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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 June 30, 2022

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)
____________________________

Massachusetts | 04-2787865
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.)

One Main Street, Cambridge, MA 02142
(Address of principal executive offices, including zip code)
(617) 374-9600
(Registrant’s telephone number, including area code)
____________________________
Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer | x | 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 81,952,276 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on July 19, 2022.

Table of Contents
PEGASYSTEMS INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

| Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements |
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 | 3
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021 | 4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2022 and 2021 | 5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2022 and 2021 | 6
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 | 7
Notes to Unaudited Condensed Consolidated Financial Statements | 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 26
Item 4. Controls and Procedures | 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings | 28
Item 1A. Risk Factors | 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 29
Item 5. Other Information | 29
Item 6. Exhibits | 30
Signature | 31

2

Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
| June 30, 2022 |  | December 31, 2021
Assets |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 109,275 |  |  | $ | 159,965 |
Marketable securities | 187,613 |  |  | 202,814 |
Total cash, cash equivalents, and marketable securities | 296,888 |  |  | 362,779 |
Accounts receivable | 171,556 |  |  | 182,717 |
Unbilled receivables | 201,130 |  |  | 226,714 |
Other current assets | 70,633 |  |  | 68,008 |
Total current assets | 740,207 |  |  | 840,218 |
Unbilled receivables | 115,901 |  |  | 129,789 |
Goodwill | 81,717 |  |  | 81,923 |
Other long-term assets | 320,557 |  |  | 541,601 |
Total assets | $ | 1,258,382 |  |  | $ | 1,593,531 |
Liabilities and stockholders’ equity |  |  |
Current liabilities: |  |  |
Accounts payable | $ | 21,465 |  |  | $ | 15,281 |
Accrued expenses | 63,120 |  |  | 63,890 |
Accrued compensation and related expenses | 73,945 |  |  | 120,946 |
Deferred revenue | 269,121 |  |  | 275,844 |
Other current liabilities | 7,800 |  |  | 9,443 |
Total current liabilities | 435,451 |  |  | 485,404 |
Convertible senior notes, net | 592,161 |  |  | 590,722 |
Operating lease liabilities | 84,170 |  |  | 87,818 |
Other long-term liabilities | 12,821 |  |  | 13,499 |
Total liabilities | 1,124,603 |  |  | 1,177,443 |
Commitments and contingencies (Note 14) |  |  |
Stockholders’ equity: |  |  |
Preferred stock, 1,000 shares authorized; none issued | — |  |  | — |
Common stock, 200,000 shares authorized; 81,940 and 81,712 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | 819 |  |  | 817 |
Additional paid-in capital | 170,251 |  |  | 145,810 |
(Accumulated deficit) retained earnings | (15,140) |  |  | 276,449 |
Accumulated other comprehensive (loss) | (22,151) |  |  | (6,988) |
Total stockholders’ equity | 133,779 |  |  | 416,088 |
Total liabilities and stockholders’ equity | $ | 1,258,382 |  |  | $ | 1,593,531 |

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 June 30, |  | Six Months Ended June 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Revenue |  |  |  |  |  |  |
Subscription services | $ | 171,832 |  |  | $ | 152,075 |  |  | $ | 341,865 |  |  | $ | 295,494 |
Subscription license | 41,600 |  |  | 104,296 |  |  | 179,133 |  |  | 215,805 |
Perpetual license | 2,266 |  |  | 12,596 |  |  | 9,706 |  |  | 18,048 |
Consulting | 58,639 |  |  | 56,735 |  |  | 119,940 |  |  | 109,854 |
Total revenue | 274,337 |  |  | 325,702 |  |  | 650,644 |  |  | 639,201 |
Cost of revenue |  |  |  |  |  |  |
Subscription services | 36,533 |  |  | 29,046 |  |  | 68,563 |  |  | 57,389 |
Subscription license | 673 |  |  | 585 |  |  | 1,295 |  |  | 1,205 |
Perpetual license | 36 |  |  | 71 |  |  | 70 |  |  | 101 |
Consulting | 57,873 |  |  | 54,829 |  |  | 113,384 |  |  | 108,283 |
Total cost of revenue | 95,115 |  |  | 84,531 |  |  | 183,312 |  |  | 166,978 |
Gross profit | 179,222 |  |  | 241,171 |  |  | 467,332 |  |  | 472,223 |
Operating expenses |  |  |  |  |  |  |
Selling and marketing | 157,198 |  |  | 156,423 |  |  | 319,434 |  |  | 305,162 |
Research and development | 74,341 |  |  | 64,395 |  |  | 145,831 |  |  | 126,837 |
General and administrative | 32,723 |  |  | 19,161 |  |  | 68,487 |  |  | 37,431 |
Total operating expenses | 264,262 |  |  | 239,979 |  |  | 533,752 |  |  | 469,430 |
(Loss) income from operations | (85,040) |  |  | 1,192 |  |  | (66,420) |  |  | 2,793 |
Foreign currency transaction gain (loss) | 1,713 |  |  | (403) |  |  | 4,589 |  |  | (5,501) |
Interest income | 309 |  |  | 236 |  |  | 516 |  |  | 389 |
Interest expense | (1,944) |  |  | (1,959) |  |  | (3,890) |  |  | (3,839) |
(Loss) income on capped call transactions | (18,945) |  |  | 26,309 |  |  | (49,505) |  |  | 7,192 |
Other income, net | 3,785 |  |  | — |  |  | 6,526 |  |  | 106 |
(Loss) income before provision for (benefit from) income taxes | (100,122) |  |  | 25,375 |  |  | (108,184) |  |  | 1,140 |
Provision for (benefit from) income taxes | 186,174 |  |  | (11,916) |  |  | 178,491 |  |  | (29,534) |
Net (loss) income | $ | (286,296) |  |  | $ | 37,291 |  |  | $ | (286,675) |  |  | $ | 30,674 |
(Loss) earnings per share |  |  |  |  |  |  |
Basic | $ | (3.50) |  |  | $ | 0.46 |  |  | $ | (3.51) |  |  | $ | 0.38 |
Diluted | $ | (3.50) |  |  | $ | 0.43 |  |  | $ | (3.51) |  |  | $ | 0.36 |
Weighted-average number of common shares outstanding |  |  |  |  |  |  |
Basic | 81,847 |  |  | 81,316 |  |  | 81,764 |  |  | 81,161 |
Diluted | 81,847 |  |  | 90,320 |  |  | 81,764 |  |  | 86,006 |

See notes to unaudited condensed consolidated financial statements.
4

PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (in thousands)
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Net (loss) income | $ | (286,296) |  |  | $ | 37,291 |  |  | $ | (286,675) |  |  | $ | 30,674 |
Other comprehensive (loss) income, net of tax |  |  |  |  |  |  |
Unrealized (loss) gain on available-for-sale securities | (1,149) |  |  | 121 |  |  | (927) |  |  | 1,131 |
Foreign currency translation adjustments | (11,466) |  |  | 1,461 |  |  | (14,236) |  |  | 731 |
Total other comprehensive (loss) income, net of tax | $ | (12,615) |  |  | $ | 1,582 |  |  | $ | (15,163) |  |  | $ | 1,862 |
Comprehensive (loss) income | $ | (298,911) |  |  | $ | 38,873 |  |  | $ | (301,838) |  |  | $ | 32,536 |

See notes to unaudited condensed consolidated financial statements.
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 Deficit) |  | Accumulated Other Comprehensive (Loss) |  | Total Stockholders’ Equity
| Number of Shares |  | Amount |  |  |  |
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 |
Repurchase of common stock | (81) |  |  | (1) |  |  | (10,245) |  |  | — |  |  | — |  |  | (10,246) |
Issuance of common stock for stock compensation plans | 267 |  |  | 3 |  |  | (16,199) |  |  | — |  |  | — |  |  | (16,196) |
Issuance of common stock under the employee stock purchase plan | 24 |  |  | 1 |  |  | 2,858 |  |  | — |  |  | — |  |  | 2,859 |
Stock-based compensation | — |  |  | — |  |  | 30,698 |  |  | — |  |  | — |  |  | 30,698 |
Cash dividends declared ($0.03 per share) | — |  |  | — |  |  | — |  |  | (2,445) |  |  | — |  |  | (2,445) |
Other comprehensive income | — |  |  | — |  |  | — |  |  | — |  |  | 1,582 |  |  | 1,582 |
Net income | — |  |  | — |  |  | — |  |  | 37,291 |  |  | — |  |  | 37,291 |
June 30, 2021 | 81,456 |  |  | $ | 815 |  |  | $ | 147,670 |  |  | $ | 375,069 |  |  | $ | (1,086) |  |  | $ | 522,468 |
December 31, 2021 | 81,712 |  |  | $ | 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 plans | 297 |  |  | 3 |  |  | (12,131) |  |  | — |  |  | — |  |  | (12,128) |
Issuance of common stock under the employee stock purchase plan | 35 |  |  | — |  |  | 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, 2022 | 81,802 |  |  | $ | 818 |  |  | $ | 141,771 |  |  | $ | 273,615 |  |  | $ | (9,536) |  |  | $ | 406,668 |
Repurchase of common stock | (38) |  |  | — |  |  | (1,925) |  |  | — |  |  | — |  |  | (1,925) |
Issuance of common stock for stock compensation plans | 117 |  |  | 1 |  |  | (3,252) |  |  | — |  |  | — |  |  | (3,251) |
Issuance of common stock under the employee stock purchase plan | 59 |  |  | — |  |  | 2,357 |  |  | — |  |  | — |  |  | 2,357 |
Stock-based compensation | — |  |  | — |  |  | 31,300 |  |  | — |  |  | — |  |  | 31,300 |
Cash dividends declared ($0.03 per share) | — |  |  | — |  |  | — |  |  | (2,459) |  |  | — |  |  | (2,459) |
Other comprehensive (loss) | — |  |  | — |  |  | — |  |  | — |  |  | (12,615) |  |  | (12,615) |
Net (loss) | — |  |  | — |  |  | — |  |  | (286,296) |  |  | — |  |  | (286,296) |
June 30, 2022 | 81,940 |  |  | $ | 819 |  |  | $ | 170,251 |  |  | $ | (15,140) |  |  | $ | (22,151) |  |  | $ | 133,779 |

See notes to unaudited condensed consolidated financial statements.
6

PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
| Six Months Ended June 30,
| 2022 |  | 2021
Operating activities |  |  |
Net (loss) income | $ | (286,675) |  |  | $ | 30,674 |
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities |  |  |
Stock-based compensation | 59,527 |  |  | 60,788 |
Deferred income taxes | 169,105 |  |  | (28,232) |
Loss (gain) on capped call transactions | 49,505 |  |  | (7,192) |
Amortization of deferred commissions | 28,155 |  |  | 21,202 |
Lease expense | 7,832 |  |  | 5,792 |
Amortization of intangible assets and depreciation | 8,175 |  |  | 15,504 |
Foreign currency transaction (gain) loss | (4,589) |  |  | 5,501 |
Other non-cash | (3,479) |  |  | 3,543 |
Change in operating assets and liabilities, net | (32,625) |  |  | (88,170) |
Cash (used in) provided by operating activities | (5,069) |  |  | 19,410 |
Investing activities |  |  |
Purchases of investments | (38,489) |  |  | (51,601) |
Proceeds from maturities and called investments | 34,912 |  |  | 68,798 |
Sales of investments | 14,839 |  |  | 2,450 |
Payments for acquisitions, net of cash acquired | (922) |  |  | (4,993) |
Investment in property and equipment | (11,863) |  |  | (4,161) |
Cash (used in) provided by investing activities | (1,523) |  |  | 10,493 |
Financing activities |  |  |
Proceeds from employee stock purchase plan | 4,803 |  |  | 5,146 |
Dividend payments to stockholders | (4,908) |  |  | (4,865) |
Common stock repurchases | (41,086) |  |  | (60,998) |
Cash (used in) financing activities | (41,191) |  |  | (60,717) |
Effect of exchange rate changes on cash and cash equivalents | (2,907) |  |  | (1,207) |
Net (decrease) in cash and cash equivalents | (50,690) |  |  | (32,021) |
Cash and cash equivalents, beginning of period | 159,965 |  |  | 171,899 |
Cash and cash equivalents, end of period | $ | 109,275 |  |  | $ | 139,878 |

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 the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021.
In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented.
All intercompany transactions and balances were eliminated in consolidation. The operating results for the interim periods presented do not necessarily indicate the expected results for the full year 2022.
Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the current year’s presentation. Such reclassifications did not affect total revenues, operating income, or net income.
NOTE 2. MARKETABLE SECURITIES

| June 30, 2022 |  | December 31, 2021
(in thousands) | Amortized Cost |  | Unrealized Gains |  | Unrealized Losses |  | Fair Value |  | Amortized Cost |  | Unrealized Gains |  | Unrealized Losses |  | Fair Value
Government debt | $ | 2,989 |  |  | $ | — |  |  | $ | (60) |  |  | $ | 2,929 |  |  | $ | 2,000 |  |  | $ | — |  |  | $ | (10) |  |  | $ | 1,990 |
Corporate debt | 188,350 |  |  | — |  |  | (3,666) |  |  | 184,684 |  |  | 201,659 |  |  | 2 |  |  | (837) |  |  | 200,824 |
| $ | 191,339 |  |  | $ | — |  |  | $ | (3,726) |  |  | $ | 187,613 |  |  | $ | 203,659 |  |  | $ | 2 |  |  | $ | (847) |  |  | $ | 202,814 |

As of June 30, 2022, marketable securities’ maturities ranged from July 2022 to November 2024, with a weighted-average remaining maturity of 0.9 years.
NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
Receivables

(in thousands) | June 30, 2022 |  | December 31, 2021
Accounts receivable | $ | 171,556 |  |  | $ | 182,717 |
Unbilled receivables | 201,130 |  |  | 226,714 |
Long-term unbilled receivables | 115,901 |  |  | 129,789 |
| $ | 488,587 |  |  | $ | 539,220 |

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

(Dollars in thousands) | June 30, 2022
1 year or less | $ | 201,130 |  | 63 | %
1-2 years | 78,813 |  | 25 | %
2-5 years | 37,088 |  | 12 | %
| $ | 317,031 |  | 100 | %

Unbilled receivables by contract effective date:

(Dollars in thousands) | June 30, 2022
2022 | $ | 81,887 |  | 26 | %
2021 | 142,578 |  | 45 | %
2020 | 56,283 |  | 18 | %
2019 | 19,928 |  | 6 | %
2018 and prior | 16,355 |  | 5 | %
| $ | 317,031 |  | 100 | %

8

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Major clients
Clients accounting for 10% or more of the Company’s total receivables:

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

* Client accounted for less than 10% of receivables
Contract assets
Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as the completion of a related performance obligation.

(in thousands) | June 30, 2022 |  | December 31, 2021
Contract assets (1) | $ | 12,149 |  |  | $ | 12,530 |
Long-term contract assets (2) | 12,983 |  |  | 10,643 |
| $ | 25,132 |  |  | $ | 23,173 |

(1) Included in other current assets. (2) Included in other long-term assets.
Deferred revenue
Deferred revenue consists of billings and payments received in advance of revenue recognition.

(in thousands) | June 30, 2022 |  | December 31, 2021
Deferred revenue | $ | 269,121 |  |  | $ | 275,844 |
Long-term deferred revenue (1) | 5,417 |  |  | 5,655 |
| $ | 274,538 |  |  | $ | 281,499 |

(1) Included in other long-term liabilities.
The change in deferred revenue in the six months ended June 30, 2022 was primarily due to new billings in advance of revenue recognition offset by $205.0 million of revenue recognized during the period that was included in deferred revenue as of December 31, 2021.
NOTE 4. DEFERRED COMMISSIONS

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

(1) Included in other long-term assets.

| Three Months Ended June 30, |  | Six Months Ended June 30,
(in thousands) | 2022 |  | 2021 |  | 2022 |  | 2021
Amortization of deferred commissions (1) | $ | 10,934 |  |  | $ | 9,706 |  |  | $ | 28,155 |  |  | $ | 21,202 |

(1) Included in selling and marketing expense.
9

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5. GOODWILL AND OTHER INTANGIBLES
Goodwill
Change in goodwill:

| Six Months Ended June 30,
(in thousands) | 2022 |  | 2021
January 1, | $ | 81,923 |  |  | $ | 79,231 |
Acquisition | — |  |  | 2,701 |
Currency translation adjustments | (206) |  |  | 241 |
June 30, | $ | 81,717 |  |  | $ | 82,173 |

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

|  |  | June 30, 2022
(in thousands) | Useful Lives |  | Cost |  | Accumulated Amortization |  | Net Book Value (1)
Client-related | 4-10 years |  | $ | 63,082 |  |  | $ | (57,944) |  |  | $ | 5,138 |
Technology | 2-10 years |  | 68,064 |  |  | (60,211) |  |  | 7,853 |
Other | 1-5 years |  | 5,361 |  |  | (5,361) |  |  | — |
|  |  | $ | 136,507 |  |  | $ | (123,516) |  |  | $ | 12,991 |

(1) Included in other long-term assets.

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

(1) Included in other long-term assets.
Amortization of intangible assets:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(in thousands) | 2022 |  | 2021 |  | 2022 |  | 2021
Cost of revenue | $ | 683 |  |  | $ | 629 |  |  | $ | 1,312 |  |  | $ | 1,258 |
Selling and marketing | 342 |  |  | 373 |  |  | 685 |  |  | 746 |
| $ | 1,025 |  |  | $ | 1,002 |  |  | $ | 1,997 |  |  | $ | 2,004 |

Future estimated intangibles assets amortization:

(in thousands) | June 30, 2022
Remainder of 2022 | $ | 2,098 |
2023 | 3,925 |
2024 | 3,156 |
2025 | 2,611 |
2026 | 874 |
2027 | 327 |
| $ | 12,991 |

NOTE 6. OTHER ASSETS AND LIABILITIES
Other current assets

(in thousands) | June 30, 2022 |  | December 31, 2021
Income tax receivables | $ | 22,982 |  |  | $ | 25,691 |
Contract assets | 12,149 |  |  | 12,530 |
Other | 35,502 |  |  | 29,787 |
| $ | 70,633 |  |  | $ | 68,008 |

10

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other long-term assets

(in thousands) | June 30, 2022 |  | December 31, 2021
Deferred income taxes | $ | 6,092 |  |  | $ | 180,656 |
Deferred commissions | 123,067 |  |  | 135,911 |
Right of use assets | 80,646 |  |  | 87,521 |
Capped call transactions | 10,459 |  |  | 59,964 |
Property and equipment | 34,886 |  |  | 26,837 |
Venture investments | 16,073 |  |  | 7,648 |
Intangible assets | 12,991 |  |  | 14,063 |
Contract assets | 12,983 |  |  | 10,643 |
Other | 23,360 |  |  | 18,358 |
| $ | 320,557 |  |  | $ | 541,601 |

Other current liabilities

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

Other long-term liabilities

(in thousands) | June 30, 2022 |  | December 31, 2021
Deferred revenue | $ | 5,417 |  |  | $ | 5,655 |
Other | 7,404 |  |  | 7,844 |
| $ | 12,821 |  |  | $ | 13,499 |

NOTE 7. LEASES
Corporate headquarters
In February 2021, the Company agreed to accelerate its exit from its previous corporate headquarters to October 1, 2021, in exchange for a one-time payment from its landlord of $18 million, which was amortized over the remaining lease term. The exit accelerated depreciation on the related leasehold improvements and reduced the Company’s future lease liabilities by $21.1 million and right of use assets by $20.3 million. On March 31, 2021 the Company leased office space at One Main Street, Cambridge, Massachusetts, to serve as its corporate headquarters. The 4.5 year lease includes a base rent of $2 million per year.
New Waltham Office
On July 6, 2021, the Company entered into an office space lease for 131 thousand square feet in Waltham, Massachusetts. The lease term of 11 years began on August 1, 2021. The annual rent equals the base rent plus a portion of building operating costs and real estate taxes. Rent first becomes payable on August 1, 2022. Base rent for the first year is approximately $6 million and will increase by 3% annually. In addition, the Company will receive an improvement allowance from the landlord of up to $11.8 million. This lease increased the Company’s lease liabilities and lease-related right of use assets by $42.1 million on August 1, 2021.
Expense

| Three Months Ended June 30, |  | Six Months Ended June 30,
(in thousands) | 2022 |  | 2021 |  | 2022 |  | 2021
Fixed lease costs (1) | $ | 4,965 |  |  | $ | (3,972) |  |  | $ | 10,059 |  |  | $ | (3,672) |
Short-term lease costs | 787 |  |  | 515 |  |  | 1,594 |  |  | 974 |
Variable lease costs | 727 |  |  | 1,340 |  |  | 1,491 |  |  | 2,727 |
| $ | 6,479 |  |  | $ | (2,117) |  |  | $ | 13,144 |  |  | $ | 29 |

(1) The lower fixed lease costs in the six months ended June 30, 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) | June 30, 2022 |  | December 31, 2021
Right of use assets (1) | $ | 80,646 |  |  | $ | 87,521 |
Operating lease liabilities (2) | $ | 5,341 |  |  | $ | 6,989 |
Long-term operating lease liabilities | $ | 84,170 |  |  | $ | 87,818 |

(1) Represents the Company’s right to use the leased asset during the lease term. Included in other long-term assets.
(2) Included in other current liabilities.
Weighted-average remaining lease term and discount rate for the Company’s leases were:

| June 30, 2022 |  | December 31, 2021
Weighted-average remaining lease term | 7.5 years |  | 7.7 years
Weighted-average discount rate (1) | 4.2 | % |  | 4.4 | %

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

(in thousands) | June 30, 2022
Remainder of 2022 | $ | (401) |
2023 | 18,837 |
2024 | 16,290 |
2025 | 14,118 |
2026 | 10,507 |
2027 and thereafter | 47,910 |
Total lease payments | 107,261 |
Less: imputed interest (1) | (17,750) |
| $ | 89,511 |

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

| Six Months Ended June 30,
(in thousands) | 2022 |  | 2021
Cash paid for leases | $ | 7,296 |  |  | $ | 11,605 |
Right of use assets recognized for new leases and amendments (non-cash) | $ | 2,223 |  |  | $ | 10,160 |

NOTE 8. DEBT
Convertible senior notes and capped calls
Convertible senior notes
In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal of $600 million, due March 1, 2025, in a private placement. No principal payments are due before maturity. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning on September 1, 2020.
Conversion rights
The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of $135.05 per share of common stock. The Company will settle conversions by paying or delivering cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate. The conversion rate will be adjusted upon certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions.
Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election.
Before September 1, 2024, noteholders may convert their Notes in the following circumstances:
•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.
12

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
•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 June 30, 2022, the Notes were not eligible for conversion.
Repurchase rights
On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s common stock exceeded 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice.
If certain corporate events that constitute a “Fundamental Change” occur, each noteholder will have the right to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or a multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. A Fundamental Change relates to mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.
Carrying value of the Notes:

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

Interest expense related to the Notes:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(in thousands) | 2022 |  | 2021 |  | 2022 |  | 2021
Contractual interest expense (0.75% coupon) | $ | 1,125 |  |  | $ | 1,125 |  |  | $ | 2,250 |  |  | $ | 2,250 |
Amortization of issuance costs | 720 |  |  | 675 |  |  | 1,439 |  |  | 1,348 |
| $ | 1,845 |  |  | $ | 1,800 |  |  | $ | 3,689 |  |  | $ | 3,598 |

The effective interest rate for the Notes:

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

Future payments of principal and contractual interest:

| June 30, 2022
(in thousands) | Principal |  | Interest |  | Total
Remainder of 2022 | $ | — |  |  | $ | 2,250 |  |  | $ | 2,250 |
2023 | — |  |  | 4,500 |  |  | 4,500 |
2024 | — |  |  | 4,500 |  |  | 4,500 |
2025 | 600,000 |  |  | 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.
13

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated following the governing documents, may not represent a fair value measurement. The Capped Call Transactions are classified as other long-term assets and remeasured to fair value each reporting period, resulting in a non-operating gain or loss.
Change in capped call transactions:

| Six Months Ended June 30,
(in thousands) | 2022 |  | 2021
January 1, | $ | 59,964 |  |  | $ | 83,597 |
Fair value adjustment | (49,505) |  |  | 7,192 |
June 30, | $ | 10,459 |  |  | $ | 90,789 |

Credit facility
In November 2019, and as since amended, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. The Company may use borrowings for general corporate purposes and to finance working capital needs. Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $200 million. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions.
The Company is required to comply with financial covenants, including:
•Beginning with the fiscal quarter ended March 31, 2022 and ending with the fiscal quarter ended December 31, 2022, Pegasystems Inc. must maintain at least $200 million in cash, investments, and availability under the Revolving Credit Loan.
•Beginning with the quarter ended March 31, 2023, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up for certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.
As of June 30, 2022 and December 31, 2021, the Company had no outstanding borrowings under the Credit Facility.
NOTE 9. FAIR VALUE MEASUREMENTS
Assets and liabilities measured at fair value on a recurring basis
The Company records its cash equivalents, marketable securities, Capped Call Transactions, and venture investments at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.
As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows:
•Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities;
•Level 2 - significant other inputs that are observable either directly or indirectly; and
•Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and minimize unobservable inputs when determining fair value.
The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation model uses various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield. The Company applies judgment when determining expected volatility. The Company considers both historical and implied volatility levels of the underlying equity security. The Company’s venture investments are recorded at fair value based on multiple valuation methods, including observable public companies and transaction prices and unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.
Assets and liabilities measured at fair value on a recurring basis:

| June 30, 2022 |  | December 31, 2021
(in thousands) | Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Cash equivalents | $ | 1,127 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,127 |  |  | $ | 3,216 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,216 |
Marketable securities | $ | — |  |  | $ | 187,613 |  |  | $ | — |  |  | $ | 187,613 |  |  | $ | — |  |  | $ | 202,814 |  |  | $ | — |  |  | $ | 202,814 |
Capped Call Transactions (1) | $ | — |  |  | $ | 10,459 |  |  | $ | — |  |  | $ | 10,459 |  |  | $ | — |  |  | $ | 59,964 |  |  | $ | — |  |  | $ | 59,964 |
Venture investments (1) (2) | $ | — |  |  | $ | — |  |  | $ | 16,073 |  |  | $ | 16,073 |  |  | $ | — |  |  | $ | — |  |  | $ | 7,648 |  |  | $ | 7,648 |

(1) Included in other long-term assets. (2) Investments in privately-held companies.
14

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Changes in venture investments:

| Six Months Ended June 30,
(in thousands) | 2022 |  | 2021
January 1, | $ | 7,648 |  |  | $ | 8,345 |
New investments | 400 |  |  | 500 |
Sales of investments | (165) |  |  | (400) |
Changes in foreign exchange rates | (290) |  |  | 14 |
Changes in fair value: |  |  |
included in other income | 5,978 |  |  | 100 |
included in other comprehensive income | 2,502 |  |  | 1,220 |
June 30, | $ | 16,073 |  |  | $ | 9,779 |

The carrying value of certain other financial instruments, including receivables and accounts payable, approximates fair value due to these items’ short maturity.
Fair value of the Notes
The Notes’ fair value (including the conversion feature embedded in the Notes) was $482.5 million as of June 30, 2022 and $642.0 million as of December 31, 2021. The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 2 in the fair value hierarchy.
NOTE 10. REVENUE
Geographic revenue

| Three Months Ended June 30, |  | Six Months Ended June 30,
(Dollars in thousands) | 2022 |  | 2021 |  | 2022 |  | 2021
U.S. | $ | 147,725 |  | 54 | % |  | $ | 189,297 |  | 58 | % |  | $ | 364,997 |  | 55 | % |  | $ | 383,865 |  | 60 | %
Other Americas | 16,261 |  | 6 | % |  | 14,058 |  | 4 | % |  | 62,012 |  | 10 | % |  | 25,959 |  | 4 | %
United Kingdom (“U.K.”) | 28,831 |  | 11 | % |  | 32,553 |  | 10 | % |  | 59,763 |  | 9 | % |  | 60,765 |  | 10 | %
Europe (excluding U.K.), Middle East, and Africa | 45,238 |  | 16 | % |  | 45,798 |  | 14 | % |  | 94,374 |  | 15 | % |  | 97,457 |  | 15 | %
Asia-Pacific | 36,282 |  | 13 | % |  | 43,996 |  | 14 | % |  | 69,498 |  | 11 | % |  | 71,155 |  | 11 | %
| $ | 274,337 |  | 100 | % |  | $ | 325,702 |  | 100 | % |  | $ | 650,644 |  | 100 | % |  | $ | 639,201 |  | 100 | %

Revenue streams

| Three Months Ended June 30, |  | Six Months Ended June 30,
(in thousands) | 2022 |  | 2021 |  | 2022 |  | 2021
Perpetual license | 2,266 |  |  | 12,596 |  |  | $ | 9,706 |  |  | $ | 18,048 |
Subscription license | 41,600 |  |  | 104,296 |  |  | 179,133 |  |  | 215,805 |
Revenue recognized at a point in time | 43,866 |  |  | 116,892 |  |  | 188,839 |  |  | 233,853 |
Maintenance | 78,326 |  |  | 78,782 |  |  | 158,042 |  |  | 154,343 |
Pega Cloud | 93,506 |  |  | 73,293 |  |  | 183,823 |  |  | 141,151 |
Consulting | 58,639 |  |  | 56,735 |  |  | 119,940 |  |  | 109,854 |
Revenue recognized over time | 230,471 |  |  | 208,810 |  |  | 461,805 |  |  | 405,348 |
Total revenue | $ | 274,337 |  |  | $ | 325,702 |  |  | $ | 650,644 |  |  | $ | 639,201 |

| Three Months Ended June 30, |  | Six Months Ended June 30,
(in thousands) | 2022 | 2021 |  | 2022 | 2021
Pega Cloud | 93,506 |  |  | 73,293 |  |  | $ | 183,823 |  |  | $ | 141,151 |
Maintenance | 78,326 |  |  | 78,782 |  |  | 158,042 |  |  | 154,343 |
Subscription services | 171,832 |  |  | 152,075 |  |  | 341,865 |  |  | 295,494 |
Subscription license | 41,600 |  |  | 104,296 |  |  | 179,133 |  |  | 215,805 |
Subscription | 213,432 |  |  | 256,371 |  |  | 520,998 |  |  | 511,299 |
Perpetual license | 2,266 |  |  | 12,596 |  |  | 9,706 |  |  | 18,048 |
Consulting | 58,639 |  |  | 56,735 |  |  | 119,940 |  |  | 109,854 |
| 274,337 |  |  | 325,702 |  |  | $ | 650,644 |  |  | $ | 639,201 |

15

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Remaining performance obligations ("Backlog")
Expected future revenue from existing non-cancellable contracts:
As of June 30, 2022:

(Dollars in thousands) | Subscription services |  | Subscription license |  | Perpetual license |  | Consulting |  | Total
Maintenance |  | Pega Cloud |  |  |  |
1 year or less | $ | 204,974 |  |  | $ | 320,102 |  |  | $ | 46,810 |  |  | $ | 6,681 |  |  | $ | 32,159 |  |  | $ | 610,726 |  | 54 | %
1-2 years | 57,862 |  |  | 200,135 |  |  | 10,711 |  |  | 4,505 |  |  | 7,919 |  |  | 281,132 |  | 25 | %
2-3 years | 28,403 |  |  | 96,861 |  |  | 2,126 |  |  | 2,252 |  |  | 2,574 |  |  | 132,216 |  | 12 | %
Greater than 3 years | 18,447 |  |  | 81,069 |  |  | 1,680 |  |  | — |  |  | 424 |  |  | 101,620 |  | 9 | %
| $ | 309,686 |  |  | $ | 698,167 |  |  | $ | 61,327 |  |  | $ | 13,438 |  |  | $ | 43,076 |  |  | $ | 1,125,694 |  | 100 | %

As of June 30, 2021:

(Dollars in thousands) | Subscription services |  | Subscription license |  | Perpetual license |  | Consulting |  | Total
Maintenance |  | Pega Cloud |  |  |  |
1 year or less | $ | 214,645 |  |  | $ | 281,793 |  |  | $ | 46,146 |  |  | $ | 6,707 |  |  | $ | 17,863 |  |  | $ | 567,154 |  | 56 | %
1-2 years | 59,164 |  |  | 194,841 |  |  | 15,708 |  |  | 234 |  |  | 2,675 |  |  | 272,622 |  | 26 | %
2-3 years | 36,076 |  |  | 88,855 |  |  | 909 |  |  | — |  |  | 762 |  |  | 126,602 |  | 12 | %
Greater than 3 years | 26,564 |  |  | 37,246 |  |  | 255 |  |  | — |  |  | 693 |  |  | 64,758 |  | 6 | %
| $ | 336,449 |  |  | $ | 602,735 |  |  | $ | 63,018 |  |  | $ | 6,941 |  |  | $ | 21,993 |  |  | $ | 1,031,136 |  | 100 | %

Major clients
Clients accounting for 10% or more of the Company’s total revenue:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(Dollars in thousands) | 2022 |  | 2021 |  | 2022 |  | 2021
Total revenue | $ | 274,337 |  |  | $ | 325,702 |  |  | $ | 650,644 |  |  | $ | 639,201 |
Client A | * |  | 13 | % |  | * |  | *

NOTE 11. STOCK-BASED COMPENSATION
Expense

| Three Months Ended June 30, |  | Six Months Ended June 30,
(in thousands) | 2022 |  | 2021 |  | 2022 |  | 2021
Cost of revenue | $ | 6,579 |  |  | $ | 5,849 |  |  | $ | 12,957 |  |  | $ | 11,774 |
Selling and marketing | 12,633 |  |  | 14,748 |  |  | 23,591 |  |  | 28,468 |
Research and development | 7,355 |  |  | 6,343 |  |  | 14,701 |  |  | 13,113 |
General and administrative | 4,733 |  |  | 3,748 |  |  | 8,278 |  |  | 7,433 |
| $ | 31,300 |  |  | $ | 30,688 |  |  | $ | 59,527 |  |  | $ | 60,788 |
Income tax benefit | $ | (543) |  |  | $ | (6,192) |  |  | $ | (905) |  |  | $ | (12,183) |

As of June 30, 2022, the Company had $195.7 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.1 years.
Grants

| Six Months Ended June 30, 2022
(in thousands) | Shares |  | Total Fair Value
Restricted stock units | 1,237 |  |  | $ | 104,059 |
Non-qualified stock options | 4,351 |  |  | $ | 99,506 |

16

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12. INCOME TAXES
Effective income tax rate

| Three Months Ended June 30, |  | Six Months Ended June 30,
(Dollars in thousands) | 2022 |  | 2021 |  | 2022 |  | 2021
Provision for (benefit from) income taxes | $ | 186,174 |  |  | $ | (11,916) |  |  | $ | 178,491 |  |  | $ | (29,534) |
Effective income tax rate (benefit rate) |  |  |  |  | 165 | % |  | (2,591) | %

The change in the effective income tax rate (benefit rate) in the six months ended June 30, 2022 was primarily due to the recognition of a $191.9 million valuation allowance on the Company’s deferred tax assets.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. Future realization of deferred tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods. The Company’s deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income based on historical and projected information. On a quarterly basis, the Company reassess the need for a valuation allowance on its existing net deferred tax assets by tax-paying jurisdiction, weighing positive and negative evidence to assess its recoverability. In making such a determination, the Company considers all available and objectively verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, committed contractual backlog (“Backlog”), projected future taxable income inclusive of the impact of enacted legislation, tax-planning strategies, and results of recent operations. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified.
As of June 30, 2022, the Company’s Backlog balance was not sufficient to recover our net deferred tax assets. The Backlog balance and other unsettled circumstances, impacting the Company’s operations, reduced the Backlog’s weight as objectively verifiable positive evidence to generate sufficient taxable income to recover its net deferred tax assets. These unsettled circumstances include growing and extended geopolitical turmoil, increasing inflation, and an uncertain global economic outlook.
As of June 30, 2022 the combination of the above factors caused the Company to conclude there is no longer sufficient objectively verifiable positive evidence to support that it is more likely than not the Company will generate sufficient future taxable income to recover the Company’s net deferred tax assets. Accordingly, the Company recorded a valuation allowance of $191.9 million in income tax expense during the three months ended June 30, 2022.
NOTE 13. (LOSS) EARNINGS PER SHARE
Basic (loss) earnings per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted (loss) earnings per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, and convertible senior notes.
Calculation of (loss) earnings per share:

| Three Months Ended June 30, |  | Six Months Ended June 30,
(in thousands, except per share amounts) | 2022 |  | 2021 |  | 2022 |  | 2021
Net (loss) income | $ | (286,296) |  |  | $ | 37,291 |  |  | $ | (286,675) |  |  | $ | 30,674 |
Weighted-average common shares outstanding | 81,847 |  |  | 81,316 |  |  | 81,764 |  |  | 81,161 |
(Loss) earnings per share, basic | $ | (3.50) |  |  | $ | 0.46 |  |  | $ | (3.51) |  |  | $ | 0.38 |
Net (loss) income | $ | (286,296) |  |  | $ | 37,291 |  |  | $ | (286,675) |  |  | $ | 30,674 |
Interest expense associated with convertible debt instruments, net of tax | — |  |  | 1,351 |  |  | — |  |  | — |
Numerator for diluted EPS | $ | (286,296) |  |  | $ | 38,642 |  |  | $ | (286,675) |  |  | $ | 30,674 |
Weighted-average effect of dilutive securities: |  |  |  |  |  |  |
Convertible debt | — |  |  | 4,443 |  |  | — |  |  | — |
Stock options | — |  |  | 3,266 |  |  | — |  |  | 3,416 |
RSUs | — |  |  | 1,295 |  |  | — |  |  | 1,429 |
Effect of dilutive securities | — |  |  | 9,004 |  |  | — |  |  | 4,845 |
Weighted-average common shares outstanding, assuming dilution (1) (2) (3) | 81,847 |  |  | 90,320 |  |  | 81,764 |  |  | 86,006 |
(Loss) earnings per share, diluted | $ | (3.50) |  |  | $ | 0.43 |  |  | $ | (3.51) |  |  | $ | 0.36 |
Outstanding anti-dilutive stock options and RSUs (4) | 3,569 |  |  | 19 |  |  | 3,873 |  |  | 22 |

(1) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.
(2) The shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period. If the outstanding conversion options were fully exercised, the Company would issue an additional approximately 4.4 million shares.
17

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(3) The Company’s Capped Call Transactions represent the equivalent of approximately 4.4 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible). The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The Capped Call Transactions are excluded from weighted-average common shares outstanding, assuming dilution, in all periods as their effect would be anti-dilutive.
(4) Outstanding stock options and RSUs that were anti-dilutive under the treasury stock method in the period were excluded from the computation of diluted (loss) earnings per share. These awards may be dilutive in the future.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Commitments
See "Note 7. Leases" for additional information.
Legal Proceedings
In addition to the matters below, the Company is, or may become, involved in a variety of claims, demands, suits, investigations, and proceedings that arise from time to time relating to matters incidental to the ordinary course of the Company’s business, including actions concerning contracts, intellectual property, employment, benefits, and securities matters. Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources, and other factors.
In addition, as the Company is a party to ongoing litigation, it is at least reasonably possible that our estimates will change in the near term and the effect may be material.
As of June 30, 2022 and December 31, 2021, the Company has no accrued losses for litigation.
Pegasystems Inc. v. Appian Corp. & Business Process Management Inc.
On July 3, 2019, the Company filed suit in Massachusetts federal court against Appian Corp. (“Appian”) and Business Process Management, Inc. (“BPM”) relating to a BPM “Market Report” that Appian had used to promote itself against the Company. Pegasystems Inc. v. Appian Corp. & Business Process Management Inc., No. 1:19-cv-11461 (D. Mass). On April 15, 2022, each of the parties filed motions for summary judgment with the court. These motions were heard on July 15, 2022 and no decision has been rendered as of the date of this filing. The Company continues to believe the counterclaims brought by Appian against the Company are without merit, and the Company intends to vigorously pursue its claims against Appian and defend against the counterclaims brought against the Company in this matter. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the Company’s belief that the damages claimed by Appian fail to satisfy the required legal standard, the status of the proceeding, and due to the uncertainty as to how a jury may rule if this ultimately proceeds to trial.
Appian Corp. v. Pegasystems Inc. & Youyong Zou
As previously reported, the Company is a defendant in litigation brought by Appian in the Circuit Court of Fairfax County, Virginia (the “Court”) titled Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). On May 9, 2022, the jury rendered its verdict finding that the Company had misappropriated one or more of Appian’s trade secrets, that the Company had violated the Virginia Computer Crimes Act, and that the trade secret misappropriation was willful and malicious. The jury awarded damages in the amount of $2,036,860,045 for trade secret misappropriation and $1.00 for the violation of the Virginia Computer Crimes Act. Since the jury rendering its verdict, the Company and Appian have filed post-trial motions with the court. On May 26, 2022, the Company filed a motion for judicial investigation of juror misconduct. Appian filed its opposition on June 17, 2022. A hearing on that motion is scheduled for July 28, 2022. On June 8, 2022, the Company filed a motion to set aside the verdict, Appian filed a response with the court on July 8, 2022, and the Company filed a reply to Appian’s filing on July 22, 2022. Also on June 8, 2022, Appian filed a motion for attorneys’ fees and costs and for post-judgment interest, seeking an award of attorneys’ fees in the amount of approximately $22.6 million, costs in the amount of approximately $4.2 million, and post-judgment interest at the rate of 6% per annum. The Company filed its opposition to that motion on July 8, 2022. Appian filed a reply brief on July 22, 2022. The Court has not yet set a date for a hearing on the motions filed on June 8, 2022. As of the date of this Quarterly Report on Form 10-Q, the court has not yet ruled on the post-trial motions or entered a judgment in this matter. The Company intends to appeal any judgment against it, if such a judgment is entered. The Company continues to believe that it did not misappropriate any alleged trade secrets and that its sales of the Company’s products at issue were not caused by, or the result of, any alleged misappropriation of trade secrets. The Company is unable to reasonably estimate possible damages because of, among other things, uncertainty as to the outcome of post-trial motions, any appellate proceedings, and/or any potential new trial resulting from the post-trial motions or the appellate proceedings.
18

PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell
On May 19, 2022, a lawsuit was filed against the Company, the Company’s chief executive officer and the Company’s chief operating and financial officer in the United States District Court for the Eastern District of Virginia Alexandria Division, captioned City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:22-cv-00578-LMB-IDD). The complaint generally alleges, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder and that the individual defendants violated Section 20(a) of the Exchange Act, in each case by allegedly making materially false and/or misleading statements, as well as allegedly failing to disclose material adverse facts about the Company’s business, operations, and prospects, which caused the Company’s securities to trade at artificially inflated prices. The complaint seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between May 29, 2020 and May 9, 2022. The Company believes the claims brought against the defendants are without merit, and intends to vigorously defend against these claims. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the stage of the lawsuit, the Company’s belief that the claims are without merit, and there being no specified quantum of damages sought in the complaint.
19

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Quarterly Report”) contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions identify forward-looking statements, which are based on current expectations and assumptions.
Forward-looking statements deal with future events and are subject to risks and uncertainties that are difficult to predict, including, but not limited to:
•our future financial performance and business plans;
•the adequacy of our liquidity and capital resources;
•the continued payment of our quarterly dividends;
•the timing of revenue recognition;
•management of our transition to a more subscription-based business model;
•variation in demand for our products and services, including among clients in the public sector;
•reliance on key personnel;
•global economic and political conditions and uncertainty, including continued impacts from the ongoing COVID-19 pandemic and the war in Ukraine;
•reliance on third-party service providers, including hosting providers;
•compliance with our debt obligations and covenants;
•the potential impact of our convertible senior notes and Capped Call Transactions;
•foreign currency exchange rates;
•the potential legal and financial liabilities and damage to our reputation due to cyber-attacks;
•security breaches and security flaws;
•our ability to protect our intellectual property rights, costs associated with defending such rights, intellectual property rights claims and other related claims by third parties against us, including related costs, damages, and other relief that may be granted against us;
•our client retention rate; and
•management of our growth.
These risks and others that may cause actual results to differ materially from those expressed in such forward-looking statements are described further in Part I of our Annual Report on Form 10-K for the year ended December 31, 2021, Part II of this Quarterly Report on Form 10-Q, and other filings we make with the U.S. Securities and Exchange Commission (“SEC”).
Except as required by applicable law, we do not undertake and expressly disclaim any obligation to update or revise these forward-looking statements publicly, whether due to new information, future events, or otherwise.
The forward-looking statements in this Quarterly Report represent our views as of July 27, 2022.
BUSINESS OVERVIEW
We develop, market, license, host, and support enterprise software that helps organizations simplify business complexity. Our powerful low-code platform for workflow automation and AI-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows. With Pega, our clients can leverage our intelligent technology and scalable architecture to accelerate their digital transformation. In addition, our client success teams, world-class partners, and clients themselves leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively.
Our target clients are Global 2000 organizations and government agencies that require solutions to distinguish themselves in the markets they serve. Our solutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. Along with our partners, we deliver solutions tailored to our clients’ specific industry needs.
Subscription transition
We are transitioning our business to sell software primarily through subscription arrangements. Until we fully complete our subscription transition, which we expect will occur in 2024, our operating results may be impacted. Operating performance and the actual mix of revenue and new arrangements in each period can fluctuate based on client preferences for our perpetual and subscription offerings. See the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information.
20

Coronavirus (“COVID-19”)
As of June 30, 2022, COVID-19 has not had a material impact on our results of operations or financial condition. See “Coronavirus (“COVID-19”)” in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information.
Ukraine
Our direct financial exposure to Ukraine, Russia, and Belarus is not material.
In 2021, before Russia's invasion of Ukraine, we made a business decision to stop pursuing new clients in Russia and closed our local office. For the year ended December 31, 2021, total revenue from clients located in Ukraine, Russia, and Belarus was less than $4.0 million. However, the ultimate impact of Russia’s invasion of Ukraine on our business will depend on future developments, including the duration and spread of the conflict, the impact on our people, partners, clients, and vendors in neighboring countries, and globally, all of which are uncertain and unpredictable.
Performance metrics
We use performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including:
Annual contract value (“ACV”)
ACV represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate ACV for subscription license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance. ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our subscription transition.
21

Remaining performance obligations (“Backlog”)
Reconciliation of GAAP Backlog and Constant Currency Backlog

(in millions) | Q2 2022 |  | 1 Year Growth Rate
Backlog - GAAP | $ | 1,126 |  |  | 9 | %
Impact of changes in foreign exchange rates | 57 |  |  | 6 | %
Backlog - Constant Currency | $ | 1,183 |  |  | 15 | %

Note: Constant currency Backlog is calculated by applying foreign exchange rates for the earliest period shown to all periods. The above constant currency measures reflect foreign exchange rates applicable as of Q2 2021. We believe that non-GAAP financial measures help investors understand our core operating results and prospects, consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations. The supplementary non-GAAP financial measures are not meant to be superior to or a substitute for financial measures prepared under U.S. GAAP.
CRITICAL ACCOUNTING POLICIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared following accounting principles generally accepted in the United States and the rules and regulations of the SEC for interim financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future given the available information.
For more information about our critical accounting policies, we encourage you to read the discussion in the following locations in our Annual Report on Form 10-K for the year ended December 31, 2021:
•“Critical Accounting Estimates and Significant Judgments” in Item 7; and
•“Note 2. Significant Accounting Policies” in Item 8.
We recorded a valuation allowance of $191.9 million in income tax expense during the three months ended June 30, 2022. See "Note 12. Income Taxes" in Part I, Item 1 of this Quarterly Report for additional information. There have been no other significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
22

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

(Dollars in thousands) | Three Months Ended June 30, |  | Change |  | Six Months Ended June 30, |  | Change
2022 |  | 2021 |  |  | 2022 |  | 2021 |
Pega Cloud | $ | 93,506 |  | 34 | % |  | $ | 73,293 |  | 23 | % |  | $ | 20,213 |  | 28 | % |  | $ | 183,823 |  | 28 | % |  | $ | 141,151 |  | 22 | % |  | $ | 42,672 |  | 30 | %
Maintenance | 78,326 |  | 29 | % |  | 78,782 |  | 24 | % |  | (456) |  | (1) | % |  | 158,042 |  | 24 | % |  | 154,343 |  | 24 | % |  | 3,699 |  | 2 | %
Subscription services | 171,832 |  | 63 | % |  | 152,075 |  | 47 | % |  | 19,757 |  | 13 | % |  | 341,865 |  | 52 | % |  | 295,494 |  | 46 | % |  | 46,371 |  | 16 | %
Subscription license | 41,600 |  | 15 | % |  | 104,296 |  | 32 | % |  | (62,696) |  | (60) | % |  | 179,133 |  | 28 | % |  | 215,805 |  | 34 | % |  | (36,672) |  | (17) | %
Subscription | 213,432 |  | 78 | % |  | 256,371 |  | 79 | % |  | (42,939) |  | (17) | % |  | 520,998 |  | 80 | % |  | 511,299 |  | 80 | % |  | 9,699 |  | 2 | %
Perpetual license | 2,266 |  | 1 | % |  | 12,596 |  | 4 | % |  | (10,330) |  | (82) | % |  | 9,706 |  | 1 | % |  | 18,048 |  | 3 | % |  | (8,342) |  | (46) | %
Consulting | 58,639 |  | 21 | % |  | 56,735 |  | 17 | % |  | 1,904 |  | 3 | % |  | 119,940 |  | 19 | % |  | 109,854 |  | 17 | % |  | 10,086 |  | 9 | %
| $ | 274,337 |  | 100 | % |  | $ | 325,702 |  | 100 | % |  | $ | (51,365) |  | (16) | % |  | $ | 650,644 |  | 100 | % |  | $ | 639,201 |  | 100 | % |  | $ | 11,443 |  | 2 | %

The revenue changes in the three and six months ended June 30, 2022 generally reflect the impact of our subscription transition. Other factors impacting our revenue include:
•The decreases in subscription license revenue in the three and six months ended June 30, 2022 were primarily due to several large software license contracts recognized in revenue in the three and six months ended June 30, 2021.
•The increases in consulting revenue in the three and six months ended June 30, 2022 were primarily due to increases in consultant billable hours in North America.
Gross profit

(Dollars in thousands) | Three Months Ended June 30, |  | Change |  | Six Months Ended June 30, |  | Change
2022 |  | 2021 |  |  | 2022 |  | 2021 |
Pega Cloud | $ | 62,259 |  | 67 | % |  | $ | 49,242 |  | 67 | % |  | $ | 13,017 |  | 26 | % |  | $ | 125,677 |  | 68 | % |  | $ | 94,543 |  | 67 | % |  | $ | 31,134 |  | 33 | %
Maintenance | 73,040 |  | 93 | % |  | 73,787 |  | 94 | % |  | (747) |  | (1) | % |  | 147,625 |  | 93 | % |  | 143,562 |  | 93 | % |  | 4,063 |  | 3 | %
Subscription services | 135,299 |  | 79 | % |  | 123,029 |  | 81 | % |  | 12,270 |  | 10 | % |  | 273,302 |  | 80 | % |  | 238,105 |  | 81 | % |  | 35,197 |  | 15 | %
Subscription license | 40,927 |  | 98 | % |  | 103,711 |  | 99 | % |  | (62,784) |  | (61) | % |  | 177,838 |  | 99 | % |  | 214,600 |  | 99 | % |  | (36,762) |  | (17) | %
Subscription | 176,226 |  | 83 | % |  | 226,740 |  | 88 | % |  | (50,514) |  | (22) | % |  | 451,140 |  | 87 | % |  | 452,705 |  | 89 | % |  | (1,565) |  | — | %
Perpetual license | 2,230 |  | 98 | % |  | 12,525 |  | 99 | % |  | (10,295) |  | (82) | % |  | 9,636 |  | 99 | % |  | 17,947 |  | 99 | % |  | (8,311) |  | (46) | %
Consulting | 766 |  | 1 | % |  | 1,906 |  | 3 | % |  | (1,140) |  | (60) | % |  | 6,556 |  | 5 | % |  | 1,571 |  | 1 | % |  | 4,985 |  | 317 | %
| $ | 179,222 |  | 65 | % |  | $ | 241,171 |  | 74 | % |  | $ | (61,949) |  | (26) | % |  | $ | 467,332 |  | 72 | % |  | $ | 472,223 |  | 74 | % |  | $ | (4,891) |  | (1) | %

* not meaningful
The decreases in gross profit and gross profit percent in the three and six months ended June 30, 2022 were primarily due to decreases in subscription license revenue.
•The increase in Pega Cloud gross profit percent in the six months ended June 30, 2022 was primarily due to cost-efficiency gains as Pega Cloud grows and scales.
•The decrease in consulting gross profit percent in the three months ended June 30, 2022 was due to a decrease in consultant utilization rates. The increase in consulting gross profit percent in the six months ended June 30, 2022 was due to an increase in consultant realization rates in North America.
23

Operating expenses

(Dollars in thousands) | Three Months Ended June 30, |  | Change |  | Six Months Ended June 30, |  | Change
2022 |  | 2021 |  |  | 2022 |  | 2021 |
| % of Revenue |  |  | % of Revenue |  |  |  |  |  | % of Revenue |  |  | % of Revenue |  |  |
Selling and marketing | $ | 157,198 |  | 57 | % |  | $ | 156,423 |  | 48 | % |  | $ | 775 |  | — | % |  | $ | 319,434 |  | 49 | % |  | $ | 305,162 |  | 48 | % |  | $ | 14,272 |  | 5 | %
Research and development | $ | 74,341 |  | 27 | % |  | $ | 64,395 |  | 20 | % |  | $ | 9,946 |  | 15 | % |  | $ | 145,831 |  | 22 | % |  | $ | 126,837 |  | 20 | % |  | $ | 18,994 |  | 15 | %
General and administrative | $ | 32,723 |  | 12 | % |  | $ | 19,161 |  | 6 | % |  | $ | 13,562 |  | 71 | % |  | $ | 68,487 |  | 11 | % |  | $ | 37,431 |  | 6 | % |  | $ | 31,056 |  | 83 | %

•The increase in selling and marketing in the six months ended June 30, 2022 was primarily due to an increase in employee travel and entertainment of $5.6 million and an increase in compensation and benefits of $3.8 million.
•The increases in research and development in the three and six months ended June 30, 2022 were primarily due to increases in compensation and benefits of $6.4 million and $12.1 million, attributable to increases in headcount and incentive compensation. The increases in headcount reflects additional investments in developing our solutions.
•The increases in general and administrative in the three and six months ended June 30, 2022 were primarily due to increases of $8.2 million and $23.6 million in legal fees and related expenses arising from litigation proceedings outside the ordinary course of business. We have incurred and expect to continue to incur additional expenses for these proceedings in 2022. See "Note 14. Commitments and Contingencies" in Part I, Item 1 and “Risk Factors” in Part II, Item 1A of this Quarterly Report for additional information.
Other income and expenses

(Dollars in thousands) | Three Months Ended June 30, |  | Change |  | Six Months Ended June 30, |  | Change
2022 |  | 2021 |  |  | 2022 |  | 2021 |
Foreign currency transaction gain (loss) | $ | 1,713 |  |  | $ | (403) |  |  | $ | 2,116 |  | * |  | $ | 4,589 |  |  | $ | (5,501) |  |  | $ | 10,090 |  | *
Interest income | 309 |  |  | 236 |  |  | 73 |  | 31 | % |  | 516 |  |  | 389 |  |  | 127 |  | 33 | %
Interest expense | (1,944) |  |  | (1,959) |  |  | 15 |  | 1 | % |  | (3,890) |  |  | (3,839) |  |  | (51) |  | (1) | %
(Loss) income on capped call transactions | (18,945) |  |  | 26,309 |  |  | (45,254) |  | * |  | (49,505) |  |  | 7,192 |  |  | (56,697) |  | *
Other income, net | 3,785 |  |  | — |  |  | 3,785 |  | * |  | 6,526 |  |  | 106 |  |  | 6,420 |  | 6,057 | %
| $ | (15,082) |  |  | $ | 24,183 |  |  | $ | (39,265) |  | * |  | $ | (41,764) |  |  | $ | (1,653) |  |  | $ | (40,111) |  | (2,427) | %

* not meaningful
•The increases in foreign currency transaction gain (loss) in the three and six months ended June 30, 2022 were primarily due to the impact of fluctuations in foreign currency exchange rates associated with our foreign currency-denominated cash, receivables, and intercompany balances held by our subsidiary in the United Kingdom.
•The increases in interest income in the three and six months ended June 30, 2022 were primarily due to increases in market interest rates.
•The decreases in (loss) income on capped call transactions in the three and six months ended June 30, 2022, were due to fair value adjustments for our capped call transactions. See "Note 9. Fair Value Measurements" in Part I, Item 1 of this Quarterly Report for additional information.
•The increases in other income, net in the three and six months ended June 30, 2022 were due to gains on our venture investments portfolio.
Provision for (benefit from) income taxes

| Three Months Ended June 30, |  | Six Months Ended June 30,
(Dollars in thousands) | 2022 |  | 2021 |  | 2022 |  | 2021
Provision for (benefit from) income taxes | $ | 186,174 |  |  | $ | (11,916) |  |  | $ | 178,491 |  |  | $ | (29,534) |
Effective income tax rate (benefit rate) |  |  |  |  | 165 | % |  | (2,591) | %

During the six months ended June 30, 2022, the change in our effective income tax rate (benefit rate) was primarily due to the recognition of a $191.9 million valuation allowance on our deferred tax assets. See "Note 12. Income Taxes" in Part I, Item 1 of this Quarterly Report for additional information.
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LIQUIDITY AND CAPITAL RESOURCES

| Six Months Ended June 30,
(in thousands) | 2022 |  | 2021
Cash provided by (used in): |  |  |
Operating activities | $ | (5,069) |  |  | $ | 19,410 |
Investing activities | (1,523) |  |  | 10,493 |
Financing activities | (41,191) |  |  | (60,717) |
Effect of exchange rates on cash and cash equivalents | (2,907) |  |  | (1,207) |
Net (decrease) in cash and cash equivalents | $ | (50,690) |  |  | $ | (32,021) |

(in thousands) | June 30, 2022 |  | December 31, 2021
Held by U.S. entities | $ | 223,116 |  |  | $ | 274,813 |
Held by foreign entities | 73,772 |  |  | 87,966 |
Total cash, cash equivalents, and marketable securities | $ | 296,888 |  |  | $ | 362,779 |

We believe that our current cash, cash flow from operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements. Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and the investments needed to support our operations. We may utilize available funds or seek additional external financing if we require additional capital resources.
If it becomes necessary to repatriate foreign funds, we may have to pay U.S. and foreign taxes upon repatriation. However, due to the complexity of income tax laws and regulations, it is impracticable to estimate the amount of taxes we would have to pay.
Operating activities
We are transitioning our business to sell software primarily through subscription arrangements. This transition has impacted and is expected to continue impacting our billings and cash collections, as the timing of billings and cash collections generally differs between our subscription and perpetual license arrangements. Subscription licenses and services are generally billed and collected over the contract term, while perpetual license arrangements usually are billed and collected upfront when the license rights become effective.
The change in cash (used in) provided by operating activities in the six months ended June 30, 2022 was primarily due to our subscription transition and increased costs as we made investments in research and development and selling and marketing activities to support future growth. In addition, in the six months ended June 30, 2022 we incurred $28.0 million in legal fees and related expenses arising from proceedings that originated outside of the ordinary course of business. We expect to continue to incur additional expenses for these proceedings. See "Note 14. Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report for additional information.
Investing activities
The change in cash (used in) provided by investing activities in the six months ended June 30, 2022 was primarily driven by our investments in financial instruments, an increase in office space related capital expenditures, and an acquisition in 2021.
Financing activities
Debt financing
In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, which mature on March 1, 2025. In November 2019, and as since amended, we entered into a five-year $100 million senior secured revolving credit agreement with PNC Bank, National Association. As of June 30, 2022, we had no outstanding borrowings under the Credit Facility. See "Note 8. Debt" in Part I, Item 1 of this Quarterly Report for additional information.
Stock repurchase program
Changes in the remaining stock repurchase authority:

(in thousands) | Six Months Ended June 30, 2022
December 31, 2021 | $ | 22,583 |
Authorizations (1) | 60,000 |
Repurchases (2) | (24,508) |
June 30, 2022 | $ | 58,075 |

(1) On June 2, 2022, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2023.
(2) All purchases under this program have been made on the open market.
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Common stock repurchases

| Six Months Ended June 30,
| 2022 |  | 2021
(in thousands) | Shares |  | Amount |  | Shares |  | Amount
Repurchases paid | 279 |  |  | $ | 24,508 |  |  | 148 |  |  | $ | 18,992 |
Repurchases unpaid at period end | — |  |  | — |  |  | 3 |  |  | 400 |
Stock repurchase program | 279 |  |  | 24,508 |  |  | 151 |  |  | 19,392 |
Tax withholdings for net settlement of equity awards | 196 |  |  | 15,379 |  |  | 328 |  |  | 41,706 |
| 475 |  |  | $ | 39,887 |  |  | 479 |  |  | $ | 61,098 |

During the six months ended June 30, 2022 and 2021, instead of receiving cash from the equity holders, we withheld shares with a value of $8.3 million and $27.8 million, respectively, for the exercise price of options. These amounts are not included in the table above.
Dividends
We intend to pay a quarterly cash dividend of $0.03 per share. However, the Board of Directors may terminate or modify the dividend program without prior notice.

| Six Months Ended June 30,
(in thousands) | 2022 |  | 2021
Dividend payments to stockholders | $ | 4,908 |  |  | $ | 4,865 |

Contractual obligations
As of June 30, 2022, our contractual obligations were:

| Payments due by period |  |
(in thousands) | Remainder of 2022 |  | 2023 |  | 2024 |  | 2025 |  | 2026 |  | 2027 and thereafter |  | Other |  | Total
Convertible senior notes (1) | $ | 2,250 |  |  | $ | 4,500 |  |  | $ | 4,500 |  |  | $ | 602,250 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 613,500 |
Purchase obligations (2) | 16,741 |  |  | 15,822 |  |  | 10,507 |  |  | 13,511 |  |  | 13,750 |  |  | — |  |  | — |  |  | 70,331 |
Operating lease obligations | (401) |  |  | 18,837 |  |  | 16,290 |  |  | 14,118 |  |  | 10,507 |  |  | 47,910 |  |  | — |  |  | 107,261 |
Liability for uncertain tax positions (3) | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,269 |  |  | 1,269 |
| $ | 18,590 |  |  | $ | 39,159 |  |  | $ | 31,297 |  |  | $ | 629,879 |  |  | $ | 24,257 |  |  | $ | 47,910 |  |  | $ | 1,269 |  |  | $ | 792,361 |

(1) Includes principal and interest.
(2) Represents the fixed or minimum amounts due under purchase obligations for hosting services and sales and marketing programs.
(3) We are unable to reasonably estimate the timing of this cash outflow due to uncertainties in the timing of the effective settlement of tax positions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in financial market prices and rates.
Foreign currency exposure
Translation risk
Our international operations’ operating expenses are primarily denominated in foreign currencies. However, our international sales are also primarily denominated in foreign currencies, which partially offsets our foreign currency exposure.
A hypothetical 10% strengthening in the U.S. dollar against other currencies would have resulted in:

| Six Months Ended June 30,
| 2022 |  | 2021
(Decrease) increase in revenue | (3) | % |  | (4) | %
Increase (decrease) in net income | 3 | % |  | (1) | %

Remeasurement risk
We incur transaction gains and losses from the remeasurement of monetary assets and liabilities denominated in currencies other than the functional currency of the entities in which they are recorded.
We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash, cash equivalents, receivables, and intercompany balances held by our U.K. subsidiary, a British pound functional entity.
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A hypothetical 10% strengthening in the British pound exchange rate in comparison to the Australian dollar, Euro, and U.S. dollar would have resulted in the following impact:

| Six Months Ended June 30,
(in thousands) | 2022 |  | 2021
Foreign currency gain (loss) | $ | (7,185) |  |  | $ | (5,676) |

ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of June 30, 2022. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2022.
(b) Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 14. Commitments and Contingencies, in Part I, Item 1 of this Quarterly Report is incorporated herein by reference and updates the description of our pending legal proceedings, as described in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 16, 2022 and in our Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission on April 28, 2022.
ITEM 1A. RISK FACTORS
The risk factors set forth below update the risk factors in our Annual Report on Form 10-K filed with the SEC on February 16, 2022 and in our Quarterly Report on Form 10-Q filed with the SEC on April 28, 2022.
In addition to the risk factors set forth below, we encourage you to carefully consider the risk factors identified in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission. These risk factors could materially affect our business, financial condition, and future results, and may cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management.
We face risks related to intellectual property claims or appropriation of our intellectual property rights.
We rely primarily on a combination of patent, copyright, trademark, and trade secrets laws, as well as intellectual property and confidentiality agreements to protect our proprietary rights. We also try to control access to and distribution of our technologies and other proprietary information. We have obtained patents in strategically important global markets relating to the architecture of our systems. We cannot be certain that such patents will not be challenged, invalidated, or circumvented, or that rights granted thereunder, or the claims contained therein will provide us with competitive advantages. Moreover, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our software or to obtain the use of information that we regard as proprietary. Although we generally enter into intellectual property and confidentiality agreements with our employees and strategic partners, despite our efforts our former employees may seek employment with our business partners, clients, or competitors, and there can be no assurance that the confidential nature of our proprietary information will be maintained. In addition, the laws of some foreign countries do not protect our proprietary rights as effectively as they do in the U.S. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology.
Other companies or individuals have obtained proprietary rights covering a variety of designs, processes, and systems. Third parties have claimed and may in the future claim that we have infringed or otherwise violated their intellectual property. We are currently party to litigation with Appian Corp. - see Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report, Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of our Quarterly Report filed with the SEC on April 28, 2022, and Part I, Item 3 “Legal Proceedings” and Note 19 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of our Annual Report filed with the SEC on February 16, 2022.
Although we attempt to limit the amount and type of our contractual liability for infringement or other violation of the proprietary rights of third parties and assert ownership of work product and intellectual property rights as appropriate, there are often exceptions, and limitations may not be applicable and enforceable in all cases. Even if limitations are found to be applicable and enforceable, our liability to our clients for these types of claims could be material given the size of certain of our transactions. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment and delivery delays, require us to enter into royalty or licensing agreements, or preclude us from making and selling the infringing software, if such proprietary rights are found to be valid. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require substantial effort and cost. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our software and may be unable to compete effectively, which could have a material effect upon our business, operating results, and financial condition.
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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.
Any litigation regarding intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Significant judgments are required for the determination of probability and the range of the outcomes in any legal dispute, and the estimates are based only on the information available to us at the time. Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods which may have a material impact on our results of operations and financial position. Intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from manufacturing or licensing certain of our products, cause severe disruptions to our operations or the markets in which we compete or require us to satisfy indemnification commitments to our customers. Any of these could seriously harm our business.
We are currently party to litigation with Appian Corp. - see Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report, Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of our Quarterly Report filed with the SEC on April 28, 2022, and Part I, Item 3 “Legal Proceedings” and Note 19 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of our Annual Report filed with the SEC on February 16, 2022. Notwithstanding the jury having rendered a verdict in the litigation pending in Virginia, we are unable to reasonably estimate possible damages in that matter because, among other things, of the uncertainty as to the outcome of post-trial motions, appellate proceedings, and/or any potential new trial resulting from the post-trial motions and appellate proceedings. If we are ultimately unsuccessful in prevailing in the matter in the entirety or having the ultimate verdict be substantially reduced, we may be required to incur debt or otherwise engage in capital market transactions to finance the final judgment, together with interest and any awards of attorneys’ fees and costs. In addition, if we do not timely satisfy the judgment within 60 days following the expiration of the right to appeal, there may be an acceleration of liabilities under our Convertible Senior Notes and our credit facility. While we continue to believe that we have the financial strength to pay these amounts if it ever becomes necessary, it is possible that we may not be able to engage in these activities on desirable terms, which could have a material adverse effect on our business, financial condition, and operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer purchases of equity securities
Common stock repurchased in the three months ended June 30, 2022:

(in thousands, except per share amounts) | Total Number of Shares Purchased (1) (2) |  | Average Price Paid per Share (1) (2) |  | Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2) |  | Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs (2)
April 1, 2022 - April 30, 2022 | 22 |  |  | $ | 77.42 |  |  | — |  |  | $ | — |
May 1, 2022 - May 31, 2022 | 24 |  |  | 65.46 |  |  | — |  |  | $ | — |
June 1, 2022 - June 30, 2022 | 81 |  |  | 51.31 |  |  | 38 |  |  | $ | 58,075 |
| 127 |  |  | $ | 58.43 |  |  | 38 |  |  |

(1) Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts.
(2) On June 2, 2022, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2023 and increased the remaining stock repurchase authority to $60 million. See "Liquidity and Capital Resources" in Part I, Item 2 of this Quarterly Report for additional information.
ITEM 5. OTHER INFORMATION
On July 25, 2022, we entered into an amendment (the “Amendment”) to our $100 million senior secured revolving credit agreement with PNC Bank, National Association (“PNC”). The Amendment increased certain sub-limits to provide additional flexibility under the Credit Agreement, amongst other changes.
The description contained herein is qualified in its entirety by reference to the Amendment, a copy of which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.
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ITEM 6. EXHIBITS

Exhibit No. |  | Description |  | Incorporation by Reference |  | Filed Herewith
|  | Form |  | Exhibit |  | Filing Date |
3.1 |  | Restated Articles of Organization of the Registrant and Amendments thereto |  | 10-Q |  | 3.1 |  | November 4, 2014 |  |
3.2 |  | Amended and Restated Bylaws of Pegasystems Inc. |  | 8-K |  | 3.2 |  | June 15, 2020 |  |
10.1 |  | Fifth Amendment to Loan Documents between Pegasystems Inc. and PNC Bank, National Association. |  |  |  |  |  |  |  | X
31.1 |  | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer. |  |  |  |  |  |  |  | X
31.2 |  | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer. |  |  |  |  |  |  |  | X
32++ |  | Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer. |  |  |  |  |  |  |  | X
101.INS |  | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |  |  |  |  |  |  |  | X
101.SCH |  | Inline XBRL Taxonomy Extension Schema Document. |  |  |  |  |  |  |  | X
101.CAL |  | Inline XBRL Taxonomy Calculation Linkbase Document. |  |  |  |  |  |  |  | X
101.DEF |  | Inline XBRL Taxonomy Extension Definition Linkbase Document. |  |  |  |  |  |  |  | X
101.LAB |  | Inline XBRL Taxonomy Label Linkbase Document. |  |  |  |  |  |  |  | X
101.PRE |  | Inline XBRL Taxonomy Presentation Linkbase Document. |  |  |  |  |  |  |  | X
104 |  | Cover 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 a part of it.
30

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

|  | Pegasystems Inc.
Dated: | July 27, 2022 | By: | /s/ KENNETH STILLWELL
|  |  | Kenneth Stillwell
|  |  | Chief Operating Officer and Chief Financial Officer
|  |  | (Principal Financial Officer)