive officer of the Company participates.

2826

SIGNATURE

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

Pegasystems Inc.

Dated:

~~July~~April 28, ~~2020~~2021

By:

/s/ KENNETH STILLWELL

Kenneth Stillwell

Chief ~~Financial~~Operating Officer and Chief ~~Administrative~~Financial Officer

(Principal Financial Officer)


	Payments due by period
(in thousands)	2020		2021		2022-2023		2024-2025		2026 and thereafter		Other		Total
Purchase obligations ⁽¹⁾	$	43,197	$	56,689	$	57,498	$	—	$	—	$	—	$	157,384
Investment commitments ⁽²⁾	992		706		—		—		—		—		1,698
Liability for uncertain tax positions⁽³⁾	—		—		—		—		—		5,250		5,250
Operating lease obligations	9,391		20,414		37,326		7,205		1,735		—		76,071
Total	$	53,580	$	77,809	$	94,824	$	7,205	$	1,735	$	5,250	$	240,403


(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, 2020 - April 30, 2020	16	$	73.07	—	$	39,484
May 1, 2020 - May 31, 2020	155	$	87.87	—	$	39,484
June 1, 2020 - June 30, 2020	179	$	97.43	23	$	57,801
	350	$	92.06	23