UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
____________________________
FORM 10-Q

FORM10-Q

(Mark One)

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

For the quarterly period ended September 30, 2017

OR

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

For the transition period fromto


Commission File Number:1-11859

____________________________
PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter)

____________________________
Massachusetts04-2787865

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

One Rogers Street, Cambridge, MA02142-1209
(Address of principal executive offices)(Zip Code)

One Main Street, Cambridge, MA 02142
(Address of principal executive offices, including zip code)
(617)374-9600

(Registrant’s telephone number, including area code)

____________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, $.01 par value per sharePEGANASDAQ 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 registrantRegistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrantRegistrant was required to submit and post such files). Yes ☒    x No ☐

¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, anon-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,”company” inRule 12b-2 of the Exchange Act.

Large accelerated filer☒xAccelerated filer☐☐
Non-accelerated filer☐☐  (Do not check if smaller reporting company)Smaller reporting company☐☐
Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrantRegistrant 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 inRule 12b-2 of the Exchange Act). Yes ☐No ☒

There were 77,859,95881,818,454 shares of the Registrant’s common stock, $.01$0.01 par value per share, outstanding on October 27, 2017.

April 19, 2022.


Table of Contents

PEGASYSTEMS INC.

Index to Form


QUARTERLY REPORT ON FORM 10-Q


TABLE OF CONTENTS
Page

PART I—I - FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Balance Sheets as of September  30, 2017March 31, 2022 and December 31, 2016

2021		2
3

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017March 31, 2022 and 2016

2021		3
4

Unaudited Condensed Consolidated Statements of Comprehensive Income(Loss) for the three and nine months ended September 30, 2017March 31, 2022 and 2016

2021		4
5

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021

6
Unaudited Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2022 and 2016

2021		5
7

Notes to Unaudited Condensed Consolidated Financial Statements

6
8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

15
19

Item 3. Quantitative and Qualitative Disclosures About Market Risk

25

Item 4. Controls and Procedures

25

PART II—OTHER INFORMATION

26

PART II - OTHER INFORMATION

Item 1. Legal Proceedings
27
Item 1A. Risk Factors

25
27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

25
28

Item 5. Other Information

28
Item 6. Exhibits

26
29

Signature

27
30


2
Table of Contents
PART I—I - FINANCIAL INFORMATION

ITEM 1.UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

   September 30,
2017		  December 31,
2016		 

Assets

   

Current assets:

   

Cash and cash equivalents

  $130,568  $70,594 

Marketable securities

   63,812   63,167 
  

 

 

  

 

 

 

Total cash, cash equivalents, and marketable securities

   194,380   133,761 

Trade accounts receivable, net of allowance of $6,189 and $4,126

   191,161   265,028 

Income taxes receivable

   34,864   14,155 

Other current assets

   17,679   12,188 
  

 

 

  

 

 

 

Total current assets

   438,084   425,132 

Property and equipment, net

   39,849   38,281 

Deferred income taxes

   73,459   69,898 

Long-term other assets

   5,982   3,990 

Intangible assets, net

   34,755   44,191 

Goodwill

   72,941   73,164 
  

 

 

  

 

 

 

Total assets

  $665,070  $654,656 
  

 

 

  

 

 

 

Liabilities and Stockholders’ Equity

   

Current liabilities:

   

Accounts payable

  $12,535  $14,414 

Accrued expenses

   39,681   36,751 

Accrued compensation and related expenses

   53,869   60,660 

Deferred revenue

   160,931   175,647 
  

 

 

  

 

 

 

Total current liabilities

   267,016   287,472 

Income taxes payable

   4,774   4,263 

Long-term deferred revenue

   6,130   10,989 

Other long-term liabilities

   15,449   16,043 
  

 

 

  

 

 

 

Total liabilities

   293,369   318,767 
  

 

 

  

 

 

 

Stockholders’ equity:

   

Preferred stock, 1,000 shares authorized; no shares issued and outstanding

   —     —   

Common stock, 200,000 shares authorized; 77,839 shares and 76,591 shares issued and outstanding

   778   766 

Additionalpaid-in capital

   146,728   143,903 

Retained earnings

   227,953   198,315 

Accumulated other comprehensive loss

   (3,758)   (7,095) 
  

 

 

  

 

 

 

Total stockholders’ equity

   371,701   335,889 
  

 

 

  

 

 

 

Total liabilities and stockholders’ equity

  $665,070  $654,656 
  

 

 

  

 

 

 

ITEM 1.     FINANCIAL STATEMENTS
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, 2022December 31, 2021
Assets
Current assets:
Cash and cash equivalents$132,771 $159,965 
Marketable securities199,401 202,814 
Total cash, cash equivalents, and marketable securities332,172 362,779 
Accounts receivable171,181 182,717 
Unbilled receivables226,052 226,714 
Other current assets74,408 68,008 
Total current assets803,813 840,218 
Unbilled receivables135,975 129,789 
Goodwill82,031 81,923 
Other long-term assets516,661 541,601 
Total assets$1,538,480 $1,593,531 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$18,628 $15,281 
Accrued expenses63,401 63,890 
Accrued compensation and related expenses54,804 120,946 
Deferred revenue290,873 275,844 
Other current liabilities7,309 9,443 
Total current liabilities435,015 485,404 
Convertible senior notes, net591,440 590,722 
Operating lease liabilities90,699 87,818 
Other long-term liabilities14,658 13,499 
Total liabilities1,131,812 1,177,443 
Commitments and contingencies (Note 14)00
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued— — 
Common stock, 200,000 shares authorized; 81,802 and 81,712 shares issued and outstanding at
March 31, 2022 and December 31, 2021, respectively
818 817 
Additional paid-in capital141,771 145,810 
Retained earnings273,615 276,449 
Accumulated other comprehensive (loss)(9,536)(6,988)
Total stockholders’ equity406,668 416,088 
Total liabilities and stockholders’ equity$1,538,480 $1,593,531 

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

   Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
   2017  2016  2017  2016 

Revenue:

     

Software license

  $41,793  $68,833  $195,220  $207,849 

Maintenance

   62,204   55,038   180,759   163,174 

Services

   75,818   58,931   225,063   179,633 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

   179,815   182,802   601,042   550,656 
  

 

 

  

 

 

  

 

 

  

 

 

 

Cost of revenue:

     

Software license

   1,276   1,313   3,826   3,646 

Maintenance

   6,716   6,659   20,945   18,889 

Services

   61,739   52,465   180,925   154,512 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total cost of revenue

   69,731   60,437   205,696   177,047 
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

   110,084   122,365   395,346   373,609 
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating expenses:

     

Selling and marketing

   70,209   67,032   217,384   202,126 

Research and development

   41,031   38,036   121,089   108,530 

General and administrative

   13,133   11,725   38,174   34,067 

Acquisition-related

   —     74   —     2,903 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating expenses

   124,373   116,867   376,647   347,626 
  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss)/income from operations

   (14,289)   5,498   18,699   25,983 

Foreign currency transaction (loss)/gain

   (552)   1,082   (793)   2,764 

Interest income, net

   144   172   470   650 

Other income/(expense), net

   —     (1,237)   287   (4,891) 
  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss)/income before (benefit)/provision for income taxes

   (14,697)   5,515   18,663   24,506 

(Benefit)/provision for income taxes

   (12,885)   2,214   (17,952)   6,269 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net (loss)/income

  $(1,812)  $3,301  $36,615  $18,237 
  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss)/earnings per share:

     

Basic

   (0.03)   0.04   0.47   0.24 

Diluted

   (0.03)   0.04   0.44   0.23 

Weighted-average number of common shares outstanding:

     

Basic

   77,691   76,278   77,258   76,323 

Diluted

   77,691   79,548   82,717   79,401 

Cash dividends declared per share

  $0.03  $0.03  $0.09  $0.09 

3

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended
March 31,
20222021
Revenue
Subscription services$170,033 $143,419 
Subscription license137,533 111,509 
Perpetual license7,440 5,452 
Consulting61,301 53,119 
Total revenue376,307 313,499 
Cost of revenue
Subscription services32,030 28,343 
Subscription license622 620 
Perpetual license34 30 
Consulting55,511 53,454 
Total cost of revenue88,197 82,447 
Gross profit288,110 231,052 
Operating expenses
Selling and marketing162,236 148,739 
Research and development71,490 62,442 
General and administrative35,764 18,270 
Total operating expenses269,490 229,451 
Income from operations18,620 1,601 
Foreign currency transaction gain (loss)2,876 (5,098)
Interest income207 153 
Interest expense(1,946)(1,880)
(Loss) on capped call transactions(30,560)(19,117)
Other income, net2,741 106 
(Loss) before (benefit from) income taxes(8,062)(24,235)
(Benefit from) income taxes(7,683)(17,618)
Net (loss)$(379)$(6,617)
(Loss) per share
Basic$0.00 $(0.08)
Diluted$0.00 $(0.08)
Weighted-average number of common shares outstanding
Basic81,680 81,004 
Diluted81,680 81,004 

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

   Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
   2017  2016  2017   2016 

Net (loss)/income

  $(1,812)  $3,301  $36,615   $18,237 

Other comprehensive income/(loss), net of tax

      

Unrealized gain/(loss) onavailable-for-sale marketable securities, net of tax

   22   (174)   148    168 

Foreign currency translation adjustments

   549   (169)   3,189    (1,400) 
  

 

 

  

 

 

  

 

 

   

 

 

 

Total other comprehensive income/(loss), net of tax

   571   (343)   3,337    (1,232) 
  

 

 

  

 

 

  

 

 

   

 

 

 

Comprehensive (loss)/income

  $(1,241)  $2,958  $39,952   $17,005 
  

 

 

  

 

 

  

 

 

   

 

 

 

4

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
(in thousands)
Three Months Ended
March 31,
20222021
Net (loss)$(379)$(6,617)
Other comprehensive (loss) income, net of tax
Unrealized gain on available-for-sale securities222 1,010 
Foreign currency translation adjustments(2,770)(730)
Total other comprehensive (loss) income, net of tax$(2,548)$280 
Comprehensive (loss)$(2,927)$(6,337)

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

   Nine Months Ended
September 30,		 
   2017  2016 

Operating activities:

   

Net income

  $36,615  $18,237 

Adjustments to reconcile net income to cash provided by operating activities:

   

Deferred income taxes

   (2,607)   (2,841) 

Depreciation and amortization

   18,703   17,896 

Stock-based compensation expense

   39,929   30,634 

Foreign currency transaction loss/(gain)

   793   (2,764) 

Othernon-cash

   (89)   153 

Change in operating assets and liabilities:

   

Trade accounts receivable

   80,580   3,940 

Income taxes receivable and other current assets

   (25,943)   (11,904) 

Accounts payable and accrued expenses

   (8,546)   (16,678) 

Deferred revenue

   (25,639)   (17,698) 

Other long-term assets and liabilities

   130   1,581 
  

 

 

  

 

 

 

Cash provided by operating activities

   113,926   20,556 

Investing activities:

   

Purchases of marketable securities

   (25,687)   (22,614) 

Proceeds from maturities and called marketable securities

   23,124   21,838 

Sales of marketable securities

   —     62,283 

Payments for acquisitions, net of cash acquired

   (297)   (49,113) 

Investment in property and equipment

   (9,106)   (15,253) 
  

 

 

  

 

 

 

Cash used in investing activities

   (11,966)   (2,859) 

Financing activities:

   

Dividend payments to shareholders

   (6,941)   (6,883) 

Common stock repurchases for tax withholdings for net settlement of equity awards

   (34,113)   (10,398) 

Common stock repurchases under share repurchase programs

   (2,986)   (25,750) 
  

 

 

  

 

 

 

Cash used in financing activities

   (44,040)   (43,031) 

Effect of exchange rates on cash and cash equivalents

   2,054   (1,309) 
  

 

 

  

 

 

 

Net increase/(decrease) in cash and cash equivalents

   59,974   (26,643) 

Cash and cash equivalents, beginning of period

   70,594   93,026 
  

 

 

  

 

 

 

Cash and cash equivalents, end of period

  $130,568  $66,383 
  

 

 

  

 

 

 

5

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
Common StockAdditional
Paid-In Capital		Retained Earnings
Accumulated Other Comprehensive (Loss)
Total
Stockholders’ Equity
Number
of Shares		Amount
December 31, 202080,890 $809 $204,432 $339,879 $(2,948)$542,172 
Cumulative-effect adjustment from adoption of ASU 2020-06, net
— — (61,604)9,399 — (52,205)
Repurchase of common stock(70)(1)(9,145)— — (9,146)
Issuance of common stock for stock compensation plans402 4 (25,513)— — (25,509)
Issuance of common stock under the employee stock purchase plan24 — 2,288 — — 2,288 
Stock-based compensation— — 30,100 — — 30,100 
Cash dividends declared ($0.03 per share)— — — (2,438)— (2,438)
Other comprehensive income— — — — 280 280 
Net (loss)— — — (6,617)— (6,617)
March 31, 202181,246 $812 $140,558 $340,223 $(2,668)$478,925 
December 31, 202181,712 $817 $145,810 $276,449 $(6,988)$416,088 
Repurchase of common stock(242)(2)(22,581)— — (22,583)
Issuance of common stock for stock compensation plans297 3 (12,131)— — (12,128)
Issuance of common stock under the employee stock purchase plan35 — 2,446 — — 2,446 
Stock-based compensation— — 28,227 — — 28,227 
Cash dividends declared ($0.03 per share)— — — (2,455)— (2,455)
Other comprehensive (loss)— — — — (2,548)(2,548)
Net (loss)— — — (379)— (379)
March 31, 202281,802 $818 $141,771 $273,615 $(9,536)$406,668 

See notes to unaudited condensed consolidated financial statements.

6

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
March 31,
20222021
Operating activities
Net (loss)$(379)$(6,617)
Adjustments to reconcile net (loss) to cash provided by operating activities
Stock-based compensation28,227 30,100 
Deferred income taxes(9,295)(15,068)
Loss on capped call transactions30,560 19,117 
Amortization of deferred commissions17,221 11,496 
Lease expense3,919 3,238 
Amortization of intangible assets and depreciation4,171 7,006 
Foreign currency transaction (gain) loss(2,876)5,098 
Other non-cash(1,100)1,634 
Change in operating assets and liabilities, net(55,332)(34,354)
Cash provided by operating activities15,116 21,650 
Investing activities
Purchases of investments(33,690)(21,051)
Proceeds from maturities and called investments20,915 40,867 
Sales of investments13,350 2,450 
Payments for acquisitions, net of cash acquired— (4,993)
Investment in property and equipment(6,657)(1,784)
Cash (used in) provided by investing activities(6,082)15,489 
Financing activities
Proceeds from employee stock purchase plan2,446 2,288 
Dividend payments to stockholders(2,454)(2,427)
Common stock repurchases(35,910)(34,655)
Cash (used in) financing activities(35,918)(34,794)
Effect of exchange rate changes on cash and cash equivalents(310)(1,536)
Net (decrease) increase in cash and cash equivalents(27,194)809 
Cash and cash equivalents, beginning of period159,965 171,899 
Cash and cash equivalents, end of period$132,771 $172,708 

See notes to unaudited condensed consolidated financial statements.
7
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 of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form10-K for the year ended December 31, 2016.

2021.

In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.
All intercompany transactions and balances were eliminated in consolidation. The operating results for the interim periods presented aredo not necessarily indicative ofindicate the expected results expected for the full year 2017.

2. NEW ACCOUNTING PRONOUNCEMENTS

Stock-Based Compensation

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2017-09 “Stock Compensation (Topic 718), Scope of Modification Accounting” to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change2022.

Certain prior period amounts reported in terms or conditions. The effective date for the Company will be January 1, 2018. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.

Financial Instruments

In June 2016, the FASB issued ASUNo. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets measured at amortized cost, including trade accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model for credit losses. Credit losses relating toavailable-for-sale debt securities should be recorded through an allowance for credit losses when the fair value is below the amortized cost of the asset, removing the concept of “other-than-temporary” impairments. The effective date for the Company will be January 1, 2020, with early adoption permitted. The Company is currently evaluating the effect this ASU will have on itsour condensed consolidated financial statements and related disclosures.

Leases

In February 2016,notes thereto have been reclassified to conform to the FASB issued ASUNo. 2016-02, “Leases (Topic 842),”current year presentation. Such reclassifications did not affect total revenues, operating income, or net income.

NOTE 2. MARKETABLE SECURITIES
March 31, 2022December 31, 2021
(in thousands)Amortized CostUnrealized GainsUnrealized LossesFair ValueAmortized CostUnrealized GainsUnrealized LossesFair Value
Government debt$2,000 $— $(47)$1,953 $2,000 $— $(10)$1,990 
Corporate debt200,371 7 (2,930)197,448 201,659 2 (837)200,824 
$202,371 $7 $(2,977)$199,401 $203,659 $2 $(847)$202,814 
As of March 31, 2022, marketable securities’ maturities ranged from April 2022 to September 2024, with a weighted-average remaining maturity of 1.02 years.
NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
(in thousands)March 31, 2022December 31, 2021
Accounts receivable$171,181 $182,717 
Unbilled receivables226,052 226,714 
Long-term unbilled receivables135,975 129,789 
$533,208 $539,220 
Unbilled receivables
Unbilled receivables are client-committed amounts for which requires lessees to record most leases on their balance sheets, recognizing a lease liability for the obligation to make lease paymentsrevenue recognition precedes billing, and aright-of-use asset for the right to use the underlying asset for the lease term. The effective date for the Company will be January 1, 2019, with early adoption permitted. The Company expects that most of its operating lease commitments will bebilling is solely subject to this ASU and recognized as operating lease liabilities andright-of-use assets upon adoption with no material impact to its resultsthe passage of operations and cash flows.

Revenue

In May 2014, the FASB issued ASUNo. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU amends the guidance for revenue recognition, creating the new Accounting Standards Codification Topic 606 (“ASC 606”). ASC 606 requires entities to apportion consideration from contracts to performance obligations on a relative standalone selling price basis, based on a five-step model. Under ASC 606, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for the good or service. In addition, ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Company has elected the full retrospective adoption model,time.

Unbilled receivables by expected billing date:
(Dollars in thousands)March 31, 2022
1 year or less$226,052 62 %
1-2 years88,003 25 %
2-5 years47,972 13 %
$362,027 100 %
Unbilled receivables by contract effective January 1, 2018. The Company’s quarterly results beginning with the quarter ending March 31, 2018 and comparative prior periods will be compliant with ASC 606. The Company’s Annual Report on Form10-K for the year ended December 31, 2018 will be the Company’s first Annual Report that will be issued in compliance with ASC 606.

date:
(Dollars in thousands)March 31, 2022
2022$72,143 20 %
2021163,869 45 %
202077,585 21 %
201927,163 8 %
2018 and prior21,267 6 %
$362,027 100 %

8
PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company has made significant progress on quantifying the impact of its adoption and identifying necessary changes to our policies, processes, systems, and controls.

The Company expects the following impacts:

Currently, the Company recognizes revenue from term licenses and perpetual licenses with extended payment terms over the term


Major clients
Clients accounting for 10% or more of the agreementCompany’s total receivables:
March 31, 2022December 31, 2021
Client A
Accounts receivable4 %1 %
Unbilled receivables15 %15 %
Total receivables11 %10 %
Contract assets
Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as the completion of a related performance obligation.
(in thousands)March 31, 2022December 31, 2021
Contract assets (1)
$11,765 $12,530 
Long-term contract assets (2)
10,292 10,643 
$22,057 $23,173 
(1) Included in other current assets. (2) Included in other long-term assets.
Deferred revenue
Deferred revenue consists of billings and payments becomereceived in advance of revenue recognition.
(in thousands)March 31, 2022December 31, 2021
Deferred revenue$290,873 $275,844 
Long-term deferred revenue (1)
6,612 5,655 
$297,485 $281,499 
(1) Included in other long-term liabilities.
The change in deferred revenue in the three months ended March 31, 2022 was primarily due or earlier if prepaid, provided all other criteria forto new billings in advance of revenue recognition have been met, and any corresponding maintenance over$124.9 million of revenue recognized during the term of the agreement. The adoption of ASC 606 will result in revenue for performance obligations being recognized as they are satisfied. Therefore, revenue from the term and perpetual license performance obligations with extended payment terms is recognized when control is transferred to the customer. Any unrecognized license revenue from these arrangements,period that was included in deferred revenue atas of December 31, 2015, will not be recognized2021.
NOTE 4. DEFERRED COMMISSIONS
(in thousands)March 31, 2022December 31, 2021
Deferred commissions (1)
$125,220 $135,911 
(1) Included in revenueother long-term assets.
Three Months Ended
March 31,
(in thousands)20222021
Amortization of deferred commissions (1)
$17,221 $11,496 
(1) Included in future periods but as a cumulative adjustment to retained earnings. Further, term license revenue from new arrangements executed in 2016selling and 2017 will be recognized in full in the year that control of the license is transferred to the customer instead of over the term of the agreement. Revenue from the maintenance performance obligations is expected to be recognized on a straight-line basis over the contractual term. Due to the revenue from term and perpetual licenses with extended payment terms being recognized prior to amounts being billed to the customer, the Company expects to recognize a net contract asset on the balance sheet.marketing expense.

Currently, the Company allocates revenue to licenses under the residual method when it has Vendor Specific Objective Evidence (“VSOE”) for the remaining undelivered elements, which allocates any future credits or significant discounts entirely to the license. The adoption of ASC 606 will result in future credits, significant discounts, and material rights under ASC 606, to be allocated to all performance obligations based upon their relative selling price. Under ASC 606, additional license revenue from the reallocation of such arrangement considerations will be recognized when control is transferred to the customer, which is generally upon delivery of the license.
9

Currently, the Company does not have VSOE for fixed price services, time and materials services in certain geographical areas, and unspecified future products, which results in revenue being deferred in such instances until such time as VSOE exists for all undelivered elements or recognized ratably over the longest performance period. The adoption of ASC 606 eliminates the requirement for VSOE and replaces it with the concept of a stand-alone selling price. Once the transaction price is allocated to each of the performance obligations, the Company can recognize revenue as the performance obligations are delivered, either at a point in time or over time. Under ASC 606, license revenue will be recognized when control is transferred to the customer, professional services revenue will be recognized over time based on input or output measures that reflect the Company’s performance on the contract. This will result in the acceleration of professional services revenue when compared to the current practice of ratable recognition for professional services when there is a lack of VSOE.

Sales commissions and other third party acquisition costs resulting directly from securing contracts with customers are currently expensed when incurred. ASC 606 will require these costs to be recognized as an asset when incurred and to be expensed over the associated contract term. As a practical expedient, if the term of the contract is one year or less, the Company will expense these costs as incurred. The Company expects this change to impact its multi-year cloud offerings and term and perpetual licenses with additional rights of use that extend beyond one year.

ASC 606 provides additional accounting guidance for contract modifications whereby changes must be accounted for either as a retrospective change (creating either a catch up or deferral of past revenues), prospectively with a reallocation of revenues amongst identified performance obligations, or prospectively as separate contracts which will not require any reallocation. This may result in a difference in the timing of the recognition of revenue as compared to how contract modifications are recognized currently.

There will be a corresponding effect on tax liabilities in relation to all of the above impacts.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. MARKETABLE SECURITIES

The Company’s marketable securities




NOTE 5. GOODWILL AND OTHER INTANGIBLES
Goodwill
Change in goodwill:
Three Months Ended
March 31,
(in thousands)2022
January 1,$81,923 
Acquisition— 
Currency translation adjustments108 
March 31,$82,031 
Intangibles
Intangible assets are as follows:

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

September 30, 2017

        

Municipal bonds

  $32,764   $12  ��$(17)   $32,759 

Corporate bonds

   31,079    12    (38)    31,053 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $63,843   $24   $(55)   $63,812 
  

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2016

        

Municipal bonds

  $36,746   $—     $(139)   $36,607 

Corporate bonds

   26,610    1    (51)    26,560 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $63,356   $1   $(190)   $63,167 
  

 

 

   

 

 

   

 

 

   

 

 

 

Asrecorded at cost and amortized using the straight-line method over their estimated useful lives.
March 31, 2022
(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
Client-related4-10 years$63,142 $(57,662)$5,480 
Technology2-10 years67,142 (59,531)7,611 
Other1-5 years5,361 (5,361)— 
$135,645 $(122,554)$13,091 

(1) Included in other long-term assets.
December 31, 2021
(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
Client-related4-10 years$63,165 $(57,342)$5,823 
Technology2-10 years67,142 (58,902)8,240 
Other1-5 years5,361 (5,361)— 
$135,668 $(121,605)$14,063 
(1) Included in other long-term assets.
Amortization of September 30, 2017, the Company did not hold any investments with unrealized losses that are considered to be other-than-temporary.

As of September 30, 2017, remaining maturities of marketable debt securities ranged from October 2017 to September 2020, with a weighted-average remaining maturity of approximately 14 months.

4. DERIVATIVE INSTRUMENTS

In May 2017, the Company discontinued its forward contracts program; however, it will continue to evaluate periodically its foreign exchange exposures and mayre-initiate this program if it is deemed necessary.

The Company has historically used foreign currency forward contracts (“forward contracts”) to hedge its exposure to fluctuations in foreign currency exchange rates associated with its foreign currency denominated cash, accounts receivable, and intercompany receivables and payables held primarily by the U.S. parent company and its United Kingdom (“U.K.”) subsidiary.

At December 31, 2016, the total notional value of the Company’s outstanding forward contracts was $128.4 million.

The fair value of the Company’s outstanding forward contracts was as follows:

   December 31, 2016 
(in thousands)  Recorded In:   Fair Value 

Asset Derivatives

    

Foreign currency forward contracts

   Other current assets   $628 

Liability Derivatives

    

Foreign currency forward contracts

   Accrued expenses   $883 

As of September 30, 2017, the Company did not have any forward contracts outstanding.

The Company had forward contracts outstanding with total notional values as of September 30, 2016 as follows:

(in thousands)    

Euro

  €21,810 

British pound

  £5,919 

Australian dollar

  A$    19,515 

United States dollar

  $59,450 

intangible assets:

Three Months Ended
March 31,
(in thousands)20222021
Cost of revenue$629 $629 
Selling and marketing343 373 
$972 $1,002 
Future estimated intangibles assets amortization:
(in thousands)March 31, 2022
Remainder of 2022$2,914 
20233,618 
20242,849 
20252,509 
2026874 
2027327 
$13,091 
NOTE 6. OTHER ASSETS AND LIABILITIES
Other current assets
(in thousands)March 31, 2022December 31, 2021
Income tax receivables$27,679 $25,691 
Contract assets11,765 12,530 
Other34,964 29,787 
$74,408 $68,008 
10
PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)




Other long-term assets
(in thousands)March 31, 2022December 31, 2021
Deferred income taxes$188,155 $180,656 
Deferred commissions125,220 135,911 
Right of use assets87,212 87,521 
Capped call transactions29,404 59,964 
Property and equipment28,603 26,837 
Intangible assets13,091 14,063 
Contract assets10,292 10,643 
Other34,684 26,006 
$516,661 $541,601 
Other current liabilities
(in thousands)March 31, 2022December 31, 2021
Operating lease liabilities$4,855 $6,989 
Dividends payable2,454 2,454 
$7,309 $9,443 
Other long-term liabilities
(in thousands)March 31, 2022December 31, 2021
Deferred revenue$6,612 $5,655 
Other8,046 7,844 
$14,658 $13,499 
NOTE 7. LEASES
Corporate headquarters
In February 2021, the Company agreed to accelerate its exit from its previous corporate headquarters to October 1, 2021, in exchange for a one-time payment from its landlord of $18 million, which was amortized over the remaining lease term. The income statement impactexit accelerated depreciation on the related leasehold improvements and reduced the Company’s future lease liabilities by $21.1 million and right of use assets by $20.3 million. On March 31, 2021 the Company leased office space at One Main Street, Cambridge, Massachusetts, to serve as its corporate headquarters. The 4.5 year lease includes a base rent of $2 million per year.
New Waltham Office
On July 6, 2021, the Company entered into an office space lease for 131 thousand square feet in Waltham, Massachusetts. The lease term of 11 years began on August 1, 2021. The annual rent equals the base rent plus a portion of building operating costs and real estate taxes. Rent first becomes payable on August 1, 2022. Base rent for the first year is approximately $6 million and will increase by 3% annually. In addition, the Company will receive an improvement allowance from the landlord of up to $11.8 million. This lease increased the Company’s lease liabilities and lease-related right of use assets by $42.1 million on August 1, 2021.
Expense
Three Months Ended
March 31,
(in thousands)20222021
Fixed lease costs (1)
$5,093 $300 
Short-term lease costs806 459 
Variable lease costs764 1,387 
$6,663 $2,146 
(1) The lower fixed lease costs in the three months ended March 31, 2021 was due to the modification of the corporate headquarters lease.
11
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



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

(1) Represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets.
(2) Included in other current liabilities.
Weighted-average remaining lease term and discount rate for the Company’s leases were:
March 31, 2022December 31, 2021
Weighted-average remaining lease term7.5 years7.7 years
Weighted-average discount rate (1)
4.3 %4.4 %

(1) The rates implicit in most of the Company’s leases are not readily determinable. Therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over the lease term in a similar economic environment.
Maturities of lease liabilities:
(in thousands)March 31, 2022
Remainder of 2022$3,887 
202320,317 
202417,141 
202514,352 
202610,664 
2027 and thereafter48,381 
Total lease payments114,742 
Less: imputed interest (1)
(19,188)
$95,554 
(1) Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement unless the discount rate is updated due to a lease reassessment event.
Cash flow information
Three Months Ended
March 31,
(in thousands)20222021
Cash paid for leases$3,650 $6,716 
Right of use assets recognized for new leases and amendments (non-cash)$3,854 $714 
NOTE 8. DEBT
Convertible senior notes and capped calls
Convertible senior notes
In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal of $600 million, due March 1, 2025, in a private placement. No principal payments are due before maturity. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning on September 1, 2020.
Conversion rights
The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of $135.05 per share of common stock. The Company will settle conversions by paying or delivering cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate. The conversion rate will be adjusted upon certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions.
Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election.
Before September 1, 2024, noteholders may convert their Notes in the following circumstances:
12
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



•During any calendar quarter beginning after June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter.
•During the 5 consecutive business days immediately after any 5 consecutive trading day period (the “Measurement Period”), if the trading price per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share of common stock on such trading day and the conversion rate on such trading day.
•Upon certain corporate events or distributions or if the Company calls any Notes for redemption, noteholders may convert before the close of business on the business day immediately before the related redemption date (or, if the Company fails to pay the redemption price in full on the redemption date, until the Company pays the redemption price).
As of March 31, 2022, the Notes were not eligible for conversion.
Repurchase rights
On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s common stock exceeded 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice.
If certain corporate events that constitute a “Fundamental Change” occur, each noteholder will have the right to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or a multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. A Fundamental Change relates to mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.

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

Interest expense related to the Notes:
Three Months Ended
March 31,
(in thousands)20222021
Contractual interest expense (0.75% coupon)$1,125 $1,125 
Amortization of issuance costs719 673 
$1,844 $1,798 
13
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



The effective interest rate for the Notes:
Three Months Ended
March 31,
20222021
Weighted-average effective interest rate1.2 %1.2 %
Future payments of principal and contractual interest:
March 31, 2022
(in thousands)PrincipalInterestTotal
Remainder of 2022$— $2,250 $2,250 
2023— 4,500 4,500 
2024— 4,500 4,500 
2025600,000 2,250 602,250 
$600,000 $13,500 $613,500 
Capped call transactions
In February 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions cover approximately 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s common stock. The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The cap price of the Capped Call Transactions is subject to adjustment upon specified extraordinary events affecting the Company, including mergers and tender offers.
The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated following the governing documents, may not represent a fair value measurement. The Capped Call Transactions are classified as other long-term assets and remeasured to fair value each reporting period, resulting in a non-operating gain or loss.
Change in capped call transactions:
Three Months Ended
March 31,
(in thousands)20222021
January 1,$59,964 $83,597 
Fair value adjustment(30,560)(19,117)
March 31,$29,404 $64,480 
Credit facility
In November 2019, and as since amended, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. The Company may use borrowings for general corporate purposes and to finance working capital needs. Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $200 million. The commitments expire on November 4, 2024, and any outstanding forward contractsloans 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 foreign currency transactions was as follows:

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
(in thousands)  2017   2016   2017   2016 

Gain (loss) from the change in the fair value of forward contracts included in other income (expense), net

  $—     $(1,237)   $286   $(4,955) 

Foreign currency transaction (loss) gain from the remeasurement of foreign currency assets and liabilities

   (552)    1,082    (793)    2,764 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $(552)   $(155)   $(507)   $(2,191) 
  

 

 

   

 

 

   

 

 

   

 

 

 

5.affiliate transactions.

The Company is required to comply with financial covenants, including:
•Beginning with the fiscal quarter ended March 31, 2022 and ending with the fiscal quarter ended December 31, 2022, Pegasystems Inc. must maintain at least $200 million in cash, investments, and availability under the Revolving Credit Loan.
•Beginning with the quarter ended March 31, 2023, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up for certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.
As of March 31, 2022 and December 31, 2021, the Company had no outstanding borrowings under the Credit Facility.
NOTE 9. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measuredliabilities measured at Fair Valuefair value on a Recurring Basis

recurring basis

The Company records its money market funds,cash equivalents, marketable securities, Capped Call Transactions, and forward contractsventure 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.
14
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows: (Level 1)
•Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities; (Level 2)
•Level 2 - significant other inputs that are observable either directly or indirectly; and (Level 3)
•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.

The Company’s money market funds are classified within Level 1fair value of the fair value hierarchy. The Company’s marketable securities classified within Level 2 of the fair value hierarchy are valued based on a market approach using quoted prices, when available, or matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. The Company’s foreign currency forward contracts, which were all classified within Level 2 of the fair value hierarchy, are valued based on the notional amounts and rates under the contracts and observable market inputs such as currency exchange rates and credit risk. If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchyCapped Call Transactions at the end of theeach reporting period in whichis determined using a Black-Scholes option-pricing model. The valuation model use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield. The Company applies judgment when determining expected volatility. The Company considers both historical and implied volatility levels of the actual event or change in circumstance occurs. There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2017.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Assets and liabilities measured at fair value on a recurring basis consistedbasis:
March 31, 2022December 31, 2021
(in thousands)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Cash equivalents$19,626 $— $— $19,626 $3,216 $— $— $3,216 
Marketable securities$— $199,401 $— $199,401 $— $202,814 $— $202,814 
Capped Call Transactions (1)
$— $29,404 $— $29,404 $— $59,964 $— $59,964 
Venture investments (1) (2)
$— $— $12,830 $12,830 $— $— $7,648 $7,648 
(1) Included in other long-term assets. (2) Investments in privately-held companies.
Changes in venture investments:
Three Months Ended
March 31,
(in thousands)20222021
January 1,$7,648 $8,345 
New investments— 500 
Sales of investments— (400)
Changes in foreign exchange rates(61)(9)
Changes in fair value:
included in other income2,741 100 
included in other comprehensive income2,502 1,220 
March 31,$12,830 $9,756 
The carrying value of the following:

   Fair Value Measurements at Reporting Date Using           Total 
(in thousands)  Level 1   Level 2       

September 30, 2017

          

Fair Value Assets:

          

Money market funds

  $    655   $—         $655 

Marketable securities:

          

Municipal bonds

  $—     $32,759        32,759 

Corporate bonds

   —      31,053        31,053 
  

 

 

   

 

 

       

 

 

 
  $—     $63,812       $63,812 

December 31, 2016

          

Fair Value Assets:

          

Money market funds

  $458   $—         $458 

Marketable securities:

          

Municipal bonds

  $—     $36,607       $36,607 

Corporate bonds

   —      26,560        26,560 
  

 

 

   

 

 

       

 

 

 
  $—     $63,167       $63,167 

Foreign currency forward contracts

   —      628        628 

Fair Value Liabilities:

          

Foreign currency forward contracts

  $—     $883       $883 

For certain other financial instruments, including accounts receivablereceivables and accounts payable, the carrying value approximates their fair value due to these items’ short maturity.

Fair value of the relatively short maturity of these items.

Assets Measured at Fair Value on a Nonrecurring Basis

Assets recorded atNotes

The Notes’ fair value on a nonrecurring basis, such(including the conversion feature embedded in the Notes) was $573.0 million as propertyof March 31, 2022 and equipment and intangible assets, are recognized at$642.0 million as of December 31, 2021. The fair value when they are impaired. Duringwas determined based on the nine months ended September 30, 2017Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and 2016,classified within Level 2 in the Company did not recognize any impairments of its assets recorded at fair value on a nonrecurring basis.

6. TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

(in thousands)  September 30,
2017		   December 31,
2016		 

Trade accounts receivable

  $164,530   $234,473 

Unbilled trade accounts receivable

   32,820    34,681 
  

 

 

   

 

 

 

Total trade accounts receivable

   197,350    269,154 

Allowance for sales credit memos

   (6,189)    (4,126) 
  

 

 

   

 

 

 
  $191,161   $265,028 
  

 

 

   

 

 

 

Unbilled trade accounts receivable primarily relate to services earned under time and materials arrangements and to license, maintenance, and cloud arrangements that have commenced or been delivered in excess of scheduled invoicing.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the nine months ended September 30, 2017 as follows:

(in thousands)    

Balance as of January 1,

  $73,164 

Purchase price adjustments to goodwill

   (354) 

Currency translation adjustments

   131 
  

 

 

 

Balance as of September 30,

  $72,941 
  

 

 

 

hierarchy.

NOTE 10. REVENUE
Geographic revenue
Three Months Ended
March 31,
(Dollars in thousands)20222021
U.S.$217,272 58 %$194,568 62 %
Other Americas45,751 12 %11,901 4 %
United Kingdom (“U.K.”)30,932 8 %28,212 9 %
Europe (excluding U.K.), Middle East, and Africa49,136 13 %51,659 16 %
Asia-Pacific33,216 9 %27,159 9 %
$376,307 100 %$313,499 100 %
15
PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

(in thousands)  Range of
Remaining
Useful Lives		   Cost   Accumulated
Amortization		   Net Book
Value		 

September 30, 2017

        

Customer related intangibles

   4-10 years   $63,158   $(43,205)   $19,953 

Technology

   7-10 years    58,942    (44,140)    14,802 

Other intangibles

   —      5,361    (5,361)    —   
    

 

 

   

 

 

   

 

 

 
    $127,461   $(92,706)   $34,755 
    

 

 

   

 

 

   

 

 

 

December 31, 2016

        

Customer related intangibles

   4-10 years   $63,091   $(37,573)   $25,518 

Technology

   3-10 years    58,942    (40,269)    18,673 

Other intangibles

   —      5,361    (5,361)    —   
    

 

 

   

 

 

   

 

 

 
    $127,394   $(83,203)   $44,191 
    

 

 

   

 

 

   

 

 

 

Amortization expense




Revenue streams
Three Months Ended
March 31,
(in thousands)20222021
Perpetual license$7,440 $5,452 
Subscription license137,533 111,509 
Revenue recognized at a point in time144,973 116,961 
Maintenance79,716 75,561 
Pega Cloud90,317 67,858 
Consulting61,301 53,119 
Revenue recognized over time231,334 196,538 
Total revenue$376,307 $313,499 
Three Months Ended
March 31,
(in thousands)20222021
Pega Cloud$90,317 $67,858 
Maintenance79,716 75,561 
Subscription services170,033 143,419 
Subscription license137,533 111,509 
Subscription307,566 254,928 
Perpetual license7,440 5,452 
Consulting61,301 53,119 
$376,307 $313,499 
Remaining performance obligations ("Backlog")
Expected future revenue from existing non-cancellable contracts:
As of intangibles assets is reflected in the Company’s unaudited condensed consolidated statementsMarch 31, 2022:
(Dollars in thousands)Subscription servicesSubscription
license		Perpetual
license		ConsultingTotal
MaintenancePega Cloud
1 year or less$228,984 $329,857 $47,428 $7,281 $40,661 $654,211 55 %
1-2 years63,870 208,875 16,111 4,505 10,955 304,316 26 %
2-3 years33,617 106,156 2,422 2,252 3,876 148,323 13 %
Greater than 3 years22,611 44,596 1,758 — 522 69,487 6 %
$349,082 $689,484 $67,719 $14,038 $56,014 $1,176,337 100 %
As of operations as follows:

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
(in thousands)  2017   2016   2017   2016 

Cost of revenue

  $1,232   $1,642   $3,871   $4,626 

Selling and marketing

   1,873    1,867    5,608    5,274 

General and administrative

   —      90    —      268 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $3,105   $3,599   $9,479   $10,168 
  

 

 

   

 

 

   

 

 

   

 

 

 

Future estimated amortization expense related to intangible assets as of September 30, 2017 is as follows:

(in thousands)    

Remainder of 2017

  $2,846 

2018

   11,347 

2019

   5,555 

2020

   2,659 

2021

   2,637 

2022 and thereafter

   9,711 
  

 

 

 
  $34,755 
  

 

 

 

8. ACCRUED EXPENSES

(in thousands)  September 30,
2017		   December 31,
2016		 

Outside professional services

  $13,447   $10,204 

Income and other taxes

   5,947    10,422 

Marketing and sales program expenses

   4,679    3,707 

Dividends payable

   2,336    2,298 

Employee related expenses

   4,715    3,806 

Other

   8,557    6,314 
  

 

 

   

 

 

 
  $39,681   $36,751 
  

 

 

   

 

 

 

March 31, 2021:

(Dollars in thousands)Subscription servicesSubscription
license		Perpetual
license		ConsultingTotal
MaintenancePega Cloud
1 year or less$220,100 $252,104 $41,025 $9,649 $21,068 $543,946 55 %
1-2 years52,366 187,456 9,874 629 914 251,239 26 %
2-3 years33,337 91,861 7,055 — 1,756 134,009 14 %
Greater than 3 years16,834 32,895 377 — 510 50,616 5 %
$322,637 $564,316 $58,331 $10,278 $24,248 $979,810 100 %
16
PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

9. DEFERRED REVENUE

(in thousands)  September 30,
2017		   December 31,
2016		 

Term license

  $5,636   $15,843 

Perpetual license

   20,844    23,189 

Maintenance

   105,588    112,397 

Cloud

   18,805    13,604 

Professional Services

   10,058    10,614 
  

 

 

   

 

 

 

Current deferred revenue

   160,931    175,647 

Perpetual license

   4,085    7,909 

Maintenance

   828    1,802 

Cloud

   1,217    1,278 
  

 

 

   

 

 

 

Long-term deferred revenue

   6,130    10,989 
  

 

 

   

 

 

 
  $167,061   $186,636 
  

 

 

   

 

 

 

10.




NOTE 11. STOCK-BASED COMPENSATION

Stock-based compensation expense is reflected in the Company’s unaudited condensed consolidated statements of operations as follows:

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
(in thousands)  2017   2016   2017   2016 

Cost of revenues

  $3,613   $3,117   $10,913   $8,711 

Selling and marketing

   3,976    3,468    11,482    9,395 

Research and development

   3,420    2,260    10,306    7,480 

General and administrative

   2,480    1,983    7,228    4,706 

Acquisition-related

   —      (10)    —      342 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation before tax

  $13,489   $10,818   $39,929   $30,634 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit

  $(4,129)   $(3,227)   $(12,231)   $(8,917) 

During the nine months ended September 30, 2017, the Company issued approximately 1,299,000 shares of common stock to its employees and 18,000 shares of common stock to itsnon-employee directors under the Company’s stock-based compensation plans.

During the nine months ended September 30, 2017, the Company granted approximately 1,052,000 restricted stock units (“RSUs”) and 1,520,000non-qualified stock options to its employees with total fair values of approximately $47.5 million and $20.6 million, respectively. This includes approximately 175,000 RSUs which were granted in connection with the election by employees to receive 50% of their 2017 target incentive compensation under the Company’s Corporate Incentive Compensation Plan in the form of RSUs instead of cash. Stock-based compensation of approximately $7.7 million associated with this RSU grant will be recognized over aone-year period beginning on the grant date.

The Company recognizes stock based compensation on the accelerated recognition method, treating each vesting tranche as if it were an individual grant.

Expense
Three Months Ended
March 31,
(in thousands)20222021
Cost of revenue$6,378 $5,925 
Selling and marketing10,958 13,720 
Research and development7,346 6,770 
General and administrative3,545 3,685 
$28,227 $30,100 
Income tax benefit$(5,311)$(5,991)
As of September 30, 2017,March 31, 2022, the Company had approximately $56.8$200.8 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to all unvested RSUs and unvested stock options thatwhich is expected to be recognized over a weighted-average period of 2.12.3 years.

11. EARNINGS

Grants
Three Months Ended
March 31, 2022
(in thousands)SharesTotal Fair Value
Restricted stock units1,096 $94,538 
Non-qualified stock options2,212 $60,514 
NOTE 12. INCOME TAXES
Effective income tax rate
Three Months Ended
March 31,
(Dollars in thousands)20222021
(Benefit from) income taxes$(7,683)$(17,618)
Effective income tax benefit rate95 %73 %
The change in the effective income tax benefit rate was primarily due to the impact of discrete tax items which were proportionately larger on a lower loss before income taxes.
Stock-based compensation increases the variability of our effective tax rates. The impact of stock-based compensation on a given period depends on our profitability, the attributes of the stock compensation awards the Company grants, and award holders' exercise behavior.
NOTE 13. (LOSS) PER SHARE

Basic earnings(loss) per share is computedcalculated using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings(loss) per share is computedcalculated using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding stock options, RSUs, and RSUs,convertible senior notes.
Calculation of (loss) per share:
Three Months Ended
March 31,
(in thousands, except per share amounts)20222021
Net (loss)$(379)$(6,617)
Weighted-average common shares outstanding81,680 81,004 
(Loss) per share, basic$0.00 $(0.08)
Net (loss)$(379)$(6,617)
Weighted-average common shares outstanding, assuming dilution (1) (2) (3)
81,680 81,004 
(Loss) per share, diluted$0.00 $(0.08)
Outstanding anti-dilutive stock options and RSUs (4)
4,178 6,465 
(1) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.
(2) The shares underlying the conversion options in the Company’s Notes are included using the treasury stock method. Certain shares related to some of the Company’s outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were anti-dilutive in the periods presented, but could beif-converted method, if dilutive in the future.

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

17
PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)




(3) The calculationCompany’s Capped Call Transactions represent the equivalent of approximately 4.4 million shares of the Company’s basiccommon stock (representing the number of shares for which the Notes are initially convertible). The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and diluted earnings per share is as follows:

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
(in thousands, except per share amounts)  2017   2016   2017   2016 

Basic

        

Net (loss)/income

  $(1,812)   $3,301   $36,615   $18,237 
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding

   77,691    76,278    77,258    76,323 
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/earnings per share, basic

  $(0.03)   $0.04   $0.47   $0.24 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        

Net (loss)/income

  $(1,812)   $3,301   $36,615   $18,237 
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average effect of dilutive securities:

        

Stock options

   —      1,933    3,519    1,851 

RSUs

   —      1,337    1,940    1,227 
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of assumed exercise of stock options and RSUs

   —      3,270    5,459    3,078 
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding, assuming dilution

   77,691    79,548    82,717    79,401 
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/earnings per share, diluted

  $(0.03)   $0.04   $0.44   $0.23 
  

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding stock options and RSUs excluded as impact would be anti-dilutive

   7,232    296    219    368 

In periodsinterest, upon conversion of loss, all equity awardsthe Notes, with such reduction and/or offset subject to a cap of $196.44. The Capped Call Transactions are excluded from weighted-average common shares outstanding, assuming dilution, in all periods as the inclusion of any equity awardstheir effect would be anti-dilutive.

12. GEOGRAPHIC INFORMATION AND MAJOR CLIENTS

Geographic Information

Operating segments are defined as components of an enterprise, about which separate financial information is available

(4) Outstanding stock options and RSUs that is evaluated regularly bywere anti-dilutive under the chief operating decision maker (“CODM”)treasury stock method in deciding how to allocate resources and in assessing performance.

The Company develops and licenses software applications for customer engagement and its Pega® Platform, and provides consulting services, maintenance, and training related to its offerings. The Company derives substantially all of its revenuethe period were excluded from the sale and supportcomputation of one group of similar products and services—software that provides case management, business process management, and real-time decisioning solutions to improve customer engagement and operational excellencediluted (loss) per share. These awards may be dilutive in the enterprise applications market. To assess performance,future.

NOTE 14. COMMITMENTS AND CONTINGENCIES
Commitments
See "Note 7. Leases" for additional information.
Legal Proceedings
In addition to the Company’s CODM, who is the chief executive officer, reviews financial information on a consolidated basis. Therefore,matters below, the Company determined it has one reportable segment—Customer Engagement Solutionsis, or may become, involved in a variety of claims, demands, suits, investigations, and one reporting unit.

The Company’s international revenue, based uponproceedings that arise from time to time relating to matters incidental to the clients’ location, is as follows:

   Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
(Dollars in thousands)  2017  2016  2017  2016 

U.S.

  $95,087    53%  $111,274    61%  $351,330    59%  $308,049    56% 

Other Americas

   8,722    5%   7,952    4%   30,243    5%   49,494    9% 

U.K.

   18,485    10%   21,490    12%   68,003    11%   77,181    14% 

Other EMEA(1)

   28,100    16%   23,656    13%   76,958    13%   67,314    12% 

Asia Pacific

   29,421    16%   18,430    10%   74,508    12%   48,618    9% 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 
  $179,815    100%  $182,802    100%  $601,042    100%  $550,656    100% 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

(1)Includes Europe, the Middle East and Africa, but excludes the United Kingdom.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Major Clients

Clients accounting for 10% or moreordinary course of the Company’s total revenue were as follows:

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
(in thousands)  2017  2016   2017   2016 

Total revenue

  $179,815  $182,802   $601,042   $550,656 

Client A

   10.6%   *    *    * 

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

Clients accounting for 10% or morebusiness, including actions concerning contracts, intellectual property, employment, benefits, and securities matters. Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources, and other factors.

In addition, as the Company is a party to ongoing litigation, it is at least reasonably possible that our estimates will change in the near term and the effect may be material.
As of March 31, 2022 and December 31, 2021, the Company has no accrued losses for litigation.
Pegasystems Inc. v. Appian Corp. & Business Process Management Inc.
On July 3, 2019, the Company filed suit in Massachusetts federal court against Appian Corp. (“Appian”) and Business Process Management, Inc. (“BPM”) relating to a BPM “Market Report” that Appian had used to promote itself against the Company. Pegasystems Inc. v. Appian Corp. & Business Process Management Inc., No. 1:19-cv-11461 (D. Mass). On April 15, 2022, each of the parties filed motions for summary judgment with the court. The Company continues to believe the counterclaims brought by Appian against the Company are without merit, and the Company intends to vigorously pursue its claims against Appian and defend against the counterclaims brought against the Company in this matter. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the Company’s totalbelief that the damages claimed by Appian fail to satisfy the required legal standard, the status of the proceeding, and due to the uncertainty as to how a jury may rule if this ultimately proceeds to trial.
Appian Corp. v. Pegasystems Inc. & Youyong Zou
As previously reported, the Company is a defendant in litigation brought by Appian that is currently being tried in Virginia (the “Court”) titled Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). The jury trial began on March 21, 2022. On April 13, 2022, Appian withdrew its claim against the Company for tortious interference with business expectancy. On that same day, in the course of making determinations on various motions, the Court stated that if the jury finds that the Company misappropriated information that constituted Appian trade accounts receivablesecrets and finds that the Company incorporated those trade secrets into the Company’s products or the Company’s marketing materials, the burden will then shift to the Company to prove that the sales Appian seeks as damages were not the result of the alleged misappropriation and use of the alleged trade secrets. This legal standard has not previously been adopted by the Virginia courts. The Company continues to believe that its sales of the products at issue were not caused by, or the result of, the alleged misappropriation of trade secrets, and is submitting evidence to the jury to that effect. The Company is unable to reasonably estimate possible damages because, among other things, of the uncertainty as follows:

(in thousands)  September 30,
2017		  December 31,
2016		 

Total trade accounts receivable

   197,350   269,154 

Client A

   12.4%   * 

*Client accounted for less than 10% of total trade account receivable

to how a jury may decide and the parties’ existing grounds for appeal based on rulings to date in the proceeding.

18

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

Forward-Looking Statements

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form10-Q (“Quarterly Report”) contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These
Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions identify forward-looking statements, include,which are based on current expectations and assumptions.
Forward-looking statements deal with future events and are subject to risks and uncertainties that are difficult to predict, including, but are 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 by the Company, and dividends;
•the timing of revenue recognition under license and cloud arrangements and are described more completely in Part Irecognition;
•management of our Annual Report on Form10-K for the year ended December 31, 2016.

These forward-looking statements are based on current expectations, estimates, forecasts, and projections about the industry and markets in which we operate, and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “strategy,” “is intendedtransition to” “project,” “guidance,” “likely,” “usually,” or variations of such words and similar expressions are intended to identify such forward-looking statements.

These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Important factors that could cause actual future activities and results to differ materially from those expressed in such forward-looking statements include, among others, a more subscription-based business model;

•variation in demand for our products and services, including among clients in the public sector;
•reliance on key personnel;
•global economic and political conditions and uncertainty, including continued impacts from the ongoing COVID-19 pandemic and the difficultywar in predicting the completion of product acceptance and other factors affecting the timing of license revenue recognition; Ukraine;
•reliance on third party relationships; third-party service providers, including hosting providers;
•compliance with our debt obligations and covenants;
•the potential lossimpact of vendor specific objective evidence for our consulting services; the inherent risks associated with international operationsconvertible senior notes and the continued uncertainties in international economies; the Company’s continued effort to market and sell both domestically and internationally; Capped Call Transactions;
•foreign currency exchange rates; the financial impact of any future acquisitions;
•the potential legal and financial liabilities and damage to our reputation damage due to cyber-attackscyber-attacks;
•security breaches and security breaches;flaws;
•our ability to protect our intellectual property rights, costs associated with defending such rights, as well as intellectual property rights claims and other related claims by third parties;
•our client retention rate; and
•management of the Company’sour growth.
These risks and other factorsothers that couldmay cause actual results to differ materially from those expressed in such forward-looking statements are described more completelyfurther in Part I of the Company’sour Annual Report on Form10-K for the year ended December 31, 2016 as well as2021, Part II of this Quarterly Report on Form 10-Q, and other filings we make with the U.S. Securities and Exchange Commission

We have no (“SEC”).

Except as required by applicable law, we do not undertake and expressly disclaim any obligation to publicly update or revise anythese forward-looking statements publicly, whether as a result ofdue to new information, future events, or risks. New information, future events or risks may cause theotherwise.
The forward-looking events we discussstatements in this report not to occur or to materially change.

Business overview

Quarterly Report represent our views as of April 28, 2022.

BUSINESS OVERVIEW
We develop, market, license, host, and support enterprise software applicationsthat helps organizations simplify business complexity. Our powerful low-code platform for marketing, sales,workflow automation and AI-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and operations.automate mission-critical business processes and workflows. With Pega, our clients can leverage our intelligent technology and scalable architecture to accelerate their digital transformation. In addition, we licenseour client success teams, world-class partners, and clients themselves leverage our Pega® Platform for Express™ methodology to design and deploy mission-critical applications quickly and collaboratively.
Our target clients that wish to build and extend their own applications. The Pega Platform assists our clients in building, deploying, and evolving enterprise applications, creating an environment in which business and IT can collaborate to manage back office operations, front office sales, marketing, and/or customer service needs. We also provide consulting services, maintenance, and training for our software. Our software applications and Pega Platform can be deployed on Pega, partner, or customer-managed cloud architectures.

Our clients includeare Global 3000 companiesorganizations and government agencies that seekrequire solutions to manage complex enterprise systemsdistinguish themselves in the markets they serve. Our solutions achieve and customer service issuesfacilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. Along with greater agility and cost-effectiveness. Our strategy isour partners, we deliver solutions tailored to our clients’ specific industry needs.

Subscription transition
We are transitioning our business to sell software primarily through subscription arrangements. Until we fully complete our subscription transition, which we expect will occur in 2023, our revenue and operating cash flow may be impacted. Operating performance and the actual mix of revenue and new arrangements in each period can fluctuate based on client preferences for our perpetual and subscription offerings. See the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information.
19

Coronavirus (“COVID-19”)
As of March 31, 2022, COVID-19 has not had a client a series of licenses, each focusedmaterial impact on a specific purpose or areaour results of operations or financial condition. See “Coronavirus (“COVID-19”)” in support of longer term enterprise-wide digital transformation initiatives.

Our license revenue is primarily derived from salesthe “Risk Factors” section of our applicationsAnnual Report on Form 10-K for the year ended December 31, 2021 for additional information.

Ukraine
Our direct financial exposure to Ukraine, Russia, and Belarus is not material.
In 2021, before Russia's invasion of Ukraine, we made a business decision to stop pursuing new clients in Russia and closed our Pega Platform. Our cloudlocal office. For the year ended December 31, 2021 total revenue is derived from clients located in Ukraine, Russia, and Belarus was less than $4.0 million. However, the licensingultimate impact of Russia’s invasion of Ukraine on our business will depend on future developments, including the duration and spread of the conflict, the impact on our people, partners, clients, and vendors in neighboring countries, and globally, all of which are uncertain and unpredictable.
Performance metrics
We use performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including:
Annual contract value (“ACV”) | Increased 21% since March 31, 2021
ACV represents the annualized value of our hosted Pega Platform and software application environments. Our consulting services revenue is primarily related to new license implementations.

Financial and Performance Metrics

Management evaluates our financial performance, based a number of select financial and performance metrics. The performance metrics are periodically reviewed and revised to reflect any changes in our business. Historically, Recurring Revenue and License and Cloud Backlog have been our primary performance metrics. However, due to the change in the revenue recognition patterns of term license arrangements as a result of the expected implementation of the new revenue accounting standard (See Note 2) in the first quarter of 2018, we have started tracking Annual Contract Value (“ACV”), a new performance measure.

Select Financial Metrics

(Dollars in thousands,

except per share amounts)

  Three Months Ended
September 30,		     Nine Months Ended
September 30,		    
  2017  2016  Change  2017  2016  Change 

Total revenue

  $179,815  $182,802   (2,987)   (2)%  $601,042  $550,656  $50,386    9% 

Operating margin

   (8)%   3%     3%   5%    

Diluted (loss)/earnings per share

  $(0.03)  $0.04  $(0.07)   (175)%  $0.44  $0.23  $0.21    91% 

Cash flow provided by operating activities

       113,926   20,556   93,370    454% 

Select Performance Metrics

Annual Contract Value (“ACV”)

The change in ACV measures the growth and predictability of future cash flows from committed term license, cloud, and maintenance arrangementsactive contracts as of the end ofmeasurement date. The contract's total value is divided by its duration in years to calculate ACV for subscription license and Pega Cloud contracts. Maintenance revenue for the particular reporting period.

quarter then ended is multiplied by four to calculate ACV for maintenance. ACV is the sum of the following two components:

Terma performance measure that we believe provides useful information to our management and Cloud contract value divided by the number of committed contract yearsinvestors, particularly during our subscription transition.

Quarterly MaintenanceForeign currency exchange rate changes were a 1% to 2% headwind to ACV growth since March 31, 2021.
pega-20220331_g1.jpg
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Remaining performance obligations (“Backlog”) | Increased 20% since March 31, 2021
Expected future revenue reported for the current three months ended period multiplied by 4.

   September 30,     
(in thousands)  2017   2016   Change 

Term License and Cloud ACV

  $200,180   $163,408   $36,772    23% 

Maintenance ACV

   248,816    220,152   $28,664    13% 
  

 

 

   

 

 

     

Term License, Cloud and Maintenance ACV

  $448,996   $383,560   $65,436    17% 
  

 

 

   

 

 

     

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Recurring Revenue

A measure of the predictability and repeatability of our revenue.

   Three Months Ended
September 30,		     Nine Months Ended
September 30,		    
(Dollars in thousands)  2017  2016  Change  2017  2016  Change 

Recurring revenue

          

Term license

  $21,678  $28,919  $(7,241)   (25)%  $106,170  $102,115  $4,055    4% 

Maintenance

   62,204   55,038  $7,166   13%   180,759   163,174  $17,585    11% 

Cloud

   13,354   10,873  $2,481   23%   36,914   30,640  $6,274    20% 
  

 

 

  

 

 

    

 

 

  

 

 

    

Total recurring revenue

  $97,236  $94,830  $2,406   3%  $323,843  $295,929  $27,914    9% 
  

 

 

  

 

 

    

 

 

  

 

 

    

Recurring revenue as a percent of total revenue

   54%   52%     54%   54%    

License and Cloud Backlog

A measure of the continued growth of our business as a result of future contractual commitments by our clients.

License and Cloud Backlog is the sum of the following two components:

Deferred license and cloud revenue as recorded on the Company’s balance sheet. (See Note 9 “Deferred Revenue”)

License and cloud contractual commitments, which are not recorded on our balance sheet because we have not yet invoiced our clients, nor have we recognized the associated revenue. (See “Future Cash Receipts from Committed License and Cloud Arrangements” which can be found in “Liquidity and Capital Resources” contained elsewhere in this Quarterly Report on Form10-Q for additional information)existing non-cancellable contracts:

License and cloud backlog may vary in any given period depending on the amount and timing of when the arrangements are executed, as well as the mix between perpetual, term, and cloud license arrangements, which may depend on our clients’ deployment preferences. A change in the mix may cause our revenues to vary materially from period to period. A higher proportion of term and cloud license arrangements executed will generally result in revenue being recognized over longer periods.

   September 30,  Change 
(Dollars in thousands)  2017  2016  

Deferred license and cloud revenue on the balance sheet

        

Term license and cloud

  $25,658    51%  $19,627    42%   31% 

Perpetual license

   24,929    49%   27,653    58%   (10)% 
  

 

 

    

 

 

    

Total deferred license and cloud revenue

   50,587    100%   47,280    100%   7% 
  

 

 

    

 

 

    

License and cloud contractual commitments not on the balance sheet

        

Term license and cloud

   450,535    91%   352,804    94%   28% 

Perpetual license

   46,459    9%   23,483    6%   98% 
  

 

 

    

 

 

    

Total license and cloud commitments

   496,994    100%   376,287    100%   32% 
  

 

 

    

 

 

    

Total license (term and perpetual) and cloud backlog

  $547,581    $423,567     29% 
  

 

 

    

 

 

    

Total term license and cloud backlog

   476,193    87%   372,431    88%   28% 
  

 

 

    

 

 

    

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Critical accounting policies

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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 withfollowing accounting principles generally accepted in the U.S.United States and the rules and regulations of the SEC for interim financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, 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 about our critical accounting policies, we encourage you to read the discussion in the following locations in our Annual Report on Form 10-K for the year ended December 31, 2021:
•“Critical Accounting Estimates and Significant Judgments” in Item 7; and
•“Note 2. Significant Accounting Policies” in Item 8.
There have been no significant changes into our critical accounting policies as disclosed in our Annual Report on Form10-K for the year ended December 31, 2016. For more information regarding2021.
RESULTS OF OPERATIONS
Revenue
Subscription transition
We are transitioning our critical accounting policies, we encourage youbusiness to read the discussion contained in Item 7 under the heading “Critical Accounting Estimatessell software primarily through subscription arrangements. This transition has impacted revenue growth as revenue is recognized differently for subscription services than license sales. Revenue from Pega Cloud and Significant Judgments” and Note 2 “Significant Accounting Policies” included in the notes to the Consolidated Financial Statements contained in our Annual Report on Form10-K for the year ended December 31, 2016.

Results of Operations

   Three Months Ended
September 30,		     Nine Months Ended
September 30,		    
(Dollars in thousands)  2017  2016  Change  2017  2016  Change 

Total revenue

  $179,815  $182,802  $(2,987)   (2)%  $601,042  $550,656  $50,386   9% 

Gross profit

  $110,084  $122,365  $(12,281)   (10)%  $395,346  $373,609  $21,737   6% 

Total operating expenses

  $124,373  $116,867  $7,506   6%  $376,647  $347,626  $29,021   8% 

(Loss)/income from operations

  $(14,289)  $5,498  $(19,787)   (360)%  $18,699  $25,983  $(7,284)   (28)% 

Operating margin

   (8)%   3%     3%   5%   

(Loss)/income before (benefit)/provision for income taxes

  $(14,697)  $5,515  $(20,212)   (366)%  $18,663  $24,506  $(5,843)   (24)% 

Revenue

Software license revenue

(Dollars in thousands)  Three Months Ended
September 30,		     Nine Months Ended
September 30,		    
  2017  2016  Change  2017  2016  Change 

Perpetual license

  $20,115    48%  $39,914    58%  $(19,799)   (50)%  $89,050    46%  $105,734    51%  ($16,684)   (16)% 

Term license

   21,678    52%   28,919    42%   (7,241)   (25)%   106,170    54%   102,115    49%   4,055   4% 
  

 

 

   

 

 

  

 

 

   

 

 

    

 

 

   

 

 

  

 

 

   

 

 

   

Total license revenue

  $41,793    100%  $68,833    100%  $(27,040)   (39)%  $195,220    100%  $207,849    100%  ($12,629)   (6)% 
  

 

 

   

 

 

  

 

 

   

 

 

    

 

 

   

 

 

  

 

 

   

 

 

   

The mix between perpetual and term licensemaintenance arrangements executed in a particular period varies based on clients’ deployment preferences. A change in the mix may cause our revenues to vary materially from period to period. A higher proportion of term license arrangements executed will generally result in license revenue beingis typically recognized over longer periods. Additionally, some of our perpetualthe contract term, while revenue from license arrangements include extended payment terms or additionalsales is recognized when the license rights of use, which may also result in the recognition ofbecome effective, typically upfront.

21

(Dollars in thousands)Three Months Ended
March 31,		Change
20222021
Pega Cloud$90,317 24 %$67,858 22 %$22,459 33 %
Maintenance79,716 21 %75,561 23 %4,155 5 %
Subscription services170,033 45 %143,419 45 %26,614 19 %
Subscription license137,533 37 %111,509 36 %26,024 23 %
Subscription307,566 82 %254,928 81 %52,638 21 %
Perpetual license7,440 2 %5,452 2 %1,988 36 %
Consulting61,301 16 %53,119 17 %8,182 15 %
$376,307 100 %$313,499 100 %$62,808 20 %
The revenue over longer periods.

The decrease in perpetual license revenuechanges in the three months ended September 30, 2017 was primarily due to a decrease inMarch 31, 2022 generally reflect the average valueimpact of perpetual arrangements executed and a lower percentage of perpetual arrangements executed and recognized inour subscription transition. Other factors impacting our revenue in the current period. The decrease in perpetual license revenue in the nine months ended September 30, 2017 was primarily due to a lower percentage of perpetual arrangements executed and recognized in revenue.

The decrease in term license revenue in the three months ended September 30, 2017 was primarily due to a large term license renewal for which the second year of the term was recognized as revenue in the three months ended September 30, 2016. If the second year of this term license arrangement was not paid in advance in the three months ended September 30, 2016, term license revenue would have decreased 2%. include:

•The increase in term license revenue in the nine months ended September 30, 2017 was primarily due to broad based growth amongst new and existing customers offset by a large term license arrangement which was prepaid and recognized inperpetual revenue in the three months ended March 31, 2016. If this term2022 was primarily due to license arrangement was not prepaid and recognizedrights becoming effective in the three months ended March 31, 2022 related to software license contracts entered into in prior years.
•The increase in consulting revenue in the three months ended March 31, 2016 term license revenue would have increased 26%.

The aggregate value of future revenue expected to be recognized during the remainder of the year under existing noncancellable perpetual arrangements not reflected in deferred revenue was $13.3 million as of September 30, 2017 compared to $3.9 million as of September 30, 2016.

The aggregate value of future revenue expected to be recognized during the remainder of the year under existing noncancellable term and cloud arrangements not reflected in deferred revenue was $37.7 million as of September 30, 2017 compared to $26.7 million as of September 30, 2016. For additional information see “Future Cash Receipts from Committed License and Cloud Arrangements” which can be found in “Liquidity and Capital Resources.”

Maintenance revenue

   Three Months Ended
September 30,		      Nine Months Ended
September 30,		     
(Dollars in thousands)  2017   2016   Change  2017   2016   Change 

Maintenance

  $62,204   $55,038   $7,166    13%  $180,759   $163,174   $17,585    11% 

The increases were primarily due to the continued growth in the aggregate value of the installed base of our software and strong renewal rates significantly in excess of 90%.

Services revenue

   Three Months Ended
September 30,		     Nine Months Ended
September 30,		    
(Dollars in thousands)  2017  2016  Change  2017  2016  Change 

Consulting services

  $61,535    81%  $46,829    80%  $14,706   31%  $183,447    82%  $144,263    80%  $39,184   27% 

Cloud

   13,354    18%   10,873    18%   2,481   23%   36,914    16%   30,640    17%   6,274   20% 

Training

   929    1%   1,229    2%   (300)   (24)%   4,702    2%   4,730    3%   (28)   (1)% 
  

 

 

   

 

 

  

 

 

   

 

 

    

 

 

   

 

 

  

 

 

   

 

 

   

Total services

  $75,818    100%  $58,931    100%  $16,887   29%  $225,063    100%  $179,633    100%  $45,430   25% 
  

 

 

   

 

 

  

 

 

   

 

 

    

 

 

   

 

 

  

 

 

   

 

 

   

Consulting services revenue is primarily generated from new license implementations. Our consulting services revenue may fluctuate in future periods depending on the mix of new implementation projects we perform as compared to those performed by our enabled clients or led by our partners.

The increases in consulting services revenue were primarily due to higher billable hours during the three and nine months ended September 30, 2017 driven by a large project which began in the second half of 2016.

Cloud revenue represents revenue from our Pega Cloud offerings. The increases in cloud revenue were primarily due to continued growth of our cloud client base.

Gross profit

   Three Months Ended
September 30,		     Nine Months Ended
September 30,		    
(Dollars in thousands)  2017  2016  Change  2017  2016  Change 

Software license

  $40,517  $67,520  $(27,003)   (40)%  $191,394  $204,203  $(12,809)   (6)% 

Maintenance

   55,488   48,379   7,109   15%   159,814   144,285   15,529   11% 

Services

   14,079   6,466   7,613   118%   44,138   25,121   19,017   76% 
  

 

 

  

 

 

    

 

 

  

 

 

   

Total gross profit

  $110,084  $122,365  $(12,281)   (10)%  $395,346  $373,609  $21,737   6% 

Software license gross profit %

   97%   98%     98%   98%   

Maintenance gross profit %

   89%   88%     88%   88%   

Services gross profit %

   19%   11%     20%   14%   
  

 

 

  

 

 

    

 

 

  

 

 

   

Total gross profit %

   61%   67%     66%   68%   

The decrease in total gross profit in the three months ended September 30, 20172022 was primarily due to a shift in the mix of license arrangements executed from perpetual to term licenses and an increase in lower margin services revenue.

The increaseconsultant billable hours in total grossNorth America.

Gross profit in the nine months ended September 30, 2017 was primarily due to increased total revenue.

(Dollars in thousands)Three Months Ended
March 31,		Change
20222021
Pega Cloud$63,418 70 %$45,301 67 %$18,117 40 %
Maintenance74,585 94 %69,775 92 %4,810 7 %
Subscription services138,003 81 %115,076 80 %22,927 20 %
Subscription license136,911 100 %110,889 99 %26,022 23 %
Subscription274,914 89 %225,965 89 %48,949 22 %
Perpetual license7,406 100 %5,422 99 %1,984 37 %
Consulting5,790 9 %(335)(1)%6,125 *
$288,110 77 %$231,052 74 %$57,058 25 %
* not meaningful
•The increases in servicegross profit and gross profit percent in the three and nine months ended September 30, 2017 was driven by a large project which beganMarch 31, 2022 were primarily due to the impact of our subscription transition, revenue growth, and cost-efficiency gains as Pega Cloud grows and scales.
•The increase in the second half of 2016 and several additional large projects for which costs were recognized in 2016 but whose associated revenue was not recognized until after September 30, 2016.

Operating expenses

Selling and marketing

   Three Months Ended
September 30,		     Nine Months Ended
September 30,		    
(Dollars in thousands)  2017  2016  Change  2017  2016  Change 

Selling and marketing

  $70,209  $67,032  $3,177    5%  $217,384  $202,126  $15,258    8% 

As a percent of total revenue

   39%   37%      36%   37%    

Selling and marketing headcount, end of period

        934   875   59    7% 

Selling and marketing expenses include compensation, benefits, and other headcount-related expenses associated with our selling and marketing personnel as well as advertising, promotions, trade shows, seminars, and other programs. Selling and marketing expenses also include the amortization of customer related intangibles.

The increaseconsulting gross profit percent in the three months ended September 30, 2017March 31, 2022 was due to an increase in consultant realization rates in North America.

Operating expenses
(Dollars in thousands)Three Months Ended
March 31,		Change
20222021
% of Revenue% of Revenue
Selling and marketing$162,236 43 %$148,739 47 %$13,497 9 %
Research and development$71,490 19 %$62,442 20 %$9,048 14 %
General and administrative$35,764 10 %$18,270 6 %$17,494 96 %
•The increase in selling and marketing in the three months ended March 31, 2022 was primarily due to an increase in compensation and benefits of $1.8$8.9 million driven by increased headcount and equity compensation, partially offset by a decreasean increase in sales commissions associated with the lower valueemployee travel and entertainment of new license arrangements executed during$2.6 million.
•The increase in research and development in the three months ended September 30, 2017.

The increase in the nine months ended September 30, 2017March 31, 2022 was primarily due to an increase in compensation and benefits of $12.7$5.7 million, respectively, driven by increasedattributable to increases in headcount and equity compensation, and an increase in employee travel and entertainment, partially offset by a decrease in brand marketing program expenses of $2.2 million.

incentive compensation. The increase in headcount reflects additional investments in developing our efforts tosolutions, particularly for Pega Cloud.

•The increase our sales capacity to target new accounts in existing industries, as well as to expand coverage in new industriesgeneral and geographies and to increase the number of sales opportunities.

Research and development

   Three Months Ended
September 30,		     Nine Months Ended
September 30,		    
(Dollars in thousands)  2017  2016  Change  2017  2016  Change 

Research and development

  $41,031  $38,036  $2,995    8%  $121,089  $108,530  $12,559    12% 

As a percent of total revenue

   23%   21%      20%   20%    

Research and Development headcount, end of period

        1,474   1,437   37    3% 

Research and development expenses include compensation, benefits, contracted services, and other headcount-related expenses associated with the creation and development of our products, as well as enhancements and design changes to existing products and integration of acquired technologies.

The increasesadministrative in the three and nine months ended September 30, 2017 wereMarch 31, 2022 was primarily due to increasesan increase of $15.4 million in compensationlegal fees and benefitsrelated expenses arising from proceedings outside the ordinary course of $2.9 millionbusiness. We have incurred and $12.6 million, respectively, attributableexpect to increased headcountcontinue to incur additional expenses for these proceedings in 2022. See "Note 14. Commitments and equity compensation.

GeneralContingencies" in Part I, Item 1 and administrative

   Three Months Ended
September 30,		     Nine Months Ended
September 30,		    
(Dollars in thousands)  2017  2016  Change  2017  2016  Change 

General and administrative

  $13,133  $11,725  $1,408    12%  $38,174  $34,067  $4,107    12% 

As a percent of total revenue

   7%   6%      6%   6%    

General and administrative headcount, end of period

        407   371   36    10% 

General“Risk Factors” in Part II, Item 1A of this Quarterly Report for additional information.

22

Other income and administrative expenses include compensation, benefits, and other headcount-related expenses associated with finance, legal, corporate governance, and other administrative headcount. They also include accounting, legal, and other professional consulting and administrative fees.
(Dollars in thousands)Three Months Ended
March 31,		Change
20222021
Foreign currency transaction gain (loss)$2,876 $(5,098)$7,974 *
Interest income207 153 54 35 %
Interest expense(1,946)(1,880)(66)(4)%
(Loss) on capped call transactions(30,560)(19,117)(11,443)(60)%
Other income, net2,741 106 2,635 2,486 %

$(26,682)$(25,836)$(846)(3)%
* not meaningful
•The general and administrative headcount includes employeesincrease in human resources, information technology, and corporate services departments, whose costs are partially allocated to other operating expense areas.

The increasesforeign currency transaction gain (loss) in the three and nine months ended September 30, 2017 were primarily due to increases in compensation and benefits of $0.4 million and $4 million, respectively, attributable to increased headcount and equity compensation. The increase in the nine months ended September 30, 2017March 31, 2022 was partially offset by a decrease of $1.5 million in legal fees.

Stock-based compensation

   Three Months Ended
September 30,		     Nine Months Ended
September 30,		    
(in thousands)  2017  2016  Change  2017  2016  Change 

Cost of revenues

  $3,613  $3,117  $496   16%  $10,913  $8,711  $2,202   25% 

Selling and marketing

   3,976   3,468   508   15%   11,482   9,395   2,087   22% 

Research and development

   3,420   2,260   1,160   51%   10,306   7,480   2,826   38% 

General and administrative

   2,480   1,983   497   25%   7,228   4,706   2,522   54% 

Acquisition-related

   —     (10)   10   (100)%   —     342   (342)   (100)% 
  

 

 

  

 

 

    

 

 

  

 

 

   

Total stock-based compensation before tax

  $13,489  $10,818  $2,671   25%  $39,929  $30,634  $9,295   30% 
  

 

 

  

 

 

    

 

 

  

 

 

   

Income tax benefit

  $(4,129)  $(3,227)  $(902)   28%  $(12,231)  $(8,917)  $(3,314)   37% 

The increases were primarily due to the increased valueimpact of our annual periodic equity awards granted in March 2016 and 2017. These awards generally have a five-year vesting schedule.

Amortization of intangibles

   Three Months Ended
September 30,		      Nine Months Ended
September 30,		     
(Dollars in thousands)  2017   2016   Change  2017   2016   Change 

Cost of revenue

  $1,232   $1,642   $(410)   (25)%  $3,871   $4,626   $(755)   (16)% 

Selling and marketing

   1,873    1,867    6   —   %   5,608    5,274    334   6% 

General and administrative

   —      90    (90)   (100)%   —      268    (268)   (100)% 
  

 

 

   

 

 

     

 

 

   

 

 

    
  $3,105   $3,599   $(494)   (14)%  $9,479   $10,168   $(689)   (7)% 
  

 

 

   

 

 

     

 

 

   

 

 

    

The decreases in amortization of intangibles in the three and nine months ended September 30, 2017 were due to the amortization in full of certain intangibles acquired through past acquisitions.

Non-operating (expense)/income, net

   Three Months Ended
September 30,		     Nine Months Ended
September 30,		    
(Dollars in thousands)  2017  2016  Change  2017  2016  Change 

Foreign currency transaction (loss)/gain

  $(552)  $1,082  $(1,634)   n/m  $(793)  $2,764  $(3,557)   n/m 

Interest income, net

   144   172  $(28)   (16)%   470   650   (180)   (28)% 

Other (expense)/income, net

   —     (1,237)  $1,237   (100)%   287   (4,891)   5,178   n/m 
  

 

 

  

 

 

    

 

 

  

 

 

   
  $(408)  $17  $(425)   n/m  $(36)  $(1,477)  $1,441   (98)% 
  

 

 

  

 

 

    

 

 

  

 

 

   

n/m - not meaningful

In May 2017, we discontinued our forward contracts program; however, we will continue to evaluate periodically our foreign exchange exposures and mayre-initiate this program if it is deemed necessary.

Historically, we have used foreign currency forward contracts (“forward contracts”) to hedge our exposure to fluctuations in foreign currency exchange rates associated with our foreign currency denominatedcurrency-denominated cash, accounts receivable,receivables, and intercompany receivables and payablesbalances held primarily by the U.S. parent company and its United Kingdom (“U.K.”) subsidiary. See Note 4 “Derivative Instruments” of this Quarterly Report on Form 10-Q for additional information.

The total changeour subsidiary in the fair value of our foreign currency forward contracts recorded in other income (expense), net, during the three months ended September 30, 2016 was a loss of $1.2 million. The total change in the fair value of our foreign currency forward contracts recorded in other (expense)/income, net, during the nine months ended September 30, 2017 and 2016 was a gain of $0.3 million and a loss of $5 million, respectively.

(Benefit)/provision for income taxes

   Three Months Ended
September 30,		      Nine Months Ended
September 30,		    
(Dollars in thousands)  2017  2016  Change   2017  2016  Change 

(Benefit)/provision for income taxes

  $(12,885)  $2,214  $(15,099)   n/m   $(17,952)  $6,269  $(24,221)   n/m 

Effective income tax rate

   88%   40%      (96)%   26%   

n/m - not meaningful

The (benefit)/provision for income taxes represents current and future amounts for federal, state, and foreign taxes.

United Kingdom.

•The increase in the effectiveinterest income tax rate in the three months ended September 30, 2017 isMarch 31, 2022 was primarily due to increases in market interest rates.
•The increase in the (loss) on capped call transactions in the three months ended March 31, 2022, was due to fair value adjustments for our capped call transactions. See "Note 9. Fair Value Measurements" in Part I, Item 1 of this Quarterly Report for additional information.
•The increase in other income, net in the three months ended March 31, 2022, was due to fair value adjustments on equity securities held in our venture investments portfolio in the three months ended March 31, 2021.
(Benefit from) income taxes
Three Months Ended
March 31,
(Dollars in thousands)20222021
(Benefit from) income taxes$(7,683)$(17,618)
Effective income tax benefit rate95 %73 %
During the three months ended March 31, 2022, the change in our effective income tax benefit rate was primarily due to the significant increaseimpact of $3.5 milliondiscrete tax items which were proportionately larger on a lower loss before income taxes.
Stock-based compensation increases the variability of our effective tax rates. The impact on our effective tax rate in excesseach period depends on our profitability and the tax benefits generated bydeductions from our stock compensation plans on significantly lower income before (benefit)/provision for income taxes,activity, which decreased by $20.2 million.

The decrease in the effective income tax rate in the nine months ended September 30, 2017 is primarily due to the significant increase of $19.1 million in excess tax benefits generated bydepend upon our stock compensation plans, on significantly lower income before (benefit)/provision for income taxes, which decreased by $5.8 million.

The inclusion of excess tax benefits as a component of the provision for income taxes may increase volatility in the effective tax rates of future periods as the amount of excess tax benefits from share-based compensation awards varies depending on our future stock price in relation to the fair value of awards, the timing of RSU vesting and exercise behavior of our stock option holders, and the total value of future grants of share-based compensation awards.

Liquidity and capital resources

   Nine Months Ended
September 30,		 
(in thousands)  2017   2016 

Cash provided by (used in):

    

Operating activities

  $113,926   $20,556 

Investing activities

   (11,966)    (2,859) 

Financing activities

   (44,040)    (43,031) 

Effect of exchange rate on cash

   2,054    (1,309) 
  

 

 

   

 

 

 

Net increase/(decrease) in cash and cash equivalents

  $59,974   $(26,643) 
  

 

 

   

 

 

 
(in thousands)  September 30,
2017		   December 31,
2016		 

Total cash, cash equivalents, and marketable securities

  $194,380   $133,761 

award holders' exercise behavior.

LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended
March 31,
 (in thousands)20222021
Cash provided by (used in):
Operating activities$15,116 $21,650 
Investing activities(6,082)15,489 
Financing activities(35,918)(34,794)
Effect of exchange rates on cash and cash equivalents(310)(1,536)
Net (decrease) increase in cash and cash equivalents$(27,194)$809 
(in thousands)March 31, 2022December 31, 2021
Held by U.S. entities$251,554 $274,813 
Held by foreign entities80,618 87,966 
Total cash, cash equivalents, and marketable securities$332,172 $362,779 
We believe that our current cash, cash equivalents, marketable securities, and cash flow from operations, and borrowing capacity will be sufficient to fund our operations, our dividend payments,stock repurchases, and our share repurchase programquarterly cash dividends for at least the next 12 months.

As of September 30, 2017, approximately $61.1 million ofmonths and to meet our known long-term cash requirements. Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and cash equivalents was held inthe investments needed to support our foreign subsidiaries. operations. We may utilize available funds or seek additional external financing if we require additional capital resources.

If it becomes necessary to repatriate theseforeign funds, we may be requiredhave to pay U.S. tax, net of any applicableand foreign tax credits,taxes upon repatriation. We considerHowever, due to the earningscomplexity of our foreign subsidiaries to be permanently reinvestedincome tax laws and as a result, U.S. taxes on such earnings are not provided. Itregulations, it is impracticalimpracticable to estimate the amount of U.S. taxtaxes we may be requiredwould have to pay upon repatriation duepay.
23

Operating activities
We are transitioning our business to sell software primarily through subscription arrangements. This transition has impacted and is expected to continue impacting our billings and cash collections, as the complexitytiming of billings and cash collections generally differs between our subscription and perpetual license arrangements. Subscription licenses and services are generally billed and collected over the foreign tax credit calculations. There can be no assurance that changescontract term, while perpetual license arrangements usually are billed and collected upfront when the license rights become effective.
The change in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures.

Cashcash provided by operating activities

The primary drivers during in the ninethree months ended September 30, 2017 were net income of $36.6 million and $80.6 million from trade accounts receivable, largelyMarch 31, 2022 was primarily due to our subscription transition and increased cash collectionscosts as we made investments in our Pega Cloud offering and selling and marketing activities to support future growth. In addition, in the timing of billings.

The primary driver during the ninethree months ended September 30, 2016 was net income of $18.2 million.

Future Cash ReceiptsMarch 31, 2022 we incurred $17.4 million in legal fees and related expenses arising from Committed License and Cloud Arrangements

As of September 30, 2017, noneproceedings that originated outside of the amounts shownordinary course of business. We expect to continue to incur additional expenses for these proceedings. See "Note 14. Commitments and Contingencies" in the table below had been billed and no revenue had been recognized.

The below amounts for 2018 and subsequent periods may not be recognized in the periods shown below as a resultPart I, Item 1 of the adoption of the new revenue recognition standard (ASC 606). (See Note 2. New Accounting Pronouncements contained elsewhere in this Quarterly Report on Form10-Qfor additional information)

   September 30,
2017		 
(in thousands)  Term and cloud
contracts		   Perpetual contracts (1)   Total 

Remainder of 2017

  $37,723   $13,274   $50,997 

2018

   150,629    21,213    171,842 

2019

   125,165    10,033    135,198 

2020

   85,939    1,572    87,511 

2021

   38,203    367    38,570 

2022 and thereafter

   12,876    —      12,876 
  

 

 

   

 

 

   

 

 

 

Total

  $450,535   $46,459   $496,994 
  

 

 

   

 

 

   

 

 

 

(1)These amounts are for perpetual licenses with extended payment terms and/or additional rights of use.

Total contractual futureinformation.

Investing activities
The change in cash receipts due from our existing license and cloud arrangements were approximately $376.3 million as of September 30, 2016.

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

During the ninethree months ended September 30, 2017,March 31, 2022 was primarily driven by our investments in financial instruments and an acquisition in 2021.

Financing activities
Debt financing
In February 2020, we purchased $25.7 million of marketable debt securities and made investments of $9.1 issued $600 million in propertyaggregate principal amount of convertible senior notes, which mature on March 1, 2025.
(in thousands)Amount
Principal$600,000 
Less: issuance costs(14,527)
Less: Capped Call Transactions(51,900)
$533,573 
In November 2019, and equipment, partially offset by proceeds received from maturitiesas since amended, we entered into a five-year $100 million senior secured revolving credit agreement with PNC Bank, National Association. As of marketable debt securities (including called marketable debt securities)March 31, 2022, we had no outstanding borrowings under the Credit Facility. See "Note 8. Debt" in Part I, Item 1 of $23.1 million.

Duringthis Quarterly Report for additional information.

Stock repurchase program
Changes in the nine months ended September 30, 2016,remaining stock repurchase authority:
(in thousands)Three Months Ended
March 31, 2022
December 31, 2021$22,583 
Authorizations (1)
— 
Repurchases (2)
(22,583)
March 31, 2022$— 
(1) On June 8, 2021, we acquired OpenSpan for $48.8 million, net of cash acquired, and invested $15.3 million primarily in internally developed software and leasehold improvements at our corporate headquarters, partially offset by proceeds received from the sales of marketable debt securities of $62.3 million.

Cash used in financing activities

We used cash primarily for repurchases of our common stock, share repurchases for tax withholdings for the net settlement of our equity awards, and the payment of our quarterly dividend.

Since 2004,announced that our Board of Directors has approved annualextended the current stock repurchase programs that have authorizedprogram’s expiration date to June 30, 2022 and increased the remaining common stock repurchase in the aggregate of upauthority to $195 million of our common stock. Purchases$60 million.

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

The following table is a summary of our repurchase activity:

   Nine Months Ended
September 30,		 
   2017  2016 
(in thousands)  Shares   Amount  Authorization Remaining
Under Publicly Announced
Share Repurchased
Programs		  Shares   Amount  Authorization Remaining
Under Publicly Announced
Share Repurchased
Programs		 

Balance as of January 1,

     $39,385     $40,534 

Authorizations

   —      —     —     —      —     25,879 

Repurchase for net settlement of tax under stock-based compensation

   682    (34,791)   —     414    (10,791)   —   

Repurchases paid under authorized share repurchase program

   68    (2,986)   (2,986)   1,028    (25,530)   (25,530) 

Repurchases unsettled

   —      —     —     6    (177)   (177) 
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Activity in Period

   750   $(37,777)  $(2,986)   1,448   $(36,498)  $172 
     

 

 

     

 

 

 

Balance as of September 30,

     $36,399     $40,706 
     

 

 

     

 

 

 

In addition to the share

Common stock repurchases made under our repurchase programs, we net settled the majority of our employee stock option exercises and RSU vestings, which resulted in the withholding of shares to cover the option exercise price and the minimum statutory tax withholding obligations.

Three Months Ended
March 31,
20222021
(in thousands)SharesAmountSharesAmount
Repurchases paid242 $22,583 67 $8,846 
Repurchases unpaid at period end— — 3 300 
Stock repurchase program242 22,583 70 9,146 
Tax withholdings for net settlement of equity awards141 12,128 197 25,509 
383 $34,711 267 $34,655 

During the ninethree months ended September 30, 2017March 31, 2022 and 2016, option and RSU holders net settled a total of 2.4 million shares and 1.6 million shares, respectively, of which only 1.3 million shares and 0.8 million shares, respectively, were issued to the option and RSU holders. The balance of the shares were surrendered to us to pay for the exercise price with respect to options and the applicable taxes for both options and RSUs. During the nine months ended September 30, 2017 and 2016,2021, instead of receiving cash from the equity holders, we withheld shares with a value of $23.7$6.1 million and $10.1 million, respectively, for the exercise price of options.

These amounts are not included in the table above.

24

Dividends

   Nine Months Ended
September 30,		 
(per share)  2017   2016 

Dividends Declared

  $0.09   $0.09 

Dividends Paid

  $0.09   $0.09 

It is our current intention

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

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE

Three Months Ended
March 31,
(in thousands)20222021
Dividend payments to stockholders$2,454 $2,427 

Contractual obligations
As of March 31, 2022, our contractual obligations were:
Payments due by period
(in thousands)Remainder of 202220232024202520262027 and thereafterOtherTotal
Convertible senior notes (1)
$2,250 $4,500 $4,500 $602,250 $— $— $— $613,500 
Purchase obligations (2)
49,936 14,311 9,198 13,072 13,750 — — 100,267 
Operating lease obligations3,887 20,317 17,141 14,352 10,664 48,381 — 114,742 
Liability for uncertain tax positions (3)
— — — — — — 1,705 1,705 
$56,073 $39,128 $30,839 $629,674 $24,414 $48,381 $1,705 $830,214 
(1) Includes principal and interest.
(2) Represents the fixed or minimum amounts due under purchase obligations for hosting services and sales and marketing programs.
(3) We are unable to reasonably estimate the timing of this cash outflow due to uncertainties in the timing of the effective settlement of tax positions.
ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk representsis the risk of loss that may affect us due tofrom adverse changes in financial market prices and rates.
Foreign currency exposure
Translation risk
Our market risk exposure isinternational operations’ operating expenses are primarily related to fluctuationsdenominated in foreign exchange rates.

Ascurrencies. However, our international sales are also primarily denominated in foreign currencies, which partially offsets our foreign currency exposure.

A hypothetical 10% strengthening in the U.S. dollar against other currencies would have resulted in:
Three Months Ended
March 31,
20222021
(Decrease) increase in revenue(3)%(4)%
Increase (decrease) in net income186 %20 %
Remeasurement risk
We incur transaction gains and losses from the remeasurement of September 30, 2017, we did not have any forward contracts outstanding. See Note 4 “Derivative Instruments” of this Quarterly Report on Form10-Q for further discussion.

Othermonetary assets and liabilities denominated in currencies other than the item discussed above, there were no significantfunctional currency of the entities in which they are recorded.

We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash, cash equivalents, receivables, and intercompany balances held by our U.K. subsidiary, a British pound functional entity.
A hypothetical 10% strengthening in the British pound exchange rate in comparison to our quantitativethe Australian dollar, Euro, and qualitative disclosures about market risk duringU.S. dollar would have resulted in the first nine months ended September 30, 2017. See Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form10-K for the year ended December 31, 2016 for a more complete discussion of our market risk exposure.

following impact:
Three Months Ended
March 31,
(in thousands)20222021
Foreign currency gain (loss)$(7,937)$(7,522)
25

ITEM 4.CONTROLS AND PROCEDURES

ITEM 4.     CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controlsdisclosure controls and Procedures

procedures

Our management, with the participation of our Chief Executive Officer or CEO,(“CEO”) and Chief Financial Officer or CFO,(“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act)Act of 1934, as amended (“Exchange Act”)) as of September 30, 2017.March 31, 2022. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2017.

March 31, 2022.

(b) Changes in Internal Controlinternal control over Financial Reporting

financial reporting

There have been no changes in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the Securities Exchange Act) during the quarter ended September 30, 2017March 31, 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

26

PART II—II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
The following information contains an update to the description of our pending legal proceedings with Appian Corp., as described in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 16, 2022.
Pegasystems Inc. v. Appian Corp. & Business Process Management Inc.
On July 3, 2019, the Company filed suit in Massachusetts federal court against Appian Corp. (“Appian”) and Business Process Management, Inc. (“BPM”) relating to a BPM “Market Report” that Appian had used to promote itself against the Company. Pegasystems Inc. v. Appian Corp. & Business Process Management Inc., No. 1:19-cv-11461 (D. Mass). On April 15, 2022, each of the parties filed motions for summary judgment with the court. The Company continues to believe the counterclaims brought by Appian against the Company are without merit, and the Company intends to vigorously pursue its claims against Appian and defend against the counterclaims brought against the Company in this matter. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the Company’s belief that the damages claimed by Appian fail to satisfy the required legal standard, the status of the proceeding, and due to the uncertainty as to how a jury may rule if this ultimately proceeds to trial.
Appian Corp. v. Pegasystems Inc. & Youyong Zou
As previously reported, the Company is a defendant in litigation brought by Appian that is currently being tried in Virginia (the “Court”) titled Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). The jury trial began on March 21, 2022. On April 13, 2022, Appian withdrew its claim against the Company for tortious interference with business expectancy. On that same day, in the course of making determinations on various motions, the Court stated that if the jury finds that the Company misappropriated information that constituted Appian trade secrets and finds that the Company incorporated those trade secrets into the Company’s products or the Company’s marketing materials, the burden will then shift to the Company to prove that the sales Appian seeks as damages were not the result of the alleged misappropriation and use of the alleged trade secrets. This legal standard has not previously been adopted by the Virginia courts. The Company continues to believe that its sales of the products at issue were not caused by, or the result of, the alleged misappropriation of trade secrets, and is submitting evidence to the jury to that effect. The Company is unable to reasonably estimate possible damages because, among other things, of the uncertainty as to how a jury may decide and the parties’ existing grounds for appeal based on rulings to date in the proceeding.
ITEM 1A.RISK FACTORS

We

ITEM 1A.     RISK FACTORS
The risk factors set forth below update the risk factors in our Annual Report on Form 10-K filed with the SEC on February 16, 2022.
In addition to the risk factors set forth below, we encourage you to carefully consider the risk factors identified in Part I, Item 1A. “Risk Factors” inof our Annual Report onForm 10-K for the year ended December 31, 2016.2021, filed with the U.S. Securities and Exchange Commission. These risk factors could materially affect our business, financial condition, and future results, and couldmay cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form10-Q or elsewhere by management from timemanagement.
We face risks related to time. Thereintellectual property claims or appropriation of our intellectual property rights.
We rely primarily on a combination of patent, copyright, trademark, and trade secrets laws, as well as intellectual property and confidentiality agreements to protect our proprietary rights. We also try to control access to and distribution of our technologies and other proprietary information. We have been no material changes during the nine months ended September 30, 2017obtained patents in strategically important global markets relating to the risk factors disclosedarchitecture of our systems. We cannot be certain that such patents will not be challenged, invalidated, or circumvented, or that rights granted thereunder, or the claims contained therein will provide us with competitive advantages. Moreover, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our software or to obtain the use of information that we regard as proprietary. Although we generally enter into intellectual property and confidentiality agreements with our employees and strategic partners, despite our efforts our former employees may seek employment with our business partners, clients, or competitors, and there can be no assurance that the confidential nature of our proprietary information will be maintained. In addition, the laws of some foreign countries do not protect our proprietary rights as effectively as they do in the U.S. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology.
Other companies or individuals have obtained proprietary rights covering a variety of designs, processes, and systems. Third parties have claimed and may in the future claim that we have infringed or otherwise violated their intellectual property. We are currently party to litigation with Appian Corp. - see Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report, and Part I, Item 3 “Legal Proceedings” and Note 19 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of our Annual Report filed with the SEC on Form10-KFebruary 16, 2022.
27

Although we attempt to limit the amount and type of our contractual liability for infringement or other violation of the proprietary rights of third parties and assert ownership of work product and intellectual property rights as appropriate, there are often exceptions, and limitations may not be applicable and enforceable in all cases. Even if limitations are found to be applicable and enforceable, our liability to our clients for these types of claims could be material given the size of certain of our transactions. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment and delivery delays, require us to enter into royalty or licensing agreements, or preclude us from making and selling the infringing software, if such proprietary rights are found to be valid. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require substantial effort and cost. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our software and may be unable to compete effectively, which could have a material effect upon our business, operating results, and financial condition.
Intellectual property rights claims by third parties are extremely costly to defend, could require us to pay significant damages, and could limit our ability to use certain technologies.
Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks, and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies can dedicate greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. The litigation may involve patent holding companies or other adverse patent owners that have no relevant product revenues and against which our patents may, therefore, provide little or no deterrence. Third parties have claimed and may claim in the future that we have misappropriated, misused, or infringed other parties' intellectual property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property claims. We are currently party to litigation with Appian Corp. - see Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report, and Part I, Item 3 “Legal Proceedings” and Note 19 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of our Annual Report filed with the SEC on February 16, 2022.
Any litigation regarding intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Significant judgments are required for the year ended December 31, 2016.

determination of probability and the range of the outcomes in any legal dispute, and the estimates are based only on the information available to us at the time. Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods which may have a material impact on our results of operations and financial position. Intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from manufacturing or licensing certain of our products, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments to our customers. Any of these could seriously harm our business.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information regarding our repurchases

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer purchases of our commonequity securities
Common stock duringrepurchased in the three months ended SeptemberMarch 31, 2022:
(in thousands, except per share amounts)
Total Number of Shares Purchased (1) (2)
Average 
Price Paid
per Share (1) (2)
Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2)
Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs (2)
January 1, 2022 - January 31, 2022118 $99.46 101 $12,584 
February 1, 2022 - February 28, 2022141 90.97 103 $3,085 
March 1, 2022 - March 31, 2022196 82.52 38 $— 
455 $89.54 242 
(1) Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts.
(2) On June 8, 2021, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2017:

Period

  Total Number
of Shares
Purchased
(in thousands)		   Average Price
Paid per
Share		   Total Number of
Shares Purchased as Part
of Publicly Announced
Share Repurchase
Program (1)
(in thousands)		   Approximate Dollar
Value of Shares That
May Yet Be Purchased at
Period End Under Publicly
Announced Share
Repurchased Programs (1)
(in thousands)		 

July 1, 2017 - July 31, 2017

   12   $58.54    —     $36,399 

August 1, 2017 - August 31, 2017

   55    56.16    —      36,399 

September 1, 2017 - September 30, 2017

   108    56.56    —      36,399 
  

 

 

       

Total

   175   $56.57     
  

 

 

       

1.Shares withheld to cover the option exercise price and statutory tax withholding obligations under the net settlement provisions of the company’s stock compensation awards have been included in the above table.

2.Since 2004, our Board of Directors has approved stock repurchase programs that have authorized the repurchase, in the aggregate, of up to $195 million of our common stock. On May 30, 2017, we announced that our Board of Directors extended the expiration date of the current stock repurchase program to June 30, 2018 (the “Current Program”). Under the Current Program, purchases may be made from time to time on the open market or in privately negotiated transactions. Shares may be repurchased in such amounts2022 and increased the remaining stock repurchase authority to $60 million. See "Liquidity and Capital Resources" in Part I, Item 2 of this Quarterly Report for additional information.
ITEM 5. OTHER INFORMATION
Effective on March 31, 2022, we entered into an amendment (the “Amendment”) to our $100 million senior secured revolving credit agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”). The Amendment modifies the financial covenants as reflected in Note 8. Debt of Part I, Item 1 of this Quarterly Report on Form 10-Q and transitions the Credit Agreement from the U.S. dollar London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) for floating rate loan commitments under the Credit Agreement.
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The description of the Credit Agreement contained herein is qualified in its entirety by reference to the Credit Agreement, a copy of which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.
ITEM 6.     EXHIBITS
Exhibit No.DescriptionIncorporation by ReferenceFiled Herewith
FormExhibitFiling Date
3.110-Q3.1November 4, 2014
3.28-K3.2June 15, 2020
10.1**X
31.1X
31.2X
32++X
101.INSInline 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.X
101.SCHInline XBRL Taxonomy Extension Schema Document.X
101.CALInline XBRL Taxonomy Calculation Linkbase Document.X
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.X
101.LABInline XBRL Taxonomy Label Linkbase Document.X
101.PREInline XBRL Taxonomy Presentation Linkbase Document.X
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)X
++ Indicates that the exhibit is being furnished with this report and is not filed as market conditions warrant, subject to regulatory and other considerations. We have established apre-arranged stock repurchase plan, intended to comply with the requirements of Rule10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule10b-18 under the Exchange Act (the“10b5-1 Plan”). All share repurchases under the Current Program during closed trading window periods will be made pursuant to the10b5-1 Plan.

ITEM 6.EXHIBITS

The following exhibits are filed or furnished, as the case may be, as part of it.

** Certain portions of this report.

EXHIBIT INDEX

Exhibit No.

Description

31.1Certification pursuant to Exchange Act Rules13a-14 and15d-14 of the Chief Executive Officer.
31.2Certification pursuant to Exchange Act Rules13a-14 and15d-14 of the Chief Financial Officer.
32Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.
101.INSXBRL Instance document.
101.SCHXBRL Taxonomy Extension Schema Document.
101.CALXBRL Taxonomy Calculation Linkbase Document.
101.DEFXBRL Taxonomy Extension Definition Linkbase Document.
101.LABXBRL Taxonomy Label Linkbase Document.
101.PREXBRL Taxonomy Presentation Linkbase Document.

++Management contracts and compensatory plan or arrangements

exhibit are considered confidential and have been omitted as allowed under SEC rules and regulations.

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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.
Date:Dated:April 28, 2022November 8, 2017By:By:/s/ KENNETH STILLWELL
Kenneth Stillwell
Chief FinancialOperating Officer and Chief AdministrativeFinancial Officer
(Principal Financial Officer)

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