Company Quick10K Filing
Pegasystems
Price67.48 EPS-1
Shares79 P/E-71
MCap5,353 P/FCF-398
Net Debt-113 EBIT-118
TEV5,240 TEV/EBIT-44
TTM 2019-09-30, in MM, except price, ratios
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 2020-06-23
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

PEGA 10Q Quarterly Report

Part I - Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 q12020ex-311.htm
EX-31.2 q12020ex-312.htm
EX-32 q12020ex-32.htm

Pegasystems Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
1.10.90.70.40.20.02012201420172020
Assets, Equity
0.30.20.10.1-0.0-0.12012201420172020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12012201420172020
Ops, Inv, Fin

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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, 2020
OR
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) 
____________________________
Massachusetts04-2787865
(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 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 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
x
Accelerated filer
Non-accelerated filerSmaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
There were 80,089,203 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on April 13, 2020.


Table of Contents

PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

Page
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three months ended March 31, 2020 and 2019
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signature
 
2

Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1.  UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

March 31, 2020December 31, 2019
Assets
Current assets:
Cash and cash equivalents$538,142  $68,363  
Accounts receivable191,533  199,720  
Unbilled receivables182,399  180,219  
Other current assets72,000  57,308  
Total current assets984,074  505,610  
Unbilled receivables
110,393  121,736  
Goodwill78,498  79,039  
Other long-term assets301,428  278,427  
Total assets$1,474,393  $984,812  
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$27,770  $17,475  
Accrued expenses36,985  48,001  
Accrued compensation and related expenses59,928  104,126  
Deferred revenue197,018  190,080  
Other current liabilities17,790  18,273  
Total current liabilities339,491  377,955  
Convertible senior notes, net505,108    
Operating lease liabilities47,919  52,610  
Other long-term liabilities15,264  15,237  
Total liabilities907,782  445,802  
Stockholders’ equity:
Preferred stock,1,000 shares authorized; none issued
    
Common stock, 200,000 shares authorized; 80,076 and 79,599 shares issued and outstanding at
March 31, 2020 and December 31, 2019, respectively
801  796  
Additional paid-in capital196,310  140,523  
Retained earnings383,142  410,919  
Accumulated other comprehensive (loss) (13,642) (13,228) 
Total stockholders’ equity566,611  539,010  
Total liabilities and stockholders’ equity$1,474,393  $984,812  

See notes to unaudited condensed consolidated financial statements.
3


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

Three Months Ended
March 31,
20202019
Revenue
Software license$93,916  $63,264  
Maintenance73,695  67,706  
Services97,980  81,576  
Total revenue265,591  212,546  
Cost of revenue
Software license684  1,378  
Maintenance5,576  6,335  
Services73,268  66,724  
Total cost of revenue79,528  74,437  
Gross profit  186,063  138,109  
Operating expenses
Selling and marketing136,024  108,865  
Research and development58,727  50,596  
General and administrative15,630  12,676  
Total operating expenses210,381  172,137  
(Loss) from operations (24,318) (34,028) 
Foreign currency transaction (loss) (5,947) (3,712) 
Interest income  607  723  
Interest expense  (2,306)   
Loss on capped call transactions  (18,592)   
Other income, net  1,374    
(Loss) before (benefit from) income taxes (49,182) (37,017) 
(Benefit from) income taxes (23,810) (8,300) 
Net (loss) $(25,372) $(28,717) 
(Loss) per share 
Basic$(0.32) $(0.37) 
Diluted$(0.32) $(0.37) 
Weighted-average number of common shares outstanding
Basic79,808  78,584  
Diluted79,808  78,584  

See notes to unaudited condensed consolidated financial statements.
4


PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
(in thousands)

Three Months Ended
March 31,
20202019
Net (loss)$(25,372) $(28,717) 
Other comprehensive (loss) income, net of tax 
Unrealized gain on available-for-sale securities  100  374  
Foreign currency translation adjustments(514) 1,627  
Total other comprehensive (loss) income, net of tax (414) 2,001  
Comprehensive (loss) $(25,786) $(26,716) 

See notes to unaudited condensed consolidated financial statements.
5



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, 201878,526  $785  $123,205  $510,863  $(13,322) $621,531  
Repurchase of common stock(144) (1) (7,586) —  —  (7,587) 
Issuance of common stock for share-based compensation plans514  5  (14,843) —  —  (14,838) 
Stock-based compensation—  —  18,406  —  —  18,406  
Cash dividends declared ($0.03 per share)
—  —  —  (2,367) —  (2,367) 
Other comprehensive income—  —  —  —  2,001  2,001  
Net (loss)—  —  —  (28,717) —  (28,717) 
March 31, 201978,896  $789  $119,182  $479,779  $(11,321) $588,429  
December 31, 201979,599  $796  $140,523  $410,919  $(13,228) $539,010  
Equity component of convertible senior notes, net—  —  61,604  —  —  61,604  
Repurchase of common stock(87) (1) (5,999) —  —  (6,000) 
Issuance of common stock for share-based compensation plans564  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, 202080,076  $801  $196,310  $383,142  $(13,642) $566,611  

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,
20202019
Operating activities
Net (loss) $(25,372) $(28,717) 
Adjustments to reconcile net (loss) to cash (used in) provided by operating activities 
Stock-based compensation23,175  18,350  
Loss on capped call transactions18,592    
Deferred income taxes(9,231) 1,455  
Amortization of deferred contract costs8,497  8,301  
Lease expense3,852  3,403  
Amortization of debt discount and issuance costs1,719    
Amortization of intangible assets and depreciation4,919  6,755  
Amortization of investments   315  
Foreign currency transaction loss  5,947  3,712  
Other non-cash(1,374) 16  
Change in operating assets and liabilities, net(49,047) 9,113  
Cash (used in) provided by operating activities (18,323) 22,703  
Investing activities
Purchases of investments(1,490) (7,224) 
Proceeds from maturities and called investments  8,548  
Sales of investments1,424    
Investment in property and equipment(12,496) (2,790) 
Cash (used in) investing activities (12,562) (1,466) 
Financing activities
Proceeds from issuance of convertible senior notes600,000    
Payment of debt issuance costs(14,527)   
Purchase of capped calls related to convertible senior notes(51,900)   
Dividend payments to shareholders(2,388) (2,363) 
Common stock repurchases(29,011) (23,224) 
Cash provided by (used in) financing activities 502,174  (25,587) 
Effect of exchange rate changes on cash and cash equivalents(1,510) 295  
Net increase (decrease) in cash and cash equivalents 469,779  (4,055) 
Cash and cash equivalents, beginning of period68,363  114,422  
Cash and cash equivalents, end of period$538,142  $110,367  

See notes to unaudited condensed consolidated financial statements.
7

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION
Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.
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.
The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2020.
2. NEW ACCOUNTING PRONOUNCEMENTS
Financial instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 accounts receivable, upon initial recognition of that financial asset using a forward-looking expected loss model, rather than an incurred loss model. Credit losses relating to available-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 Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material effect on the Company’s financial position or results of operations.
3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables
(in thousands)
March 31, 2020December 31, 2019
Accounts receivable$191,533  $199,720  
Unbilled receivables182,399  180,219  
Long-term unbilled receivables110,393  121,736  
$484,325  $501,675  
Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time. They are expected to be billed in the future as follows:
(Dollars in thousands)
March 31, 2020
1 year or less$182,399  62 %
1-2 years88,928  31 %
2-5 years21,465  7 %
$292,792  100 %
Unbilled receivables based upon contract effective date:
(Dollars in thousands)
March 31, 2020
2020$40,533  14 %
2019102,154  35 %
201855,484  19 %
201744,691  15 %
2016 and prior49,930  17 %
$292,792  100 %
8

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



Contract assets and deferred revenue
(in thousands)
March 31, 2020December 31, 2019
Contract assets (1)
$6,195  $5,558  
Long-term contract assets (2)
5,664  5,420  
$11,859  $10,978  
Deferred revenue$197,018  $190,080  
Long-term deferred revenue (3)
5,630  5,407  
$202,648  $195,487  
(1) Included in other current assets. (2) Included in other long-term assets. (3) Included in other long-term liabilities.
Contract assets are client committed amounts for which revenue recognized exceeds the amount billed to the client and the right to payment is subject to conditions other than the passage of time, such as the completion of a related performance obligation. Deferred revenue consists of billings and payments received in advance of revenue recognition. Contract assets and deferred revenue are netted at the contract level for each reporting period.
The change in deferred revenue in the three months ended March 31, 2020 was primarily due to new billings in advance of revenue recognition, partially offset by revenue recognized during the period that was included in deferred revenue at December 31, 2019.
4. DEFERRED CONTRACT COSTS
(in thousands)
March 31, 2020December 31, 2019
Deferred contract costs (1)
$81,452  $85,314  
(1) Included in other long-term assets.
Three Months Ended
March 31,
(in thousands)20202019
Amortization of deferred contract costs (1)
$8,497  $8,301  
(1) Included in selling and marketing expenses.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Change in the carrying amount of goodwill:
(in thousands)Three Months Ended
March 31, 2020
Balance as of January 1,$79,039  
Currency translation adjustments(541) 
Balance as of March 31,$78,498  
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives:
March 31, 2020
(in thousands)Useful LivesCostAccumulated
Amortization
Net Book Value (1)
Client-related
4 - 10 years
$63,096  $(54,703) $8,393  
Technology
2 - 10 years
64,842  (54,546) 10,296  
Other
1 - 5 years
5,361  (5,361)   
$133,299  $(114,610) $18,689  
(1) Included in other long-term assets.
December 31, 2019
(in thousands)Useful LivesCostAccumulated Amortization
Net Book Value (1)
Client-related
4 - 10 years
$63,140  $(54,368) $8,772  
Technology
2 - 10 years
64,843  (53,898) 10,945  
Other
1 - 5 years
5,361  (5,361)   
$133,344  $(113,627) $19,717  
(1) Included in other long-term assets.
9

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



Amortization of intangible assets:
(in thousands)Three Months Ended
March 31,
20202019
Cost of revenue$647  $1,332  
Selling and marketing371  1,603  
$1,018  $2,935  

6. DEBT
Convertible senior notes and capped calls
Convertible senior notes
In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement to certain initial purchasers in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act in transactions not involving any public offering, for resale by the initial purchasers to persons whom the initial purchasers believe are qualified institutional buyers pursuant to Rule144A under the Securities Act. This included $75 million in aggregate principal amount of the Notes that the Company issued resulting from initial purchasers fully exercising their option to purchase additional Notes. There are no required principal payments prior to the maturity of the Notes. The Notes will accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2020. The proceeds of the issuance were used for the Capped Call Transactions (described below), working capital, and other general corporate purposes.
Total net proceeds from the Notes and Capped Call Transactions:

(in thousands)Amount
Principal$600,000  
Less: issuance costs(14,527) 
Less: Capped Call Transactions(51,900) 
$533,573  
Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election. Before September 1, 2024, noteholders may convert their Notes in the following circumstances:
During any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of common stock exceeds one hundred and thirty percent (130%) of the conversion price for each of at least twenty (20) trading days (whether or not consecutive) during the thirty (30) consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter.
During the five (5) consecutive business days immediately after any five (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 ninety eight percent (98%) of the product of the last reported sale price per share of common stock on such trading day and the conversion rate on such trading day.
Upon the occurrence of certain corporate events or distributions, or if the Company calls all or any Notes for redemption, then the noteholder of any Note may convert such Note at any time before the close of business on the business day immediately before the related redemption date (or, if the Company fails to pay the redemption price due on such redemption date in full, at any time until the Company pays such redemption price in full).
As of March 31, 2020, no Notes were eligible for conversion at the election of the noteholder.
The initial conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, which represents an initial conversion price of approximately $135.05 per share of common stock. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate. The conversion rate will be adjusted upon the occurrence of certain events including spin offs, tender offers, exchange offers and certain stockholder distributions.
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.
10

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



If certain corporate events that constitute a “Fundamental Change” (as described below) occur at any time, each noteholder will have the right, at such noteholder’s option, to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or an integral 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 events such as mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.
In accounting for the transaction, the Notes have been separated into liability and equity components.
The initial carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature.
The equity component was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.
The excess of the principal amount of the Notes over the initial carrying amount of the liability component, the debt discount, is amortized as interest expense over the contractual term of the Notes.
The Company incurred issuance costs of $14.5 million related to the Notes, which were allocated between liability and equity components of the Notes proportionate to the initial carry amount of the liability and equity components.
Issuance costs attributable to the liability component are netted against the principal balance of the Notes and are amortized as interest expense using the effective interest method over the contractual term of the Notes.
Issuance costs attributable to the equity component are netted with the equity component in additional paid-in capital and are not amortized.
Net carrying amount of the liability component:
(in thousands)March 31, 2020
Principal$600,000  
Unamortized debt discount(82,624) 
Unamortized issuance costs(12,268) 
$505,108  
Net carrying amount of the equity component, included in additional paid in capital:
(in thousands)March 31, 2020
Conversion options (1)
$61,604  
(1) Net of issuance costs and taxes.
Interest expense related to the Notes:
Three Months Ended
March 31,
(in thousands)2020
Contractual interest expense (0.75% coupon)
$450  
Amortization of debt discount (1)
1,497  
Amortization of issuance cost (1)
222  
$2,169  
(1) Amortized based upon an effective interest rate of 4.31%.
Future payments of principal and contractual interest:
March 31, 2020
(in thousands)PrincipalInterestTotal
2020$  $2,338  $2,338  
2021  4,500  4,500  
2022  4,500  4,500  
2023  4,500  4,500  
2024  4,500  4,500  
2025600,000  1,488  601,488  
$600,000  $21,826  $621,826  


PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



Capped call transactions
In February 2020, the Company entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions cover approximately 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s common stock and are generally expected to reduce potential dilution to the common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The cap price of the Capped Call Transactions is initially $196.44. The Capped Call Transactions are classified as “other long-term assets” and re-measured to fair value at the end of each reporting period, resulting in a non-operating gain or loss.
Change in value of Capped Call Transactions:
(in thousands)Three Months Ended
March 31, 2020
Value at issuance$51,900  
Fair value adjustment(18,592) 
Balance as of March 31,$33,308  
Credit Facility
In November 2019, and as amended in February 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 circumstances, the Credit Facility allows the Company to increase the aggregate commitment up to $200 million.
The Credit Facility 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 that consist of a maximum net consolidated leverage ratio of 3.5 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date.
As of March 31, 2020 and December 31, 2019, the Company had no outstanding borrowings under the Credit Facility.
7. FAIR VALUE MEASUREMENTS
Assets and liabilities measured at fair value on a recurring basis
The Company records its cash equivalents, Capped Call Transactions, and investments in privately-held companies at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.
As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows:
Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2 - significant other inputs that are observable either directly or indirectly; and
Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The Company’s cash equivalents are composed of money market funds which are classified within Level 1 in the fair value hierarchy. The Company’s investments in privately-held companies are classified within Level 3 in the fair value hierarchy. The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. These valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable. The Company applies significant judgment in its determination of expected volatility. The Company considers both historical and implied volatility levels of the underlying equity security and apply limited consideration of historical peer group volatility levels.
The Company’s assets and liabilities measured at fair value on a recurring basis were:
March 31, 2020December 31, 2019
(in thousands)Level 1Level 2Level 3TotalLevel 1