Pegasystems Earnings 2021-03-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

pega-20210331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

_____________________________________


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

For the quarterly period ended March 31, 2021


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

Commission File Number: 1-11859

____________________________

PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter)

____________________________

Massachusetts

04-2787865

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

One Rogers Street, Cambridge, MA 02142-1209

(Address of principal executive offices, including zip code)

(617) 374-9600

(Registrant’s telephone number, including area code)

____________________________

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


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

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

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

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

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

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

Table of Contents

PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020			3
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020			4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three months ended March 31, 2021 and 2020			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2021 and 2020			6
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020			7
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			24
Item 4. Controls and Procedures			25

PART II - OTHER INFORMATION

Item 1A. Risk Factors			26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 6. Exhibits			26

Signature			27

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
	March 31, 2021		December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	172,708	$	171,899
Marketable securities	269,650		293,269
Total cash, cash equivalents, and marketable securities	442,358		465,168
Accounts receivable	159,324		215,827
Unbilled receivables	228,603		207,155
Other current assets	91,868		88,760
Total current assets	922,153		976,910
Unbilled receivables	108,048		113,278
Goodwill	82,037		79,231
Other long-term assets	416,265		434,843
Total assets	$	1,528,503	$	1,604,262
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	24,426	$	24,028
Accrued expenses	59,765		59,261
Accrued compensation and related expenses	59,490		123,012
Deferred revenue	244,170		232,865
Other current liabilities	16,599		20,969
Total current liabilities	404,450		460,135
Convertible senior notes, net	588,418		518,203
Operating lease liabilities	36,471		59,053
Other long-term liabilities	20,239		24,699
Total liabilities	1,049,578		1,062,090
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued	—		—
Common stock, 200,000 shares authorized; 81,246 and 80,890 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively	812		809
Additional paid-in capital	140,558		204,432
Retained earnings	340,223		339,879
Accumulated other comprehensive (loss)	(2,668)		(2,948)
Total stockholders’ equity	478,925		542,172
Total liabilities and stockholders’ equity	$	1,528,503	$	1,604,262

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
	Three Months Ended March 31,
		2021		2020
Revenue
Software license		$	116,961	$	93,916
Maintenance		75,561		73,695
Pega Cloud		67,858		43,466
Consulting		53,119		54,514
Total revenue		313,499		265,591
Cost of revenue
Software license		650		684
Maintenance		5,786		5,576
Pega Cloud		22,557		17,533
Consulting		53,454		55,735
Total cost of revenue		82,447		79,528
Gross profit		231,052		186,063
Operating expenses
Selling and marketing		148,739		136,024
Research and development		62,442		58,727
General and administrative		18,270		15,630
Total operating expenses		229,451		210,381
Income (loss) from operations		1,601		(24,318)
Foreign currency transaction (loss)		(5,098)		(5,947)
Interest income		153		607
Interest expense		(1,880)		(2,306)
(Loss) on capped call transactions		(19,117)		(18,592)
Other income, net		106		1,374
(Loss) before (benefit from) income taxes		(24,235)		(49,182)
(Benefit from) income taxes		(17,618)		(23,810)
Net (loss)		$	(6,617)	$	(25,372)
(Loss) per share
Basic		$	(0.08)	$	(0.32)
Diluted		$	(0.08)	$	(0.32)
Weighted-average number of common shares outstanding
Basic		81,004		79,808
Diluted		81,004		79,808

See notes to unaudited condensed consolidated financial statements.


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

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)		Total Stockholders’ Equity
	Number of Shares	Amount
December 31, 2019	79,599	$	796	$	140,523	$	410,919	$	(13,228)	$	539,010
Equity component of convertible senior notes, net	—	—		61,604		—		—		61,604
Repurchase of common stock	(87)	(1)		(5,999)		—		—		(6,000)
Issuance of common stock for stock compensation plans	564	6		(23,017)		—		—		(23,011)
Stock-based compensation	—	—		23,199		—		—		23,199
Cash dividends declared ($0.03 per share)	—	—		—		(2,405)		—		(2,405)
Other comprehensive (loss)	—	—		—		—		(414)		(414)
Net (loss)	—	—		—		(25,372)		—		(25,372)
March 31, 2020	80,076	$	801	$	196,310	$	383,142	$	(13,642)	$	566,611
















December 31, 2020	80,890	$	809	$	204,432	$	339,879	$	(2,948)	$	542,172
Cumulative-effect adjustment from adoption of ASU 2020-06, net	—	—		(61,604)		9,399		—		(52,205)
Repurchase of common stock	(70)	(1)		(9,145)		—		—		(9,146)
Issuance of common stock for stock compensation plans	402	4		(25,513)		—		—		(25,509)
Issuance of common stock under the employee stock purchase plan	24	—		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, 2021	81,246	$	812	$	140,558	$	340,223	$	(2,668)	$	478,925

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
	Three Months Ended March 31,
	2021		2020
Operating activities
Net (loss)	$	(6,617)	$	(25,372)
Adjustments to reconcile net (loss) to cash provided by (used in) operating activities
Stock-based compensation	30,100		23,175
Loss on capped call transactions	19,117		18,592
Deferred income taxes	(15,068)		(9,231)
Amortization of deferred commissions	11,496		8,497
Amortization of debt discount and issuance costs	673		1,719
Amortization of intangible assets and depreciation	7,006		4,919
Amortization of investments	1,019		—
Foreign currency transaction loss	5,098		5,947
Other non-cash	(556)		2,478
Change in operating assets and liabilities, net	(30,618)		(49,047)
Cash provided by (used in) operating activities	21,650		(18,323)
Investing activities
Purchases of investments	(21,051)		(1,490)
Proceeds from maturities and called investments	40,867		—
Sales of investments	2,450		1,424
Payments for acquisitions, net of cash acquired	(4,993)		—
Investment in property and equipment	(1,784)		(12,496)
Cash provided by (used in) investing activities	15,489		(12,562)
Financing activities
Proceeds from issuance of convertible senior notes	—		600,000
Purchase of capped calls related to convertible senior notes	—		(51,900)
Payment of debt issuance costs	—		(14,527)
Proceeds from employee stock purchase plan	2,288		—
Dividend payments to stockholders	(2,427)		(2,388)




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

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

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

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

All intercompany transactions and balances were eliminated in consolidation. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2021.

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

Convertible debt

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, after adoption, entities will no longer separately present in stockholders’ equity an embedded conversion feature for such debt. Additionally, the debt discount resulting from the separation of the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. The standard also requires the convertible instruments’ impact on diluted earnings per share (“EPS”) be determined using the if-converted method.

The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021. Upon adoption, the book value of the Company’s Convertible Senior Notes (the “Notes”) increased by $69.5 million to $587.7 million, and retained earnings increased by $9.4 million. The retained earnings adjustment reflects the tax effected difference between the value of the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.

See "Note 8. Debt" for additional information.

NOTE 3. MARKETABLE SECURITIES


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

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

NOTE 4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables


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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Unbilled receivables

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

Unbilled receivables by expected billing date:


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

Unbilled receivables by contract effective date:


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

Major clients

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

Contract assets

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


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

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

Deferred revenue

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


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

(1) Included in other long-term liabilities.

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

NOTE 5. DEFERRED COMMISSIONS


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

(1) Included in other long-term assets.


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

(1) Included in selling and marketing expense.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6. GOODWILL AND OTHER INTANGIBLES

Goodwill

Change in goodwill:


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

Intangibles

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


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

(1) Included in other long-term assets.


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

(1) Included in other long-term assets.

Amortization of intangible assets:


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

		$	1,002	$	1,018

Future estimated intangibles assets amortization:


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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7. LEASES

Corporate headquarters

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

Expense


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

Right of use assets and lease liabilities


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

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

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


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

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

Maturities of lease liabilities:


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

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

Cash flow information


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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8. DEBT

Convertible senior notes and capped calls

Convertible senior notes

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

Conversion rights

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

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

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

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

•Upon certain corporate events or distributions or if the Company calls any Notes for redemption, noteholders may convert before the close of business on the business day immediately before the related redemption date (or, if the Company fails to pay the redemption price in full on the redemption date, until the Company pays the redemption price).

As of March 31, 2021, the Notes were not eligible for conversion at the noteholders’ election.

Repurchase rights

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

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

Impact of the Notes

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

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

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

•The equity component was recorded as an increase to additional paid-in capital and not remeasured.

Upon adoption of ASU 2020-06, the book value of the Company’s Convertible Senior Notes (the “Notes”) increased by $69.5 million to $587.7 million, and retained earnings increased by $9.4 million. The retained earnings adjustment reflects the tax effected difference between the value of the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Carrying value of the Notes:


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

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

Interest expense related to the Notes:


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

Future payments of principal and contractual interest:


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

Capped call transactions

In February 2020, the Company entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions cover approximately 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s common stock. The Capped Call Transactions are generally expected to reduce common stock dilution and/or offset any potential cash payments the Company is required to make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The cap price of the Capped Call Transactions is subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including mergers and tender offers.

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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Change in capped call transactions:


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

Credit facility

In November 2019, and as amended as of February 2020, July 2020, and September 2020, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). The Company may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $200 million. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions.

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

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

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

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

NOTE 9. FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis

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

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

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

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

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

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

Assets and liabilities measured at fair value on a recurring basis:

March 31, 2021

December 31, 2020

(in thousands)

Level 1

Price	67.48	EPS	-1
Shares	79	P/E	-71
MCap	5,353	P/FCF	-398
Net Debt	-113	EBIT	-118
TEV	5,240	TEV/EBIT	-44
TTM 2019-09-30, in MM, except price, ratios

10-Q	2021-03-31	Filed 2021-04-28
10-K	2020-12-31	Filed 2021-02-17
10-Q	2020-09-30	Filed 2020-10-28
10-Q	2020-06-30	Filed 2020-07-28
10-Q	2020-03-31	Filed 2020-04-29
10-K	2019-12-31	Filed 2020-02-12
10-Q	2019-09-30	Filed 2019-11-07
10-Q	2019-06-30	Filed 2019-08-07
10-Q	2019-03-31	Filed 2019-05-07
10-K	2018-12-31	Filed 2019-02-20
10-Q	2018-09-30	Filed 2018-11-07
10-Q	2018-06-30	Filed 2018-08-08
10-Q	2018-03-31	Filed 2018-05-10
10-K	2017-12-31	Filed 2018-02-26
10-Q	2017-09-30	Filed 2017-11-08
10-Q	2017-06-30	Filed 2017-08-09
10-Q	2017-03-31	Filed 2017-05-10
10-K	2016-12-31	Filed 2017-02-24
10-Q	2016-09-30	Filed 2016-11-02
10-Q	2016-06-30	Filed 2016-08-03
10-Q	2016-03-31	Filed 2016-05-05
10-K	2015-12-31	Filed 2016-02-25
10-Q	2015-09-30	Filed 2015-10-27
10-Q	2015-06-30	Filed 2015-07-29
10-Q	2015-03-31	Filed 2015-05-06
10-K	2014-12-31	Filed 2015-02-26
10-Q	2014-09-30	Filed 2014-11-04
10-Q	2014-06-30	Filed 2014-08-05
10-Q	2014-03-31	Filed 2014-05-06
10-K	2013-12-31	Filed 2014-02-25
10-Q	2013-09-30	Filed 2013-11-12
10-Q	2013-06-30	Filed 2013-08-08
10-Q	2013-03-31	Filed 2013-05-06
10-K	2012-12-31	Filed 2013-02-20
10-Q	2012-09-30	Filed 2012-11-08
10-Q	2012-06-30	Filed 2012-08-09
10-Q	2012-03-31	Filed 2012-05-03
10-K	2011-12-31	Filed 2012-02-29
10-Q	2011-09-30	Filed 2011-11-09
10-Q	2011-06-30	Filed 2011-08-09
10-Q	2011-03-31	Filed 2011-05-10
10-K	2010-12-31	Filed 2011-03-16
10-Q	2010-09-30	Filed 2010-11-09
10-Q	2010-06-30	Filed 2010-08-09
10-Q	2010-03-31	Filed 2010-04-22
10-K	2009-12-31	Filed 2010-02-22

8-K	2020-10-28
8-K	2020-07-28
8-K	2020-06-23
8-K	2020-06-12
8-K	2020-04-29
8-K	2020-04-29
8-K	2020-03-03
8-K	2020-02-19
8-K	2020-02-18
8-K	2020-02-18
8-K	2020-02-12
8-K	2020-02-04
8-K	2019-11-07
8-K	2019-08-07
8-K	2019-08-05
8-K	2019-06-25
8-K	2019-05-07
8-K	2019-04-18
8-K	2019-03-15
8-K	2019-03-06
8-K	2019-02-20
8-K	2019-02-06
8-K	2018-12-19
8-K	2018-11-07
8-K	2018-11-07
8-K	2018-08-08
8-K	2018-06-28
8-K	2018-06-15
8-K	2018-06-04
8-K	2018-05-10
8-K	2018-04-23
8-K	2018-03-05
8-K	2018-02-26
8-K	2018-02-26

EX-31.1	q12021_ex-311.htm
EX-31.2	q12021_ex-312.htm
EX-32	q12021_ex-32.htm

PEGA 10Q Quarterly Report

Pegasystems Earnings 2021-03-31