Pegasystems
Annual Report 2020

Plain-text annual report

PEGASYSTEMS INC FORM 10-K (Annual Report) Filed 02/17/21 for the Period Ending 12/31/20 Address ONE ROGERS STREET Telephone CIK Symbol SIC Code Industry Sector Fiscal Year CAMBRIDGE, MA, 02142-1209 6173749600 0001013857 PEGA 7374 - Services-Computer Processing and Data Preparation Software Technology 12/31 http://www.edgar-online.com © Copyright 2021, EDGAR Online, a division of Donnelley Financial Solutions. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, a division of Donnelley Financial Solutions, Terms of Use. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549____________________________FORM 10-K____________________________☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934For the fiscal year ended December 31, 2020OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934Commission File No. 1-11859 ____________________PEGASYSTEMS INC.(Exact name of Registrant as specified in its charter)____________________Massachusetts04-2787865(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)One Rogers Street, Cambridge, MA 02142-1209(Address of principal executive offices, including zip code)(617) 374-9600(Registrant’s telephone number, including area code)____________________Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredCommon Stock, $.01 par value per sharePEGANASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:None____________________Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒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 forsuch 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 ☒ 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 12months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ 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 emerging growth company. See thedefinitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging company,” in Rule 12b-2 of the Exchange Act.Large accelerated filer☒Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accountingstandards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting underSection 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒The aggregate market value of the Registrant’s common stock held by non-affiliates, based upon the closing price of the Registrant’s common stock on the NASDAQ Global Select Market of$101.17, on June 30, 2020 was approximately $4.0 billion.There were 80,900,637 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on February 5, 2021.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s definitive proxy statement related to its 2021 annual meeting of stockholders to be filed subsequently are incorporated by reference into Part III of this report.PEGASYSTEMS INC.ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTSItemPagePART I1Business41ARisk Factors101BUnresolved Staff Comments222Properties223Legal Proceedings224Mine Safety Disclosures22PART II5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities236Selected Financial Data247Management’s Discussion and Analysis of Financial Condition and Results of Operations247AQuantitative and Qualitative Disclosures about Market Risk338Financial Statements and Supplementary Data349Changes in and Disagreements with Accountants on Accounting and Financial Disclosure619AControls and Procedures619BOther Information61PART III10Directors, Executive Officers, and Corporate Governance6211Executive Compensation6212Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters6213Certain Relationships and Related Transactions, and Director Independence6214Principal Accountant Fees and Services62PART IV15Exhibits and Financial Statement Schedules6316Form 10-K Summary64Signatures652PART IFORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K (“Annual Report”), including without limitation, “Item 1. Business,” “Item 1A. Risk Factors,” “Item 5. Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” and “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” along with other reports that we have filed with the Securities and Exchange Commission (“SEC”), external documents andoral presentations, 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.These forward-looking statements deal with future events and are subject to various risks and uncertainties that are difficult to predict, including, but not limited to,statements about:•our future financial performance and business plans;•the adequacy of our liquidity and capital resources;•the continued payment of 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;•the impact of actual or threatened public health emergencies, such as the Coronavirus (COVID-19);•reliance on third-party service providers;•compliance with our debt obligations and debt covenants;•the potential impact of our convertible senior notes and related Capped Call Transactions;•reliance on key personnel;•the relocation of our corporate headquarters;•the continued uncertainties in the global economy;•foreign currency exchange rates;•the potential legal and financial liabilities and reputation damage due to cyber-attacks;•security breaches and security flaws;•our ability to protect our intellectual property rights and costs associated with defending such rights;•our client retention rate;•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 “Item 1A.Risk Factors” of this Annual Report and other filings we make with the SEC. Except as required by applicable law, we do not undertake and expressly disclaimany obligation to publicly update or revise these forward-looking statements whether as the result of new information, future events, or otherwise.The forward-looking statements contained in this Annual Report represent our views as of February 17, 2021.3ITEM 1. BUSINESSOur BusinessWe develop, market, license, host, and support enterprise software applications that help organizations transform how they engage with their customers andprocess work. We also license our low code Pega Platform™ for rapid application development to clients that wish to build and extend their business applications.Our cloud-architected portfolio of customer engagement and digital process automation applications leverages artificial intelligence (“AI”), case management, androbotic automation technology, built on our unified low code Pega Platform, empowering businesses to quickly design, extend, and scale their enterpriseapplications to meet strategic business needs.To grow our business, we intend to:•increase market share by developing and delivering market-leading applications for marketing, sales, service, and operations that can work together seamlesslywith maximum competitive differentiation;•execute new-market growth initiatives, further expanding go-to-market coverage within the Global 3000; and•continue to scale our marketing efforts to support the way today’s clients discover, evaluate, and buy products and services.Whether we are successful depends, in part, on our ability to:•execute our marketing and sales strategies;•appropriately manage our expenses as we grow our organization;•effectively develop new products and enhance our existing products; and•incorporate acquired technologies into our applications and unified Pega Platform.Cloud TransitionWe are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud (“Cloud Transition”).Until we substantially complete our Cloud Transition, which we anticipate will occur in early 2023, we expect to continue to experience lower revenue growth andlower operating cash flow growth or negative cash flow. The actual mix of revenue and new arrangements in a given period can fluctuate based on clientpreferences.See risk factor "If we fail to manage our transition to a more subscription-based business model successfully, our results of operations and/or cash flows could benegatively impacted." in Item 1A of this Annual Report for additional information.Coronavirus (“COVID-19”)As of December 31, 2020, COVID-19 has not had a material impact on our results of operations or financial condition.COVID-19's ultimate impact on our operational and financial performance will depend on future developments, including the duration and spread of the outbreakand the impact of COVID-19 on our sales cycles, partners, vendors, and employees, all of which is uncertain and unpredictable. Our shift towards subscription-based revenue streams, the industry mix of our clients, the substantial size and available resources of our clients, and the critical nature of our products to ourclients may reduce or delay the impact of COVID-19 on our business. However, it is not possible to estimate the ultimate impact that COVID-19 will have on ourbusiness at this time.See “Coronavirus (“COVID-19”)” in Item 1A of this Annual Report for additional information.Relocation of Corporate HeadquartersOn February 12, 2021, we entered into an agreement with our landlord to vacate our Cambridge, Massachusetts corporate headquarters on October 1, 2021, inexchange for a one-time payment to us of $18 million. We expect to enter into a new lease agreement for a facility within the greater Boston area.4Our ProductsPega Infinity™, the latest version of our software portfolio, helps connect enterprises to their customers in real time across channels, streamline businessoperations, and adapt to meet changing requirements.Our applications and platform intersect with and encompass several software markets, including:•Customer Engagement, including Customer Relationship Management (“CRM”);•Digital Process Automation (“DPA”), including Business Process Management (“BPM”) and Dynamic Case Management (“DCM”);•Robotic Process Automation (“RPA”);•Business Rules Management Systems (“BRMS”);•Decision Management, including predictive and adaptive analytics;•Low code application development platforms, including Multi-experience Development Platforms (“MXDP”); and•Vertical-Specific Software (“VSS”) market of industry solutions and packaged applications.1:1 Customer EngagementOur omnichannel customer engagement applications are designed to maximize the lifetime value of customers and help reduce the costs of serving customers whileensuring a consistent, unified, and personalized customer experience. At the center of our customer engagement applications is the Pega Customer DecisionHub™, our real time AI engine, which can predict a customer’s behavior and recommend the “next best action” to take across channels in real time. It is designedto enable enterprises to improve customer acquisition and experiences across inbound, outbound, and paid media channels. It incorporates AI in the form ofpredictive and machine-learning analytics, as well as business rules, and executes these decisions in real time to evaluate the context of each customer interactionand dynamically deliver the most relevant action, offer, content, and channel.Customer ServiceThe Pega Customer Service™ application simplifies customer service. It is designed to anticipate customer needs, connect customers to the right people andsystems, and automate or intelligently guide customer interactions, to rapidly and continuously evolve the customer service experience, and to allow enterprises todeliver consistent interactions across channels and improve employee productivity. The application consists of a contact center desktop, case management forcustomer service, chat, knowledge management, mobile field service, omnichannel self-service, AI-powered virtual assistants, and industry-specific processes(“Microjourneys™”) and data models. For clients who want to extend intelligence and automation into the early stages of the customer journey, Pega SalesAutomation™ automates and manages the entire sales process, from prospecting to product fulfillment. It allows enterprises to capture best practices and leverageAI to guide sales teams through the sales and customer onboarding processes.5Intelligent AutomationOur software for Intelligent Automation boosts the efficiency of our clients’ processes. This technology allows organizations to take an end-to-end approach totransformation by using intelligence and design thinking to streamline processes and create better experiences for their customers and employees. Intelligentautomation goes beyond traditional Business Process Management (BPM) to unify technologies such as Robotic Process Automation (RPA) and ArtificialIntelligence (AI) and enable organization-wide digital transformation. The Pega Platform, with its intelligent automation capabilities, allows clients to break downsilos, improve customer-centricity, add agility to legacy technology, and provide end-to-end automation to support the needs of customers and employees.Our CapabilitiesWe drive better business outcomes in two ways:•Making decisions: delivering real time customer engagement, powered by real time, omnichannel AI.•Getting work done: making customer and employee-facing processes more efficient through end-to-end automation and robotics.We deliver our solution through our Center-out Business™ Architecture, which enables clients to transcend channels and internal data silos to achieve both quickwins and long-term transformation. This approach insulates business logic from back-end and front-end complexity, delivering both consistent experiences tocustomers and agility to the business.The key aspects of this architecture are:Centrally-managed intelligencePega’s centrally-managed intelligence ensures AI and business rules operate across all channels. Applications built on the Pega Platform leverage predictive andadaptive analytics to deliver more personalized customer experiences and maximize business objectives. For example, Pega Customer Decision Hub, a centralized,always-on “customer brain,” unleashes the power of predictive analytics, machine learning, and real time decisioning across our clients’ data, systems, andtouchpoints - orchestrating engagement across customer interaction channels.End-to-end automation aligned with business outcomesWe bring together human-assisted robotic desktop automation and unattended robotic process automation with our unified process and case managementcapabilities. This provides our platform and applications the differentiated ability to automate both customer-facing and back-office operational processes from“end to end,” connecting across organizational and system silos to connect customers and employees to outcomes seamlessly and easily.Consistent omni-channel experiencesWith business and process logic centrally defined, Pega provides dynamic, open APIs to keep front-end channels and business logic operating in alignment forconsistent customer experiences. By leveraging cutting-edge user interface (UI) technology, Pega-powered processes and decisions can be easily embedded intoexisting front-ends or used as the basis for new employee-facing applications.Insulation of back-end complexityPega’s architecture insulates case and decision logic from the complexity of back-end systems. Our data virtualization automatically pulls in needed data in acommon structure, regardless of source. This capability gives clients the agility to build new experiences on existing systems, modernizing legacy systems withoutbreaking existing processes.A Layered approach to managing variationPega’s Situational Layer Cake organizes logic into layers that map to the unique dimensions of a client’s business – customer types, lines of business, geographies,etc. This layered approach lets organizations manage variations of their business without duplicating logic. This capability allows initial deployments into a singledepartment or region to seamlessly scale to manage the complexity of a global, multi-line enterprise.In addition to our Center-out Business Architecture, Pega technology has been designed to be deployed rapidly, be changed easily, and scale across changingarchitecture needs.Pega Express™ Methodology and low codeOur solutions are designed to quickly improve targeted customer outcomes and with out-of-the-box functionality that connects enterprise data and systems tocustomer experience channels. From there, organizations can scale, one customer experience at a time, to realize greater value while delivering increasinglyconsistent and personalized customer experiences. We prescribe a “Microjourney™” approach to delivery that breaks customer journeys into discrete processesthat drive meaningful outcomes, such as “inquiring about a bill” or “updating an insurance policy.” This allows us to combine design-thinking and out-of-the-boxfunctionality to deliver rapid results and ensure the ability to enhance the application going forward.Our approach leverages low code to improve business and IT collaboration and bypass the error-prone and time-consuming process of manually translatingrequirements into code. Users design software in low code visual models that reflect the needs of the business. The software application is created and optimizedautomatically and directly from the model, helping to close the costly gap between vision and execution. Changes to the code are made by altering the model, andapplication documentation is generated directly from the model.®6Cloud choicePega Cloud allows clients to develop, test, and deploy, on an accelerated basis, our applications and the Pega Platform using a secure, flexible internet-basedinfrastructure, minimizing cost while focusing on core revenue-generating competencies.Clients can also choose to manage the Pega deployment themselves (“client cloud”) using the cloud architecture they prefer. This multi-cloud approach of bothPega Cloud and client-managed cloud gives our clients the ability to select, and change as needed, the best cloud architecture for the security, data access, speed-to-market, and budget requirements of each application they deploy.Our Services and SupportWe offer services and support through our Global Client Success, Global Service Assurance, Global Client Support, and PegaAcademy groups. We also usethird-party contractors to assist us in providing these services.•Global Client Success – Our Global Client Success group guides our clients on how to maximize their investment in our technology and realize the businessoutcomes they are targeting. This includes building implementation expertise and creating awareness of product features and capabilities.•Global Service Assurance – Our Global Service Assurance group addresses risks to client success because of technical concerns. By providing technical staffdedicated to client success, we reduce the time to resolve technical issues, eliminate lengthy deliberations of technical resource logistics, and increase clients’confidence in our technology and client service.•Global Client Support – Our Global Client Support group provides technical support for our products and Pega Cloud services. Support services include cloudservice reliability management, online support community management, self-service knowledge, proactive problem prevention through information andknowledge sharing, problem tracking, prioritization, escalation, diagnosis, and resolution.•Pega Academy – The success of our sales strategy for repeat sales to target clients depends on enablement and ecosystem engagement. We have increased ourability to train a large number of partners and clients to implement our technology and made it easier for individuals to stay current with our technology as itevolves. We offer both instructor-led and online training to our employees, clients, and partners. We have also partnered with universities to provide ourcourseware as part of the student curriculum to expand our ecosystem. Engagement is an important part of our strategy to create a broad ecosystem that ispassionate about Pega technology.Our PartnersWe collaborate with global systems integrators and technology consulting firms that provide consulting services to our clients, as well as Independent SoftwareVendors (“ISVs”) and technology partners that extend clients’ investments with integrated solutions. In addition, Authorized Training Partners (“ATPs”) supportPega customers in local languages, while our Workforce Development Partners let clients outsource their recruiting. Strategic partnerships with these firms areimportant to our sales efforts because they influence buying decisions, identify sales opportunities, and complement our software with their domain expertise,solutions, and services capabilities. These partners may deliver strategic business planning, consulting, project management, training, and implementation servicesto our clients.Our partners include well-respected major firms, such as Accenture PLC, Amazon.com, Inc., Capgemini SA, Coforge, Cognizant Technology SolutionsCorporation, EY, HCL Infosys, Merkle, PwC, Tata Consultancy Services Limited, Tech Mahindra Limited, Virtusa Corporation, and Wipro Limited.Our MarketsTarget ClientsOur target clients are Global 3000 organizations and government agencies that require applications to differentiate themselves in the markets they serve. Ourapplications achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, andreducing risk. We deliver applications tailored to our clients’ specific industry needs.Our clients represent many industries, including:•Financial services – Financial services organizations rely on software to market, onboard, cross-sell, retain, and service their customers, as well as automatethe operations that support these customer interactions. Our intelligent automation, customer service, account onboarding, Know Your Customer (“KYC”),payment dispute and exception management, collections, and next best action solutions allow clients to improve the efficiency of their operations and providebetter service to their customers.•Life sciences – Life sciences organizations are looking for solutions to improve customer engagement, as well as increase efficiencies and transparency acrossthe product development lifecycle. Our customer engagement, clinical, and pharmacovigilance applications are designed to deliver customer engagement,safety and risk management, and regulatory transparency.•Healthcare – Healthcare organizations seek software that integrates their front and back-offices and helps them deliver personalized care and customer servicewhile reducing costs, automating processes, and increasing operational efficiency. Our applications allow healthcare clients to address the sales, service,operational, financial, administrative, and regulatory requirements of healthcare consumerism and reform.® ™7•Communications and media – Communications and media organizations need to address high levels of customer churn, growing pressure to increase revenue,and an ability to respond quickly to changing market conditions. Our applications enable organizations to reshape the way they engage with customers andincrease customer lifetime value throughout the customer lifecycle by delivering omnichannel, personalized customer experiences. Our applications aredesigned to solve the most critical business issues, including acquiring more customers at a higher margin, increasing cross-sell/upsell, improving customerservice efficiency and effectiveness, and streamlining sales and quoting.•Government – Government agencies need to modernize legacy systems and processes to meet the growing demands for improved constituent service, lowercosts, reduced fraud, and greater transparency. Our applications deliver advanced capabilities to help streamline operations and optimize service deliverythrough an agile, low risk approach.•Insurance – Insurance companies, whether competing globally or nationally, need software to automate policyholder acquisition, cross sell/upsell,underwriting, claims, policy service, and retention activities across operations and channels of distribution. Insurers are also becoming increasingly sensitive toways to improve customer service and the overall customer experience. Our applications for insurance carriers are designed to help increase business value bydelivering customer-focused experiences and personalized interactions that help drive higher sales, lower expense ratios, and mitigate risk.•Manufacturing and high tech – Manufacturers and high tech companies worldwide are transforming their businesses to engage customers and suppliers better,as well as to directly manage product performance throughout the product lifecycle. Our manufacturing applications address customer service and fieldservice, manage warranties, recalls, repairs, returns, improve the performance of direct sales forces, and extend existing enterprise resource planning systemcapabilities.•Consumer services – Consumer services organizations provide services to a range of consumers in industries such as transportation, utilities, internetproviders, retail, hospitality, and entertainment. Our 1:1 customer engagement, customer service, and intelligent automation solutions help these organizationspersonalize their customer engagement to acquire more customers, drive revenue through cross-sell/upsell, and increase service efficiency while increasingcustomer satisfaction.CompetitionThe markets for our offerings are intensely competitive, rapidly changing, and highly fragmented, as current competitors expand their product offerings and newcompanies enter the market.We compete in the CRM, including marketing, sales, and customer service, and DPA, including BPM, case management, decision management, roboticautomation, co-browsing, social engagement, and mobile application development platform software markets, as well as in markets for the vertical applications weprovide (e.g., Pega KYC™ for Financial Services, Pega Underwriting™ for Insurance).We also compete with clients’ internal information systems departments that seek to modify their existing systems or develop their own proprietary systems, andprofessional service organizations that develop their own products or create custom software in conjunction with rendering consulting services.Competitors vary in size, scope, and breadth of the products and services they offer and include some of the world’s largest companies, including Salesforce.com,Microsoft Corporation, Oracle Corporation, SAP SE, ServiceNow, and International Business Machines Corporation (“IBM”).We have been most successful in competing for clients whose businesses are characterized by a high degree of change, complexity, or regulation.We believe we are competitively differentiated from our competitors because our unified Pega Platform is designed to allow client business and IT staff, using asingle, intuitive user interface, to build and evolve enterprise applications in a fraction of the time it would take with disjointed architectures and tools offered bymany of our competitors. In addition, our applications, built on the Pega Platform, provide the same level of flexibility and ability to adapt to our clients’ needs asour Pega Platform. We believe we compete favorably due to our expertise in our target industries and our long-standing client relationships. We believe wecompete less favorably on some of the above factors against our larger competitors, many of which have greater sales, marketing, and financial resources, moreextensive geographical presence, and greater name recognition than we do. In addition, we may be at a competitive disadvantage against our larger competitorswith respect to our ability to provide expertise outside our target industries.See risk factor "The market for our offerings is intensely and increasingly competitive, rapidly changing, and fragmented" in Item 1A of this Annual Report foradditional information.Intellectual PropertyWe rely primarily on a combination of copyright, patent, trademark, and trade secrets laws, as well as confidentiality and intellectual property agreements toprotect our proprietary rights. We have obtained patents relating to our system architecture and products in strategic global markets. We enter into confidentiality,intellectual property ownership, and license agreements with our employees, partners, clients, and other third parties. We also control access to and ownership ofsoftware, services, documentation, and other information to protect our proprietary rights.8Sales and MarketingWe encourage our direct sales force and outside partners to co-market, pursue joint sales initiatives, and drive broader adoption of our technology, helping us growour business more efficiently and focus our resources on continued innovation and enhancement of our solutions. In addition, strategic partnerships withmanagement consulting firms and major systems integrators are important to our sales efforts because they influence buying decisions, help us identify salesopportunities and complement our software and services with their domain expertise and consulting capabilities. We also partner with technology providers andapplication developers.To support our sales efforts, we conduct a broad range of marketing programs, including awareness advertising, client and industry-targeted solution campaigns,trade shows, including our PegaWorld iNspire user conference, solution seminars and webinars, industry analyst and press relations, web and digital marketing,community development, social media presence, and other direct and indirect marketing efforts. Our consulting employees, business partners, and other thirdparties also conduct joint and separate marketing campaigns that generate sales leads for us.Research and DevelopmentOur research and development organization is responsible for product architecture, core technology development, product testing, and quality assurance. Ourproduct development priority is to continue expanding our technology’s capabilities and ensure we deliver superior cloud-native solutions. We intend to maintainand extend the support of our existing applications, and we may choose to invest in additional strategic applications that incorporate the latest business innovations.We also intend to maintain and extend the support of popular hardware platforms, operating systems, databases, and connectivity options to facilitate easy andrapid deployment in diverse IT infrastructures. Our goal with all products is to enhance product capabilities, ease of implementation, long-term flexibility, and theability to provide improved client service.BacklogAs of December 31, 2020, we expected to recognize approximately $1.1 billion in revenue in future periods from backlog on existing contracts. See "Remainingperformance obligations ("Backlog")" in Item 7 of this Annual Report for additional information.Our PeopleAs of January 31, 2021, we had 5,776 employees, of which 2,476 were based in the Americas, 1,306 were based in Europe, 1,668 were based in India, and 326were based elsewhere in Asia-Pacific.As a high technology company, our employees are critical to our success. We strive to be an employer of choice that can attract and retain exceptional talent. Weaim to create a corporate culture that is equitable, inclusive, and diverse. We believe that encouraging employee development will help achieve our goal ofdeveloping, expanding, and retaining our workforce to support our business.We build our corporate culture through a variety of initiatives, including global inclusion and diversity, employee engagement, pay equity, and employeedevelopment.Global Inclusion and DiversityAn inclusive and diverse culture contributes to our ability to deliver innovative products and services, which is critical to our success. Our commitment to inclusionand diversity begins with a highly skilled and diverse board and includes our commitment to educate both managers and individual contributors about ourcorporate values. In 2020, we made significant investments in furthering our culture of inclusion, including hiring a Global Leader of Inclusion and Diversity andDiversity Talent Attraction Partner. We expanded our diversity recruiting efforts and delivered inclusivity workshops to leaders at all levels, among other efforts.We also currently sponsor formal resource groups for women, veterans, and members of the black and LGBTQIA+ communities, and plan to launch fouradditional resource groups in the first half of 2021.Employee Engagement, Health, and Well-BeingOur efforts to recruit and retain diverse and passionate employees include providing competitive rewards packages and ensuring active communication throughoutthe Company. We regularly solicit and collect feedback to better understand and improve our employee experience and identify opportunities to strengthen ourcorporate culture. In 2020, in addition to our annual employee survey and continuous feedback tools, we hosted monthly check-in chats with our leadership team todirectly address our employees’ questions and constructive feedback. We are committed to creating an environment that supports our employees’ health andoverall well-being, focusing on physical, emotional, financial, and personal wellness. PegaUp!, our employee wellness program, includes such programs asawareness campaigns, fitness classes, guided meditation, and health, wellness, and financial seminars.Pay EquityWe compensate our employees for what they do and how they do it, regardless of their gender, race, or other personal characteristics. To deliver on thatcommitment, we benchmark and set pay ranges based on market data and consider individual factors, such as an employee’s role and experience, job location, andjob performance. We also regularly review our compensation practices, both in terms of our overall workforce and individual employees, to ensure our pay is fairand equitable.®9Employee DevelopmentEmployee development underpins our efforts to execute our strategy and continue to create and sell innovative products and services. We continually invest in ouremployees’ career growth and provide employees with a wide range of development opportunities, including formal and informal learning, mentoring, andcoaching. Pega Academy helps employees as well as clients and partners more rapidly gain and advance Pega software skills. To ensure our business’s long-termcontinuity, we actively manage the development of talent to fill the roles most critical to our success. To support our current and future leaders’ development, Pegacurrently offers five programs addressing the development of people managers and leaders in a cohort format comprised of all functions and geographies. We alsoprovide educational resources and classes, career training, and education reimbursement programs. In 2020, more than 90% of our employees participated in aformal education program.Corporate InformationPegasystems Inc. was incorporated in Massachusetts in 1983. Our stock is traded on the NASDAQ Global Select Market under the symbol “PEGA.” Our website islocated at www.pega.com, and our investor relations website is located at www.pega.com/about/investors.Available InformationWe make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, free ofcharge through our website as soon as reasonably practicable after we electronically file such material with or furnish such material to the SEC. We also makeavailable on our website reports filed by our executive officers and directors on Forms 3, 4, and 5 regarding their ownership of our securities. Our Code of Conductis available on our website in the “Governance” section.The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SECat www.sec.gov.ITEM 1A. RISK FACTORSThe risks and uncertainties described below are not the only ones we face. Events that we do not currently anticipate or that we currently expect to be immaterialmay also affect our results of operations, cash flows, and financial condition.Risks Related to Our Business and IndustryIf we fail to manage our transition to a more subscription-based business model successfully, our results of operations and/or cash flows could be negativelyimpacted.We are transitioning to a more subscription-based business model, which may have negative revenue and/or cash flow implications. The subscription model pricesand delivers our software differently than a perpetual license model. These changes reflect a significant shift from perpetual license sales in favor of providing ourclients the right to access our software in a hosted environment or use downloaded software for a specified subscription period. The potential shift of our clients’preference to a cloud-based subscription model requires a considerable investment of technical, financial, legal, managerial and sales resources, and a scalableorganization.Market acceptance of our subscription-based offering will depend on our ability to continue to:•innovate and include new functionality and improve the usability of our products in a manner that addresses our clients’ needs and requirements; and•optimally price our products in light of marketplace conditions, competition, our costs, and client demand.Our cloud-based subscription model also requires that we rely on third parties to host our products for our clients. We incur significant recurring third-party hostingexpenses to deliver our Pega Cloud offering that we do not incur for our perpetual and term license products. These expenses may cause the gross margin werealize from our Pega Cloud sales to be lower than the gross margin we realize from our perpetual and term license products. If we are unable to meet thesechallenges effectively, our operating results and financial condition could be materially adversely affected.The transition to a subscription-based business model gives rise to several risks, including the following:•our revenues and cash flows may fluctuate more than anticipated in the near term;•if the increased demand for our offerings does not continue, we could experience decreased profitability or losses and reduced or negative cash flow becauseof our continued significant investments in our Pega Cloud offering;•if new or current clients desire only perpetual licenses, our subscription sales may lag behind our expectations;•we may be unsuccessful in maintaining or implementing our target pricing or new pricing models, product adoption and projected renewal rates, or we mayselect a target price or new pricing model that is not optimal and could negatively affect our sales or earnings;•if our clients do not renew their subscriptions, our revenue may decline, and our business may be materially adversely affected; and•we may incur sales compensation costs at a higher than forecasted rate if the pace of our subscription transition is faster than anticipated.The metrics our investors and we use to monitor our business model transition may evolve over the course of the transition as significant trends emerge. Therefore,it may be difficult to accurately determine the impact of this transition on our business on a contemporaneous basis or to clearly communicate the appropriatemetrics to our investors.10We may not achieve the key elements of our strategy and grow our business as anticipated.We currently intend to grow our business by pursuing strategic initiatives. Key elements of our strategy include growing our market share by developing anddelivering robust applications that can work together seamlessly with maximum differentiation and minimal customization, offering versatility in our PegaPlatform and application deployment and licensing options to meet the specific needs of our clients, growing our network of partner alliances, and developing thetalent and organizational structure capable of supporting our revenue and earnings growth targets. We may not be able to achieve one or more of our keyinitiatives. Our success depends on our ability to manage our expenses as we grow our organization appropriately, successfully execute our marketing and salesstrategies, successfully incorporate acquired technologies into our unified Pega Platform and develop new products or product enhancements. If we are not able toexecute these actions, our business may not grow as we anticipate, and our operating results and financial condition could be materially adversely affected.We depend on key personnel, including our Chief Executive Officer, and must be able to attract and retain qualified personnel in the future.Our business is dependent on key, highly skilled technical, managerial, consulting, sales, and marketing personnel, including our Chief Executive Officer, who isalso our founder and largest stockholder.On February 12, 2021, we entered into an agreement with our landlord to vacate our Cambridge, Massachusetts facility on October 1, 2021 and expect to enter intoa new lease agreement for a facility within the greater Boston area. Although we believe this relocation will help us attract and retain key personnel and provide adynamic space to engage with our employees, competition for talent, delays in and costs associated with development and occupancy of the new facility andchanges in commuting for our existing employees could impact our ability to realize the intended benefits of the move.The loss of key personnel could be disruptive to our operations, and materially adversely affect financial performance. We do not have any significant key-personlife insurance on any officers or employees and do not plan to obtain any. Our success will largely depend on the ability to attract and retain qualified personneland rapidly replace and develop new management. The number of potential employees who have the extensive knowledge needed to develop, sell, and maintainour offerings is limited, and competition for their services is intense. There can be no assurance that we will be able to attract and retain such personnel. If we areunable to do so, our business, operating results, and financial condition could be materially adversely affected.The timing of our license and Pega Cloud revenue is difficult to predict accurately, which may cause our operating results to vary considerably.A change in the size or volume of license and Pega Cloud arrangements, or a change in the mix between perpetual licenses, term licenses, and Pega Cloudarrangements can cause our revenues and cash flows to fluctuate materially between periods. Revenue from Pega Cloud arrangements is typically recognized overthe contract term. In contrast, revenue from license sales is generally recognized upfront when the license rights become effective. Pega Cloud and term licensearrangements are generally billed and collected over the contract term while perpetual license arrangements are generally billed in full and collected upfront whenthe license rights become effective.Factors that may influence the predictability of our license and Pega Cloud revenue include:•changes in clients’ budgets and decision-making processes that could affect both the timing and size of transactions;•deferral of license revenue to future periods due to the timing of the execution of an agreement or our ability to deliver the products or services;•changes in our business model; and•our ability to execute our marketing and sales strategies.We budget for our selling and marketing, product development, and other expenses based upon anticipated future bookings and revenue. If the timing or amount ofrevenue fails to meet our expectations in a given period, our financial performance is likely to be materially adversely affected because only a small portion of ourexpenses vary with revenue. Other factors that may cause our operating results to vary considerably include changes in foreign currency exchange rates, incometax effects, and the impact of new accounting pronouncements.As a result, period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon to predict future performance. If ourrevenues and operating results do not meet the expectations of our investors or securities analysts or fall below guidance we may provide to the market, or due toother factors discussed elsewhere in this section, the price of our common stock may decline.11The number of license and Pega Cloud arrangements has been increasing, and we may not be able to sustain this growth unless our partners and we canprovide sufficient high-quality consulting, training, and maintenance resources to enable our clients to realize significant business value from our software.Our clients typically request consulting and training to assist them in implementing our license and Pega Cloud offerings. Our clients also typically purchasemaintenance on our perpetual and term licenses. As a result, an increase in the number of license and Pega Cloud arrangements is likely to increase demand forconsulting, training, and maintenance related to our offerings. Given that the number of our license and Pega Cloud arrangements has been growing, we will needto provide our clients with more consulting, training, and maintenance to enable them to realize significant business value from our software. We have beenincreasing our partner and client enablement through training to create an expanded ecosystem of people that are skilled in the implementation of our products.However, if our partners and we are unable to provide sufficient high-quality consulting, training, and maintenance resources, our clients may not realize sufficientbusiness value from our offerings to justify follow-on sales, which could impact our future financial performance. Further, some of our client engagements havehigh public visibility. If our partners or we encounter problems in helping these clients implement our license and Pega Cloud offerings or if there is negativepublicity regarding these engagements (even if unrelated to our services or offerings) our reputation could be harmed and our future financial performance could benegatively impacted. Finally, the investments required to meet the increased demand for our consulting services could strain our ability to deliver our consultingengagements at desired profitability, thereby impacting our overall profitability and financial results.We may not be able to maintain our retention rate for Pega Cloud clients.An increasing percentage of our revenue has been derived from our Pega Cloud offerings. Our clients have no obligation to renew their Pega Cloud subscriptions,although historically, most have elected to do so. If our retention rate for those clients decreases our business, operating results, and financial condition could bematerially adversely affected.We are investing heavily in sales and marketing, research and development, and support resources in anticipation of continued growth in license and PegaCloud arrangements, and we may experience decreased profitability or losses and reduced or negative cash flow if we do not continue to increase the value ofour license and Pega Cloud arrangements to balance our growth in expenses.We have been expanding our sales and marketing capacity to meet the increasing demand for our software and to broaden our market coverage by hiring additionalsales and marketing personnel. We anticipate that we will need to provide our clients with more maintenance support because of this increase in demand and havebeen hiring additional personnel in this area. We continue to invest significantly in research and development to expand and improve the Pega Platform andapplications. These investments have resulted in increased fixed costs that do not vary with the level of revenue. If the increased demand for our offerings does notcontinue, we could experience decreased profitability or losses and reduced or negative cash flow because of these increased fixed costs. Conversely, if we areunable to hire sales and marketing personnel to meet future demand or research and development personnel to enhance our current products or develop newproducts, we may not be able to achieve our sales and profitability targets.We face risks from operations and clients based outside of the U.S.We market our products and services to clients based outside of the U.S., which represent 43% of our revenue over the last three years. We have established officesin the Americas, Europe, Asia, and Australia. We believe that growth will necessitate expanded international operations, resulting in increased managerial attentionand costs. We anticipate hiring additional personnel to accommodate increased international market demand, and we may also enter into agreements with localdistributors, representatives, or resellers. If we are unable to do one or more of these things in a timely and effective manner, the growth, if any, of our internationaloperations may be restricted, and our business, operating results, and financial condition could be materially adversely affected. Additional risks inherent in our international business activities generally include:•laws and business practices favoring local competitors;•compliance with multiple, conflicting, and changing governmental laws and regulations, including employment, tax, privacy and data privacy and protection,and increased tariffs and other trade barriers;•the costs of localizing offerings for local markets, including translation into foreign languages and associated expenses;•longer payment cycles and credit and collectability risk on our foreign trade receivables;•difficulties in enforcing contractual and intellectual property rights;•heightened fraud and bribery risks;•treatment of revenue from international sources and changes to tax codes, including being subject to foreign tax laws, being liable for paying withholding,income or other taxes in foreign jurisdictions, and other potentially adverse tax consequences (including restrictions on repatriating earnings and the threat of“double taxation”);•management of our international operations, including increased accounting, internal control, and compliance expenses;•heightened risks of political and economic instability; and•foreign currency exchange rate fluctuations and controls.There can be no assurance that one or more of these factors will not have a material adverse effect on our international operations and, consequently, on ourbusiness, operating results, and financial condition.12We rely on third-party relationships.We have a number of relationships with third parties that are significant to our sales, marketing, support, and product development efforts, including hostingfacilities for our Pega Cloud offering. We rely on software and hardware vendors, large system integrators, and technology consulting firms to supply marketingand sales opportunities for our direct sales force and to strengthen our products using industry-standard tools and utilities. We also have relationships with thirdparties that distribute our products. There can be no assurance that these companies, many of which have far greater financial and marketing resources than us, willnot develop or market offerings that compete with ours in the future or will not otherwise end or limit their relationships with us. Further, the use of third-partyhosting facilities requires us to rely on the functionality and availability of the third parties’ services, as well as their data security, which despite our due diligence,may be or become inadequate.We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows.Because a significant portion of our business is conducted outside of the U.S., we face exposure to movements in foreign currency exchange rates. Ourinternational sales are usually denominated in foreign currencies. The operating expenses of our foreign operations are also primarily denominated in foreigncurrencies, which partially offset our foreign currency exposure on our international sales. Our results of operations and cash flows are subject to fluctuations dueto changes in foreign currency exchange rates, particularly changes in the U.S. dollar, the Euro, and the Australian dollar relative to the British Pound. Theseexposures may change over time as business practices evolve.We have historically used but do not currently use foreign currency forward contracts to hedge our exposure to changes in foreign currency exchange ratesassociated with our foreign currency-denominated cash, accounts receivable, and intercompany receivables and payables held by our U.S. parent company and itsU.K. subsidiary. We may enter into hedging contracts again in the future if we believe it is appropriate. Our realized gain or loss for foreign currency fluctuations will generally depend on the size and type of cross-currency exposures that we enter into, the currencyexchange rates associated with these exposures and changes in those rates, whether we have entered into forward contracts to offset these exposures and otherfactors. All of these factors could materially impact our operating results, financial condition, and cash flows.Our consulting revenue is significantly dependent upon our consulting personnel implementing new license and Pega Cloud arrangements.We derive a substantial portion of our consulting revenue from implementations of new license and Pega Cloud arrangements managed by our consultingpersonnel and consulting for partner and client-led implementation efforts. Our strategy is to support and encourage partner-led and client-led implementations toincrease the breadth, capability, and depth of market capacity to deliver implementation services to our clients. Accordingly, if our consulting personnel’sinvolvement in future implementations decreases, this could materially adversely affect our consulting revenue.We frequently enter into a series of license or Pega Cloud arrangements that are each focused on a specific purpose or area of operations. If we are notsuccessful in obtaining follow-on business from these clients, our financial performance could be materially adversely affected.Once a client has realized the value of our software, we work with the client to identify opportunities for follow-on sales. However, we may not be successful indemonstrating this value for several reasons, including the performance of our products, the quality of the services and support provided by our partners and us, orexternal factors. Also, some of our smaller clients may have limited additional sales opportunities available. We may not obtain follow-on sales, or the follow-onsales may be delayed, and our future revenue could be limited. This could lower the total value of all transactions, and materially adversely affect our financialperformance.We will need to acquire or develop new products, evolve existing ones, address any defects or errors, and adapt to technology changes.Technical developments, client requirements, programming languages, industry standards, and regulatory requirements frequently change in the markets in whichwe operate. The introduction of third-party solutions embodying new technologies and the emergence of new industry standards could make our existing and futuresoftware solutions obsolete and unmarketable. As a result, our success will depend upon our ability to enhance current products, address any product defects orerrors, acquire or develop and introduce new products that meet client needs, keep pace with technology and regulatory changes, respond to competitive products,and achieve market acceptance. Product development requires substantial investments for research, refinement, and testing. We may not have sufficient resourcesto make the necessary product development investments. We may experience technical or other difficulties that will delay or prevent the successful development,introduction, or implementation of new or enhanced products. We may also experience technical or other challenges in the integration of acquired technologies intoour existing platform and applications. Inability to introduce or implement new or enhanced products in a timely manner could result in loss of market share ifcompetitors are able to provide solutions to meet client needs before we do, give rise to unanticipated expenses related to further development or modification ofacquired technologies, and materially adversely affect our financial performance. We may also fail to adequately anticipate and prepare for the development of newmarkets and applications for our technology and the commercialization of emerging technologies such as blockchain and thereby fail to take advantage of newmarket opportunities or fall behind early movers in those markets.13The market for our offerings is intensely and increasingly competitive, rapidly changing, and fragmented.We encounter significant competition from:•customer engagement vendors, including CRM application vendors;•DPA vendors and platforms, including BPM vendors, low code application development platforms, and service-oriented architecture middleware vendors;•case management vendors;•decision management, data science, and AI vendors, as well as vendors of solutions that leverage decision making and data science in managing customerrelationships and marketing;•robotic automation and workforce intelligence software providers;•companies that provide application-specific software for financial services, healthcare, insurance, and other specific markets;•mobile application platform vendors;•co-browsing software providers;•social listening, text analytics, and natural language processing vendors;•commercialized open-source vendors;•professional service organizations that develop their own products or create custom software in conjunction with rendering consulting services; and•clients’ in-house information technology departments, which may seek to modify their existing systems or develop their own proprietary systems.Many of our competitors, such as Salesforce.com, Microsoft Corporation, Oracle Corporation, SAP SE, ServiceNow, and International Business MachinesCorporation (“IBM”), have far greater resources than we do and may be able to respond more quickly and efficiently to new or emerging technologies,programming languages or standards, or changes in client requirements or preferences. Competitors may also be able to devote greater managerial and financialresources to develop, promote, and distribute products and to provide related consulting and training services.We believe the principal competitive factors within our market include:•product adaptability, scalability, functionality, and performance;•proven success in delivering cost-savings and efficiency improvements;•proven success in enabling improved customer interactions;•ease-of-use for developers, business units, and end-users;•timely development and introduction of new products and product enhancements;•establishment of a significant base of reference clients;•ability to integrate with other products and technologies;•customer service and support;•product price;•vendor reputation; and•relationships with systems integrators.Competition for market share and pressure to reduce prices and make sales concessions is likely to increase. There can be no assurance that we will be able tocompete successfully against current or future competitors or that the competitive pressures faced by us will not materially adversely affect our business, operatingresults, and financial condition.See "Competition" in Item 1 of this Annual Report for additional information.Our Chief Executive Officer is our largest stockholder and can exert significant influence over matters submitted to our stockholders, which could materiallyadversely affect our other stockholders.As of December 31, 2020, our Chief Executive Officer beneficially owned 49% of our outstanding common stock. As a result, he has the ability to exert significantinfluence over all matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation, or sale of ourassets. This concentration of ownership may delay or prevent a change in control, impede a merger, consolidation, takeover, or other business combinationinvolving us, discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, or result in actions that may be opposed byother stockholders.14Risks Related to Information Technology Resilience and SecurityWe face risks related to outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure.The increasing user traffic for our Pega Cloud offering demands more computing power. It requires that we maintain an internet connectivity infrastructure that isrobust and reliable within competitive and regulatory constraints that continue to evolve. Inefficiencies or operational failures, including temporary or permanentloss of client data, power outages, or telecommunications infrastructure outages, by our third-party service providers or us, could diminish the quality of our userexperience resulting in contractual liability, claims by clients and other third parties, damage to our reputation, loss of current and potential clients, and negativelyimpact our operating results and financial condition.Security of our systems and global client data is a growing challenge on many fronts. Cyber-attacks and security breaches may expose us to significant legaland financial liabilities.Security breaches could expose our clients and us to a risk of loss or misuse of this information. Any security breach could result in a loss of confidence in thesecurity of our services, damage our reputation, disrupt our business, lead to legal liability, and negatively impact our future sales. High-profile security breaches atother companies have increased in recent years. Security industry experts and government officials have warned about the risks of hackers and cyber-attackerstargeting information technology products and businesses. Threats to IT security can take a variety of forms. Individual hackers, groups of hackers, andsophisticated organizations, including state-sponsored organizations, or nation-states themselves, may take steps that threaten our clients and IT structure.Additionally, our Pega Cloud offering provides environments that are provisioned, monitored, and maintained for individual clients to create and deploy Pega-based applications using an Internet-based infrastructure. These services involve the storage and transmission of clients’ data and other confidential information.Our security measures and those of our clients may be breached because of third-party actions or that of employees, consultants, or others, including intentionalmisconduct by computer hackers, system error, human error, technical flaws in our products, or otherwise. Because we do not control the configuration of Pegaapplications by our clients, the transmissions between our clients and our third-party technology providers, the processing of data on the servers at third-partytechnology providers, or the internal controls maintained by our clients and third-party technology providers that could prevent unauthorized access or provideappropriate data encryption, we cannot fully ensure the complete integrity or security of such transmissions processing or controls. In addition, privacy, security,and data transmission concerns in some parts of the world may inhibit demand for our Pega Cloud offering or lead to requirements to provide our products orservices in configurations that may increase the cost of serving such markets. The techniques used to obtain unauthorized access or sabotage systems changefrequently and are generally not recognized until launched against a target. While we have invested in protecting our data and systems and our clients’ data toreduce these risks, there can be no assurance that our efforts will prevent breaches. We carry data breach insurance coverage to mitigate the financial impact of abreach, though this may prove insufficient in the event of a breach.Our Pega Cloud offering involves the hosting of clients’ applications on the servers of third-party technology providers. We also rely on third-party systems andtechnology, including encryption, virtualized infrastructure, and support, and we employ a shared security model with our clients and our third-party technologyproviders.To defend against security threats, we need to continuously engineer products and services with enhanced security and reliability features, improve the deploymentof software updates to address security vulnerabilities, apply technologies that mitigate the risk of attacks, and maintain a digital security infrastructure thatprotects the integrity of our network, products, and services. The cost of these steps could negatively impact our operating results.We may experience significant errors or security flaws in our products and services and could face privacy, product liability, and warranty claims as a result.Despite quality testing each release, our software frequently contains errors or security flaws, especially when first introduced or when new versions are released.Errors in our software could affect its ability to work with hardware or other software or delay the development or release of new products or new versions of oursoftware. Additionally, the detection and correction of any security flaws can be time-consuming and costly. Errors or security flaws in our software could result inthe inadvertent disclosure of confidential information or personal data relating to our clients, employees, or third parties. Software errors and security flaws in ourproducts or services could expose us to privacy, product liability, and/or warranty claims as well as harm our reputation, which could impact our future sales ofproducts and services. Typically, we enter into license agreements that contain provisions intended to limit the nature and extent of our risk of product liability andwarranty claims. There is a risk that a court might interpret these terms in a limited way or could hold part or all of these terms to be unenforceable. Also, there is arisk that these contract terms might not bind a party other than the direct client. Furthermore, some of our licenses with our clients are governed by non-U.S. law,and there is a risk that foreign law might give us less or different protection. Although we have not experienced any material product liability claims to date, aproduct liability suit or action claiming a breach of warranty, whether meritorious, could result in substantial costs and a diversion of management’s attention andour resources.15Risks Related to Our Financial Obligations and IndebtednessWe have a significant amount of debt that may decrease our business flexibility, access to capital, and/or increase our borrowing costs, and we may still incuradditional debt in the future, which may adversely affect our operations and financial results.As of December 31, 2020, we had $600 million aggregate principal amount of indebtedness under our Convertible Senior Notes due 2025 (the “Notes”).Our indebtedness may:•limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, or other business purposes;•limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions, or other general businesspurposes;•require us to use a substantial portion of our cash flow from operations to make debt service payments;•limit our flexibility to plan for, or react to, changes in our business and industry;•place us at a competitive disadvantage compared to our less leveraged competitors;•dilute the interests of our existing stockholders as a result of issuing shares of our common stock upon the conversion of the Notes; and•increase our vulnerability to the impact of adverse economic and industry conditions.Our ability to pay our debt when due or refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic,financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debtand make necessary investments in our business. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at suchtime. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligationswhich could, in turn, result in that and our other indebtedness becoming immediately payable in full which could harm our financial condition, results of operationor cost of borrowing. In addition, we may incur additional debt to meet future financing needs. If we incur additional indebtedness, the risks related to our businessand our ability to service or repay our indebtedness will increase.The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.Under certain circumstances, the noteholders may convert their Notes at their option prior to the scheduled maturities. Upon conversion of the Notes, unless weelect to deliver solely shares of our common stock to settle such conversion, we will be obligated to make cash payments. In addition, holders of our Notes willhave the right to require us to repurchase their Notes upon the occurrence of a fundamental change (as defined in the indenture, dated as of February 24, 2020,between U.S. Bank National Association, as trustee (the “Trustee”) and us (the “Indenture”)), at a repurchase price equal to 100% of the principal amount of theNotes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. Although it is our intention and wecurrently expect to settle the conversion value of the Notes in cash up to the principal amount and any excess in shares, there is a risk that we may not have enoughavailable cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or Notes being converted. In addition,our ability to make payments may be limited by law, by regulatory authority, or by agreements governing our future indebtedness. Our failure to repurchase Noteswhen the Indenture requires the repurchase or to pay any cash payable on the Notes’ future conversions as required by the Indenture would constitute a defaultunder the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our futureindebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds torepay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof. In addition, even if holders of Notes do not elect to converttheir Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather thanlong-term liability, which would result in a material reduction of our net working capital.The Capped Call Transactions may affect the value of the Notes and our common stock.In connection with the Notes’ issuance, we entered into Capped Call Transactions with certain financial institutions (“option counterparties”). The Capped CallTransactions are generally expected to reduce the potential dilution to our common stock upon any conversion of the Notes and/or offset any cash payments we arerequired to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. From time to time,the option counterparties that are parties to the Capped Call Transactions or their respective affiliates may modify their hedge positions by entering into orunwinding various derivative transactions with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondarymarket transactions before the maturity of the Notes. This activity could cause a decrease in the market price of our common stock.16We are exposed to counterparty risk for the Capped Call Transactions.The option counterparties are financial institutions, and we are subject to the risk that one or more of the option counterparties may default or otherwise fail toperform, or may exercise certain rights to terminate, their obligations under the Capped Call Transactions. Our exposure to the credit risk of the optioncounterparties is not secured by any collateral. Recent global economic conditions have resulted in the actual or perceived failure or financial difficulties of manyfinancial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claimequal to our exposure at the time under such transaction. Our exposure depends on many factors, but our exposure will generally increase if the market price or thevolatility of our common stock increases. In addition, upon default or other failures to perform, or termination of obligations, by an option counterparty, we maysuffer more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of theoption counterparties.Provisions in the Notes’ Indenture may deter or prevent a business combination that may be favorable to our stockholders.If a fundamental change occurs prior to the Notes’ maturity date, holders of the Notes will have the right, at their option, to require us to repurchase all or a portionof their Notes. In addition, if a “make-whole fundamental change” (as defined in the Indenture) occurs prior to the maturity date, we will in some cases be requiredto increase the conversion rate of the Notes for a holder that elects to convert its Notes in connection with such make-whole fundamental change.Furthermore, the Indenture will prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes ourobligations under the Notes. These and other provisions in the Indenture could deter or prevent a third party from acquiring us even when the acquisition may befavorable to our stockholders.Conversion of the Notes may dilute the ownership interest of existing stockholders.The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares of our common stock uponconversion of any of the Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect our common stock’sprevailing market prices. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could beused to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.We are required to comply with certain financial and operating covenants under our revolving credit facility. Failure to comply with these covenants couldcause amounts borrowed to become immediately due and payable and/or prevent us from borrowing under the credit facility.We must comply with specified financial and operating covenants under our credit facility and to make payments, limiting our ability to operate our business as weotherwise might. Our failure to comply with any of these covenants or to meet any debt payment obligations could result in an event of default which, if not curedor waived, would result in any amounts outstanding, including any accrued interest and/or unpaid fees, becoming immediately due and payable. We might not havesufficient working capital or liquidity to satisfy any repayment obligations in the event of an acceleration of those obligations. In addition, if we are not incompliance with the financial and operating covenants under the credit facility at the time we wish to borrow funds, we will be unable to borrow funds. Thefinancial and operating covenants under the credit facility may limit our ability to borrow funds or capital, including for strategic acquisitions, share repurchases,and other general corporate purposes.Risks Related to Government Regulation and Intellectual PropertyOur success depends in part on maintaining and increasing our sales to clients in the public sector.We derive a portion of our revenues from contracts with federal, state, local, and foreign governments and agencies. We believe that our business’s success andgrowth will continue to depend on our successful procurement of government contracts. Selling to government entities can be highly competitive, expensive, andtime-consuming, often requiring significant upfront time and expense without any assurance that our efforts will produce any sales.Factors that could impede our ability to maintain or increase the revenue derived from government contracts include:•changes in fiscal or contracting policies;•decreases in available government funding;•changes in government programs or applicable requirements;•the adoption of new laws or regulations or changes to existing laws or regulations;•potential delays or changes in the government appropriations or other funding authorization processes;•governments and governmental agencies requiring contractual terms that are unfavorable to us, such as most-favored-nation pricing provisions; and•delays in the payment of our invoices by government payment offices.The occurrence of any of those factors could cause governments and governmental agencies to delay or refrain from purchasing our software in the future orotherwise harm our business, results of operations, financial condition, and cash flows.17Further, to increase our sales to clients in the public sector, we must comply with laws and regulations relating to the formation, administration, performance, andpricing of contracts with the public sector, including U.S. federal, state, and local governmental bodies, which affect how our channel partners and we do businessin connection with governmental agencies. These laws and regulations may impose added costs on our business, and failure to comply with these laws andregulations or other applicable requirements, including non-compliance in the past, could lead to claims for damages from our channel partners or governmentclients, penalties, termination of contracts, loss of intellectual property rights and temporary suspension or permanent debarment from government contracting.Any such damages, penalties, disruptions, or limitations in our ability to do business with the public sector could have a material adverse effect on our business,results of operations, financial condition, and cash flows.We are subject to increasingly complex U.S. and foreign laws and regulations, requiring costly compliance measures. Any failure to comply with these lawsand regulations could subject us to, among other things, penalties and legal expenses that could harm our reputation or have a material adverse effect on ourbusiness, financial condition, and results of operations.We are subject to extensive federal, state, and foreign laws and regulations, including but not limited to the U.S. Foreign Corrupt Practices Act, the U.K. BriberyAct, data privacy and security laws, and similar laws and regulations. The U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar foreign anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to obtain or retain business. Similar laws and regulations existin many other countries throughout the world in which we do or intend to do business. Data privacy laws and regulations in Europe, Australia, Latin America, andelsewhere are undergoing a rapid transformation toward increased restrictions.In April 2016, the European Parliament adopted the General Data Protection Regulation (“GDPR”). It became effective in May 2018. The GDPR extends the scopeof European privacy laws to any entity that controls or processes EU residents' personal data in connection with the offer of goods or services or the monitoring ofbehavior and imposes new compliance obligations concerning the handling of personal data. Complying with the GDPR and other emerging and changingrequirements caused us to incur additional costs in 2020 and may cause us to incur substantial additional costs or require us to change our business practices.Compliance also depends on how regulators choose to interpret and apply the new requirements. Moreover, non-compliance, or if regulators assert we have notcomplied, with GDPR could result in significant monetary penalties of up to the higher of 20 million Euro or 4% of annual worldwide revenue, private lawsuits,and damage to our reputation, which could have a material adverse effect on our business, financial condition, and results of operation.The California Consumer Privacy Act (“CCPA”), which creates new individual privacy rights for California consumers (as defined in the law) and places increasedprivacy and security obligations on entities handling certain personal data of consumers or households, went into effect on January 1, 2020, and the CaliforniaAttorney General may now bring enforcement actions for violations. The CCPA requires, among other things, covered companies to provide new disclosure toconsumers about such companies’ data collection, use and sharing practices, provide such consumers new ways to opt-out of certain sales or transfers of personalinformation, and provide consumers with additional causes of action. The CCPA may increase our compliance costs and potential liability.We have developed and implemented a compliance program based on what we believe are current best practices, including the background checking of our currentpartners and prospective clients and partners. We cannot guarantee, however, that we, our employees, our consultants, our partners, or our contractors are or will becompliant with all federal, state, and foreign regulations, particularly as we expand our operations outside of the U.S. If our representatives or we fail to complywith any of these laws or regulations, a range of fines, penalties, and/or other sanctions could be imposed on us, which could have a material adverse effect on ourbusiness, financial condition, and results of operations. Even if we are determined not to have violated these laws, government inquiries into these issues typicallyrequire the expenditure of significant resources and generate negative publicity, which could also harm our business. In addition, regulation of data privacy andsecurity laws is increasing worldwide, including various restrictions on cross-border access or transfer of data, including personal data of our employees, ourclients, and customers of our clients. Compliance with such regulations may increase our costs, and there is a risk of enforcement of such laws resulting in damageto our brand, as well as financial penalties and potential loss of business, which could be significant.We may have exposure to greater than anticipated tax liabilities.The determination of our worldwide provision for income taxes and other tax liabilities requires estimation and significant judgment, and there are manytransactions and calculations where the ultimate tax determination is uncertain. Like many other multinational corporations, we are subject to tax in multiple U.S.and foreign jurisdictions. The determination of our tax liability is always subject to audit and review by applicable domestic and foreign tax authorities, and we arecurrently undergoing several inquiries, audits, and reviews by taxing authorities throughout the world. Any adverse outcome of any such audit or review couldharm our business, and the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results inthe period or periods for which such determination is made. While we have established reserves based on assumptions and estimates that we believe are reasonableto cover such eventualities, these reserves may prove to be insufficient.In addition, our future income taxes could be materially adversely affected by a shift in our jurisdictional income mix, by changes in the valuation of our deferredtax assets and liabilities, as a result of changes in tax laws, regulations, or accounting principles, as well as by certain discrete items.18In light of continuing fiscal challenges in many jurisdictions, various levels of government are increasingly focused on tax reform and other legislative action toincrease tax revenue, including corporate income taxes. Several U.S. states have attempted to increase corporate tax revenues by taking an expansive view ofcorporate presence to attempt to impose corporate income taxes and other direct business taxes on companies that have no physical presence in their state, andtaxing authorities in foreign jurisdictions may take similar actions. Many U.S. states are also altering their apportionment formulas to increase the amount oftaxable income or loss attributable to their state from certain out-of-state businesses. Similarly, in Europe and elsewhere globally, there are various tax reformefforts underway designed to ensure that corporate entities are taxed on a larger percentage of their earnings.If it becomes necessary or desirable to repatriate any of our foreign cash balances to the United States, we may be subject to increased taxes, other restrictions,and limitations.As of December 31, 2020, $66.0 million of our cash and cash equivalents were held in our foreign subsidiaries. If it becomes necessary or desirable to repatriatethese funds, we may be required to pay U.S. federal, state, and local income and foreign withholding taxes upon repatriation. We consider the earnings of ourforeign subsidiaries to be permanently reinvested. As a result, U.S. federal, state, and local, and foreign withholding taxes on such earnings have not been providedin our financial statements. It is not practical to estimate the amount of tax we would have to pay upon repatriation due to the complexity of the tax laws and otherfactors.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 toprotect our proprietary rights. We also try to control access to and distribution of our technologies and other proprietary information. We have obtained patents instrategically important global markets relating to the architecture of our systems. We cannot assure that such patents will not be challenged, invalidated, orcircumvented, or that rights granted thereunder, or the claims contained therein will provide us with competitive advantages. Moreover, despite our efforts toprotect 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 formeremployees may seek employment with our business partners, clients, or competitors, and there can be no assurance that the confidential nature of our proprietaryinformation 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 canbe 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. There can be no assurance that third parties,including clients, will not claim infringement by us for current or future products. Although we attempt to limit the amount and type of our contractual liability forinfringement of the proprietary rights of third parties and assert ownership of work product and intellectual property rights as appropriate, there are oftenexceptions, and limitations may not be applicable and enforceable in all cases. Even if limitations are found to be applicable and enforceable, our liability to ourclients for these types of claims could be material given the size of certain of our transactions. We expect that software product developers will increasingly besubject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industrysegments 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 be precluded from making and selling the infringing software, if such proprietary rights are found to bevalid. 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 significantliability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. Even if a license were available, wecould be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringingtechnology, which could require substantial effort and cost. If we cannot license or develop technology for any infringing aspect of our business, we would beforced to limit or stop sales of our software and may be unable to compete effectively, which could have a material adverse effect upon our business, operatingresults, and financial condition.We may be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages, andcould 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 substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought againstthem. The litigation may involve patent holding companies or other adverse patent owners that have no relevant product revenues and against which our patentsmay, therefore, provide little or no deterrence. We have received, and may in the future receive, notices that claim we have misappropriated, misused, or infringedother parties' intellectual property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual propertyinfringement claims.19Coronavirus (“COVID-19”)Epidemic diseases, such as the recent global COVID-19 outbreak, could harm our business and results of operations.The recent outbreak of a novel coronavirus disease (“COVID-19”), which has been declared by the World Health Organization to be a pandemic, has spread acrossthe globe and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemics pose the risk that our employees,partners, and clients may be prevented from conducting business activities at full capacity for an indefinite period, including due to the spread of the disease withinthese groups or due to the shutdowns that are requested or mandated by governmental authorities. Moreover, these conditions can affect the rate of IT spending andmay adversely affect our clients’ willingness to purchase our solutions, delay prospective clients’ purchasing decisions, reduce the value or duration of theircontracts, request concessions including extended payment terms or better pricing, or affect attrition rates, all of which could adversely affect our future sales andoperating results. The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption.We have undertaken measures to protect our employees, partners, and clients, including by adopting a virtual-only meeting format for our annual PegaWorldconference and encouraging employees to work remotely. There can be no assurance that these measures will be sufficient, however, or that we can implementthem without adversely affecting our business operations.We continue to monitor the situation and adjust our policies as more information and public health guidance become available. Precautionary measures that havebeen adopted, or may be adopted in the future, could negatively affect our client success efforts, sales, and marketing efforts, delay and lengthen our sales cycles,or create operational or other challenges, any of which could harm our business and results of operations. In addition, COVID-19 may disrupt our clients’,vendors’, and partners’ operations for an indefinite period, including as a result of travel restrictions and/or business shutdowns, all of which could negativelyimpact our business and results of operations, including cash flows.At this time, it is not possible to estimate the ultimate impact that COVID-19 could have on our business, as the impact will depend on future developments, whichare highly uncertain and cannot be predicted. Furthermore, due to our shift to a renewable model, the effect of COVID-19 may not be fully reflected in our resultsof operations until future periods. The extent to which COVID-19 impacts our business, operations, and financial results will depend on numerous evolving factorsthat we may not be able to predict accurately, including:•the duration and scope of the pandemic;•governmental, business, and individual actions taken in response to the pandemic and the impact of those actions on global economic activity;•the actions that are taken in response to economic disruption;•the impact of business disruptions and reductions in our clients’ business and the resulting impact on their demand for our services and solutions; and•our ability to provide our services and solutions, including as a result of our employees or our clients’ employees working remotely and/or closures of officesand facilities.General Risk FactorsThe provision in our amended and restated bylaws, requiring exclusive forum in certain courts in The Commonwealth of Massachusetts or the federal districtcourt for the District of Massachusetts for certain types of lawsuits, may have the effect of discouraging lawsuits against us and our directors, officers, andemployees.Our amended and restated bylaws provide that unless we consent in writing to the selection of an alternative forum, the Business Litigation Section of the SuperiorCourt of Suffolk County, Massachusetts (the “BLS”) or, if the BLS lacks jurisdiction, the federal district court for the District of Massachusetts, Eastern Division,shall be the exclusive forum for any (i) derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owedby any of our directors, officers, or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to the Massachusetts BusinessCorporation Act (the “MBCA”), our articles of organization, or our bylaws (as each may be amended from time to time), or (iv) any action asserting a claimgoverned by the internal affairs doctrine.The choice of forum provision may increase costs to bring a claim, discourage claims, or limit a stockholder’s ability to bring a claim in a judicial forum that itfinds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us or our directors, officers andother employees. Alternatively, if a court were to find the choice of forum provision in our amended and restated bylaws to be inapplicable or unenforceable in anaction, we may incur additional costs associated with resolving such action in other jurisdictions. The exclusive forum provision in our amended and restatedbylaws will not preclude or contract the scope of exclusive federal or concurrent jurisdiction for actions brought under the federal securities laws, including theSecurities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, or the respective rules and regulations promulgated thereunder.20The continued uncertainties in the global economy may negatively impact our sales to, and the collection of receivables, from our clients.Our sales to, and the collection of receivables from, our clients may be impacted by adverse changes in global economic conditions. The U.S. and other keyinternational economies have experienced cyclical downturns from time to time, during which economic activity has been impacted by falling demand for goodsand services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity, and foreign exchange markets, bankruptcies, and economicuncertainty. These changes in global economic conditions could impact the ability and willingness of our clients to make investments in technology, which in turnmay delay or reduce the purchases of our software and services. These factors could also impact the ability and willingness of these clients to pay their tradeobligations and honor their contractual commitments. These clients may also become subject to increasingly restrictive regulatory requirements, which could limitor delay their ability to proceed with technology purchases and may result in longer sales cycles, increased price competition, and reductions in sales of ourproducts and services. The financial uncertainties facing many of our clients and the industries in which they operate could negatively impact our business,operating results, and financial condition.The U.K.’s withdrawal from the European Union (commonly referred to as “Brexit”) on January 31, 2020 could have a material impact on our business,including our relationships with existing and future clients, suppliers, and employees, which could harm our financial results and operations.We have material operations in the U.K. and European Union. The ultimate or perceived effects of the U.K.’s withdrawal from the European Union, couldpotentially disrupt the markets we serve and the tax jurisdictions in which we operate.The market price of our common stock has been and is likely to continue to be volatile.The market price of our common stock may be highly volatile and may fluctuate substantially due to a variety of factors, some of which are related in complexways.Factors that may affect the market price of our common stock include:•actual or anticipated fluctuations in our financial condition and operating results;•variance in our financial performance from expectations of securities analysts;•changes in our projected operating and financial results;•changes in the prices of our products and professional services;•changes in laws or regulations applicable to our products or services;•announcements by our competitors or us of significant business developments, acquisitions, or new offerings;•our involvement in any litigation or investigations by regulators;•our sale of our common stock or other securities;•changes in our Board of Directors, senior management, or key personnel;•the trading volume of our common stock;•price and volume fluctuations in the overall stock market;•changes in the anticipated future size and growth rate of our market; and•general economic, regulatory, political, and market conditions.Broad market and industry fluctuations, as well as general economic, regulatory, political, and market conditions, may negatively impact the market price of ourcommon stock. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation.We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management’s attention.We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which could cause our stock priceto decline.We have provided and may continue to give guidance on our business, future operating results, and other business metrics. In developing this guidance, ourmanagement must make certain assumptions and judgments about our future performance. Furthermore, analysts and investors may develop and publish their ownprojections of our business, which may form a consensus about our future performance. Our business results may vary significantly from such guidance or thatconsensus due to a number of factors, many of which are outside of our control and which could materially adversely affect our operations and operating results.Furthermore, if we make downward revisions of our previously announced guidance, or if our publicly announced guidance of future operating results fails to meetexpectations of securities analysts, investors, or other interested parties, our common stock price would decline.21If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price andtrading volume could decline.The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We donot have any control over these analysts. If our financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgrade ourshares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports onus regularly, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESOur principal administrative, sales, marketing, support, and research and development operations are in Cambridge, Massachusetts and Hyderabad, India. We alsomaintain offices elsewhere in the Americas, Europe, and the Asia-Pacific regions. On February 12, 2021, we entered into an agreement with our landlord to vacateour Cambridge, Massachusetts corporate headquarters on October 1, 2021, in exchange for a one-time payment to us of $18 million. We expect to enter into a newlease agreement for a facility within the greater Boston area. All of our properties are leased. We are currently assessing the impact of the COVID-19 pandemicand the increase in remote work on our future real estate needs. We believe we will be able to obtain future space as needed on acceptable and commerciallyreasonable terms.See "Note 9. Leases" in Item 8 of this Annual Report for additional information.ITEM 3. LEGAL PROCEEDINGSFrom time to time, we may be subject to legal proceedings and civil and regulatory claims that arise in the ordinary course of our business activities. Regardless ofthe outcome, litigation can have a material adverse effect on us because of defense and settlement costs, diversion of management resources, and other factors.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.22PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIESMarket informationOur common stock is quoted on the NASDAQ Global Select Market under the symbol “PEGA.”HoldersAs of February 5, 2021, we had 48 stockholders of record.DividendsDuring 2020, 2019, and 2018, we paid quarterly cash dividends of $0.03 per share of common stock. We currently expect to pay a quarterly cash dividend of $0.03per share, however, the Board of Directors may terminate or modify this dividend program at any time without prior notice.Issuer purchases of equity securities Common stock repurchased in the three months ended December 31, 2020:(in thousands, except per share amounts)Total Numberof SharesPurchasedAverage PricePaid perShare Total Numberof Shares Purchased as Part of PubliclyAnnounced Share Repurchase ProgramApproximate DollarValue of Shares ThatMay Yet Be Purchased at Period EndUnder Publicly Announced ShareRepurchased ProgramsOctober 1, 2020 - October 31, 202037 $125.97 26 $43,873 November 1, 2020 - November 30, 2020105 $123.82 23 $41,024 December 1, 2020 - December 31, 2020138 $128.76 25 $37,726 Total280 $126.54 (1) See "Stock repurchase program" in Item 7 of this Annual Report for additional information.(2) 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 theseamounts.(1) (2)(2)23Stock performance graph and cumulative total stockholder return The following performance graph represents a comparison of the cumulative total stockholder return, assuming the reinvestment of dividends, for a $100investment on December 31, 2015 in our common stock, the Total Return Index for the NASDAQ Composite, a broad market index, and the Standard & Poor’s(“S&P”) North American Technology Sector - Software Index™ (“S&P NA Tech Software”), a published industry index.December 31,201520162017201820192020Pegasystems Inc.$100.00 $131.46 $172.58 $175.44 $292.66 $490.22 NASDAQ Composite$100.00 $108.87 $141.13 $137.12 $187.44 $271.64 S&P NA Tech Software$100.00 $106.20 $151.66 $170.83 $229.93 $349.26 (1) The graph lines merely connect measurement dates and do not reflect fluctuations between those dates.ITEM 6. SELECTED FINANCIAL DATAConsistent with the final rules promulgated by the SEC on November 19, 2020 (Release 33-10890 titled “Management’s Discussion and Analysis, SelectedFinancial Data, and Supplementary Financial Data”), we have elected early adoption of the elimination of Item 301 of Regulation S-K.ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONSBUSINESS OVERVIEWWe develop, market, license, host, and support enterprise software applications that help organizations transform how they engage with their customers andprocess work. We also license our low code Pega Platform™ for rapid application development to clients that wish to build and extend their business applications.Our cloud-architected portfolio of customer engagement and digital process automation applications leverages artificial intelligence (“AI”), case management, androbotic automation technology, built on our unified low code Pega Platform, empowering businesses to quickly design, extend, and scale their enterpriseapplications to meet strategic business needs.Our target clients are Global 3000 organizations and government agencies that require applications to differentiate themselves in the markets they serve. Ourapplications achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, andreducing risk. We deliver applications tailored to our clients’ specific industry needs.(1)24Cloud TransitionWe are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud (“Cloud Transition”).Until we substantially complete our Cloud Transition, which we anticipate will occur in early 2023, we expect to continue to experience lower revenue growth andlower operating cash flow growth or negative cash flow. The actual mix of revenue and new arrangements in a given period can fluctuate based on clientpreferences.See risk factor "If we fail to manage our transition to a more subscription-based business model successfully, our results of operations and/or cash flows could benegatively impacted." in Item 1A of this Annual Report for additional information.Coronavirus (“COVID-19”)As of December 31, 2020, COVID-19 has not had a material impact on our results of operations or financial condition.COVID-19's ultimate impact on our operational and financial performance will depend on future developments, including the duration and spread of the outbreakand the impact of COVID-19 on our sales cycles, partners, vendors, and employees, all of which is uncertain and unpredictable. Our shift towards subscription-based revenue streams, the industry mix of our clients, the substantial size and available resources of our clients, and the critical nature of our products to ourclients may reduce or delay the impact of COVID-19 on our business. However, it is not possible to estimate the ultimate impact that COVID-19 will have on ourbusiness at this time.See “Coronavirus (“COVID-19”)” in Item 1A of this Annual Report for additional information.Relocation of Corporate HeadquartersOn February 12, 2021, we entered into an agreement with our landlord to vacate our Cambridge, Massachusetts corporate headquarters on October 1, 2021, inexchange for a one-time payment to us of $18 million. We expect to enter into a new lease agreement for a facility within the greater Boston area.Performance metricsWe utilize several performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods,including:Annual contract value (“ACV”) | Increased 21% since December 31, 2019•ACV, as reported, represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration inyears to calculate ACV for term license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV formaintenance. Client Cloud ACV is composed of maintenance ACV and ACV from term license contracts. ACV is a performance measure that we believeprovides useful information to our management and investors, particularly during our Cloud Transition. Reported amounts have not been adjusted for changesin foreign exchange rates. Foreign currency contributed 1%-2% to ACV growth in 2020.25Remaining performance obligations (“Backlog”) | Increased 28% since December 31, 2019•Backlog represents contracted revenue that has not yet been recognized and includes deferred revenue and non-cancellable amounts expected to be invoicedand recognized as revenue in future periods.• Pega Cloud revenue | Increased 56% since 2019•Pega Cloud revenue is revenue as reported under U.S. GAAP for cloud contracts.26RESULTS OF OPERATIONSRevenueCloud TransitionWe are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud. Revenue growth has andis expected to continue to be slower during this transition Revenue from Pega Cloud arrangements is typically recognized over the contract term. In contrast,revenue from license sales is generally recognized upfront when the license rights become effective.(Dollars in thousands)20202019ChangePega Cloud$208,268 20 %$133,746 15 %$74,522 56 %Maintenance296,709 30 %280,580 30 %16,129 6 %Term license266,352 26 %199,433 22 %66,919 34 %Subscription $771,329 76 %$613,759 67 %157,570 26 %Perpetual license28,558 3 %80,015 9 %(51,457)(64)%Consulting217,630 21 %217,609 24 %21 — %$1,017,517 100 %$911,383 100 %$106,134 12 %(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).The change in total revenue since 2019 generally reflects the impact of our Cloud Transition. Additional contributing factors were:•An increasing portion of our term license contracts include multi-year committed maintenance periods instead of annually renewable maintenance periods.Under such arrangements, a larger portion of the total contract value is recognized as maintenance revenue over the contract term rather than as term licenserevenue upon effectiveness of the license rights. In 2020, multi-year committed maintenance contributed $10.2 million to maintenance revenue growth andreduced term revenue growth by $20.8 million.•Maintenance renewal rates remained over 90% in 2020.•The slight increase in consulting revenue in 2020 was primarily due to increased billable hours, which offset the impact of reduced billable travel expenses dueto COVID-19. As part of our long-term strategy, we intend to continue growing and increasingly leveraging our ecosystem of partners on futureimplementation projects, potentially reducing our future consulting revenue growth rate.Gross profit(Dollars in thousands)20202019ChangeSoftware license$291,982 99 %$275,792 99 %$16,190 6 %Maintenance274,398 92 %254,924 91 %19,474 8 %Pega Cloud131,693 63 %67,918 51 %63,775 94 %Consulting8,531 4 %2,727 1 %5,804 213 %$706,604 69 %$601,361 66 %$105,243 18 %•The increase in gross profit in 2020 was primarily due to cost-efficiency gains as Pega Cloud grows and scales as a result of our Cloud Transition and overallrevenue growth.•The increase in consulting gross profit in 2020 was primarily due to a decrease in travel and entertainment expenses and an increase in consultant utilization.Consultant utilization is impacted by several factors, including the timing of new implementation projects and our scope and level of involvement in theseprojects compared to that of our consulting partners and enabled clients.Operating expenses20202019Change(Dollars in thousands)% of Revenue% of RevenueSelling and marketing$545,693 54 %$474,459 52 %$71,234 15 %Research and development$236,986 23 %$205,210 23 %$31,776 15 %General and administrative$67,452 7 %$56,570 6 %$10,882 19 %•The increase in selling and marketing in 2020 was primarily due to an increase in compensation and benefits of $97.2 million, attributable to increases inheadcount and equity compensation, partially offset by a decrease in travel and entertainment of $27.2 million due to COVID-19. The increase in headcountreflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts.•The increase in research and development in 2020 was primarily due to an increase in compensation and benefits of $30.2 million, attributable to increases inheadcount and equity compensation. The increase in headcount reflects additional investments in the development of our products, particularly for PegaCloud.(1)27•The increase in general and administrative in 2020 was primarily due to an increase in compensation and benefits of $4.0 million, attributable to increases inheadcount and equity compensation to support the growth in our operations and an increase in professional services fees of $4.2 million.Other income (expense), net(Dollars in thousands)20202019ChangeForeign currency transaction gain (loss)3,704 (2,335)$6,039 *Interest income1,223 2,020 (797)(39)%Interest expense(19,356)(212)(19,144)(9,030)%Gain on capped call transactions31,697 — 31,697 *Other (loss) income, net1,370 559 811 145 %$18,638 $32 $18,606 58,144 %* not meaningful•The change in foreign currency transaction gain (loss) in 2020 was primarily due to the impact of fluctuations in foreign currency exchange rates associatedwith our foreign currency-denominated cash, accounts receivable, and intercompany receivables and payables held by our United Kingdom (“U.K.”)subsidiary.•The decrease in interest income in 2020 was due to the significant decline in market interest rates despite the significant increase in our interest-bearinginvestment balances.•The increase in interest expense in 2020 was due to our issuance of $600 million in aggregate principal amount of the Notes on February 24, 2020. See "Note10. Debt" in Item 8 of this Annual Report for additional information.Interest expense related to the Notes:Year Ended December 31,Change(in thousands)20202019Contractual interest expense (0.75% coupon)$3,825 $— $3,825 Amortization of debt discount12,898 — 12,898 Amortization of issuance costs1,915 — 1,915 $18,638 $— $18,638 •The increase in the gain on capped call transactions in 2020 was due to fair value adjustments on the Capped Call Transactions. See "Note 10. Debt" in Item 8of this Annual Report for additional information.•The increase in other (loss) income, net in 2020 was due to a gain from our venture investments portfolio.(Benefit from) income taxes(Dollars in thousands)20202019(Benefit from) income taxes$(63,516)$(44,413)Effective income tax benefit rate51 %33 %During 2020, the increase in our effective income tax benefit rate was primarily due to an increase in excess tax benefits from stock-based compensation and acarryback claim benefit due to the Coronavirus Aid, Relief, and Economic Security Act (“Cares Act”). See "Note 16. Income Taxes" in Item 8 of this AnnualReport for additional information.Stock-based compensation increases the variability of our effective tax rates. The impact of stock-based compensation on a given period depends on ourprofitability, the attributes of our stock compensation awards we grant, and award holders' exercise behavior.28LIQUIDITY AND CAPITAL RESOURCES(in thousands)20202019Cash provided by (used in)Operating activities$(563)$(42,165)Investing activities(321,683)70,074 Financing activities423,448 (74,258)Effect of exchange rate on cash and cash equivalents2,334 290 Net increase (decrease) in cash and cash equivalents$103,536 $(46,059)December 31,(in thousands)20202019Held in U.S. entities$399,138 $23,437 Held in foreign entities66,030 44,926 Total cash, cash equivalents, and marketable securities$465,168 $68,363 We believe that our current cash, cash flow from operations, and borrowing capacity will be sufficient to fund our operations, stock repurchases, and quarterly cashdividends for at least the next 12 months. Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our growth,operating results, and the investments required to respond to the possible increased demand for our services. If we require additional capital resources to grow ourbusiness, we may seek to finance our operations from available funds or additional external financing.If it became necessary to repatriate foreign funds, we may be required to pay U.S. and foreign taxes upon repatriation. Due to the complexity of income taxlaws and regulations, and the Tax Reform Act’s effects, it is impracticable to estimate the amount of taxes we would have to pay. See risk factor "If it becomesnecessary or desirable to repatriate any of our foreign cash balances to the United States, we may be subject to increased taxes, other restrictions, andlimitations" in Item 1A of this Annual Report for additional information.Cash (used in) operating activitiesWe are in the process of transitioning our business to sell software primarily through subscription arrangements, particularly Pega Cloud. This transition has and isexpected to continue to impact our billings and resulting timing of cash collections. Pega Cloud and term license arrangements are generally billed and collectedover the contract term while perpetual license arrangements are generally billed in full and collected upfront when the license rights become effective. As clientpreferences continue to shift in favor of Pega Cloud arrangements, we could continue to experience slower operating cash flow growth, or negative cash flow, inthe near termIn 2020, COVID-19 did not have a material impact on our cash flows from operations. See “Coronavirus (“COVID-19”)” in Item 1A. of this Annual Report foradditional information.The change in cash (used in) operating activities in 2020 was primarily due to improved cash collections. The increased cash collections were partially offset byincreased costs as we accelerated investments in our Pega Cloud offering and selling and marketing activities to support future growth.Cash (used in) provided by investing activitiesThe change in cash (used in) provided by investing activities in 2020 was primarily driven by purchases of financial instruments and property and equipmentinvestments for our offices.Cash provided by (used in) financing activitiesConvertible senior notesIn February 2020, we issued $600 million in aggregate principal amount of our convertible senior notes (the “Notes”) due March 1, 2025, which provided proceedsas follows:(in thousands)AmountPrincipal$600,000 Less: issuance costs(14,527)Less: Capped Call Transactions(51,900)$533,573 A portion of the proceeds of the Notes was used to fund the Capped Call Transactions, with the remainder to be used for working capital and other generalcorporate purposes. The Notes mature on March 1, 2025; however, under certain circumstances, holders may surrender their Notes for conversion prior to thematurity date. We may settle conversion by paying or delivering, as applicable, cash, shares of our common29stock or a combination of cash and shares of our common stock. See "Note 10. Debt" in Item 8 of this Annual Report for additional information.Credit facilityIn November 2019, and as amended as of February 2020, July 2020, and September 2020, we entered into a five-year $100 million senior secured revolving creditagreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). As of December 31, 2020, we had no outstanding borrowings under the CreditFacility. See "Note 10. Debt" in Item 8 of this Annual Report for additional information.Stock repurchase programChanges in the remaining stock repurchase authority:(in thousands)2020December 31, 2019$45,484 Authorizations 20,516 Repurchases (28,274)December 31, 2020$37,726 (1) On June 15, 2020, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2021 and increased the remaining common stockrepurchase authority to $60 million.(2) Purchases under this program have been made on the open market.Common stock repurchases20202019(in thousands)SharesAmountSharesAmountTax withholdings for net settlement of equity awards725 $75,560 645 $44,857 Stock repurchase program278 28,274 333 21,136 1,003 $103,834 978 $65,993 During 2020 and 2019, instead of receiving cash from the equity holders, we withheld shares with a value of $59.6 million and $41.7 million, respectively, for theexercise price of options. These amounts have been excluded from the table above.Dividends(in thousands)20202019Dividend payments to stockholders$9,628 $9,486 We currently intend to pay a quarterly cash dividend of $0.03 per share. However, the Board of Directors may terminate or modify the dividend program at anytime without prior notice.Contractual obligationsAs of December 31, 2020, our contractual obligations were:Payments due by period(in thousands)20212022202320242025 and afterOtherTotalConvertible senior notes (1)$4,500 $4,500 $4,500 $4,500 $601,488 $— $619,488 Purchase obligations (2)59,685 56,829 7,669 747 351 — 125,281 Operating lease obligations22,164 21,747 21,599 7,683 14,431 — 87,624 Investment commitments (3)500 — — — — — 500 Liability for uncertain tax positions (4)— — — — — 4,680 4,680 $86,849 $83,076 $33,768 $12,930 $616,270 $4,680 $837,573 (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) Represents the maximum funding under existing venture investment agreements. Our investment agreements generally allow us to withhold unpaid funds at our discretion.(4) We are unable to reasonably estimate the timing of the cash outflow due to uncertainties in the timing of the effective settlement of tax positions.A detailed discussion and analysis of the 2019 year-over-year changes can be found in "Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2019.(1)(2)30CRITICAL ACCOUNTING ESTIMATES AND SIGNIFICANT JUDGMENTSManagement’s discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted in the U.S. and the rules and regulations of the SEC for annual financial reporting.The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of currentconditions, and beliefs of what could occur in the future, given the available information.We believe that, of our significant accounting policies, described in “Note 2. Significant Accounting Policies” in Item 8 of this Annual Report, the followingaccounting policies are most important to the portrayal of our financial condition and require the most subjective judgment. Accordingly, these are the policieswe believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. If actual resultsdiffer significantly from management’s estimates and projections, there could be a material effect on our financial statements.Revenue recognitionOur contracts with clients typically contain promises by us to provide multiple products and services. Specifically, contracts associated with Pega Platform salesand other software applications, sold either as licenses to use functional intellectual property or as a cloud-based solution, typically include consulting services.Determining whether such products and services within a client contract are considered distinct performance obligations that should be accounted for separatelyrequires significant judgment. We review client contracts to identify all separate promises to transfer goods and services that would be considered performanceobligations. Judgment is also required in determining whether an option to acquire additional products and services within a client contract represents a materialright that the client would not receive without entering into the contract.A contract modification is a legally binding change to the scope, price, or both of an existing contract. Contract modifications are reviewed to determine whetherthey should be accounted for as part of the original contract or as a separate contract. This determination requires significant judgment, which could impact thetiming of revenue recognition. We typically account for contract modifications prospectively as a separate contract. The additional performance obligation(s) inour contract modifications are generally distinct and priced at their stand-alone selling price.We allocate the transaction price to the distinct performance obligations, including options in contracts determined to represent a material right, based on eachperformance obligation's relative stand-alone selling price. Judgment is required in estimating stand-alone selling prices. We maximize the use of observable inputsby maintaining pricing analyses that consider our pricing policies, historical stand-alone sales when they exist, and historical renewal prices charged to clients. Wehave concluded that the stand-alone selling prices of certain performance obligations, specifically the stand-alone selling prices of software licenses and PegaCloud arrangements, are highly variable. In these instances, we estimate the stand-alone selling prices using the residual approach, determined based on totaltransaction price minus the stand-alone selling price of other performance obligations promised in the contract. We update our stand-alone selling price analysisperiodically, including a re-assessment of whether the residual approach used to determine the stand-alone selling prices for software licenses and Pega Cloudarrangements remains appropriate.Changes in the assumptions or judgments used in determining the performance obligations in client contracts and stand-alone selling prices could significantlyimpact the timing and amount of revenue we report in a particular period.Goodwill and intangible assets impairmentOur goodwill and intangible assets result from our previous business acquisitions. Goodwill and intangible assets with indefinite useful lives are not amortizedbut are tested for impairment at least annually or as circumstances indicate their value may no longer be recoverable. We do not carry any intangible assetswith indefinite useful lives other than goodwill. We perform our annual goodwill impairment test as of November 30th. To assess if goodwill is impaired, wefirst perform a qualitative assessment to determine whether further impairment testing is necessary. If based on the qualitative assessment, we consider itmore-likely-than-not that our reporting unit's fair value is less than its carrying amount, we perform a quantitative impairment test. An excess of carrying valueover fair value would indicate that goodwill may be impaired. We periodically reevaluate our business and have determined that we have one operatingsegment and one reporting unit. If our assumptions change in the future, we may be required to record impairment charges to reduce our goodwill's carryingvalue. Changes in the valuation of goodwill could materially impact our operating results and financial position.We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that such assets' carrying amount may not berecoverable. In evaluating potential impairment of these assets, we specifically consider whether any indicators of impairment are present, including, but notlimited to:•whether there has been a significant adverse change in the business climate that affects the value of an asset;•whether there has been a significant change in the extent or way an asset is used; and•whether it is expected that the asset will be sold or disposed of before the end of its originally estimated useful life.If indicators of impairment are present, we compare the estimated undiscounted cash flows that the specific asset is expected to generate to its carrying value.The key assumptions of the cash flow model involve significant subjectivity. If such assets are impaired, an impairment is measured by the amount by whichthe carrying amount of the asset exceeds its fair value.31As of December 31, 2020, we had $79.2 million of goodwill and $15.7 million of intangible assets. Changes in the valuation of long-lived assets couldmaterially impact our operating results and financial position. To date, there have been no impairments of goodwill or intangible assets.Accounting for income taxesSignificant judgment is required to determine our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties inapplying accounting principles and complex tax laws. Changes in tax laws or our interpretation of tax laws and the resolution of any tax audits couldsignificantly impact our financial statements.We regularly assess the need for a valuation allowance against our deferred tax assets. Future realization of our deferred tax assets ultimately depends onsufficient taxable income within the available carryback or carryforward periods. We record a valuation allowance to reduce our deferred tax assets to anamount we believe is more likely than not to be realized. Changes in our valuation allowance impact income tax expense in the period of adjustment. Ourdeferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income based on historical andprojected information.We assess our income tax positions and record tax benefits based upon management’s evaluation of the facts, circumstances, and information available at thereporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we record the largest amount of tax benefit with agreater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. Forthose income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements.As a global company, we use significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which we operate. In theordinary course of our business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertaintiesarise due to transfer pricing for transactions with our subsidiaries, the determination of tax nexus, and tax credit estimates. In addition, the calculation ofacquired tax attributes and the associated limitations are complex. We estimate our exposure to unfavorable outcomes related to these uncertainties andestimate the probability of such outcomes.Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome will not be different from what is reflected in ourhistorical income tax provisions, returns, and accruals. Such differences, or changes in estimates relating to potential differences, could have a material impacton our income tax provision and operating results in the period in which such a determination is made.See "Note 16. Income Taxes" in Item 8 of this Annual Report for additional information.Convertible senior notes and capped call transactionsIn February 2020, we issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a privateplacement. We also entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped CallTransactions cover 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of our common stock and are generallyexpected to reduce potential dilution of our common stock upon any conversion of the Notes.In accounting for the convertible senior notes and Capped Call Transactions:•The initial carrying amount of the liability component was calculated by measuring a similar debt instrument’s fair value that does not have an associatedconversion feature. The excess of the Notes’ principal amount over the initial carrying amount of the liability component, the debt discount, is amortized asinterest expense over the Notes’ contractual term. The fair value was determined utilizing a discounted cash flow model and required us to make variousestimates including, implied credit spread, expected volatility, and the risk-free rate for notes with a similar term.•The equity component was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equityclassification. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liabilitycomponent from the par value of the Convertible Senior Notes.•The Capped Call Transactions are accounted for as derivative instruments. The Capped Call Transactions do not qualify for the Company’s own equity scopeexception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated in accordance with thegoverning documents, may not represent a fair value measurement.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 modelsuse various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, asapplicable. Management applies judgment in its determination of expected volatility. We consider both historical and implied volatility levels of the underlyingequity security and, to a lesser extent, historical peer group volatility levels.32Applying the accounting framework for the Convertible Senior Notes and the Capped Call Transactions requires the exercise of judgment and the determination ofthe fair value of the liability component of the convertible notes and the fair value of the Capped Call Transactions requires the Company to make significantestimates and assumptions. As of December 31, 2020, a hypothetical 10% increase in our stock price would have increased the fair value of the capped call to$96.5 million, while a hypothetical 10% decrease in our stock price would have decreased the fair value of the capped call to $70.3 million.See "Note 2. Significant Accounting Policies", "Note 10. Debt", and "Note 12. Fair Value Measurements" in Item 8 of this Annual Report for additionalinformation.New accounting pronouncementsSee "Note 2. Significant Accounting Policies" in Item 8 of this Annual Report for additional information.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKMarket risk represents the risk of loss that may affect us due to adverse changes in financial market prices and rates.Foreign currency exposureTranslation riskOur foreign operations’ operating expenses are primarily denominated in foreign currencies. However, our international sales are also primarily denominated inforeign currencies, which partially offsets our foreign currency exposure.A hypothetical 10% strengthening in the U.S. dollar against other currencies would result in the following impact:202020192018(Decrease) increase in revenue(4)%(4)%(4)%(Decrease) increase in net income12 %(7)%(1)%Remeasurement riskWe experience fluctuations in transaction gains or losses from remeasurement of monetary assets and liabilities denominated in currencies other than the functionalcurrency of the entities in which they are recorded.We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash and cashequivalents, accounts receivable, unbilled receivables, and intercompany receivables and payables held by our U.K. subsidiary, a British pound functional entity.A hypothetical 10% strengthening in the British pound exchange rate against the Australian dollar, Euro, and U.S. dollar would result in the following impact:(in thousands)December 31, 2020December 31, 2019December 31, 2018Foreign currency (loss) gain$(7,782)$3,633 $(6,295)33ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm35Consolidated Balance Sheets as of December 31, 2020 and 201937Consolidated Statements of Operations for the years ended December 31, 2020, 2019, and 201838Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2020, 2019, and 201839Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019, and 201840Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 201841Notes to Consolidated Financial Statements4234REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and the Board of Directors of Pegasystems Inc.Cambridge, MassachusettsOpinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of Pegasystems Inc. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements ofoperations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred toas the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control —Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of itsoperations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in InternalControl — Integrated Framework (2013) issued by COSO.Basis for OpinionsThe Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Management’s Report on and Changes in Internal Control over Financial Reporting. Our responsibility is to express anopinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the PublicCompany Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performingprocedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also includedevaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal controlover financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the designand operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. Webelieve that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”). A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financialstatements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Critical Audit MattersThe critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the auditcommittee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. Thecommunication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relates.Revenue Recognition – Software License Arrangements - Refer to Note 2 to the financial statementsThe Company generates revenue from multiple sources, including software license revenue primarily derived from license sales of the Company’s Pega Platform and other softwareapplications, maintenance revenue from client support, and services revenue primarily derived from cloud sales of the Company’s hosted Pega Platform and other software applications andconsulting services.The Company’s license and cloud arrangements often contain multiple performance obligations. These performance obligations may be included in the same contract or negotiated separately.Additionally, the Company enters into amendments to previously executed contracts which constitute contract modifications. Certain new complex arrangements require a detailed analysis ofthe contractual terms and application of more complex accounting guidance, specifically for contracts with higher contract values. Factors with potentially significant judgments include:•Identification of the complete client arrangement•Accounting treatment of contract modifications•Valuation and allocation of identified material rights•Allocation of arrangement consideration to bundled fixed price work ordersGiven the accounting complexity and the management judgment necessary to properly identify, classify, and account for performance obligations, auditing such estimates involved especiallycomplex and subjective auditor judgment in relation to license and cloud arrangements.How the Critical Audit Matter Was Addressed in the AuditOur audit procedures related to license and cloud revenue arrangements included the following, among others:35•We tested the effectiveness of controls over revenue recognition, including those over the identification of performance obligations included in the transaction, accounting treatmentof contract modifications, identification of material rights, and allocation of arrangement consideration.•We selected a sample of client contracts and performed the following:◦Evaluated whether the Company properly identified the terms of the arrangements and considered all arrangement terms that may have an impact on revenue recognition.◦Evaluated whether the Company appropriately identified all performance obligations in the arrangement and whether the methodology to allocate the transaction price tothe individual performance obligations was appropriately applied.◦Tested the accuracy of management’s calculation of revenue for each performance obligation by developing an expectation for the revenue to be recorded in the currentperiod and comparing it to the Company’s recorded balances.◦Evaluated management’s assessment of any ongoing negotiations with clients and bundling with statements of work.◦Analyzed the proper accounting treatment for any contract modifications based on 1) whether the additional products and services are distinct from the products andservices in the original arrangement, and 2) whether the amount of consideration expected for the added products and services reflects the stand-alone selling price of thoseproducts and services.◦Evaluated management’s determination of whether certain renewal clauses, additional product offers, or additional usage offers represented material rights included in thecontract and whether they were properly valued based on the incremental discount provided and the probability of the right being exercised.◦For contracts with a performance obligation of bundled fixed price services, evaluated whether management reasonably estimated the number of hours that each projectwill require and independently recalculated the stand-alone selling price for each bundled fixed price service.◦Obtained evidence of delivery of the elements of the arrangement to the client.Convertible senior notes and capped calls— Refer to Note 10 to the financial statementsIn February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement. In accounting forthe issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of asimilar debt instrument that does not have an associated convertible feature. The fair value was determined utilizing a discounted cash flow model that includes assumptions such as impliedcredit spread, expected volatility, and the risk-free rate for notes with a similar term. The carrying amount of the equity component representing the conversion option was determined bydeducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equityclassification.In February 2020, the Company also entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions aregenerally expected to reduce potential dilution to the common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of theprincipal amount of converted Notes. The Capped Call Transactions are accounted for as derivative instruments which are recorded at fair value at the end of each reporting period. The fairvalue was determined utilizing a lattice model that includes inputs and assumptions such as stock price, expected term, volatility, risk-free rate and implied yield.There is complexity in applying the accounting framework for the Notes and the related Capped Call Transactions. In addition, the determination of the fair value of the liability component ofthe convertible notes and the Capped Call Transactions requires the Company to make significant estimates and assumptions relating to the implied credit spread, expected volatility, and therisk-free rate for the liability component of the Convertible Notes, and the expected term, volatility, risk-free rate and implied yield for the derivative value of the Capped Call Transactions.Performing audit procedures to evaluate the appropriateness of the accounting framework and the reasonableness of the estimates and assumptions used in the fair value of the liabilitycomponent of the Notes and the Capped Call Transactions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.How the Critical Audit Matter Was Addressed in the AuditOur audit procedures related to the accounting for the Notes and Capped Call Transactions, including the Company’s judgments and calculations related to the fair value of the liabilitycomponent of the Notes and the derivative value of the Capped Call Transactions, included the following procedures, among others:•We tested the effectiveness of controls over the Company’s accounting for the Notes and Capped Call Transactions, and over the determination of the fair value of the liabilitycomponent of the Notes and fair value of the Capped Call Transaction derivative.•With the assistance of professionals in our firm having expertise in debt issuance and derivative transaction accounting, we evaluated the Company’s conclusions regarding theaccounting treatment applied to the Notes and Capped Call Transactions.•With the assistance of fair value specialists, we evaluated the reasonableness of the valuation methodologies and the significant assumptions used to determine the respective fairvalues of the liability component of the Notes and the Capped Call Transaction derivative, by:◦Testing the source information underlying the respective fair values of the liability component of the Notes and the Capped Call Transaction derivative and themathematical accuracy of the calculations.◦Developing estimates of the respective fair values of the liability component of the Notes and the Capped Call Transaction derivative using independent expectations of thesignificant assumptions, and comparing our estimates of fair value to the Company’s estimates./s/ DELOITTE & TOUCHE LLPBoston, MassachusettsFebruary 17, 2021We have served as the Company's auditor since 2000.36PEGASYSTEMS INC.CONSOLIDATED BALANCE SHEETS(in thousands, except per share amounts)December 31, 2020December 31, 2019AssetsCurrent assets:Cash and cash equivalents$171,899 $68,363 Marketable securities293,269 — Total cash, cash equivalents, and marketable securities465,168 68,363 Accounts receivable215,827 199,720 Unbilled receivables207,155 180,219 Other current assets88,760 57,308 Total current assets976,910 505,610 Unbilled receivables113,278 121,736 Goodwill79,231 79,039 Other long-term assets434,843 278,427 Total assets$1,604,262 $984,812 Liabilities and Stockholders’ EquityCurrent liabilities:Accounts payable$24,028 $17,475 Accrued expenses59,261 48,001 Accrued compensation and related expenses123,012 104,126 Deferred revenue232,865 190,080 Other current liabilities20,969 18,273 Total current liabilities460,135 377,955 Convertible senior notes, net518,203 — Operating lease liabilities59,053 52,610 Other long-term liabilities24,699 15,237 Total liabilities1,062,090 445,802 Commitments and Contingencies (Note 19)Stockholders’ equity:Preferred stock, $0.01 par value, 1,000 shares authorized; none issued— — Common stock, $0.01 par value, 200,000 shares authorized; 80,890 and 79,599 shares issued and outstanding at December 31, 2020 and2019, respectively809 796 Additional paid-in capital204,432 140,523 Retained earnings339,879 410,919 Accumulated other comprehensive (loss)Net unrealized gain on available-for-sale marketable securities, net of tax46 — Foreign currency translation adjustments(2,994)(13,228)Total stockholders’ equity542,172 539,010 Total liabilities and stockholders’ equity$1,604,262 $984,812 See notes to consolidated financial statements.37PEGASYSTEMS INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)Year Ended December 31,202020192018RevenueSoftware license$294,910 $279,448 $288,119 Maintenance296,709 280,580 263,875 Pega Cloud208,268 133,746 82,627 Consulting217,630 217,609 256,960 Total revenue1,017,517 911,383 891,581 Cost of revenueSoftware license2,928 3,656 5,169 Maintenance22,311 25,656 24,565 Pega Cloud76,575 65,828 37,409 Consulting209,099 214,882 234,622 Total cost of revenue310,913 310,022 301,765 Gross profit706,604 601,361 589,816 Operating expensesSelling and marketing545,693 474,459 373,495 Research and development236,986 205,210 181,710 General and administrative67,452 56,570 51,643 Total operating expenses850,131 736,239 606,848 (Loss) from operations(143,527)(134,878)(17,032)Foreign currency transaction gain (loss)3,704 (2,335)2,421 Interest income1,223 2,020 2,715 Interest expense(19,356)(212)(10)Gain on capped call transactions31,697 — — Other income (loss), net1,370 559 363 (Loss) before (benefit from) income taxes(124,889)(134,846)(11,543)(Benefit from) income taxes(63,516)(44,413)(22,160)Net (loss) income$(61,373)$(90,433)$10,617 (Loss) earnings per shareBasic$(0.76)$(1.14)$0.14 Diluted$(0.76)$(1.14)$0.13 Weighted-average number of common shares outstandingBasic80,336 79,055 78,564 Diluted80,336 79,055 83,064 See notes to consolidated financial statements.38PEGASYSTEMS INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME(in thousands)202020192018Net (loss) income$(61,373)$(90,433)$10,617 Other comprehensive income (loss), net of taxUnrealized gain (loss) on available-for-sale securities46 249 (17)Foreign currency translation adjustments10,234 (155)(6,600)Total other comprehensive income (loss), net of tax10,280 94 (6,617)Comprehensive (loss) income$(51,093)$(90,339)$4,000 See notes to consolidated financial statements.39PEGASYSTEMS INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands, except per share amounts)Common StockAdditionalPaid-InCapitalRetainedEarningsAccumulated OtherComprehensive(Loss) IncomeTotal Stockholders’EquityNumber of SharesAmountBalance at January 1, 201878,081 $781 $152,097 $509,697 $(6,705)$655,870 Repurchase of common stock(1,001)(10)(55,265)— — (55,275)Issuance of common stock for stock compensation plans1,413 14 (39,375)— — (39,361)Issuance of common stock under the employee stock purchase plan33 — 1,767 — — 1,767 Stock-based compensation— — 63,981 — — 63,981 Cash dividends declared ($0.12 per share)— — — (9,451)— (9,451)Other comprehensive (loss)— — — — (6,617)(6,617)Net income— $— $— $10,617 $— $10,617 December 31, 201878,526 $785 $123,205 $510,863 $(13,322)$621,531 Repurchase of common stock(333)(3)(21,133)— — (21,136)Issuance of common stock for stock compensation plans1,375 14 (44,853)— — (44,839)Issuance of common stock under the employee stock purchase plan31 — 2,202 — — 2,202 Stock-based compensation— — 81,102 — — 81,102 Cash dividends declared ($0.12 per share)— — — (9,511)— (9,511)Other comprehensive income— — — — 94 94 Net (loss)— — — (90,433)— (90,433)December 31, 201979,599 $796 $140,523 $410,919 $(13,228)$539,010 Equity component of convertible senior notes, net— — 61,604 — — 61,604 Repurchase of common stock(278)(3)(28,271)— — (28,274)Issuance of common stock for stock compensation plans1,536 16 (75,578)— — (75,562)Issuance of common stock under the employee stock purchase plan33 — 3,039 — — 3,039 Stock-based compensation— — 103,115 — — 103,115 Cash dividends declared ($0.12 per share)— — — (9,667)— (9,667)Other comprehensive income— — — — 10,280 10,280 Net (loss)— — — (61,373)— (61,373)December 31, 202080,890 $809 $204,432 $339,879 $(2,948)$542,172 See notes to consolidated financial statements.40PEGASYSTEMS INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)202020192018Operating activitiesNet (loss) income$(61,373)$(90,433)$10,617 Adjustments to reconcile net (loss) income to cash (used in) provided by operating activitiesStock-based compensation103,068 80,909 63,862 (Gain) loss on capped call transactions(31,697)— — Deferred income taxes(59,777)(49,317)(30,898)Amortization of deferred commissions33,302 29,152 17,271 Lease expense16,248 14,497 — Amortization of debt discount and issuance costs14,813 — — Amortization of intangible assets and depreciation21,348 21,396 25,295 Amortization of investments1,073 800 1,596 Foreign currency transaction (gain) loss(3,704)2,335 (2,421)Other non-cash(879)(521)(1,678)Change in operating assets and liabilities:Accounts receivable, unbilled receivables, and contract assets(32,321)1,088 25,779 Other current assets(12,959)(6,344)(6,068)Accounts payable, accrued compensation, and accrued expenses37,945 25,670 20,798 Deferred revenue43,661 1,937 28,951 Deferred commissions(55,175)(49,746)(44,036)Other long-term assets and liabilities(14,136)(23,588)(4,712)Cash (used in) provided by operating activities(563)(42,165)104,356 Investing activitiesPurchases of investments(326,549)(11,424)(69,494)Proceeds from maturities and called investments28,811 13,634 33,991 Sales of investments1,424 89,406 — Payments for acquisitions, net of cash acquired— (10,934)(800)Investment in property and equipment(25,369)(10,608)(11,893)Cash (used in) provided by investing activities(321,683)70,074 (48,196)Financing activitiesProceeds from issuance of convertible senior notes600,000 — — Purchase of capped calls related to convertible senior notes(51,900)— — Payment of debt issuance costs(14,527)— — Dividend payments to stockholders(9,628)(9,486)(9,432)Proceeds from revolving credit facility— 45,000 — Payments on revolving credit facility— (45,000)— Common stock repurchases for tax withholdings for net settlement of equity awards(72,523)(42,637)(37,594)Common stock repurchases under stock repurchase program(27,974)(22,135)(54,434)Cash provided by (used in) financing activities423,448 (74,258)(101,460)Effect of exchange rate changes on cash and cash equivalents2,334 290 (2,557)Net increase (decrease) in cash and cash equivalents103,536 (46,059)(47,857)Cash and cash equivalents, beginning of period68,363 114,422 162,279 Cash and cash equivalents, end of period$171,899 $68,363 $114,422 Supplemental disclosuresInterest paid on convertible notes$2,338 $— $— Income taxes paid$3,377 $4,745 $6,630 Non-cash investing and financing activity:Dividends payable$2,427 $2,388 $2,363 See notes to consolidated financial statements.41PEGASYSTEMS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. BASIS OF PRESENTATIONBusinessThe Company develops, markets, licenses, and supports customer engagement and digital process automation software applications in addition to the PegaPlatform™ for clients that wish to build and extend their own applications. The Company provides consulting, training, support, and hosting services tofacilitate the use of its software.Management estimates and reportingThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requiresmanagement to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from thoseestimates. Accounts with reported amounts based on significant estimates and judgments include, but are not limited to, revenue, unbilled receivables, deferredrevenue, deferred income taxes, deferred commissions, income taxes payable, convertible senior notes, capped call transactions, intangible assets, andgoodwill.Principles of consolidationThe Company’s consolidated financial statements reflect Pegasystems Inc. and subsidiaries in which the Company holds a controlling financial interest.All intercompany accounts and transactions were eliminated in consolidation.2. SIGNIFICANT ACCOUNTING POLICIESRevenueThe Company’s revenue is primarily derived from:•software license revenue from sales of the Company’s Pega Platform and software applications. Software licenses represent functional intellectual propertyand are delivered separately from maintenance and services.•maintenance revenue from client support including software upgrades (on a when and if available basis), telephone support, and bug fixes or patches.•Pega Cloud revenue, which is sales of the Company’s hosted Pega Platform and software applications.•consulting revenue, which is primarily related to new software license implementations, training, and reimbursable costs.Performance ObligationsThe Company’s software license and Pega Cloud arrangements often contain multiple performance obligations. If a contract contains multiple performanceobligations, the Company accounts for each distinct performance obligation separately. The transaction price is allocated to the separate performance obligationson a relative stand-alone selling price basis. Any discounts or expected potential future price concessions are considered when determining the total transactionprice. The Company’s policy is to exclude sales and similar taxes collected from clients from the determination of transaction price.The Company’s typical performance obligations are:PerformanceObligationHow Standalone Selling Price is Typically DeterminedWhen Performance Obligation is Typically SatisfiedWhen Payment is Typically DuePerpetual licenseResidual approachUpon transfer of control to the client, defined when theclient can use and benefit from the license (point in time)Effective date of the licenseTerm licenseResidual approachUpon transfer of control to the client, defined when theclient can use and benefit from the license (point in time)Annually, or more frequently, over theterm of the licenseMaintenanceConsistent pricing relationship as a percentage of the relatedlicense and observable in stand-alone renewal transactions Ratably over the term of the maintenance (over time)Annually, or more frequently, over theterm of the maintenancePega CloudResidual approachRatably over the term of the service (over time)Annually, or more frequently, over theterm of the serviceConsulting - time and materialsObservable hourly rate for time and materials-based services insimilar geographies for similar contract sizesBased on hours incurred to dateMonthlyConsulting - fixed priceObservable hourly rate for time and materials-based services insimilar geographies for similar contract sizes multiplied byestimated hours for the projectBased on hours incurred as a percentage of total estimatedhoursAs contract milestones are achieved(1) Technical support and software updates are considered distinct services but accounted for as a single performance obligation, as they have the same pattern of transfer to the client.The Company utilizes the residual approach for performance obligations since the selling price is highly variable and stand-alone selling price is not discerniblefrom past transactions or other observable evidence. Periodically, the Company reevaluates whether the residual approach remains appropriate. As required, theCompany evaluates its residual approach estimate compared to all available observable data in order to conclude the estimate is representative of its stand-aloneselling price.(1)42If the contract grants the client the option to acquire additional products or services, the Company assesses whether the option represents a material right to theclient that the client would not receive without entering into that contract. Discounts on options to purchase additional products and services greater than discountsavailable to similar clients are accounted for as an additional performance obligation.During most of each client contract term, the amount invoiced is generally less than the amount of revenue recognized to date, primarily because we transfercontrol of the performance obligation related to the software license at the inception of the contract term. A significant portion of the total contract consideration istypically allocated to the license performance obligation. Therefore, our contracts often result in the recording of unbilled receivables and contract assetsthroughout most of the contract term. The Company records an unbilled receivable or contract asset when revenue recognized on a contract exceeds the billings.The Company recognizes an impairment on receivables and contract assets if, after contract inception, it becomes probable that payment is not collectible. TheCompany reviews receivables and contract assets on an individual basis for impairment.Variable considerationThe Company’s arrangements can include variable fees, such as the option to purchase additional usage of a previously delivered software license. The Companymay also provide pricing concessions to clients, a business practice that also gives rise to variable fees in contracts. For variable fees arising from the client’sacquisition of additional usage of a previously delivered software license, the Company applies the sales and usage-based royalties guidance related to a license ofintellectual property and recognizes the revenue in the period the underlying sale or usage occurs. The Company includes variable fees in the determination of totaltransaction price if it is not probable that a future significant reversal of revenue will occur. The Company uses the expected value or most likely value amount,whichever is more appropriate for specific circumstances, to estimate variable consideration, and the estimates are based on the level of historical price concessionsoffered to clients. The variable consideration related to pricing concessions and other forms of variable consideration, including usage-based fees, have not beenmaterial to the Company’s consolidated financial statements.Significant financing componentsThe Company generally does not intend to provide financing to its clients, as financing arrangements are not contemplated as part of the negotiated terms ofcontracts between the Company and its clients. Although there may be instances with an intervening period between the delivery of the license and the payment,typically in term license arrangements, the purpose of that timing difference is to align the client’s payment with the timing of the use of the software license orservice.In certain circumstances, however, there are instances where revenue recognition timing differs from the timing of payment due to extended payment terms or feesthat are non-proportional to the associated usage of software licenses. In these instances, the Company evaluates whether a significant financing component exists.This evaluation includes determining the difference between the consideration the client would have paid at the time the performance obligation was satisfied andthe amount of consideration actually paid. Contracts that include a significant financing component are adjusted for the time value of money at the rate inherent inthe contract, the client’s borrowing rate, or the Company’s incremental borrowing rate, depending upon the recipient of the financing.During 2020, 2019, and 2018, significant financing components were not material.Contract modificationsThe Company assesses contract modifications to determine:•if the additional products and services are distinct from the products and services in the original arrangement; and•if the amount of consideration expected for the added products and services reflects the stand-alone selling price of those products and services.A contract modification meeting both criteria is accounted for as a separate contract. A contract modification not meeting both criteria is considered a change to theoriginal contract and is accounted for on either:•a prospective basis as a termination of the existing contract and the creation of a new contract; or•a cumulative catch-up basis.43Deferred commissionsThe Company recognizes an asset for the incremental costs of obtaining a client contract, primarily related to sales commissions. The Company expects tobenefit from those costs for more than one year, as the Company primarily pays sales commissions on the initial contract. As a result, there are nocommensurate commissions paid on contract renewals. Deferred commissions are allocated to each performance obligation within the contract and amortizedaccording to the transfer of underlying goods and services within those contracts and expected renewals. The expected benefit period is determined based onthe length of the client contracts, client attrition rates, the underlying technology life-cycle, and the competitive marketplace’s influence in which the productsand services are sold. Deferred costs allocated to maintenance and deferred costs for Pega Cloud arrangements are amortized over an average expected benefitperiod of five years. Deferred costs allocated to software licenses, and any expected renewals of term software licenses within the five years expected benefitperiod, are amortized at the point in time control of the software license is transferred. Deferred costs allocated to consulting are amortized over a periodconsistent with the pattern of transfer of control for the related services.Financial instrumentsThe principal financial instruments held by the Company consist of cash equivalents, marketable securities, receivables, capped call transactions, and accountspayable. The Company considers debt securities that are readily convertible to known amounts of cash with maturities of three months or less from thepurchase date to be cash equivalents. Interest is recorded when earned. All of the Company’s investments are classified as available-for-sale and are carried atfair value. Unrealized gains and losses considered temporary in nature are recorded as a component of accumulated other comprehensive loss, net of relatedincome taxes. The Company reviews all investments for reductions in fair value that are other-than-temporary. When such reductions occur, the investmentcost is adjusted to fair value by recording a loss on investments in the consolidated statements of operations. Gains and losses on investments are calculatedbased upon the specific investment.See "Note 4. Receivables, Contract Assets, And Deferred Revenue", "Note 10. Debt", and "Note 12. Fair Value Measurements" for additional information.Property and equipmentProperty and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of theassets, which are three years for computer equipment and five years for furniture and fixtures. Leasehold improvements are amortized over the lesser of thelease’s term or the useful life of the asset. Repairs and maintenance costs are expensed as incurred.LeasesAll the Company’s leases are operating leases, primarily composed of office space leases. The Company accounts for a contract as a lease when it has the right tocontrol the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification andmeasurement of its operating right of use assets and lease liabilities at the lease commencement date and thereafter if modified. Fixed lease costs are recognized ona straight-line basis over the term of the lease. Variable lease costs are recognized in the period in which the obligation for those payments is incurred. TheCompany combines lease and non-lease components in the determination of lease costs for its office space leases. The lease liability includes lease paymentsrelated to options to extend or renew the lease term if the Company is reasonably certain it will exercise those options. The Company’s leases do not contain anymaterial residual value guarantees or restrictive covenants.Internal-use softwareThe Company capitalizes and amortizes certain direct costs associated with computer software developed or purchased for internal use incurred during theapplication development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. The Companyamortizes capitalized software costs generally over three to five years, commencing on the date the software is placed into service.GoodwillGoodwill represents the residual purchase price paid in a business combination after the fair value of all identified assets and liabilities have been recorded.Goodwill is not amortized. The Company has a single reporting unit. The Company performed a qualitative assessment as of November 30, 2020, 2019, and2018, and concluded that there was no impairment since it was not more likely than not that the fair value of its reporting unit was less than its carrying value.Intangible and long-lived assetsAll of the Company’s intangible assets are amortized using the straight-line method over their estimated useful life. The Company evaluates its long-livedtangible and intangible assets for impairment whenever events or changes in circumstances indicate that such assets’ carrying amount may not be recoverable.Impairment is assessed by comparing the undiscounted cash flows expected to be generated by the long-lived tangible or intangible assets to their carryingvalue. If impairment exists, the Company calculates the impairment by comparing the carrying value to its fair value as determined by discounted expectedcash flows.44Cash equivalentsCash equivalents include money market funds, time deposits and other investments with original maturities of three months or less.Business combinationsThe Company uses its best estimates and assumptions to assign a fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisitiondate. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from theacquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with thecorresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a businesscombination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records anyadjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of themeasurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments arerecorded to the Company’s consolidated statements of operations.Research and development and software development costsResearch and development costs are expensed as incurred. Capitalization of computer software developed for resale begins upon the establishment oftechnological feasibility, generally demonstrated by a working model or an operative version of the computer software product. Such costs have not beenmaterial to date, as technological feasibility is established within a short time frame from the software’s general availability. As a result, no costs werecapitalized in 2020, 2019, or 2018.Stock-based compensationThe Company recognizes stock-based compensation expense associated with equity awards based on the award’s fair value at the grant date. Stock-basedcompensation is recognized over the requisite service period, which is generally the vesting period of the equity award and is adjusted each period foranticipated forfeitures. See "Note 14. Stock-Based Compensation" for discussion of the Company’s key assumptions included in determining the fair value ofits equity awards at the grant date.Foreign currency translation and remeasurementThe translation of assets and liabilities for the Company’s subsidiaries with functional currencies other than the U.S. dollar are made at period-end exchangerates. Revenue and expense accounts are translated at the average exchange rates during the period transactions occurred. The resulting translation adjustmentsare reflected in accumulated other comprehensive income. Realized and unrealized exchange gains or losses from transactions and remeasurement adjustmentsare reflected in foreign currency transaction gain (loss) in the accompanying consolidated statements of operations.Accounting for income taxesThe Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined basedon temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. The Company regularly assesses the need for a valuation allowance against its deferred tax assets. Future realization of theCompany’s deferred tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods. Taxable incomesources include taxable income in prior carryback years, future reversals of existing taxable temporary differences, tax planning strategies, and future taxableincome. The Company records a valuation allowance to reduce its deferred tax assets to an amount it believes is more-likely-than-not to be realized. Changesin the valuation allowance impacts income tax expense in the period of adjustment. The Company’s deferred tax valuation allowance requires significantjudgment and uncertainties, including assumptions about future taxable income that are based on historical and projected information. The Companyrecognizes excess tax benefits when they are realized, as a reduction of the provision for income taxes.The Company assesses its income tax positions and records tax benefits based upon management’s evaluation of the facts, circumstances, and informationavailable at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company records the largestamount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of allrelevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in thefinancial statements. The Company classifies liabilities for uncertain tax positions as non-current liabilities unless the uncertainty is expected to be resolvedwithin one year. The Company classifies interest and penalties on uncertain tax positions as income tax expense.As a global company, the Company uses significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which it operates. Inthe ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some ofthese uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries and nexus and tax credit estimates. In addition,the calculation of acquired tax attributes and the associated limitations are complex. See "Note 16. Income Taxes" for additional information.45Advertising expenseAdvertising costs are expensed as incurred. Advertising costs were $8.7 million, $6.7 million, and $6.9 million during 2020, 2019, and 2018, respectively.New Accounting StandardsConvertible debtIn August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, “Accounting for ConvertibleInstruments and Contracts in an Entity’s Own Equity” (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics ofliabilities and equity, including convertible instruments and contracts in an entity’s own equity. The standard eliminates the liability and equity separation modelfor convertible instruments with a cash conversion feature. As a result, after adoption, entities will no longer separately present in equity an embedded conversionfeature for such debt. Additionally, the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life.Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as aderivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Additionally, the standardrequires applying the if-converted method to calculate convertible instruments’ impact on diluted earnings per share (“EPS”). The standard is effective for fiscalyears beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020. It can be adopted on either a fullretrospective or modified retrospective basis. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements andrelated disclosures. The Company expects to elect to early adopt the new standard in the first quarter of 2021.3. MARKETABLE SECURITIESDecember 31, 2020(in thousands)Amortized CostUnrealized GainsUnrealized LossesFair ValueGovernment debt$39,996 $— $(8)$39,988 Corporate debt253,345 88 (152)253,281 $293,341 $88 $(160)$293,269 As of December 31, 2020, marketable securities maturities ranged from January 2021 to December 2023, with a weighted-average remaining maturity of 1.5 years.As of December 31, 2019, the Company did not hold any marketable securities.4. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUEReceivables(in thousands)December 31, 2020December 31, 2019Accounts receivable$215,827 $199,720 Unbilled receivables207,155 180,219 Long-term unbilled receivables113,278 121,736 $536,260 $501,675 Unbilled receivables are client committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.Unbilled receivables are expected to be billed in the future as follows:(Dollars in thousands)December 31, 20201 year or less$207,155 65 %1-2 years83,992 26 %2-5 years29,286 9 %$320,433 100 %Unbilled receivables based upon contract effective date:(Dollars in thousands)December 31, 20202020$149,867 47 %201987,941 27 %201831,097 10 %201731,668 10 %2016 and prior19,860 6 %$320,433 100 %46Major clientsNo client represented 10% or more of the Company’s total accounts receivable and unbilled receivables as of December 31, 2020 or December 31, 2019.Contract assets and deferred revenue(in thousands)December 31, 2020December 31, 2019Contract assets $15,296 $5,558 Long-term contract assets 7,777 5,420 $23,073 $10,978 Deferred revenue$232,865 $190,080 Long-term deferred revenue 8,991 5,407 $241,856 $195,487 (1) Included in other current assets. (2) Included in other long-term assets. (3) Included in other long-term liabilities.Contract assets are client committed amounts for which revenue recognized exceeds the amount billed to the client where the right to payment is subject toconditions other than the passage of time, such as completing a related performance obligation. Deferred revenue consists of billings and payments received inadvance of revenue recognition. Contract assets and deferred revenue are netted at the contract level for each reporting period.The change in deferred revenue in the year ended December 31, 2020 was primarily due to new billings in advance of revenue recognition and $187.6 million ofrevenue recognized during the period that was included in deferred revenue on December 31, 2019.5. DEFERRED COMMISSIONSDecember 31,(in thousands)20202019Deferred commissions $108,624 $85,314 (1) Included in other long-term assets.(in thousands)202020192018Amortization of deferred commissions $33,302 $29,152 $17,271 (1) Included in selling and marketing expenses.6. PROPERTY AND EQUIPMENT (in thousands)December 31,20202019Leasehold improvements$52,335 $42,162 Computer equipment30,211 25,147 Furniture and fixtures10,572 8,524 Computer software purchased8,415 7,775 Computer software developed for internal use18,542 17,606 Fixed assets in progress2,077 4,044 122,152 105,258 Less: accumulated depreciation(81,754)(70,975)$40,398 $34,283 (1) Included in other long-term assets.(in thousands)202020192018Depreciation expense$17,378 $14,771 $13,875 7. GOODWILL AND OTHER INTANGIBLE ASSETSGoodwill(in thousands)20202019January 1,$79,039 $72,858 Acquisition— 6,179 Currency translation adjustments192 2 December 31,$79,231 $79,039 (1)(2)(3)(1)(1)(1)47IntangiblesIntangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives as follows:December 31, 2020(in thousands)Useful LivesCostAccumulated AmortizationNet Book Value Client-related4-10 years$63,168 $(55,877)$7,291 Technology2-10 years64,843 (56,386)8,457 Other1-5 years5,361 (5,361)— $133,372 $(117,624)$15,748 Included in other long-term assets.December 31, 2019(in thousands)Useful LivesCostAccumulated AmortizationNet Book Value Client-related4-10 years$63,140 $(54,368)$8,772 Technology2-10 years64,843 (53,898)10,945 Other1-5 years5,361 (5,361)— $133,344 $(113,627)$19,717 Included in other long-term assets.Amortization of intangible assets was:(in thousands)202020192018Cost of revenue$2,487 $3,500 $5,027 Selling and marketing1,483 3,125 6,416 $3,970 $6,625 $11,443 Future estimated amortization expense related to intangible assets:(in thousands)December 31, 20202021$3,657 20223,557 20233,289 20242,520 2025 and after2,725 $15,748 8. SEGMENT INFORMATIONOperating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chiefoperating decision-maker (“CODM”) in deciding how to allocate resources and in assessing performance.The Company derives substantially all of its revenue from the sale and support of one group of similar products and services – software that provides casemanagement, business process management, and real time decisioning solutions to improve customer engagement and operational excellence in the enterpriseapplications market. To assess performance, the Company’s CODM, the Chief Executive Officer, reviews financial information on a consolidated basis.Therefore, the Company determined it has one operating segment and one reporting unit.Long-lived assets related to the Company’s U.S. and international operations were:(Dollars in thousands)December 31,20202019U.S.$31,339 78 %$26,644 78 %International9,059 22 %7,639 22 %$40,398 100 %$34,283 100 %(1)(1)(1)(1) 489. LEASESExpense(in thousands)20202019Fixed lease costs$20,235 $18,250 Short-term lease costs1,669 1,291 Variable lease costs4,470 5,554 $26,374 $25,095 Total rent expense under operating leases was $14.9 million for 2018.Right of use assets and lease liabilities(in thousands)December 31, 2020December 31, 2019Right of use assets $67,651 $58,273 Lease liabilities $18,541 $15,885 Long-term lease liabilities$59,053 $52,610 (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.The weighted-average remaining lease term and discount rate for the Company’s leases were:December 31, 2020December 31, 2019Weighted-average remaining lease term4.7 years4.0 yearsWeighted-average discount rate 5.4 %5.8 %(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 operatinglease 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 collateralizedbasis over the lease term in a similar economic environment.Maturities of lease liabilities are:(in thousands)December 31, 20201 year or less$22,164 1-2 years21,747 2-3 years21,599 3-4 years7,683 > 4 years14,431 Total lease payments87,624 Less: imputed interest (1)(10,030)Total short and long-term lease liabilities$77,594 (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 alease reassessment event.Cash flow information(in thousands)20202019Cash paid for leases$20,548 $19,727 Right of use assets recognized for new leases and amendments (non-cash)$24,276 $31,155 (1)(2)(1)4910. DEBTConvertible senior notes and capped callsConvertible senior notesIn February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a privateplacement. The proceeds from the Notes were used or are anticipated to be used for the Capped Call Transactions (described below), working capital, and othergeneral corporate purposes. There are no required principal payments until the maturity of the Notes. The Notes accrue interest at an annual rate of 0.75%, payablesemi-annually in arrears on March 1 and September 1, beginning on September 1, 2020.Proceeds from the Notes and Capped Call Transactions:(in thousands)AmountPrincipal$600,000 Less: issuance costs(14,527)Less: Capped Call Transactions(51,900)$533,573 Conversion rightsThe 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 ofcommon stock. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock, or a combination of cash and sharesof its common stock, at the Company’s election, based on the applicable conversion rate. The conversion rate will be adjusted upon the occurrence of certainevents, 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 Notesin the following circumstances:•During any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported saleprice per share of the Company’s common stock exceeds one hundred and thirty percent (130%) of the conversion price for each of at least twenty (20) tradingdays (whether or not consecutive) during the thirty (30) consecutive trading days ending on, and including, the last trading day of the immediately precedingcalendar quarter.•During the five consecutive business days immediately after any five consecutive trading day period (the “Measurement Period”), if the trading price per$1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share ofcommon stock on such trading day and the conversion rate on such trading day.•Upon the occurrence of certain corporate events or distributions, or if the Company calls all or any Notes for redemption, then the noteholder of any Note mayconvert such Note at any time before the close of business on the business day immediately before the related redemption date (or if the Company fails to paythe redemption price due on such redemption date in full, at any time until the Company pays such redemption price in full).As of December 31, 2020, no Notes were eligible for conversion at the noteholders’ election.Repurchase rightsOn 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 ofthe 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 commonstock 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 periodending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice.If certain corporate events that constitute a “Fundamental Change” (as described below) occur at any time, each noteholder will have the right, at such noteholder’soption, to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or an integralmultiple 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 eventssuch as mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.Impact of the NotesIn accounting for the transaction, the Notes have been separated into liability and equity components.•The initial carrying amount of the liability component was calculated by measuring a similar debt instrument’s fair value that does not have an associatedconversion feature. The excess of the Notes’ principal amount over the initial carrying amount of the liability component, the debt discount, is amortized asinterest expense over the Notes’ contractual term.•The equity component was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equityclassification. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liabilitycomponent from the par value of the Convertible Senior Notes.50The Company incurred issuance costs of $14.5 million related to the Notes, allocated between the Notes’ liability and equity components proportionate to theinitial carrying amount of the liability and equity components.•Issuance costs attributable to the liability component are recorded as an offset to the Notes’ principal balance. They are amortized as interest expense using theeffective interest method over the contractual term of the Notes.•Issuance costs attributable to the equity component are recorded as an offset to the equity component in additional paid-in capital and are not amortized.Net carrying amount of the liability component:(in thousands)December 31, 2020Principal$600,000 Unamortized debt discount(71,222)Unamortized issuance costs(10,575)$518,203 Net carrying amount of the equity component, included in additional paid-in capital:(in thousands)December 31, 2020Conversion options $61,604 (1) Net of issuance costs and taxes.Interest expense related to the Notes:(in thousands)2020Contractual interest expense (0.75% coupon)$3,825 Amortization of debt discount 12,898 Amortization of issuance costs 1,915 $18,638 (1) Amortized based upon an effective interest rate of 4.31%.Future payments of principal and contractual interest:December 31, 2020(in thousands)PrincipalInterestTotal2021— 4,500 4,500 2022— 4,500 4,500 2023— 4,500 4,500 2024— 4,500 4,500 2025600,000 1,488 601,488 $600,000 $19,488 $619,488 Capped Call TransactionsIn February 2020, the Company entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. TheCapped Call Transactions cover 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s commonstock. They are generally expected to reduce potential dilution to the common stock upon any conversion of Notes and/or offset any potential cash payments theCompany is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The capprice of the Capped Call Transactions is $196.44, subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, includingmerger events and tender offers.The Capped Call Transactions are accounted for as derivative instruments. The Capped Call Transactions do not qualify for the Company’s own equity scopeexception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated in accordance with the governingdocuments, may not represent a fair value measurement. The Capped Call Transactions are classified as “other long-term assets” and remeasured to fair value atthe end of each reporting period, resulting in a non-operating gain or loss.Change in value of Capped Call Transactions:(in thousands)Year Ended December 31, 2020Value at issuance$51,900 Fair value adjustment31,697 Balance as of December 31,$83,597 (1)(1)(1)51Credit facilityIn November 2019, and as amended as of February 2020, July 2020, and September 2020, the Company entered into a five-year $100 million senior securedrevolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). The Company may use borrowings to finance working capitalneeds and for general corporate purposes. Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $200million. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. The Credit Facility, as amended, containscustomary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions.The Company is also required to comply with financial covenants, including:•Beginning with the fiscal quarter ended on September 30, 2020 and ending with the fiscal quarter ended December 31, 2021, at least $200 million in cash andinvestments held by Pegasystems Inc.•Beginning with the quarter ended on March 31, 2022, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event of certainacquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.As of December 31, 2020 and December 31, 2019, the Company had no outstanding borrowings under the Credit Facility.11. STOCKHOLDERS’ EQUITYPreferred stockThe Company has 1 million authorized shares of preferred stock, $0.01 par value per share, of which none were issued and outstanding at December 31, 2020.The Board of Directors has the authority to issue the shares of preferred stock in one or more series, to establish the number of shares to be included in eachseries, and to determine the designation, powers, preferences, and rights of the shares of each series and the qualifications, limitations, or restrictions thereof,without any further vote or action by the stockholders. The issuance of preferred stock could decrease the earnings and assets available for distribution toholders of common stock and may have the effect of delaying, deferring, or defeating a change in control of the Company. The Company had not issued anyshares of preferred stock through December 31, 2020.Common stockThe Company has 200 million authorized shares of common stock, $0.01 par value per share, of which 80.9 million shares were issued and outstanding atDecember 31, 2020.Dividends declared202020192018Dividends declared (per share)$0.12 $0.12 $0.12 Dividend payments to stockholders (in thousands)$9,628 $9,486 $9,432 The Company’s paid a quarterly cash dividend of $0.03 per share in 2020, 2019, and 2018, however, the Board of Directors may terminate or modify thedividend program at any time without prior notice.Stock repurchases(in thousands)202020192018SharesAmountSharesAmountSharesAmountJanuary 1,$45,484 $6,620 $34,892 Authorizations $20,516 $60,000 $27,003 Repurchases (278)$(28,274)(333)$(21,136)(1,001)$(55,275)December 31,$37,726 $45,484 $6,620 (1) On June 15, 2020, the Company announced that the Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2021 and increased the remainingstock repurchase authority to $60 million.(2) Purchases under this program have been made on the open market.12. FAIR VALUE MEASUREMENTSAssets and liabilities measured at fair value on a recurring basisThe Company records its cash equivalents, marketable securities, Capped Call Transactions, and venture investments at fair value on a recurring basis. Fair value isan 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 marketparticipants 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 inmeasuring 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(1)(2)52•Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions. This hierarchyrequires 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 modelsuse various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, asapplicable. The Company applies judgment in its determination of expected volatility. The Company considers both historical and implied volatility levels of theunderlying equity security and, to a lesser extent, historical peer group volatility levels. The Company’s venture investments are recorded at fair value based onvaluation methods using the observable transaction price and other unobservable inputs, including the volatility, rights, and obligations of the securities theCompany holds.The Company’s assets and liabilities measured at fair value on a recurring basis:December 31, 2020December 31, 2019(in thousands)Level 1Level 2Level 3TotalLevel 1Level 2Level 3TotalCash equivalents$42,339 $14,000 $— $56,339 $— $— $— $— Marketable securities$— $293,269 $— $293,269 $— $— $— $— Capped Call Transactions $— $83,597 $— $83,597 $— $— $— $— Venture investments $— $— $8,345 $8,345 $— $— $4,871 $4,871 (1) Included in other long-term assets.(2) See "Note 10. Debt" for additional information.(3) Investments in privately-held companies.Change in venture investments:(in thousands)20202019January 1,$4,871 $3,390 New investments3,306 1,444 Sales of investments(1,424)— Changes in foreign exchange rates118 37 Fair value adjustment1,474 — December 31,$8,345 $4,871 The carrying value of certain other financial instruments, including receivables and accounts payable, approximates fair value due to these items’ relatively shortmaturity.Fair value of the NotesThe fair value of the Company’s Notes was recorded at $515.9 million upon issuance, which reflected the principal amount of the Notes less the fair value of theconversion feature. The fair value of the debt component was determined based on a discounted cash flow model. The discount rate used reflected both the timevalue of money and credit risk inherent in the Notes. The carrying value of the Notes will be accreted, over the remaining term to maturity, to their principal valueof $600 million.The Notes’ fair value (inclusive of the conversion feature embedded in the Notes) was $706.5 million as of December 31, 2020. The fair value was determinedbased 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 valuehierarchy. See "Note 10. Debt" for additional information.Credit riskIn addition to receivables, the Company is potentially subject to concentrations of credit risk from the Company’s cash, cash equivalents, and marketable securities.The Company’s cash and cash equivalents are generally held with large, diverse financial institutions worldwide to reduce the Company’s credit risk exposure.Investment policies have been implemented that limit purchases of marketable debt securities to investment-grade securities.13. REVENUEGeographic revenue(Dollars in thousands)202020192018U.S.$613,844 61 %$525,191 57 %$469,987 52 %Other Americas49,441 5 %60,536 7 %53,239 6 %United Kingdom (“U.K.”)91,517 9 %87,382 10 %95,628 11 %Europe (excluding U.K.), Middle East, and Africa156,056 15 %137,946 15 %147,248 17 %Asia-Pacific106,659 10 %100,328 11 %125,479 14 %$1,017,517 100 %$911,383 100 %$891,581 100 %(1) (2)(1) (3)53Revenue streams(in thousands)202020192018Perpetual license$28,558 $80,015 $109,863 Term license266,352 199,433 178,256 Revenue recognized at a point in time294,910 279,448 288,119 Maintenance296,709 280,580 263,875 Pega Cloud208,268 133,746 82,627 Consulting217,630 217,609 256,960 Revenue recognized over time722,607 631,935 603,462 $1,017,517 $911,383 $891,581 (in thousands)202020192018Pega Cloud208,268 133,746 82,627 Maintenance296,709 280,580 263,875 Term license$266,352 $199,433 $178,256 Subscription771,329 613,759 524,758 Perpetual license28,558 80,015 109,863 Consulting217,630 217,609 256,960 Total revenue$1,017,517 $911,383 $891,581 Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).Remaining performance obligations ("Backlog")Expected future revenue on existing contracts:December 31, 2020(Dollars in thousands)Perpetual licenseTerm licenseMaintenancePega CloudConsultingTotal1 year or less$11,514 $105,920 $227,803 $248,223 $19,226 $612,686 57 %1-2 years395 7,962 54,509 193,064 346 256,276 24 %2-3 years— 4,928 28,320 104,542 851 138,641 13 %Greater than 3 years— 4 19,283 44,308 1,189 64,784 6 %$11,909 $118,814 $329,915 $590,137 $21,612 $1,072,387 100 %December 31, 2019(Dollars in thousands)Perpetual licenseTerm licenseMaintenancePega CloudConsultingTotal1 year or less$2,305 $97,826 $206,882 $165,571 $20,798 $493,382 58 %1-2 years2,179 12,014 30,291 128,109 1,439 174,032 21 %2-3 years— 3,132 17,844 84,788 132 105,896 13 %Greater than 3 years— 3,861 13,277 43,702 1,993 62,833 8 %$4,484 $116,833 $268,294 $422,170 $24,362 $836,143 100 %14. STOCK-BASED COMPENSATIONThe following table presents the stock-based compensation expense included in the Company’s consolidated statements of operations:(in thousands)202020192018Cost of revenue$20,796 $18,822 $16,862 Selling and marketing46,283 32,665 23,237 Research and development22,885 18,938 15,274 General and administrative13,104 10,484 8,489 $103,068 $80,909 $63,862 Income tax benefit$(20,464)$(16,392)$(13,383)The Company periodically grants stock options and restricted stock units (“RSUs”) for a fixed number of shares upon vesting to employees and non-employeeDirectors. Beginning in 2019, the Company granted Directors awards in the form of common stock and stock options. (1)(1) 54Most of the Company’s stock-based compensation arrangements vest over five years, with 20% vesting after one year and the remaining 80% vesting in equalquarterly installments over the remaining four years. The Company’s stock options have a term of ten years. The Company recognizes stock-basedcompensation using the accelerated attribution method, treating each vesting tranche as if it were an individual grant. The stock-based compensation expenserecognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the Company recognizes the actual expense over the vestingperiod only for the shares that vest.Employees may elect to receive 50% of the employee’s target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the“CICP”) in the form of RSUs instead of cash. If elected by an employee, the equity amount is equal in value on the date of grant to 50% of the employee’starget incentive opportunity, based on the employee’s base salary. The number of RSUs granted is determined by dividing 50% of the employee’s targetincentive opportunity by 85% of the closing price of the Company’s common stock on the grant date, less the present value of expected dividends during thevesting period. If elected, the award vests 100% on the following year’s CICP payout date. Vesting is conditioned upon the performance conditions of theCICP and on continued employment; if threshold funding does not occur, the RSUs will not vest. The Company considers vesting to be probable on the grantdate and recognizes the associated stock-based compensation expense over the requisite service period beginning on the grant date and ending on the vestingdate.The Company grants awards that allow for the settlement of vested stock options and RSUs on a net share basis (“net settled awards”). With net settledawards, the employee does not surrender any cash or shares upon exercise. Instead, the Company withholds the number of shares to cover the exercise price(in the case of stock options) and the minimum statutory tax withholding obligations (in the case of stock options and RSUs) from the shares that wouldotherwise be issued upon exercise or settlement. The exercise of stock options and settlement of RSUs on a net share basis results in fewer shares issued by theCompany.Share-based compensation plans2004 Long-Term Incentive Plan (as amended and restated)In 2004, the Company adopted the 2004 Long-Term Incentive Plan (as amended and restated, the “2004 Plan”) to provide employees, non-employeeDirectors, and consultants with opportunities to purchase stock through incentive stock options and non-qualified stock options. Subsequent amendments tothe plan increased the number of shares authorized for issuance under the plan to 36 million, extended the term of the plan to 2030, and limited annualcompensation to any non-employee Director to $0.5 million.As of December 31, 2020, 9.9 million shares were subject to outstanding options and stock-based awards under the 2004 Plan.2006 Employee Stock Purchase PlanIn 2006, the Company adopted the 2006 Employee Stock Purchase Plan (the “2006 ESPP”) under which the Company’s employees are entitled to purchase upto an aggregate of one million shares of common stock, at a price equal to at least 85% of the fair market value of the Company’s common stock on the lesserof the commencement date or completion date for offerings under the plan, or such higher price as the Company’s Board of Directors may establish from timeto time. Until the Company’s Board of Directors determines otherwise, the Board has set the purchase price at 95% of the fair market value on the completiondate of the offering period. As a result, the 2006 ESPP is non-compensatory and is tax-qualified. Therefore, as of December 31, 2020, no compensationexpense related to the plan had been recognized. In October 2012, the Company’s Board of Directors amended the term of the 2006 ESPP such that it willcontinue until there are no shares remaining under the plan or until the plan is terminated by the Board of Directors, whichever occurs first.As of December 31, 2020, 0.5 million shares had been issued thereunder.Shares issued and available for issuanceDuring 2020, the Company issued 1.6 million shares to its employees and directors under the Company’s share-based compensation plans.As of December 31, 2020, there were 11.1 million shares available for issuance for future equity grants under the Company’s stock plans, consisting of 10.6million shares under the 2004 Plan and 0.5 million shares under the 2006 ESPP.Grant activityStock optionsThe Company estimates the fair value of stock options using a Black-Scholes option-pricing model. Key inputs used to estimate the fair value of stock optionsinclude the exercise price of the award, expected term of the option, expected volatility of the Company’s common stock over the option’s expected term, risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The exercise price for stock options is greater than orequal to the shares’ fair market value at the grant date.55The following table summarizes the Company’s fair value assumptions for stock options:202020192018Weighted-average grant-date fair value$24.16 $19.10 $18.03 Assumptions used in the Black-Scholes option-pricing model:Expected annual volatility 31 %32 %34 %Expected term in years 4.54.54.5Risk-free interest rate0.7 %2.4 %2.6 %Expected annual dividend yield 0.2 %0.3 %0.4 %(1) The expected annual volatility for each grant is determined based on the average of historic daily price changes of the Company’s common stock over a period, which approximates theexpected option term.(2) The expected option term for each grant is determined based on the historical exercise behavior of employees and post-vesting employment termination behavior.(3) The risk-free interest rate is based on the yield of U.S. Treasury securities with a commensurate maturity with the expected option term at the time of grant.(4) The expected annual dividend yield is based on the weighted-average dividend yield assumptions used for options granted during the applicable period.The following table summarizes the combined stock option activity under the Company’s stock option plans for 2020:Shares (in thousands)Weighted-averageExercise PriceWeighted-average RemainingContractual Term (in years)Aggregate Intrinsic Value (in thousands)Options outstanding as of January 1, 20207,436 $44.76 Granted2,018 92.81 Exercised(1,777)33.52 Forfeited(286)62.86 Options outstanding as of December 31, 20207,391 $59.88 Vested and expected to vest as of December 31, 20206,225 $57.85 7.1$469,374 Exercisable as of December 31, 20202,935 $38.73 5.6$277,450 The aggregate intrinsic value of stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee atexercise) in 2020, 2019, and 2018 was $126.8 million, $63.3 million, and $56.8 million, respectively. The aggregate intrinsic value of stock optionsoutstanding and exercisable as of December 31, 2020 is based on the difference between the closing price of the Company’s stock of $133.26 and the exerciseprice of the applicable stock options.As of December 31, 2020, the Company had unrecognized stock-based compensation expense related to the unvested portion of stock options of $35.9 millionthat is expected to be recognized as expense over a weighted-average period of 2.3 years.RSUsRSUs deliver to the recipient a right to receive a specified number of shares of the Company’s common stock upon vesting. The Company values its RSUs atthe fair value of its common stock on the grant date, which is the closing price of its common stock on the grant date less the present value of expecteddividends during the vesting period, as the recipient is not entitled to dividends during the requisite service period.The weighted-average grant-date fair value for RSUs granted in 2020, 2019, and 2018 was $93.68, $66.21, and $58.52, respectively.The following table summarizes the combined RSU activity for all grants, including the CICP, under the 2004 Plan for 2020:Shares (in thousands)Weighted- Average Grant-Date Fair ValueAggregate Intrinsic Value (in thousands)Nonvested as of January 1, 20202,565 $55.61 Granted1,168 93.68 Vested(1,059)51.11 Forfeited(212)65.17 Nonvested as of December 31, 20202,462 $74.78 $328,023 Expected to vest as of December 31, 20201,841 $76.05 $245,339 The fair value of RSUs vested in 2020, 2019, and 2018 was $108.4 million, $77.0 million, and $66.5 million, respectively. The aggregate intrinsic value ofRSUs outstanding and expected to vest as of December 31, 2020 is based on the closing price of the Company’s stock of $133.26 on December 31, 2020.As of December 31, 2020, the Company had $68.6 million of unrecognized stock-based compensation expense related to all unvested RSUs that is expected tobe recognized as expense over a weighted-average period of 2.1 years.Common stockIn 2020, the Company granted 0.01 million shares of common stock to Directors with a weighted-average grant-date fair value of $117.47 per share.(1)(2) (3)(4)5615. EMPLOYEE BENEFIT PLANSThe Company sponsors defined contribution plans for qualifying employees, including a 401(k) plan in the United States to which the Company makesdiscretionary matching contributions.The following expenses related to defined contribution plans were recorded in the Company’s consolidated statements of operations:(in thousands)202020192018U.S. 401(k) Plan$8,109 $6,676 $5,506 International plans16,132 13,021 11,101 $24,241 $19,697 $16,607 16. INCOME TAXESThe components of (loss) before (benefit from) income taxes are:(in thousands)202020192018Domestic$(59,281)$(51,396)$(27,494)Foreign(65,608)(83,450)15,951 $(124,889)$(134,846)$(11,543)The components of (benefit from) income taxes are:(in thousands)202020192018Current:Federal$(11,251)$1,050 $(1,862)State399 405 287 Foreign7,113 3,449 10,313 Total current (benefit from) provision for(3,739)4,904 8,738 Deferred:Federal(34,573)(25,356)(18,939)State(8,119)(5,143)(3,702)Foreign(17,085)(18,818)(8,257)Total deferred (benefit)(59,777)(49,317)(30,898)$(63,516)$(44,413)$(22,160)A reconciliation of the U.S federal statutory tax rate and the Company’s effective tax rate, is as follows:(in thousands)202020192018U.S. federal income taxes at statutory rates$(26,227)$(28,318)$(2,424)Valuation allowance(5,881)727 510 State income taxes, net of federal benefit and tax credits(6,994)(4,450)(3,329)Permanent differences1,773 2,606 1,302 GILTI, FDII, and BEAT— — 399 Federal research and experimentation credits(5,716)(4,295)(6,991)Tax effects of foreign activities3,050 3,056 (399)Tax-exempt income— (91)(137)Provision to return adjustments3,416 (5,460)253 Non-deductible compensation1,806 1,716 1,025 Expiration of statutes and changes in estimates55 2,420 (516)Excess tax benefits related to share-based compensation(25,797)(14,291)(13,541)Cares Act(10,576)— — Impact of change in tax law7,489 1,908 1,636 Other86 59 52 $(63,516)$(44,413)$(22,160)(1) Global Intangible Low Taxed Income (“GILTI”), Foreign-Derived Intangible Income (“FDII”), and Base Erosion and Anti-abuse Tax (“BEAT”) (1)57Cares ActOn March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“Cares Act”) was enacted to address the economic impact of the COVID-19pandemic in the United States. Among other things, the Cares Act allows a five-year carryback period for tax losses generated in 2019 through 2021.The Company carried back net operating losses generated in 2019, resulting in an income tax benefit of $5.7 million. The $5.7 million income tax benefitrepresents the Federal rate differential between 35% and 21%. In addition, the Company applied the carryback provisions of the Cares Act to its net operatinglosses generated in 2020, which resulted in the reclassification of $4.8 million net operating losses from a deferred income tax asset to refundable income taxes.The Company does not expect the other income tax provisions of the Cares Act to have a material impact on its financial statements.Deferred income taxesSignificant components of net deferred tax assets and liabilities are:December 31,(in thousands)20202019Deferred tax assets:Net operating loss carryforwards$88,129 $70,960 Accruals and reserves26,309 24,902 Interest expense carryforward3,464 — Depreciation4,795 2,493 Tax credit carryforwards31,556 15,307 Other370 199 Total deferred tax assets154,623 113,861 Valuation allowances(23,409)(28,007)Total net deferred tax assets131,214 85,854 Deferred tax liabilities:Capped call transactions(20,858)— Convertible senior notes(6,473)— Software revenue(11,477)(23,859)Intangibles(4,338)(6,103)Total deferred tax liabilities(43,146)(29,962)$88,068 $55,892 The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positiveand negative evidence related to the likelihood of realizing the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. This determination requires significant judgment, including assumptions about futuretaxable income based on historical and projected information. In 2020, the change in valuation allowances was primarily due to the expiration of $5.9 million inacquisition-related net operating losses. There were no material changes in valuation allowances in 2019.As of December 31, 2020, the Company’s net operating losses and credit carryforwards are:(in thousands)FederalStateNet operating losses $124,115 $9,149 Net operating losses due to acquisitions $76,826 $1,466 Credit carryforwards$24,372 $1,895 Credit carryforwards due to acquisitions$640 $60 (1) Excludes federal and state net operating losses of $29.5 million and $0.8 million, respectively, from prior acquisitions that the Company expects will expire unutilized.(2) Excludes federal and state tax credits of $0.1 million and $9.0 million, respectively, that the Company expects will expire unutilized.Carryforward losses and credits expire between 2021 and 2038, except for the 2020 federal net operating loss of $47.3 million and $1.2 million of state credits,which both have unlimited carryforward periods.The Company’s India subsidiary is primarily located in Special Economic Zones (“SEZs”) and is entitled to a tax holiday in India. The tax holiday reduces oreliminates income tax in India. The tax holiday in the Hyderabad SEZ is scheduled to expire in 2024. The tax holiday in the Bangalore SEZ is scheduled to expirein 2022. For 2020, 2019, and 2018, the income tax holiday reduced the Company’s provision for income taxes by $1.7 million, $1.9 million, and $1.3 million,respectively.(1)(1) (2)58Uncertain tax benefitsA rollforward of the Company’s gross unrecognized tax benefits is:(in thousands)202020192018Balance as of January 1,$23,271 $18,157 $19,150 Additions for tax positions related to the current year653 510 978 Additions for tax positions of prior years962 4,917 174 Reductions for tax positions of prior years(1,085)(313)(2,145)Balance as of December 31,$23,801 $23,271 $18,157 As of December 31, 2020, the Company had $23.8 million of total unrecognized tax benefits, which would decrease the Company’s effective tax rate ifrecognized.As of December 31, 2020 and December 31, 2019, the Company’s income tax receivable was $44.1 million and $25.9 million, respectively.Tax examinationsThe Company files federal and state income tax returns in the U.S. and in various foreign jurisdictions. In the ordinary course of business, the Company and itssubsidiaries are examined by various tax authorities, including the Internal Revenue Service in the U.S. As of December 31, 2020, the Company’s U.S. federal taxreturns for the years 2014 through 2017 were under examination by the Internal Revenue Service. In addition, certain foreign jurisdictions are auditing theCompany’s income tax returns for periods ranging from 2010 through 2018. The Company does not expect the results of these audits to have a material effect onthe Company’s financial condition, results of operations, or cash flows. With few exceptions, the statute of limitations remains open in all jurisdictions for the taxyears 2014 to the present.17. (LOSS) EARNINGS PER SHAREBasic earnings per share is calculated using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share iscalculated using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding stock options andRSUs, using the treasury stock method. In periods of loss, all stock options and RSUs are excluded from the weighted-average number of common shares, as theirinclusion would be anti-dilutive.(in thousands, except per share amounts)202020192018Net (loss) income$(61,373)$(90,433)$10,617 Weighted-average common shares outstanding80,336 79,055 78,564 (Loss) earnings per share, basic$(0.76)$(1.14)$0.14 Net (loss) income$(61,373)$(90,433)$10,617 Stock options— — 2,891 RSUs— — 1,609 Effect of dilutive securities— — 4,500 Weighted-average common shares outstanding, assuming dilution80,336 79,055 83,064 (Loss) earnings per share, diluted$(0.76)$(1.14)$0.13 Outstanding anti-dilutive stock options and RSUs 6,278 5,911 188 (1) Certain outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were anti-dilutive in the period presented. These awards maybe dilutive in the future.18. COMMITMENTS AND CONTINGENCIESCommitmentsSee "Note 9. Leases" for additional information.ContingenciesThe Company is a party in various contractual disputes, litigation, and potential claims arising in the ordinary course of business. The Company does not believethat the resolution of these matters will have a material adverse effect on its financial position or results of operations.(1)5919. SUBSEQUENT EVENTSRelocation of Corporate HeadquartersOn February 12, 2021, the Company executed the Lease Termination Agreement with Charles Park Owner LLC to accelerate the lease termination date for theCompany’s corporate headquarters in Cambridge, Massachusetts to October 1, 2021. Under the terms of the Lease Termination Agreement, the Company willreceive a payment of $18 million. The Company is obligated to make rent payments outlined in the existing lease agreements until October 1, 2021, the newlease termination date.Qurious.io acquisitionIn January 2021, the Company acquired Qurious.io, Inc., a cloud-based real time speech analytics solution for customer service teams. The acquisition wasimmaterial.60ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of disclosure controls and proceduresOur management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of December 31, 2020. In designing andevaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2020.Management’s report on and changes in internal control over financial reportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act. Under the supervision and with the participation of our management, including our CEO and CFO, we conducted anevaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the framework in the updated Internal Control —Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) on May 14, 2013.Based on this evaluation, management has concluded that (i) our internal control over financial reporting was effective as of December 31, 2020 and (ii) no changein our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the quarter endedDecember 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Deloitte & Touche LLP, our independent registered public accounting firm which also audited our consolidated financial statements, has issued an attestationreport on our internal control over financial reporting, which is included in Item 8 “Financial Statements and Supplementary Data”.ITEM 9B. OTHER INFORMATIONOn February 12, 2021, Pegasystems Inc. (the “Company”) executed the Lease Termination Agreement with Charles Park Owner LLC to accelerate the leasetermination date for the Company’s corporate headquarters in Cambridge, Massachusetts to October 1, 2021. Under the terms of the Lease TerminationAgreement, the Company will receive a payment of $18 million. The Company is obligated to make rent payments outlined in the existing lease agreementsuntil October 1, 2021, the new lease termination date.The foregoing description of the Lease Termination Agreement does not purport to be complete and is qualified in its entirety by reference to the LeaseTermination Agreement, a copy of which is attached as Exhibit 10.17 hereto.61PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCEExcept as set forth below, information required by this item is incorporated herein by reference from the information contained in our proxy statement for our 2021annual stockholders meeting (the “2021 proxy statement”) under the headings Executive Compensation, Election of Directors, Corporate Governance, ExecutiveOfficers, and Delinquent Section 16(a) Reports, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.We have adopted a written code of conduct that applies to our Board of Directors and employees, including our principal executive officer, principal financialofficer, principal accounting officer, and persons performing similar functions. A copy of our code of conduct can be found on our website, www.pega.com.We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K and the applicable the NASDAQ Global Select Market rules by posting suchinformation on our website in accordance with such requirements.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this item is incorporated herein by reference from the information contained in the 2021 proxy statement under the headings“Director Compensation”, “Compensation Discussion and Analysis”, and “Executive Compensation” and is incorporated herein by reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERSThe information required by this item is incorporated herein by reference from the information contained in the 2021 proxy statement under the headings“Executive Compensation”, “Equity Compensation Plan Information”, and “Security Ownership of Certain Beneficial Owners and Management”, and isincorporated herein by reference.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item is incorporated herein by reference from the information contained in the 2021 proxy statement under the headings“Certain Relationships and Related Transactions” and “Determination of Independence” and is incorporated herein by reference.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item is incorporated herein by reference from the information contained in the 2021 proxy statement under the heading“Independent Registered Public Accounting Firm Fees and Services” and is incorporated herein by reference.62PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) The following are filed as part of this Annual Report:(1) Financial StatementsThe following consolidated financial statements are included in Item 8:PageReport of Independent Registered Public Accounting Firm35Consolidated Balance Sheets as of December 31, 2020 and 201937Consolidated Statements of Operations for the years ended December 31, 2020, 2019, and 201838Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2020, 2019, and 201839Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019, and 201840Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 201841(b) ExhibitsExhibit No.Description3.1Restated Articles of Organization of the Registrant and Amendments thereto. (Filed as Exhibit 3.1 to the Registrant’s September 30, 2014 Form 10-Q and incorporatedherein by reference.)3.2Amended and Restated Bylaws of Pegasystems Inc. (Filed as Exhibit 3.2 to the Registrant’s June 15, 2020 Form 8-K and incorporated herein by reference.)4.1Specimen Certificate Representing the Common Stock. (Filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-03807) oran amendment thereto and incorporated herein by reference.)4.2Indenture, dated as of February 24, 2020, between Pegasystems Inc. and U.S. Bank National Association, as trustee. (Filed as Exhibit 4.1 to the Registrant’s February24, 2020 Form 8-K and incorporated herein by reference)4.3Form of certificate representing the 0.75% Convertible Senior Notes due 2025 (included as Exhibit A to Exhibit 4.1 to the Registrant’s Form 8-K filed February 24,2020 and incorporated herein by reference)4.4Description of Common Stock (Filed as Exhibit 4.2 to the Registrant’s 2019 Form 10-K and incorporated herein by reference).10.1++2004 Long-Term Incentive Plan (as amended and restated) (Filed as Exhibit 10.1 to the Registrant’s June 24, 2020 Form 8-K and incorporated herein by reference)10.2++Restricted Stock Unit Sub-Plan of the Registrant’s 2004 Long-Term Incentive Plan for French Participants (Filed as Appendix B within the Registrant’s 2016 ProxyStatement, filed April 18, 2016 and incorporated herein by reference.)+10.3++2006 Employee Stock Purchase Plan, as amended on October 29, 2020.10.4++Form of Employee Stock Option Agreement, as amended. (Filed as Exhibit 10.3 to the Registrant’s March 31, 2017 Form 10-Q and incorporated herein by reference.)+10.5++Form of Global Stock Option Agreement10.6++Form of Restricted Stock Unit Agreement, as amended. (Filed as Exhibit 10.4 to the Registrant’s March 31, 2017 Form 10-Q and incorporated herein by reference.)+10.7++Form of Global Restricted Stock Unit Agreement10.8++Form of Non-Employee Director Stock Option Agreement. (Filed as Exhibit 10.2 to the Registrant’s September 30, 2004 Form 10-Q and incorporated herein byreference.)10.9++Form of Director Indemnification Agreement. (Filed as Exhibit 99.1 to the Registrant’s April 11, 2005 Form 8-K and incorporated herein by reference.)10.10++Offer Letter between the Registrant and Douglas I. Kra dated October 19, 2004. (Filed as Exhibit 10.20 to the Registrant’s 2004 Form 10-K and incorporated herein byreference.)10.11++Offer Letter, dated April 27, 2020, between Pegasystems Inc. and Hayden Stafford. (Filed as Exhibit 10.3 to the Registrant’s June 30, 2020 Form 10-Q andincorporated herein by reference)10.12++Offer Letter between the Registrant and Kenneth Stillwell dated June 1, 2016. (Filed as Exhibit 99.1 to the Registrant’s June 14, 2016 Form 8-K and incorporatedherein by reference.)10.13++Compensation program for non-employee members of the Registrant’s Board of Directors, effective August 5, 2019 (Filed as Item 1.01 of the Registrant’s August 9,2019 Form 8-K and incorporated herein by reference.)10.14++2020 Section 16 Officer/FLT Member Corporate Incentive Compensation Plan. (Filed as Exhibit 99.1 to the Registrant’s February 7, 2020 Form 8-K and incorporatedherein by reference.)10.152020 Section 16 Officers/FLT Member Executive Officers Base Salaries and Target Bonus Payments (Filed as Exhibit 99.1 to the Registrant’s March 9, 2020 Form 8-K and incorporated herein by reference)10.162021 Section 16 Officers/FLT Member Corporate Incentive Compensation Plan (Filed as Exhibit 99.1 to the Registrant’s February 8, 2021 Form 8-K and incorporatedherein by reference.10.17Lease Agreement dated June 29, 2011 between Charles Park One, LLC and Pegasystems Inc. for premises at One Charles Park (Filed as Exhibit 99.1 to theRegistrant’s Form 8-K/A filed on July 6, 2011 and incorporated herein by reference.)10.18First Amendment to Lease Agreement dated November 11, 2014 between Charles Park One, LLC and Pegasystems Inc. (Filed as Exhibit 10.2 to the Registrant’sSeptember 30, 2015 Form 10-Q and incorporated herein by reference.)63Exhibit No.Description+10.18Lease Termination Agreement, dated February 12, 2021, between Charles Park One, LLC and Pegasystems Inc.10.19Credit Agreement dated as of November 5, 2019 with PNC Bank, National Association (Filed as Exhibit 10.1 to the Registrant’s September 30, 2019 Form 10-Q andincorporated herein by reference.)10.20Amendment to Loan Documents, dated February 18, 2020, between Pegasystems Inc. and PNC Bank, National Association. (Filed as Exhibit 10.3 to the Registrant’sForm 8-K filed February 24, 2020 and incorporated herein by reference)10.21Amendment 2 to Loan Documents, dated July 22, 2020, between Pegasystems Inc. and PNC Bank, National Association. (Filed as Exhibit 10.2 to the Registrant’sJune 30, 2020 Form 10-Q and incorporated herein by reference.)10.22Amendment to Loan Documents, dated as of September 30, 2020, between Pegasystems Inc. and PNC Bank, National Association (Filed as Exhibit 10.3 to theRegistrant’s September 30, 2020 Form 10-Q and incorporated herein by reference.)10.23Form of Side Letter to Base Call Option Transaction (Filed as Exhibit 10.1 to the Registrant’s September 30, 2014 Form 10-Q and incorporated herein by reference.)10.24Form of Side Letter to Additional Call Option Transaction (Filed as Exhibit 10.2 to the Registrant’s September 30, 2020 Form 10-Q and incorporated herein byreference.)10.25Form of Confirmation of Base Call Option Transaction. (Filed as Exhibit 10.1 to the Registrant’s Form 8-K filed February 24, 2020 and incorporated herein byreference)10.26Form of Confirmation of Additional Call Option Transaction. (Filed as Exhibit 10.2 to the Registrant’s Form 8-K filed February 24, 2020 and incorporated herein byreference)+21.1Subsidiaries of the Registrant.+23.1Consent of Independent Registered Public Accounting Firm—Deloitte & Touche LLP.+31.1Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.+31.2Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.+32Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.101.INSInline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRLdocument.101.SCHInline XBRL Taxonomy Extension Schema Document.101.CALInline XBRL Taxonomy Calculation Linkbase Document.101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.101.LABInline XBRL Taxonomy Label Linkbase Document.101.PREInline XBRL Taxonomy Presentation Linkbase Document.104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)+ Filed herewith++ Management contracts and compensatory plan or arrangements required to be filed pursuant to Item 15(b) of Form 10-K.(c) Financial Statement SchedulesAll financial statement schedules are omitted because the required information is not present or not present in sufficient amounts to require submission of theschedule or because the information is reflected in the consolidated financial statements or notes thereto. ITEM 16. FORM 10-K SUMMARYOmitted at Registrant’s option.64SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to besigned on its behalf by the undersigned, thereunto duly authorized.Pegasystems Inc.Date:February 17, 2021By:/s/ KENNETH STILLWELLKenneth StillwellChief Financial Officer and Chief Administrative Officer(Principal Financial Officer)Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below on February 17, 2021 by thefollowing persons on behalf of the Registrant and in the capacities indicated.SignatureTitle/s/ ALAN TREFLERChairman and Chief Executive Officer(Principal Executive Officer)Alan Trefler/s/ KENNETH STILLWELLChief Financial Officer and Chief Administrative Officer(Principal Financial Officer)Kenneth Stillwell/s/ EFSTATHIOS KOUNINISChief Accounting Officer, Vice President of Finance, and Treasurer(Principal Accounting Officer)Efstathios Kouninis/s/ PETER GYENESDirectorPeter Gyenes/s/ RONALD HOVSEPIANDirectorRonald Hovsepian/s/ RICHARD JONESDirectorRichard Jones/s/ CHRISTOPHER LAFONDDirectorChristopher Lafond/s/ DIANNE LEDINGHAMDirectorDianne Ledingham/s/ SHARON ROWLANDSDirectorSharon Rowlands/s/ LARRY WEBERDirector Larry Weber65PEGASYSTEMS INC.2006 EMPLOYEE STOCK PURCHASE PLAN 1.PURPOSE. The purpose of this 2006 Employee Stock Purchase Plan (the “Plan”) is to provide employees of Pegasystems Inc., a Massachusettscorporation (the “Company”), and its subsidiary corporations, who wish to become stockholders of the Company an opportunity to purchase shares of theCommon Stock, $.01 par value per share, of the Company (the “Shares”). The Plan is intended to qualify as an “employee stock purchase plan” within themeaning of Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”).2.ELIGIBLE EMPLOYEES. Subject to provisions of Sections 7, 8 and 9 below, any individual who is in the full-time employment (as defined below) ofthe Company, or any of its subsidiary corporations (as defined in Section 424(f) of the Code) (the “subsidiaries”) the employees of which are designatedby the Board of Directors of the Company (the “Board”) as eligible to participate in the Plan, is eligible to participate in any Offering of Shares (asdefined in Section 3 below) made by the Company hereunder. Full-time employment shall include all employees whose customary employment is:a.in excess of 20 hours per week; andb.more than five months in the relevant calendar year.3.OFFERING DATES. From time to time the Company, by action of the Board, will grant rights to purchase Shares to employees eligible to participate inthe Plan pursuant to one or more offerings (each of which is an “Offering”) on a date or series of dates (each of which is an “Offering Date”) designatedfor this purpose by the Board. Offerings may be consecutive or overlapping, and the terms of each Offering need not be identical provided that the termsof the Plan and the Offering together satisfy the requirements of Section 423 of the Code.4.PRICES. The price per share for each grant of rights hereunder shall be equal to the lesser of (a) eighty-five percent (85%) of the fair market value of ashare of Common Stock on the Offering Date on which such purchase right is granted or (b) eighty-five percent (85%) of the fair market value of a shareof Common Stock on the date such purchase right is exercised, or such higher price as may be set by the Board of Directors from time to time.At its discretion, the Board of Directors may determine a higher price for a grant of rights with respect to any Offering.For purposes of this Plan, the term “fair market value” means, as of any date, the value of a share of Common Stock determined as follows: (i) if theCommon Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or theNasdaq SmallCap Market of the Nasdaq Stock Market, its fair market value shall be the closing price (excluding “after hours” trading) for a share of suchstock on that day (or, if the Common Stock is not traded on that day, on the last trading day preceding such date) as reported in The Wall Street Journal orsuch other source as the Administrator deems reliable; (ii) if the Common Stock is regularly quoted by a recognized securities dealer but selling prices arenot reported, its fair market value shall be the mean between the highest bid and lowest asked prices (excluding “after hours” trading) for a share of theCommon Stock on that day (or, if there are no quotes for that day, on the last day preceding such date for which quotes were available); or (iii) in theabsence of an established market for the Common Stock, the fair market value thereof shall be determined in good faith by the Board.5.EXERCISE OF RIGHTS AND METHOD OF PAYMENT.a.Rights granted under the Plan will be exercisable periodically on specified dates as determined by the Board.b.The method of payment for Shares purchased upon exercise of rights granted hereunder shall be through regular payroll deductions or by lumpsum cash payment, or both, as determined by the Board. No interest shall be paid upon payroll deductions unless specifically provided for by theBoard.c.Any payments received by the Company from a participating employee and not utilized for the purchase of Shares upon exercise of a rightgranted hereunder shall be promptly returned to such employee by the Company after termination of the right to which the payment relates.6.TERM OF RIGHTS. Rights granted on any Offering Date shall be exercisable upon the expiration of such period (“Offering Period”) as shall bedetermined by the Board when it authorizes the Offering, provided that such Offering Period shall in no event be longer than twenty-seven (27) months. This Plan has been restated to reflect amendments to the Plan adopted by the Company’s Board of Directors on February 14, 2008, January 8, 2010, October 25, 2012 and October 29, 2020.117.SHARES SUBJECT TO THE PLAN. No more than 500,000 Shares may be sold pursuant to rights granted under the Plan; provided, however, thatappropriate adjustment shall be made in such number, in the number of Shares covered by outstanding rights granted hereunder, in the exercise price ofthe rights and in the maximum number of Shares which an employee may purchase (pursuant to Section 8 below) to give effect to any mergers,consolidations, reorganizations, recapitalizations, stock splits, stock dividends or other relevant changes in the capitalization of the Company occurringafter the effective date of the Plan, provided that no fractional Shares shall be subject to a right and each right shall be adjusted downward to the nearestfull Share. Any agreement of merger or consolidation will include provisions for protection of the then existing rights of participating employees underthe Plan. Either authorized and unissued Shares or issued Shares heretofore or hereafter reacquired by the Company may be made subject to rights underthe Plan. If for any reason any right under the Plan terminates in whole or in part, Shares subject to such terminated right may again be subjected to a rightunder the Plan.8.LIMITATIONS ON GRANTS.a.No employee shall be granted a right hereunder if such employee, immediately after the right is granted, would own stock or rights to purchasestock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company, or of anysubsidiary, computed in accordance with Sections 423(b)(3) and 424(d) of the Code.b.No employee shall be granted a right which permits his right to purchase shares under all employee stock purchase plans of the Company and itssubsidiaries to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) (or such other maximum as may be prescribed from time totime by the Code) of the fair market value of such Shares (determined at the time such right is granted) for each calendar year in which suchright is outstanding at any time in accordance with the provisions of Section 423(b)(8) of the Code.c.Subject to adjustment in accordance with Section 7 above, no right granted to any participating employee under a single Offering shall covermore shares than may be purchased at an exercise price (using for this purpose 85% of the fair market value of a Share on the first day of theOffering) equal to 10% of the base salary payable to the employee during the Offering not taking into consideration any changes in theemployee’s rate of compensation after the first day of the Offering, or such other percentage as determined by the Board from time to time priorto the commencement of the Offering. When determining the base salary payable to the employee during the Offering, for any employee thatreceives base salary in a currency other than the US dollar, the exchange rate in effect at the close of business on the last business day of theOffering will be used. This provision shall be construed to meet the requirements set forth in Section 423(b)(5) of the Code.9.LIMIT ON PARTICIPATION. Participation in an Offering shall be limited to eligible employees who elect to participate in such Offering in the manner,and within the time limitation, established by the Board when it authorizes the offering.10.CANCELLATION OF ELECTION TO PARTICIPATE. An employee who has elected to participate in an Offering may, unless the employee has waivedthis cancellation right at the time of such election in a manner established by the Board, cancel such election as to all (but not part) of the rights grantedunder such Offering by giving written notice of such cancellation to the Company before the expiration of the Offering Period. Any amounts paid by theemployee for the Shares or withheld for the purchase of Shares from the employee’s compensation through payroll deductions shall be paid to theemployee, without interest, upon such cancellation.11.TERMINATION OF EMPLOYMENT. Upon termination of employment for any reason, including the death of the employee, before the date on whichany rights granted under the Plan are exercisable, all such rights shall immediately terminate and amounts paid by the employee for the Shares or withheldfor the purchase of Shares from the employee’s compensation through payroll deductions shall be paid to the employee or to the employee’s estate,without interest.12.EMPLOYEE’S RIGHTS AS STOCKHOLDER. No participating employee shall have any rights as a stockholder in the Shares covered by a right grantedhereunder until such right has been exercised, full payment has been made for the corresponding Shares and a certificate for the Shares is actually issued.13.RIGHTS NOT TRANSFERABLE. Rights under the Plan are not assignable or transferable by a participating employee and are exercisable only by theemployee.14.LIMITS ON SALE OF STOCK PURCHASED UNDER THE PLAN. The Plan is intended to provide shares of Common Stock for investment and not forresale. Unless the Board provides otherwise, an employee may not sell, exchange, assign, encumber, alienate, transfer, pledge or otherwise dispose of anyshares of Common Stock acquired upon exercise of the applicable right at the end of an Offering Period that commences on or subsequent to January 1,2021 until the one-year anniversary of the end of such Offering Period. Thereafter, an employee may sell stock purchased under the Plan at any time theemployee chooses, subject to the terms and conditions of the Company’s Insider Trading Policy and open and closed trading windows, and compliancewith any applicable federal or state securities laws; provided, however, that because of certain federal tax requirements, each employee agrees by enteringthe Plan, promptly to give the Company notice of any such stock disposed of within two years after the date of grant or within one year of the date ofexercise of the applicable right, such notice to set forth the number of such shares disposed of. THE EMPLOYEE ASSUMES THE RISK OF ANYMARKET FLUCTUATIONS IN THE PRICE OF THE STOCK.15.AMENDMENTS TO OR DISCONTINUANCE OF THE PLAN. The Board may at any time terminate or amend the Plan without notice and withoutfurther action on the part of stockholders of the Company, provided:a.that no such termination or amendment shall materially and adversely affect the then existing rights of any participating employee; andb.that any such amendment which:i.increases the number of Shares subject to the Plan (subject to the provisions of Section 7);ii.changes the class of persons eligible to participate under the Plan; oriii.materially increases the benefits accruing to participants under the Plan shall be subject to approval of the stockholders of theCompany.16.EFFECTIVE DATE AND APPROVALS. The Plan was adopted by the Board on March 30, 2006 to become effective as of said date. The Company’sobligation to offer, sell and deliver its Shares under the Plan is subject to the approval of its stockholders not later than June 30, 2006 and of anygovernmental authority required in connection with the authorized issuance or sale of such Shares and is further subject to the Company receiving theopinion of its counsel that all applicable securities laws have been complied with.17.TERM OF PLAN. The Plan will continue until there are no Shares remaining to be issued under the Plan or until the Plan is terminated by the Board,whichever occurs first.18.ADMINISTRATION OF THE PLAN. The Board or any committee or persons to whom it delegates its authority (the “Administrator”) shall administer,interpret and apply all provisions of the Plan. The Administrator may waive such provisions of the Plan as it deems necessary to meet specialcircumstances not anticipated or covered expressly by the Plan. Nothing contained in this Section shall be deemed to authorize the Administrator to alteror administer the provisions of the Plan in a manner inconsistent with the provisions of Section 423 of the Code. No member of the Administrator shall beliable for any action or determination made in good faith with respect to the Plan or any right granted under it.Date approved by the Board of Directors of the Company: March 30, 2006 (as further amended on February 14, 2008, January 8, 2010, October 25, 2012 andOctober 29, 2020)Date approved by the stockholders of the Company: May 30, 2006Notice of Grant of Stock Option and Option AgreementYou have been granted an award of Nonstatutory Stock Options pursuant to the terms of the Pegasystems Inc. Amended and Restated 2004 Long-Term IncentivePlan (the “Plan”).If you have not yet completed the acceptance process for any of your awards, you may complete the acceptance process by (A) reviewing your award details, (B)reviewing your award documents listed in Section B of your Online Award Acceptance (the “Award Documents”), and (C) confirming your acceptance of youraward.By accepting this award, you agree that this award is granted and governed by the terms and conditions of the Plan, this notice and all your Award Documentslisted herein, including Exhibit A to this Notice of Stock Option and Option Agreement, and incorporated by reference. This notice, together with your AwardDocuments and your electronic acceptance, collectively compromise your total agreement (the “Award Agreement”).Pegasystems Inc./s/ Alan TreflerBy:Alan Trefler, Chairman and Chief Executive OfficerPegasystems Inc.One Rogers StreetCambridge, MA02142-1590 USAPhone 617.374.9600Fax 617.374.9620Pega.comExhibit ANotice of Grant of Stock Option and Option Agreement1.Exercise Price. The Exercise Price is equal to Fair Market Value, as defined in Section 2(n) of the Plan, of a share of the Company’s Common Stock onthe date of the Notice of Grant of Stock Option and Option Agreement (of which this Exhibit A is a part and including any special terms and conditionsfor the Optionee’s country set forth in Exhibit B attached hereto) (collectively, the “Option Agreement”).2.Vesting. The Option will vest on the dates listed in the Option Agreement if the Optionee is actively providing Service and is in good standing from thedate of grant through the applicable vesting date. The Option will cease to vest immediately upon the cessation of the Optionee’s active Service, for anyreason.3.Option Exercise. Once vested, and subject to the other provisions of this Option Agreement, the Option shall remain exercisable in whole or in part at anytime through and including the day immediately preceding the date set forth under the heading “Expiration” on the Option Agreement (the “ExpirationDate”), after which the Option shall expire and no longer be exercisable.The Option shall be exercisable by notice to the Company or the Company’s designated stock option administrator, which shall:a.state the election to exercise the Option, the number of shares of Common Stock with respect to which it is being exercised, and, if different thanthe Optionee, the person in whose name the stock certificate or certificates for such shares of Common Stock are to be registered, and theaddress and Social Security number (if applicable) of such person;b.be signed by the person or persons entitled to exercise the Option, and if the Option is being exercised by a person or persons other than theOptionee, be accompanied by proof satisfactory to the Company’s legal counsel of the right of such person or persons to exercise the Option;andc.if to the Company, be in writing and delivered in person or by certified mail to the Chief Financial Officer of the Company or, if to theCompany’s designated stock option administrator, be in the manner and form specified by such stock option administrator.Payment of the full purchase price of any shares of Common Stock, with respect to which the Option is being exercised, shall accompany the notice ofexercise of the Option and such payment may be made in cash or check payable to the Company. Alternatively, the Optionee may elect to pay the fullpurchase price of any shares of Common Stock, with respect to which the Option is being exercised, by having the Company withhold, such number ofshares of Common Stock as are equal in value to the full purchase price. Notwithstanding the foregoing, the Company, in its sole discretion, may (i)suspend or eliminate the above methods of exercise, or (ii) require the exercise of the Option by an alternate method of exercise identified in Section 8(c)of the Plan. Unless the Company has elected to have shares recorded in book entry form, the certificate or certificates for shares of Common Stock as towhich the Option is exercised shall be registered in the name of the person or persons exercising the Option.4.Termination of Service. If the Optionee terminates Service other than by reason of the Optionee’s death, Disability or Retirement, the Optionee mayexercise his or her Option for three months following such termination to the extent that the Option is vested on the date of termination (but in no eventlater than the expiration of the term of the Option).5.Retirement of Optionee. If the Optionee terminates Service as a result of Retirement, the Optionee may exercise his or her Option for 24 monthsfollowing such termination to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of theOption).6.Disability of Optionee. If the Optionee terminates Service as a result of the Optionee’s Disability, the Optionee may exercise his or her Option for 24months following such termination to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term ofthe Option).7.Death of Optionee. If the Optionee dies while a Service Provider, the Option may be exercised by the Optionee’s estate or by a person who acquires theright to exercise the Option by bequest or inheritance for 12 months following the Optionee’s termination of Service because of death.8.Optionee’s Agreement. The Optionee agrees to all the terms stated in the Option Agreement (of which this Exhibit is a part), as well as to the terms of thePlan (which shall control in case of conflict with the Option Agreement), a copy of which is attached and of which the Optionee acknowledges receipt.9.Withholding. Regardless of any action the Company and/or the Optionee’s employer (“Employer”) take with respect to any or all income tax (includingU.S. federal, state and local tax and/or non-U.S. tax), social insurance, payroll tax, fringe benefits tax, payment on account or other tax-related itemsrelated to the Optionee’s participation in the Plan (“Tax-Related Items”), the Optionee acknowledges that the ultimate liability for all Tax-Related Itemslegally due by the Optionee is and remains the Optionee’s responsibility and that the Company and/or the Employer (i) make no representations orundertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option, including the grant of the Option, the vestingor exercise of the Option, the delivery of shares of Common Stock, the subsequent sale of any shares of Common Stock acquired at exercise and thereceipt of any dividends; and (ii) do not commit to structure the terms of the grant or any aspect of the Option to reduce or eliminate the Optionee’sliability for Tax-Related Items. Further, if the Optionee is subject to Tax-Related Items in more than one jurisdiction, the Optionee acknowledges that theCompany and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than onejurisdiction.Prior to any relevant taxable event or tax withholding event, as applicable, the Optionee shall pay or make arrangements satisfactory to the Companyand/or the Employer to satisfy all Tax-Related Items. In this regard, the Optionee authorizes the Company and/or the Employer to withhold all applicableTax-Related Items legally payable by the Optionee by withholding otherwise deliverable shares of Common Stock, if permissible under local law.Alternatively, or in addition, if permissible under local law, the Optionee authorizes the Company and/or the Employer, at its discretion and pursuant tosuch procedures as it may specify from time to time, to satisfy the obligations with regard to all Tax-Related Items legally payable by the Optionee by oneor a combination of the following: (i) withholding from any wages or other cash compensation paid to the Optionee by the Company and/or theEmployer; (ii) arranging for the sale of shares of Common Stock otherwise deliverable to the Optionee (on the Optionee’s behalf and at the Optionee’sdirection pursuant to this authorization); or (iii) withholding from the proceeds of the sale of shares of Common Stock acquired upon exercise of theOption.Depending on the withholding method, the Company may withhold or account for the Tax-Related Items by considering applicable minimum statutorywithholding rates or other applicable withholding rates, including maximum applicable rates in the Optionee’s jurisdiction. If the obligation for Tax-Related Items is satisfied by withholding a number of shares of Common Stock as described herein, for tax purposes, the Optionee is deemed to have beenissued the full number of shares of Common Stock subject to the Option, notwithstanding that a number of the shares of Common Stock are held backsolely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Option. The Optionee shall pay to the Company and/or theEmployer any amount of Tax-Related Items that the Company and/or the Employer may be required to withhold as a result of the Optionee’s participationin the Plan that cannot be satisfied by the means previously described.The Company may refuse to deliver to the Optionee any shares of Common Stock pursuant to the Option or the proceeds from the sale of shares ofCommon Stock if the Optionee fails to comply with the Optionee’s obligations in connection with the Tax-Related Items as described in this section.10.Rights as Shareholders. The Optionee shall have no rights as a shareholder of the Company with respect to any of the shares of Common Stock coveredby the Option until the issuance of a stock certificate or certificates upon the exercise of the Option, and then only with respect to the shares of CommonStock represented by such certificate or certificates.11.Non-Transferability. The Option may not be transferred in any manner other than by will or by the laws of descent and distribution. The terms of theOption shall be binding upon the executors, administrators, heirs and successors of the Optionee.12.Compliance with Securities, Tax and Other Law. The Option may not be exercised if the issuance of shares of Common Stock upon such exercise wouldconstitute a violation of any applicable U.S. federal or state or non-U.S. securities law or any other law or valid regulation. As a condition to the exerciseof the Option, the Company may require the Optionee, or any person acquiring the right to exercise the Option, to make any representation or warrantythat the Company deems to be necessary under any applicable securities, tax, or other law or regulation.13.Adjustments upon Changes in Capitalization. In the event of any change in the shares subject to the Plan or to any Option granted under the Plan byreason of a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, combination or exchange of shares of Common Stock, orother change in the structure of the Company, the number of shares of Common Stock subject to each outstanding Option and/or the Option price withrespect to the shares of Common Stock shall be appropriately adjusted by the Company and such adjustment shall be final, binding and conclusive.14.No Right to Employment. The granting of the Option does not confer upon the Optionee the right to continue in the Service of the Company and/or theEmployer, or affect in any way the right and power of the Company and/or the Employer to terminate the Service of the Optionee at any time with orwithout assigning a reason therefor, to the same extent as the Company and/or the Employer might have done if the Option had not been granted.15.No Guarantee. The Company offers no guarantee or assurance that the Company’s stock has any value at the time of this grant or will have any value orliquidity at any future time.16.Employment Agreement. In consideration for this Option, the Optionee reaffirms the terms of the Optionee’s Employment Agreement with the Employer,including but not limited to the provisions (if any) related to competition and solicitation. The Optionee further agrees that to the extent the nature of theEmployer’s business has evolved since the date of the Employment Agreement the covenants shall also apply to the business as evolved.17.Acknowledgment of Nature of Plan and Option. In accepting the Option, the Optionee acknowledges that:a.the Plan is established voluntarily by the Company, it is discretionary in nature, and it may be modified, amended, suspended or terminated bythe Company at any time, unless otherwise provided in the Plan and this Option Agreement;b.the Option is exceptional, voluntary and occasional and does not create any contractual or other right to receive future grants of Options, orbenefits in lieu of Options, even if Options have been granted repeatedly in the past;c.all decisions with respect to future Option or other grants, if any, will be at the sole discretion of the Company;d.the Optionee’s participation in the Plan is voluntary;e.the Option is an extraordinary item that does not constitute compensation for services of any kind rendered to the Company or any RelatedCompany, and which is outside the scope of the employment contract, if any;f.the Option and the shares of Common Stock subject to the Option, and the income and value of the same, are not part of normal or expectedcompensation or salary for any purposes, including, but not limited to, calculation of any severance, resignation, termination, redundancy, end-of-service payments, bonuses, holiday pay, long-service awards, pension or retirement or welfare benefits or similar payments and in no eventshould be considered as compensation for, or relating in any way to, past services for the Company or any Related Company;g.in the event that the Optionee is not an Employee of the Company or any Related Company, the Option and the Optionee’s participation in thePlan will not be interpreted to form an employment or service contract or relationship with the Company or any Related Company;h.unless otherwise agreed with the Company, the Option and the shares of Common Stock subject to the Option, and the income and value of thesame, are not granted as consideration for, or in connection with, the service the Optionee may provide as a director of a Subsidiary.i.the future value of the underlying shares of Common Stock is unknown and cannot be predicted with any certainty;j.if the Optionee exercises the Option and acquires shares of Common Stock, the value of such shares of Common Stock acquired upon exercise ofthe Option may increase or decrease in value, even below the Exercise Price;k.in consideration of the Option, no claim or entitlement to compensation or damages shall arise from forfeiture of the Option resulting fromtermination of the Optionee’s employment or other service relationship (for any reason whatsoever and whether or not in breach of employmentlaws in the jurisdiction where the Optionee is employed or the terms of the Optionee’s employment agreement, if any);l.for purposes of the Option, the Optionee’s Service will be considered terminated as of the date the Optionee is no longer actively providingservices to the Company, the Employer or any Related Company (regardless for the reason for such termination and whether or not later found tobe invalid or in breach of employment laws in the jurisdiction where the Optionee is employed or the terms of the Optionee’s employmentagreement, if any) and, unless otherwise expressly provided in the Option Agreement or determined by the Company, (i) the Optionee’s right tovest in the Option under the Plan (if any) will terminate, and (ii) the period (if any) during which the Optionee may exercise the Option aftersuch termination will commence, as of such date and will not be extended by any notice period (e.g., the Optionee’s period of service would notinclude any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdictionwhere the Optionee is employed or the terms of the Optionee’s employment agreement, if any); the Committee or its delegate shall have theexclusive discretion to determine when the Optionee is no longer actively employed for purposes of the Option (including whether the Optioneemay still be considered to be providing services while on a leave of absence);m.neither the Company, the Employer nor any Subsidiary shall be liable for any foreign exchange rate fluctuation between the Optionee’s localcurrency and the United States Dollar that may affect the value of the Option or of any amounts due to the Optionee pursuant to the exercise ofthe Option or the subsequent sale of any shares of Common Stock acquired upon exercise;n.the Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the Optionee’sparticipation in the Plan or the Optionee’s acquisition or sale of the underlying shares of Common Stock; ando.the Optionee understands and agrees that the Optionee should consult with the Optionee’s personal tax, legal and financial advisors regarding theOptionee’s participation in the Plan before taking any action related to the Plan.18.Data Privacy Notice and Consent. The Optionee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic orother form, of the Optionee’s personal data as described in this Option Agreement and any other Option grant materials by and among, as applicable,the Employer, the Company and its Subsidiaries for the exclusive purpose of implementing, administering and managing the Optionee’s participationin the Plan.The Optionee understands that the Company and the Employer may hold certain personal information about the Optionee, including, but not limitedto, the Optionee’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary,nationality, job title, any shares of stock or directorships held in the Company, details of all Options or any other entitlement to shares of stockgranted, exercised, canceled, vested, unvested or outstanding in the Optionee’s favor, for the exclusive purpose of implementing, administering andmanaging the Plan (“Data”).The Optionee understands that Data will be transferred to a third party stock plan service provider(s) as may be selected by the Company, which isassisting the Company with the implementation, administration and management of the Plan. The Optionee understands the recipients of the Datamay be located in the Optionee’s country, in the United States or elsewhere, and that the data recipients’ country may have different data privacy lawsand protections than the Optionee’s country. The Optionee understands that the Optionee may request details of any potential recipients of the Databy contacting privacy@pega.com. The Optionee authorizes the Company and any other possible recipients which may assist the Company (presentlyor in the future) with implementing, administering and managing the Plan to receive, possess, use, retain and transfer the Data, in electronic or otherform, for the sole purpose of implementing, administering and managing the Optionee’s participation in the Plan. The Optionee understands thatData will be held only as long as is necessary to implement, administer and manage the Optionee’s participation in the Plan. The Optioneeunderstands that the Optionee may, at any time, view Data, request additional information about the storage and processing of Data, require anynecessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting privacy@pega.com. The Optioneeunderstands, however, that refusing or withdrawing the Optionee’s consent may affect the Optionee’s ability to participate in the Plan. For moreinformation on the consequences of the Optionee’s refusal to consent or withdrawal of consent, the Optionee understands that the Optionee maycontact privacy@pega.com.19.Amendment and Termination of Option. The Company may amend, modify or terminate any outstanding Option, provided that the Optionee’s consent tosuch action shall be required unless it occurs pursuant to a Sale of the Company or the Committee determines that the action would not materially andadversely affect the Optionee.20.Language. The Optionee acknowledges and agrees that he or she is sufficiently proficient in English, or has consulted with an advisor who is sufficientlyproficient in English, so as to enable him or her to understand the terms and conditions of this Option Agreement. If the Optionee has received this OptionAgreement or any other document related to the Plan translated into a language other than English and if the translated version is different from theEnglish version, the English version will control.21.Electronic Delivery and Acceptance. The Company may, in its sole discretion, decide to deliver any documents related to the Option or future grantsmade under the Plan by electronic means or request that the Optionee consent to participate in the Plan by electronic means. The Optionee herebyconsents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established andmaintained by the Company or a third party designated by the Company.22.Insider Trading Restrictions/Market Abuse Laws. The Optionee acknowledges that, depending on the Optionee’s country, the broker’s country or thecountry in which the shares of Common Stock are listed, the Optionee may be subject to insider trading restrictions and/or market abuse laws inapplicable jurisdictions, including the United States and the Optionee’s country, which may affect the Optionee’s ability to accept, acquire, sell, attempt tosell or otherwise dispose of shares of Common Stock, rights to shares of Common Stock (e.g., Options) or rights linked to the value of shares of CommonStock during such times as the Optionee is considered to have “inside information” regarding the Company, as defined by the laws or regulations in theapplicable jurisdictions. Local insider trading laws and regulations may prohibit the cancellation or amendment of orders the Optionee placed before he orshe possessed inside information. Furthermore, the Optionee could be prohibited from (i) disclosing the inside information to any third party (other thanon a “need to know” basis) and (ii) “tipping” third parties or causing them otherwise to buy or sell securities, where third parties include fellowemployees. The insider trading and/or market abuse laws may be different from any Company Insider Trading Policy. The Optionee is responsible forensuring compliance with any applicable restrictions and should consult his or her personal legal advisor on this matter.23.Foreign Asset/Account and Exchange Control Reporting. The Optionee’s country may have certain exchange controls and foreign asset and/or accountreporting requirements that may affect his or her ability to purchase or hold shares of Common Stock under the Plan or receive cash from his or herparticipation in the Plan (including from any dividends received or sale proceeds arising from the sale of shares of Common Stock) in a brokerage or bankaccount outside the Optionee’s country. The Optionee may be required to report such accounts, assets or transactions to the tax or other authorities in hisor her country. Further, the Optionee may be required to repatriate shares of Common Stock or proceeds acquired as a result of participating in the Plan tohis or her country through a designated bank/broker and/or within a certain time. The Optionee acknowledges and agrees that it is his or her responsibilityto be compliant with such regulations and understands that the Optionee should speak with his or her personal legal advisor for any details regarding anyforeign asset/account reporting or exchange control reporting requirements in the Optionee’s country arising out of his or her participation in the Plan.24.Option Subject to Company Clawback or Recoupment. The Option shall be subject to clawback or recoupment pursuant to any compensation clawbackor recoupment policy adopted by the Board or required by law during the term of the Optionee’s employment or other service with the Company that isapplicable to executive officers, employees, directors or other service providers of the Company, and in addition to any other remedies available undersuch policy and applicable law may require the cancellation of the Option and the recoupment of any gains realized with respect to the Option.25.Governing Law and Venue. The Option Agreement shall be governed by and interpreted in accordance with the laws of The Commonwealth ofMassachusetts (U.S.A.), without regard to any applicable conflicts of law provisions thereof.For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties evidenced by this Option or this OptionAgreement, the parties hereby submit to and consent to the exclusive jurisdiction of The Commonwealth of Massachusetts (U.S.A.) and agree that suchlitigation shall be conducted only in the courts of Middlesex County, Massachusetts (U.S.A.), or the federal courts for the United States for the district ofMassachusetts, and no other courts, where this Option grant is made and/or to be performed.26.Severability. In the event any one or more of the provisions of the Option Agreement shall for any reason be held to be invalid, illegal or unenforceable,the remaining provisions of the Option Agreement shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutuallyacceptable provision, which being valid, legal and enforceable, comes closest to the intention of the parties underlying the invalid, illegal or unenforceableprovision.27.Waiver. The Optionee acknowledges that a waiver by the Company of a breach of any provision of the Option Agreement shall not operate or beconstrued as a waiver of any other provision of the Option Agreement, or of any subsequent breach by the Optionee or any other Optionee.28.Definitions. All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Plan.29.Exhibit B. Notwithstanding any provision herein, the Option and the Optionee’s participation in the Plan shall be subject to any special terms andconditions as set forth in Exhibit B for the Optionee’s country, if any. Moreover, if the Optionee relocates to one of the countries included in Exhibit B,the country-specific terms for such country will apply to the Optionee, to the extent the Company determines that the application of such terms andconditions is necessary or advisable for legal or administrative reasons. Exhibit B constitutes part of this Option Agreement.30.Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Optionee’s participation in the Plan, on thisOption and on any shares of Common Stock acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal oradministrative reasons, and to require the Optionee to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.Exhibit BTo Notice of Grant of Option and Option AgreementCountry-Specific Provisions for Optionees Outside the U.S.Capitalized terms used but not defined in this Exhibit B shall have the same meanings assigned to them in the Notice of Grant, the Option Agreement and the Plan.This Exhibit B forms part of the Option Agreement.Terms and ConditionsThis Exhibit B includes additional terms and conditions that govern the Option granted to the Optionee under the Plan if the Optionee works and/or resides in oneof the countries listed below. If the Optionee is a citizen or resident of a country other than the one in which the Optionee is currently working (or is considered assuch for local law purposes), or if the Optionee transfers employment or residency to a different country after the date of grant, the Company will, in its discretion,determine the extent to which the terms and conditions contained herein will be applicable to the Optionee.NotificationsThis Exhibit B also includes information regarding securities laws and certain other considerations of which the Optionee should be aware with respect toparticipating in the Plan. The information is based on the securities and other laws in effect in the respective countries as of July 2020. Such laws are often complexand change frequently. As a result, the Optionee should not rely on the information noted herein as the only source of information relating to the consequences ofparticipating in the Plan because the information may be out of date at the time the Optionee acquires shares of Common Stock under the Plan or subsequently sellssuch shares of Common Stock.In addition, the information contained in this Exhibit B is general in nature and may not apply to the Optionee’s particular situation, and the Company is not in aposition to assure the Optionee of any particular result. Accordingly, the Optionee should seek appropriate professional advice as to how the relevant laws in theOptionee’s country may apply to the Optionee’s situation.If the Optionee is a citizen or resident of a country other than the one in which the Optionee is currently working or residing (or is considered as such for local lawpurposes), or the Optionee transfers employment or residency to a different country after the date of grant, the notifications contained in this Exhibit B may not beapplicable to the Optionee in the same manner.EUROPEAN UNION (“EU”) / EUROPEAN ECONOMIC AREA (“EEA”) MEMBER STATES / SWITZERLAND / UNITED KINGDOMData PrivacyIf the Optionee resides and/or works in the EU/EEA, Switzerland or the United Kingdom, Section 18 (Data Privacy Notice and Consent) of Exhibit A to the OptionAgreement shall be replaced with the following:The Company, located at One Rogers Street, Cambridge, MA 02142-1209, U.S.A. is the controller for the processing of the Optionee’s personal data by theCompany and the third parties noted below.a.Data Collection, Processing and Usage. Pursuant to applicable data protection laws, the Optionee is hereby notified that the Company collects, processesand uses certain personal information about the Optionee for the legitimate purpose of implementing, administering and managing the Plan and generallyadministering awards; specifically: the Optionee’s name, home address, email address, date of birth, plan or benefit enrollment forms and elections, awardor benefit statements, any shares of Common Stock, details of all awards or any other entitlements to shares of Common Stock awarded, canceled,purchased, vested, unvested or outstanding (“Personal Data”). In granting the Option under the Plan, the Company will collect, process, use, disclose andtransfer (collectively, “Processing”) Personal Data for purposes of implementing, administering and managing the Plan. The Company’s legal basis forthe Processing of Personal Data is the Company’s legitimate business interests of managing the Plan, administering awards and complying with itscontractual and statutory obligations, as well as the necessity of the Processing for the Company to perform its contractual obligations under the Optionand the Plan. The Optionee’s refusal to provide Personal Data would make it impossible for the Company to perform its contractual obligations and mayaffect the Optionee’s ability to participate in the Plan. As such, by participating in the Plan, the Optionee voluntarily acknowledges the Processing of theOptionee’s Personal Data as described herein.b.Stock Plan Administration Service Providers. The Company may transfer Personal Data to Morgan Stanley Smith Barney (“MSSB”) (or any successorPlan broker), an independent service provider based, in relevant part, in the United States, which may assist the Company with the implementation,administration and management of the Plan. In the future, the Company may select a different service provider and share Personal Data with anothercompany that serves in a similar manner. The Company’s service provider will open an account for the Optionee to receive and trade shares of CommonStock under the Plan. The Processing of Personal Data will take place through both electronic and non-electronic means. Personal Data will only beaccessible by those individuals requiring access to it for purposes of implementing, administering and operating the Plan. When receiving the Optionee’sPersonal Data, if applicable, MSSB provides appropriate safeguards in accordance with the EU Standard Contractual Clauses or other appropriate cross-border transfer solutions. By participating in the Plan, the Optionee understands that the service provider will Process the Optionee’s Personal Data for thepurposes of implementing, administering and managing his or her participation in the Plan.c.International Data Transfers. The Company and its service providers are based in the United States. The Optionee’s country or jurisdiction may havedifferent data privacy laws and protections than the United States. For example, an appropriate level of protection can be achieved by implementingsafeguards such as the Standard Contractual Clauses adopted by the EU Commission. Personal Data will be transferred from the EU/EEA, Switzerlandand/or the United Kingdom to the Company and onward from the Company to any of its service providers based on the Standard Contractual Clauses.The Optionee may request a copy of such appropriate safeguards by contacting privacy@pega.com.d.Data Retention. The Company will use Personal Data only as long as is necessary to implement, administer and manage the Optionee’s participation inthe Plan or as required to comply with legal or regulatory obligations, including tax and securities laws. When the Company no longer needs PersonalData, the Company will remove it from its systems. If the Company keeps Personal Data longer, it would be to satisfy legal or regulatory obligations andthe Company’s legal basis would be for compliance with relevant laws or regulations.e.Data Subject Rights. To the extent provided by law, the Optionee has the right to (i) subject to certain exceptions, request access or copies of PersonalData the Company Processes, (ii) request rectification of incorrect Personal Data, (iii) request deletion of Personal Data, (iv) place restrictions onProcessing of Personal Data, (v) lodge complaints with competent authorities in the Optionee’s country, and/or (vi) request a list with the names andaddresses of any potential recipients of Personal Data. To receive clarification regarding the Optionee’s rights or to exercise his or her rights, the Optioneemay contact privacy@pega.com. The Optionee also has the right to object, on grounds related to a particular situation, to the Processing of Personal Data,as well as opt-out of the Plan herein, in any case without cost, by contacting his or her local human resources department in writing. The Optionee’sprovision of Personal Data is a contractual requirement. The Optionee understands, however, that the only consequence of refusing to provide PersonalData is that the Company may not be able to administer the Option, or grant other awards or administer or maintain such awards. For more information onthe consequences of the refusal to provide Personal Data, the Optionee may contact his or her human resources representative in writing. The Optioneemay also have the right to lodge a complaint with the relevant data protection supervisory authority.AUSTRALIAOffer DocumentThe Company is pleased to provide the Optionee with this offer to participate in the Plan. This offer document sets out information regarding the offer of Optionsto Australian resident employees of the Company and its Subsidiaries. The Company is providing this information to ensure the Plan’s compliance with AustralianSecurities and Investments Commission (“ASIC”) Class Order 14/1000 and relevant provisions of the Corporations Act 2001.Additional DocumentsIn addition to the information set out in the Option Agreement and this Exhibit B, the Optionee is also being provided with copies of the following documents:a.the Plan; andb.the Information Statement for Participants in the Pegasystems Inc. 2004 Long-Term Incentive Plan (the “Information Statement”); (collectively, the“Additional Documents”).The Additional Documents provide further information to help the Optionee to make an informed investment decision about participating in the Plan. Neither thePlan nor the Information Statement is a prospectus for the purposes of the Corporations Act 2001.The Optionee should not rely upon any oral statements made in relation to this offer. The Optionee should rely only upon the statements contained in the OptionAgreement, including this Exhibit B, and the Additional Documents when considering participation in the Plan.General Information OnlyThe information herein is general information only. It is not advice or information that takes into account the Optionee’s objectives, financial situation and needs.The Optionee should consider obtaining his or her own financial product advice from a person who is licensed by ASIC to give such advice.Risk FactorsInvestment in shares of Common Stock involves a degree of risk. The Optionee should monitor his or her participation and consider all risk factors relevant to theacquisition of shares of Common Stock under the Plan as set forth below and in the Additional Documents.The Optionee should have regard to risk factors relevant to investment in securities generally and, in particular, to holding shares of Common Stock. For example,the price at which an individual share of Common Stock is quoted on the Nasdaq Global Select Market (“Nasdaq”) may increase or decrease due to a number offactors. There is no guarantee that the price of a share of Common Stock will increase. Factors that may affect the price of an individual share of Common Stockinclude fluctuations in the domestic and international market for listed stocks, general economic conditions, including interest rates, inflation rates, commodity andoil prices, changes to government fiscal, monetary or regulatory policies, legislation or regulation, the nature of the markets in which the Company operates andgeneral operational and business risks.More information about potential factors that could affect the Company’s business and financial results will be included in the Company’s most recent AnnualReport on Form 10-K and the Company’s Quarterly Report on Form 10-Q. Copies of these reports are available at http://www.sec.gov/, on the Company’s“Investor Relations” page at https://www.pega.com/about/investors, and upon request to the Company.In addition, the Optionee should be aware that the Australian dollar (“AUD”) value of any shares of Common Stock acquired under the Plan will be affected by theUSD/AUD exchange rate. Participation in the Plan involves certain risks related to fluctuations in this rate of exchange.Common Stock in a U.S. CorporationCommon stock of a U.S. corporation is analogous to ordinary shares of an Australian corporation. Each holder of a share of Common Stock is entitled to one vote.Further, shares of Common Stock are not liable to any further calls for payment of capital or for other assessment by the Company and have no sinking fundprovisions, pre-emptive rights, conversion rights or redemption provisions.Ascertaining the Market Price of a Share of Common StockThe Optionee may ascertain the current market price of an individual share of Common Stock as traded on the Nasdaq under the symbol “PEGA” at:https://www.nasdaq.com/market-activity/stocks/pega. The AUD equivalent of that price can be obtained at: https://www.rba.gov.au/statistics/frequency/exchange-rates.html.This will not be a prediction of the market price of an individual share of Common Stock when such shares of Common Stock are acquired under the Plan or of theapplicable exchange rate on the date of acquisition.Ascertaining the Exercise PriceThe Exercise Price of the Option is determined by the Committee in accordance with the terms of the Plan. The Exercise Price will be no less than 100% of theFair Market Value of a share of Common Stock on the date the Option is granted.The Exercise Price is denominated in USD. The AUD equivalent of the Exercise Price will change with fluctuations in the USD/AUD exchange rate. As noted inabove, indicative USD/AUD exchange rates can be obtained at: http://www.rba.gov.au/statistics/frequency/exchange-rates.html.Tax NotificationThe Plan is a plan to which Subdivision 83A-C of the Income Tax Assessment Act 1997 (Cth) (the “Act”) applies (subject to the conditions in that Act).AUSTRIAThere are no country-specific provisions.BRAZILCompliance with LawBy accepting the Option, the Optionee agrees to comply with all applicable Brazilian laws and pay any and all applicable Tax-Related Items associated with theOption, the receipt of any dividends paid on shares of Common Stock and the sale of shares of Common Stock acquired under the Plan.Labor Law Acknowledgment and Policy StatementThis provision supplements Section 17 (Acknowledgment of Nature of Plan and Option) of Exhibit A to the Option Agreement:The Optionee acknowledges and agrees that (i) the Optionee is making an investment decision, and (ii) the value of the underlying shares of Common Stock is notfixed and may increase or decrease, without compensation to the Optionee.Further, the Optionee acknowledges and agrees that, for all legal purposes, (i) any benefits provided to the Optionee under the Plan are unrelated to the Optionee’semployment or service; (ii) the Plan is not a part of the terms and conditions of the Optionee’s employment or service; and (iii) the income from the Optionee’sparticipation in the Plan, if any, is not part of the Optionee’s remuneration from employment or service.CANADAResale RestrictionThe Optionee is permitted to sell shares of Common Stock acquired under the Plan through the designated broker appointed under the Plan, if any, provided theresale of shares of Common Stock takes place outside of Canada through the facilities of the stock exchange on which the shares of Common Stock are listed. Theshares of Common Stock are currently traded on the Nasdaq Global Select Market, which is located outside of Canada, and may be sold through this exchange.Cessation of ServiceIn the event of the termination of the Optionee’s Service (whether or not later found to be invalid or unlawful for any reason, including for breaching eitherapplicable employment laws or the Optionee’s employment or service agreement, if any), unless otherwise set forth in the Option Agreement, the Optionee’s rightto vest in the Option under the Plan, if any, will terminate and the period (if any) during which the Optionee may exercise the Option after such termination willcommence effective on the earliest of: (a) the date on which the Optionee’s active employment terminates, (b) the date the Optionee receives notice of termination,and (c) the date the Optionee no longer actively provides service to the Company or any Related Company, regardless of any period during which notice, pay inlieu of notice or related payments or damages are provided or required to be provided under local law. The Optionee will not earn or be entitled to any pro-ratedvesting for that portion of time before the date on which the Optionee’s right to vest terminates, nor will the Optionee be entitled to any compensation for lostvesting. The Committee or its delegate shall have the exclusive discretion to determine when the Optionee is no longer providing Service for purposes of theOption Agreement (including whether the Optionee may still be considered to be providing Service while on a leave of absence). Notwithstanding the foregoing, ifapplicable employment standards legislation explicitly requires continued entitlement to vesting during a statutory notice period, the Optionee’s right to vest in theOption under the Plan, if any, will terminate and the period (if any) during which the Optionee may exercise the Option will commence effective as of the last dayof the Optionee’s minimum statutory notice period, but the Optionee will not earn or be entitled to pro-rated vesting if the vesting date falls after the end of theOptionee’s statutory notice period, nor will the Optionee be entitled to any compensation for lost vesting.The following provisions apply if the Optionee is a resident of Quebec:Consent to Receive Information in English for Quebec OptioneesThe parties acknowledge that it is their express wish that the Option Agreement, as well as all documents, notices and legal proceedings entered into, given orinstituted pursuant hereto or relating directly or indirectly hereto, be drawn up in English.Les parties reconnaissent avoir exigé la rédaction en anglais du Contrat d’Attribution, ainsi que de tous documents exécutés, avis donnés et procédures judiciairesintentées, directement ou indirectement, relativement à ou suite à la présente convention.GERMANYThere are no country-specific provisions.HONG KONGSecurities Law NotificationWARNING: The Option and the shares of Common Stock issued upon exercise of the Option do not constitute a public offering of securities under Hong Kong lawand are available only to certain eligible employees. The Notice of Grant, the Option Agreement, the Plan and other incidental communication materials have notbeen prepared in accordance with and are not intended to constitute a “prospectus” for a public offering of securities under the applicable securities legislation inHong Kong. In addition, the documents have not been reviewed by any regulatory authority in Hong Kong. The Option is intended only for the personal use of theOptionee, and may not be distributed to any other person. If the Optionee is in any doubt about any of the contents of the Notice of Grant, the Option Agreement orthe Plan, the Optionee should obtain independent professional advice.Restriction on Sale of Shares of Common StockShares of Common Stock received pursuant to the Option are accepted as a personal investment. To facilitate compliance with securities laws in Hong Kong, theOptionee agrees not to sell the shares of Common Stock acquired upon exercise of the Option within six months after the date of grant.Award Is Not WagesThe Option and the shares of Common Stock underlying the Option do not form part of the Optionee’s wages for purposes of calculating any statutory orcontractual payments under applicable law in Hong Kong.INDIAExercise MethodDue to regulatory requirements, the Optionee will be restricted to paying the Option Exercise Price by having the Company withhold such number of shares ofCommon Stock as are equal in value to the full Exercise Price. Paying the Exercise Price in cash or by check is prohibited. In the event of changes in the regulatoryrequirements, the Company reserves the right to eliminate the net exercise method restriction and, in its sole discretion, to permit alternate exercise methods.ITALYPlan Document AcknowledgmentIn accepting the grant of the Option, the Optionee acknowledges that he or she has received a copy of the Plan, has reviewed the Plan and the Option Agreement intheir entirety and fully understands and accepts all provisions of the Plan and the Option Agreement.The Optionee further acknowledges that he or she has read and specifically and expressly approves the following clauses in Exhibit A to the Option Agreement:Section 2: Vesting; Section 3: Option Exercise; Section 9: Withholding; Section 11: Non-Transferability; Section 17: Acknowledgment of Nature of Plan andOption; Section 21: Electronic Delivery and Acceptance; Section 25: Governing Law and Venue; and the “Data Privacy” provision for European Union / EuropeanEconomic Area Member States / Switzerland / United Kingdom, included in this Exhibit B.JAPANThere are no country-specific provisions.NETHERLANDSThere are no country-specific provisions.NEW ZEALANDSecurities Law NotificationWARNING: The Optionee is being offered an Option that allows him/her to acquire shares of Common Stock in accordance with the terms of the Plan and theOption Agreement. The shares of Common Stock, if issued, give the Optionee a stake in the ownership of the Company. The Optionee may receive a return ifdividends are paid.If the Company runs into financial difficulties and is wound up, the Optionee will be paid only after all creditors have been paid. The Optionee may lose some orall of his/her investment.New Zealand law normally requires people who offer financial products to give information to investors before they invest. This information is designed to helpinvestors to make an informed decision. The usual rules do not apply to this offer because it is made under an employee share purchase scheme. As a result, theOptionee may not be given all the information usually required. The Optionee will also have fewer other legal protections for this investment.The Optionee should ask questions, read all documents carefully, and seek independent financial advice before committing to participate in the Plan.Prior to the exercise of the Option, the Optionee will not have any rights of ownership (e.g., voting or dividend rights) with respect to the underlying shares ofCommon Stock.No interest in any Options may be transferred (legally or beneficially), assigned, mortgaged, charged or encumbered.The shares of Common Stock are quoted on the Nasdaq Global Select Market (“Nasdaq”). This means that, if the Optionee acquires shares of Common Stockunder the Plan, the Optionee may be able to sell any shares of Common Stock acquired on the Nasdaq if there are interested buyers. The Optionee may get lessthan his/her investment. The price will depend on the demand for the shares of Common Stock.For information on risk factors impacting the Company’s business that may affect the value of the shares of Common Stock, the Optionee should refer to the riskfactors discussion in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, and the auditor’s reports on those financial statements,which are filed with the U.S. Securities and Exchange Commission and are available online at www.sec.gov, as well as on the Company’s website athttps://www.pega.com/about/investors.POLANDThere are no country-specific provisions.SINGAPORESecurities Law NotificationThe grant of the Option is being made pursuant to the “Qualifying Person” exemption under section 273(1)(f) of the Securities and Futures Act (Chapter 289, 2006Ed.) (“SFA”) and is not made to the Optionee with a view to the underlying shares of Common Stock being subsequently offered for sale to any other party. ThePlan has not been, and will not be, lodged or registered as a prospectus with the Monetary Authority of Singapore. The Optionee should note that the Option issubject to section 257 of the SFA and the Optionee should not make (a) any subsequent sale of the shares of Common Stock in Singapore or (b) any offer of suchsubsequent sale of the shares of Common Stock subject to the Option in Singapore, unless such sale or offer is made after six months from the date of grant orpursuant to the exemptions under Part XIII Division 1 Subdivision (4) (other than section 280) of the SFA. The shares of Common Stock are currently traded onthe Nasdaq Global Select Market, which is located outside of Singapore, and may be sold through this exchange.SPAINSecurities Law NotificationNo “offer of securities to the public,” as defined under Spanish law, has taken place or will take place in the Spanish territory. The Option Agreement (includingthis Exhibit B) and the Plan have not been, nor will they be, registered with the Comisión Nacional del Mercado de Valores (the Spanish securities regulator) anddo not constitute a public offering prospectus.Labor Law AcknowledgementThe following provisions supplement Section 17 (Acknowledgment of Nature of Plan and Option) of Exhibit A to the Option Agreement:In accepting the Option, the Optionee consents to participation in the Plan and acknowledges that he or she has received a copy of the Plan.The Optionee understands that the Company has unilaterally, gratuitously and in its sole discretion decided to grant Options under the Plan to individuals who maybe employees of the Company or a Subsidiary. The decision is a limited decision that is entered into upon the express assumption and condition that any grant willnot economically or otherwise bind the Company or any Subsidiary on an ongoing basis, over and above the specific terms of the Plan. Consequently, the Optioneeunderstands that the Option is granted on the assumption and condition that the Option and the shares of Common Stock underlying the Option shall not become apart of any employment or service agreement (either with the Company, the Employer or any Subsidiary) and shall not be considered a mandatory benefit, salaryfor any purposes (including severance compensation) or any other right whatsoever.The Optionee understands and agrees that, unless otherwise provided by the Company, the termination of the Optionee’s Service for any reason will automaticallyresult in the forfeiture of the Option that may have been granted to the Optionee and has not vested as of the Optionee’s Service termination date. In particular, andwithout limitation to the provisions of the Plan, the Optionee understands and agrees that any unvested portion of the Option as of the date the Optionee’s Serviceterminates will be cancelled without entitlement to the underlying shares of Common Stock or to any amount as indemnification if the Optionee terminates for anyreason, including, but not limited to, resignation, retirement, disciplinary dismissal adjudged to be with cause, disciplinary dismissal adjudged or recognized to bewithout cause (i.e., subject to a “despido improcedente”), individual or collective dismissal on objective grounds, whether adjudged or recognized to be with orwithout cause, material modification of the terms of employment under Article 41 of the Workers’ Statute, relocation under Article 40 of the Workers’ Statute,and/or Article 50 of the Workers’ Statute, unilateral withdrawal by the Employer and under Article 10.3 of the Royal Decree 1382/1985.Finally, the Optionee understands that the grant of the Option would not be made to the Optionee but for the assumptions and conditions referred to above. Thus,the Optionee acknowledges and freely accepts that should any or all of the assumptions be mistaken or should any of the conditions not be met for any reason, thenthe grant of the Option shall be null and void.SWEDENWithholding of Tax-Related ItemsThe paragraph below supplements Section 9 (Withholding) of Exhibit A to the Option Agreement:Without limiting the Company’s and the Employer’s authority to satisfy their withholding obligations for Tax-Related Items as set forth in Section 9 of Exhibit Ato the Option Agreement, in accepting the grant of the Option, the Optionee authorizes the Company and/or the Employer to withhold shares of Common Stock orto sell shares of Common Stock otherwise deliverable to the Optionee upon exercise to satisfy Tax-Related Items, regardless of whether the Company and/or theEmployer have an obligation to withhold such Tax-Related Items.SWITZERLANDSecurities Law NotificationNeither the Option Agreement, this Exhibit B nor any other materials relating to the Option (a) constitutes a prospectus according to article 35 et seq. of the SwissFederal Act on Financial Services (“FinSA”), (b) may be publicly distributed nor otherwise made publicly available in Switzerland to any person other than anemployee of the Company, or (c) has been or will be filed with, approved or supervised by any Swiss reviewing body according to article 51 of FinSA or anySwiss regulatory authority, including the Swiss Financial Market Supervisory Authority (FINMA).THAILANDThere are no country-specific provisions.TURKEYSecurities Law NotificationIn certain circumstances, the Optionee is permitted to acquire and sell securities on a non-Turkish stock exchange only through a financial intermediary licensed inTurkey. Therefore, the Optionee may be required to appoint a Turkish broker to assist with the sale of the shares of Common Stock acquired under the Plan. TheOptionee should consult his or her personal legal advisor before selling any shares of Common Stock acquired under the Plan to confirm the applicability of thisrequirement.UNITED KINGDOMResponsibility for Tax-Related ItemsThe paragraphs below supplement Section 9 (Withholding) of Exhibit A to the Option Agreement:Without limitation to Section 9 (Withholding) of Exhibit A to the Option Agreement, the Optionee agrees that the Optionee is liable for all Tax-Related Items andhereby covenants to pay all such Tax-Related Items as and when requested by the Company or, if different, the Employer or by Her Majesty’s Revenue andCustoms (“HMRC”) (or any other tax authority or any other relevant authority). The Optionee also agrees to indemnify and keep indemnified the Company or theEmployer against any Tax-Related Items that it is required to pay or withhold or have paid or will pay to HMRC (or any other tax authority or any other relevantauthority) on the Optionee’s behalf.Notwithstanding the foregoing, if the Optionee is a director or executive officer of the Company (within the meaning of Section 13(k) of the Exchange Act), theterms of the immediately foregoing provision will not apply. In such case, if any amount of income tax is not collected from or paid by Optionee within 90 daysafter the end of the U.K. tax year in which an event giving rise to the indemnification described above occurs, the amount of any uncollected income tax mayconstitute a benefit to Optionee on which additional income tax and National Insurance contributions (“NICs”) may be payable. The Optionee acknowledges thathe or she will be responsible for reporting and paying any income tax due on this additional benefit directly to the HMRC under the self-assessment regime and forpaying the Company or the Employer, as applicable, for the value of any employee NICs due on this additional benefit, which the Company or the Employer maycollect by any of the means set forth in Section 9 (Withholding) of Exhibit A to the Option Agreement.Joint ElectionAs a condition of the Optionee’s participation in the Plan and the vesting of the Option, the Optionee agrees to accept any liability for secondary Class 1 NICs (the“Employer’s Liability”) that may be payable by the Company and/or the Employer in connection with the Option and any event giving rise to Tax-Related Items.To accomplish the foregoing, the Optionee agrees to execute a joint election with the Company or the Employer (the “Election”), the form of such Election beingformally approved by HMRC, and any other consent or elections required to accomplish the transfer of the Employer’s Liability to the Optionee. The Optioneefurther agrees to execute such other joint elections as may be required between the Optionee and any successor to the Company and/or the Employer. If theOptionee does not enter into the Election when the Optionee accepts the Option Agreement or when otherwise requested by the Company and/or Employer, or ifthe Election is revoked at any time by HMRC, the Option will cease vesting and become null and void, and no shares of Common Stock will be acquired under thePlan, unless the Optionee agrees to pay an amount equal to the Employer’s Liability to the Company, the Employer and/or any Related Company. The Optioneefurther agrees that the Company and/or the Employer may collect the Employer’s Liability by any of the means set forth in Section 9 (Withholding) of Exhibit A tothe Option Agreement.Notice of Grant of Award and Award AgreementYou have been granted an award of Restricted Stock Units pursuant to the terms of the Pegasystems Inc. Amended and Restated 2004 Long-Term Incentive Plan(the “Plan”).If you have not yet completed the acceptance process for any of your awards, you may complete the acceptance process by (A) reviewing your award details, (B)reviewing your award documents listed in Section B of your Online Award Acceptance (the “Award Documents”), and (C) confirming your acceptance of youraward.By accepting this award, you agree that this award is granted and governed by the terms and conditions of the Plan, this notice and all your Award Documentslisted herein, and incorporated by reference. This notice, together with your Award Documents and your electronic acceptance, collectively compromise your totalagreement (the “Award Agreement”).Pegasystems Inc./s/ Alan TreflerBy:Alan Trefler, Chairman and Chief Executive OfficerPegasystems Inc.One Rogers StreetCambridge, MA02142-1590 USAPhone 617.374.9600Fax 617.374.9620Pega.comExhibit ANotice of Grant of Award and Award Agreement1.Conversion of Restricted Stock Units to Common Stock. Each restricted stock unit (“RSU”) granted in the Notice of Grant of Award and AwardAgreement (of which this Exhibit A is a part and including any special terms and conditions for the Recipient’s country set forth in Exhibit B attachedhereto) (collectively, the “Award Agreement”) represents the right of the person receiving such grant (the “Recipient”) to receive one share of thecommon stock (“Common Stock”) of Pegasystems Inc. (the “Company”) subject to the vesting requirements listed in the Award Agreement and to theother terms and conditions of this Award Agreement. On each vesting date listed in the Award Agreement, the Company will issue such number of sharesof Common Stock as are equal to the applicable number of RSUs vesting on such date, less such number of shares of Common Stock as are required to bewithheld to satisfy Recipient’s tax withholding obligations. The Recipient shall not be entitled to receive any dividends declared on shares of CommonStock for any periods prior to the relevant vesting date, nor shall the Recipient be entitled to any dividend equivalent payouts.2.Vesting. RSUs will vest on the dates listed in the Award Agreement if the Recipient remains in the active employment of the Company and/or a RelatedCompany in good standing from the date of grant through the applicable vesting date. RSUs will cease to vest immediately upon the cessation of theRecipient’s active employment, for any reason.3.Recipient’s Agreement. The Recipient agrees to all the terms stated in the Award Agreement, as well as to the terms of the Plan (which shall control incase of conflict with the Award Agreement), a copy of which is attached and of which the Recipient acknowledges receipt.4.Withholding. Regardless of any action the Company and/or the Recipient’s employer (“Employer”) take with respect to any or all income tax (includingU.S. federal, state and local tax and/or non-U.S. tax), social insurance, payroll tax, fringe benefits tax, payment on account or other tax-related itemsrelated to the Recipient’s participation in the Plan (“Tax-Related Items”), the Recipient acknowledges that the ultimate liability for all Tax-Related Itemslegally due by the Recipient is and remains the Recipient’s responsibility and that the Company and/or the Employer (i) make no representations orundertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant of the RSUs, the vestingof the RSUs, the delivery of shares of Common Stock, the subsequent sale of any shares of Common Stock acquired at vesting and the receipt of anydividends; and (ii) do not commit to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Recipient’s liability for Tax-Related Items. Further, if the Recipient is subject to Tax-Related Items in more than one jurisdiction, the Recipient acknowledges that the Companyand/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.Prior to any relevant taxable event or tax withholding event, as applicable, the Recipient shall pay or make arrangements satisfactory to the Companyand/or the Employer to satisfy all Tax-Related Items. In this regard, the Recipient authorizes the Company and/or the Employer to withhold all applicableTax-Related Items legally payable by the Recipient by withholding otherwise deliverable shares of Common Stock, if permissible under local law.Alternatively, or in addition, if permissible under local law, the Recipient authorizes the Company and/or the Employer, at its discretion and pursuant tosuch procedures as it may specify from time to time, to satisfy the obligations with regard to all Tax-Related Items legally payable by the Recipient byone or a combination of the following: (i) withholding from any wages or other cash compensation paid to the Recipient by the Company and/or theEmployer; (ii) arranging for the sale of shares of Common Stock otherwise deliverable to the Recipient (on the Recipient’s behalf and at the Recipient’sdirection pursuant to this authorization); or (iii) withholding from the proceeds of the sale of shares of Common Stock acquired upon vesting of theAward.Depending on the withholding method, the Company may withhold or account for the Tax-Related Items by considering applicable minimum statutorywithholding rates or other applicable withholding rates, including maximum applicable rates in the Recipient’s jurisdiction. If the obligation for Tax-Related Items is satisfied by withholding a number of shares of Common Stock as described herein, for tax purposes, the Recipient is deemed to havebeen issued the full number of shares of Common Stock subject to the Award, notwithstanding that a number of the shares of Common Stock are heldback solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Award. The Recipient shall pay to the Company and/orthe Employer any amount of Tax-Related Items that the Company and/or the Employer may be required to withhold as a result of the Recipient’sparticipation in the Plan that cannot be satisfied by the means previously described.The Company may refuse to deliver to the Recipient any shares of Common Stock pursuant to the Award or the proceeds from the sale of shares ofCommon Stock if the Recipient fails to comply with the Recipient’s obligations in connection with the Tax-Related Items as described in this section.5.Rights as Shareholders. The Recipient shall have no rights as a shareholder of the Company with respect to any of the RSUs until the issuance of sharesof Common Stock at the time of vesting, and then only with respect to those shares of Common Stock issued.6.Non-Transferability. The Award may not be transferred in any manner other than by will or by the laws of descent and distribution. The terms of theAward shall be binding upon the executors, administrators, heirs and successors of the Recipient.7.Compliance with Securities, Tax and Other Law. No shares of Common Stock may be issued if the issuance of shares would constitute a violation of anyapplicable U.S. federal, state or non-U.S. securities law or any other law or valid regulation. As a condition to issuance of Common Stock, the Companymay require the Recipient, or any person acquiring the right to receive the Common Stock, to make any representation or warranty that the Companydeems to be necessary under any applicable securities, tax, or other law or regulation.8.Adjustments upon Changes in Capitalization. In the event of any change in the shares subject to the Plan or to any Award granted under the Plan byreason of a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, combination or exchange of shares of Common Stock, orother change in the structure of the Company, the number of RSUs and the number of shares of Common Stock shall be appropriately adjusted by theCompany and such adjustment shall be final, binding and conclusive.9.No Right to Employment. The granting of the Award does not confer upon the Recipient the right to continue in the service of the Company and/or theEmployer, or affect in any way the right and power of the Company and/or the Employer to terminate the service of the Recipient at any time with orwithout assigning a reason therefor, to the same extent as the Company and/or the Employer might have done if the Award had not been granted.10.No Guarantee. The Company offers no guarantee or assurance that the Company’s stock has any value at the time of this grant or will have any value orliquidity at any future time.11.Employment Agreement. In consideration for this Award, the Recipient reaffirms the terms of the Recipient’s Employment Agreement with theEmployer, including but not limited to the provisions (if any) related to competition and solicitation. The Recipient further agrees that to the extent thenature of the Employer’s business has evolved since the date of the Employment Agreement the covenants shall also apply to the business as evolved.12.Acknowledgment of Nature of Plan and Award. In accepting the Award, the Recipient acknowledges, understands and agrees that:a.the Plan is established voluntarily by the Company, it is discretionary in nature, and it may be modified, amended, suspended or terminated bythe Company at any time, unless otherwise provided in the Plan and this Award Agreement;b.the Award is exceptional, voluntary and occasional and does not create any contractual or other right to receive future awards of RSUs, orbenefits in lieu of RSUs, even if RSUs have been awarded repeatedly in the past;c.all decisions with respect to future awards, if any, will be at the sole discretion of the Company;d.the Recipient’s participation in the Plan is voluntary;e.the Award is an extraordinary item that does not constitute compensation for services of any kind rendered to the Company or any RelatedCompany, and which is outside the scope of the service or employment contract, if any;f.the Award and the shares of Common Stock subject to the RSUs, and the income and value of the same, are not part of normal or expectedcompensation or salary for any purposes, including, but not limited to, calculation of any severance, resignation, termination, redundancy, end-of-service payments, bonuses, holiday pay, long-service awards, pension or retirement or welfare benefits or similar payments and in no eventshould be considered as compensation for, or relating in any way to, past services for the Company or any Related Company;g.in the event that the Recipient is not an Employee of the Company or any Related Company, the Award and the Recipient’s participation in thePlan will not be interpreted to form an employment or service contract or relationship with the Company or any Related Company;h.unless otherwise agreed with the Company, the RSUs and the shares of Common Stock subject to the RSUs, and the income and value of thesame, are not granted as consideration for, or in connection with, the service the Recipient may provide as a director of a Subsidiary.i.the future value of the underlying shares of Common Stock is unknown and cannot be predicted with any certainty;j.if the Recipient receives shares of Common Stock upon vesting, the value of such shares of Common Stock acquired on vesting of RSUs mayincrease or decrease;k.in consideration of the Award, no claim or entitlement to compensation or damages shall arise from forfeiture of the Award resulting fromtermination of the Recipient’s employment or other service relationship (for any reason whatsoever and whether or not in breach of employmentlaws in the jurisdiction where the Recipient is employed or the terms of the Recipient’s employment agreement, if any);l.for purposes of the RSUs, the Recipient’s employment relationship will be considered terminated as of the date the Recipient is no longerproviding services to the Company, the Employer or any Related Company (regardless for the reason for such termination and whether or notlater found to be invalid or in breach of employment laws in the jurisdiction where the Recipient is employed or the terms of the Recipient’semployment agreement, if any) and, unless otherwise expressly provided in the Agreement or determined by the Company, the Recipient’s rightto receive an Award and vest in the Award under the Plan, if any, will terminate as of such date and will not be extended by any notice period(e.g., the Recipient’s period of service would not include any contractual notice period or any period of “garden leave” or similar periodmandated under employment laws in the jurisdiction where the Recipient is employed or the terms of the Recipient’s employment agreement, ifany); the Committee or its delegate shall have the exclusive discretion to determine when the Recipient is no longer actively employed forpurposes of the Award (including whether the Recipient may still be considered to be providing services while on a leave of absence);m.neither the Company, the Employer nor any Subsidiary shall be liable for any foreign exchange rate fluctuation between the Recipient’s localcurrency and the United States Dollar that may affect the value of the RSUs or of any amounts due to the Recipient pursuant to the settlement ofthe RSUs or the subsequent sale of any shares of Common Stock acquired upon settlement;n.the Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the Recipient’sparticipation in the Plan or the Recipient’s acquisition or sale of the underlying shares of Common Stock; ando.the Recipient understands and agrees that the Recipient should consult with the Recipient’s personal tax, legal and financial advisors regardingthe Recipient’s participation in the Plan before taking any action related to the Plan.13.Data Privacy Notice and Consent. The Recipient hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic orother form, of the Recipient’s personal data as described in this Award Agreement and any other RSU grant materials by and among, as applicable,the Employer, the Company and its Subsidiaries for the exclusive purpose of implementing, administering and managing the Recipient’s participationin the Plan.The Recipient understands that the Company and the Employer may hold certain personal information about the Recipient, including, but not limitedto, the Recipient’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary,nationality, job title, any shares of stock or directorships held in the Company, details of all RSUs or any other entitlement to shares of stock awarded,granted, canceled, vested, exercised, unvested or outstanding in the Recipient’s favor, for the exclusive purpose of implementing, administering andmanaging the Plan (“Data”).The Recipient understands that Data will be transferred to a third party stock plan service provider(s) as may be selected by the Company, which isassisting the Company with the implementation, administration and management of the Plan. The Recipient understands the recipients of the Datamay be located in the Recipient’s country, in the United States or elsewhere, and that the data recipients’ country may have different data privacy lawsand protections than the Recipient’s country. The Recipient understands that the Recipient may request details of any potential recipients of the Databy contacting privacy@pega.com. The Recipient authorizes the Company and any other possible recipients which may assist the Company (presentlyor in the future) with implementing, administering and managing the Plan to receive, possess, use, retain and transfer the Data, in electronic or otherform, for the sole purpose of implementing, administering and managing the Recipient’s participation in the Plan. The Recipient understands thatData will be held only as long as is necessary to implement, administer and manage the Recipient’s participation in the Plan. The Recipientunderstands that the Recipient may, at any time, view Data, request additional information about the storage and processing of Data, require anynecessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting privacy@pega.com. The Recipientunderstands, however, that refusing or withdrawing the Recipient’s consent may affect the Recipient’s ability to participate in the Plan. For moreinformation on the consequences of the Recipient’s refusal to consent or withdrawal of consent, the Recipient understands that the Recipient maycontact privacy@pega.com.14.Amendment and Termination of Award. The Company may amend, modify or terminate any outstanding Award, provided that the Recipient’s consent tosuch action shall be required unless it occurs pursuant to a Sale of the Company or the Committee determines that the action would not materially andadversely affect the Recipient.15.Language. The Recipient acknowledges and agrees that he or she is sufficiently proficient in English, or has consulted with an advisor who is sufficientlyproficient in English, so as to enable him or her to understand the terms and conditions of this Award Agreement. If the Recipient has received this AwardAgreement or any other document related to the Plan translated into a language other than English and if the translated version is different from theEnglish version, the English version will control.16.Electronic Delivery and Acceptance. The Company may, in its sole discretion, decide to deliver any documents related to the Award or future awardsmade under the Plan by electronic means or request that the Recipient consent to participate in the Plan by electronic means. The Recipient herebyconsents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established andmaintained by the Company or a third party designated by the Company.17.Insider Trading Restrictions/Market Abuse Laws. The Recipient acknowledges that, depending on the Recipient’s country, the broker’s country or thecountry in which the shares of Common Stock are listed, the Recipient may be subject to insider trading restrictions and/or market abuse laws inapplicable jurisdictions, including the United States and the Recipient’s country, which may affect the Recipient’s ability to accept, acquire, sell, attemptto sell or otherwise dispose of shares of Common Stock, rights to shares of Common Stock (e.g., RSUs) or rights linked to the value of shares of CommonStock during such times as the Recipient is considered to have “inside information” regarding the Company, as defined by the laws or regulations in theapplicable jurisdictions. Local insider trading laws and regulations may prohibit the cancellation or amendment of orders the Recipient placed before heor she possessed inside information. Furthermore, the Recipient could be prohibited from (i) disclosing the inside information to any third party (otherthan on a “need to know” basis) and (ii) “tipping” third parties or causing them otherwise to buy or sell securities, where third parties include fellowemployees. The insider trading and/or market abuse laws may be different from any Company Insider Trading Policy. The Recipient is responsible forensuring compliance with any applicable restrictions and should consult his or her personal legal advisor on this matter.18.Foreign Asset/Account and Exchange Control Reporting. The Recipient’s country may have certain exchange controls and foreign asset and/or accountreporting requirements that may affect his or her ability to purchase or hold shares of Common Stock under the Plan or receive cash from his or herparticipation in the Plan (including from any dividends received or sale proceeds arising from the sale of Shares) in a brokerage or bank account outsidethe Recipient’s country. The Recipient may be required to report such accounts, assets or transactions to the tax or other authorities in his or her country.Further, the Recipient may be required to repatriate shares of Common Stock or proceeds acquired as a result of participating in the Plan to his or hercountry through a designated bank/broker and/or within a certain time. The Recipient acknowledges and agrees that it is his or her responsibility to becompliant with such regulations and understands that the Recipient should speak with his or her personal legal advisor for any details regarding anyforeign asset/account reporting or exchange control reporting requirements in the Recipient’s country arising out of his or her participation in the Plan.19.Award Subject to Company Clawback or Recoupment. The RSUs shall be subject to clawback or recoupment pursuant to any compensation clawback orrecoupment policy adopted by the Board or required by law during the term of the Recipient’s employment or other service with the Company that isapplicable to executive officers, employees, directors or other service providers of the Company, and in addition to any other remedies available undersuch policy and applicable law may require the cancellation of the Recipient’s RSUs (whether vested or unvested) and the recoupment of any gainsrealized with respect to the Recipient’s RSUs.20.Governing Law and Venue. The Award Agreement shall be governed by and interpreted in accordance with the laws of The Commonwealth ofMassachusetts (U.S.A.), without regard to any applicable conflicts of law provisions thereof.For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties evidenced by this Award or this AwardAgreement, the parties hereby submit to and consent to the exclusive jurisdiction of The Commonwealth of Massachusetts (U.S.A.) and agree that suchlitigation shall be conducted only in the courts of Middlesex County, Massachusetts (U.S.A.), or the federal courts for the United States for the district ofMassachusetts, and no other courts, where this Award of RSUs is made and/or to be performed.21.Severability. In the event any one or more of the provisions of the Award Agreement shall for any reason be held to be invalid, illegal or unenforceable,the remaining provisions of the Award Agreement shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutuallyacceptable provision, which being valid, legal and enforceable, comes closest to the intention of the parties underlying the invalid, illegal or unenforceableprovision.22.Waiver. The Recipient acknowledges that a waiver by the Company of a breach of any provision of the Award Agreement shall not operate or beconstrued as a waiver of any other provision of the Award Agreement, or of any subsequent breach by the Recipient or any other Recipient.23.Definitions. All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Plan.24.Exhibit B. Notwithstanding any provision herein, the Award and the Recipient’s participation in the Plan shall be subject to any special terms andconditions as set forth in Exhibit B for the Recipient’s country, if any. Moreover, if the Recipient relocates to one of the countries included in Exhibit B,the country-specific terms for such country will apply to the Recipient, to the extent the Company determines that the application of such terms andconditions is necessary or advisable for legal or administrative reasons. Exhibit B constitutes part of this Award Agreement.25.Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Recipient’s participation in the Plan, on thisAward and on any shares of Common Stock acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal oradministrative reasons, and to require the Recipient to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.Exhibit BTo Notice of Grant of Award and Award AgreementCountry-Specific Provisions for Recipients Outside the U.S.Capitalized terms used but not defined in this Exhibit B shall have the same meanings assigned to them in the Notice of Grant, the Award Agreement and the Plan.This Exhibit B forms part of the Award Agreement.Terms and ConditionsThis Exhibit B includes additional terms and conditions that govern the RSUs granted to the Recipient under the Plan if the Recipient works and/or resides in oneof the countries listed below. If the Recipient is a citizen or resident of a country other than the one in which the Recipient is currently working (or is considered assuch for local law purposes), or if the Recipient transfers employment or residency to a different country after the date of grant, the Company will, in its discretion,determine the extent to which the terms and conditions contained herein will be applicable to the Recipient.NotificationsThis Exhibit B also includes information regarding securities laws and certain other considerations of which the Recipient should be aware with respect toparticipating in the Plan. The information is based on the securities and other laws in effect in the respective countries as of July 2020. Such laws are often complexand change frequently. As a result, the Recipient should not rely on the information noted herein as the only source of information relating to the consequences ofparticipating in the Plan because the information may be out of date at the time the Recipient acquires shares of Common Stock under the Plan or subsequentlysells such shares of Common Stock.In addition, the information contained in this Exhibit B is general in nature and may not apply to the Recipient’s particular situation, and the Company is not in aposition to assure the Recipient of any particular result. Accordingly, the Recipient should seek appropriate professional advice as to how the relevant laws in theRecipient’s country may apply to the Recipient’s situation.If the Recipient is a citizen or resident of a country other than the one in which the Recipient is currently working or residing (or is considered as such for local lawpurposes), or the Recipient transfers employment or residency to a different country after the date of grant, the notifications contained in this Exhibit B may not beapplicable to the Recipient in the same manner.EUROPEAN UNION (“EU”) / EUROPEAN ECONOMIC AREA (“EEA”) MEMBER STATES / SWITZERLAND / UNITED KINGDOMData PrivacyIf the Recipient resides and/or works in the EU/EEA, Switzerland or the United Kingdom, Section 13 (Data Privacy Notice and Consent) of Exhibit A to theAward Agreement shall be replaced with the following:The Company, located at One Rogers Street, Cambridge, MA 02142-1209, U.S.A. is the controller for the processing of the Recipient’s personal data by theCompany and the third parties noted below.a.Data Collection, Processing and Usage. Pursuant to applicable data protection laws, the Recipient is hereby notified that the Company collects, processesand uses certain personal information about the Recipient for the legitimate purpose of implementing, administering and managing the Plan and generallyadministering awards; specifically: the Recipient’s name, home address, email address, date of birth, plan or benefit enrollment forms and elections,award or benefit statements, any shares of Common Stock, details of all awards or any other entitlements to shares of Common Stock awarded, canceled,purchased, vested, unvested or outstanding (“Personal Data”). In granting the RSUs under the Plan, the Company will collect, process, use, disclose andtransfer (collectively, “Processing”) Personal Data for purposes of implementing, administering and managing the Plan. The Company’s legal basis forthe Processing of Personal Data is the Company’s legitimate business interests of managing the Plan, administering awards and complying with itscontractual and statutory obligations, as well as the necessity of the Processing for the Company to perform its contractual obligations under the RSUsand the Plan. The Recipient’s refusal to provide Personal Data would make it impossible for the Company to perform its contractual obligations and mayaffect the Recipient’s ability to participate in the Plan. As such, by participating in the Plan, the Recipient voluntarily acknowledges the Processing of theRecipient’s Personal Data as described herein.b.Stock Plan Administration Service Providers. The Company may transfer Personal Data to Morgan Stanley Smith Barney (“MSSB”) (or any successorPlan broker), an independent service provider based, in relevant part, in the United States, which may assist the Company with the implementation,administration and management of the Plan. In the future, the Company may select a different service provider and share Personal Data with anothercompany that serves in a similar manner. The Company’s service provider will open an account for the Recipient to receive and trade shares of CommonStock under the Plan. The Processing of Personal Data will take place through both electronic and non-electronic means. Personal Data will only beaccessible by those individuals requiring access to it for purposes of implementing, administering and operating the Plan. When receiving the Recipient’sPersonal Data, if applicable, MSSB provides appropriate safeguards in accordance with the EU Standard Contractual Clauses or other appropriate cross-border transfer solutions. By participating in the Plan, the Recipient understands that the service provider will Process the Recipient’s Personal Data forthe purposes of implementing, administering and managing his or her participation in the Plan.c.International Data Transfers. The Company and its service providers are based in the United States. The Recipient’s country or jurisdiction may havedifferent data privacy laws and protections than the United States. For example, an appropriate level of protection can be achieved by implementingsafeguards such as the Standard Contractual Clauses adopted by the EU Commission. Personal Data will be transferred from the EU/EEA, Switzerlandand/or the United Kingdom to the Company and onward from the Company to any of its service providers based on the Standard Contractual Clauses.The Recipient may request a copy of such appropriate safeguards by contacting privacy@pega.com.d.Data Retention. The Company will use Personal Data only as long as is necessary to implement, administer and manage the Recipient’s participation inthe Plan or as required to comply with legal or regulatory obligations, including tax and securities laws. When the Company no longer needs PersonalData, the Company will remove it from its systems. If the Company keeps Personal Data longer, it would be to satisfy legal or regulatory obligations andthe Company’s legal basis would be for compliance with relevant laws or regulations.e.Data Subject Rights. To the extent provided by law, the Recipient has the right to (i) subject to certain exceptions, request access or copies of PersonalData the Company Processes, (ii) request rectification of incorrect Personal Data, (iii) request deletion of Personal Data, (iv) place restrictions onProcessing of Personal Data, (v) lodge complaints with competent authorities in the Recipient’s country, and/or (vi) request a list with the names andaddresses of any potential recipients of Personal Data. To receive clarification regarding the Recipient’s rights or to exercise his or her rights, theRecipient may contact privacy@pega.com. The Recipient also has the right to object, on grounds related to a particular situation, to the Processing ofPersonal Data, as well as opt-out of the Plan herein, in any case without cost, by contacting his or her local human resources department in writing. TheRecipient’s provision of Personal Data is a contractual requirement. The Recipient understands, however, that the only consequence of refusing to providePersonal Data is that the Company may not be able to administer the RSUs, or grant other awards or administer or maintain such awards. For moreinformation on the consequences of the refusal to provide Personal Data, the Recipient may contact his or her human resources representative in writing.The Recipient may also have the right to lodge a complaint with the relevant data protection supervisory authority.AUSTRALIAOffer DocumentThe Company is pleased to provide the Recipient with this offer to participate in the Plan. This offer document sets out information regarding the offer of RSUs toAustralian resident employees of the Company and its Subsidiaries. The Company is providing this information to ensure the Plan’s compliance with AustralianSecurities and Investments Commission (“ASIC”) Class Order 14/1000 and relevant provisions of the Corporations Act 2001.Additional DocumentsIn addition to the information set out in the Award Agreement and this Exhibit B, the Recipient is also being provided with copies of the following documents:a.the Plan; andb.the Information Statement for Participants in the Pegasystems Inc. 2004 Long-Term Incentive Plan (the “Information Statement”) (collectively, the“Additional Documents”).The Additional Documents provide further information to help the Recipient to make an informed investment decision about participating in the Plan. Neither thePlan nor the Information Statement is a prospectus for the purposes of the Corporations Act 2001.The Recipient should not rely upon any oral statements made in relation to this offer. The Recipient should rely only upon the statements contained in the AwardAgreement, including this Exhibit B, and the Additional Documents when considering participation in the Plan.General Information OnlyThe information herein is general information only. It is not advice or information that takes into account the Recipient’s objectives, financial situation and needs.The Recipient should consider obtaining his or her own financial product advice from a person who is licensed by ASIC to give such advice.Risk FactorsInvestment in shares of Common Stock involves a degree of risk. The Recipient should monitor his or her participation and consider all risk factors relevant to theacquisition of shares of Common Stock under the Plan as set forth below and in the Additional Documents.The Recipient should have regard to risk factors relevant to investment in securities generally and, in particular, to holding shares of Common Stock. For example,the price at which an individual share of Common Stock is quoted on the Nasdaq Global Select Market (“Nasdaq”) may increase or decrease due to a number offactors. There is no guarantee that the price of a share of Common Stock will increase. Factors that may affect the price of an individual share of Common Stockinclude fluctuations in the domestic and international market for listed stocks, general economic conditions, including interest rates, inflation rates, commodity andoil prices, changes to government fiscal, monetary or regulatory policies, legislation or regulation, the nature of the markets in which the Company operates andgeneral operational and business risks.More information about potential factors that could affect the Company’s business and financial results will be included in the Company’s most recent AnnualReport on Form 10-K and the Company’s Quarterly Report on Form 10-Q. Copies of these reports are available at http://www.sec.gov/, on the Company’s“Investor Relations” page at https://www.pega.com/about/investors, and upon request to the Company.In addition, the Recipient should be aware that the Australian dollar (“AUD”) value of any shares of Common Stock acquired under the Plan will be affected by theUSD/AUD exchange rate. Participation in the Plan involves certain risks related to fluctuations in this rate of exchange.Common Stock in a U.S. CorporationCommon stock of a U.S. corporation is analogous to ordinary shares of an Australian corporation. Each holder of a share of Common Stock is entitled to one vote.Further, shares of Common Stock are not liable to any further calls for payment of capital or for other assessment by the Company and have no sinking fundprovisions, pre-emptive rights, conversion rights or redemption provisions.Ascertaining the Market Price of a Share of Common StockThe Recipient may ascertain the current market price of an individual share of Common Stock as traded on the Nasdaq under the symbol “PEGA” at:https://www.nasdaq.com/market-activity/stocks/pega. The AUD equivalent of that price can be obtained at: https://www.rba.gov.au/statistics/frequency/exchange-rates.html.This will not be a prediction of the market price of an individual share of Common Stock when such shares of Common Stock are acquired under the Plan or of theapplicable exchange rate on the date of acquisition.Tax NotificationThe Plan is a plan to which Subdivision 83A-C of the Income Tax Assessment Act 1997 (Cth) (the “Act”) applies (subject to the conditions in that Act).AUSTRIAThere are no country-specific provisions.BRAZILCompliance with LawBy accepting the RSUs, the Recipient agrees to comply with all applicable Brazilian laws and pay any and all applicable Tax-Related Items associated with thevesting and settlement of the RSUs, the receipt of any dividends paid on shares of Common Stock and the sale of shares of Common Stock acquired under thePlan.Labor Law Acknowledgment and Policy StatementThis provision supplements Section 12 (Acknowledgment of Nature of Plan and Award) of Exhibit A to the Award Agreement:The Recipient acknowledges and agrees that (i) the Recipient is making an investment decision, and (ii) the value of the underlying shares of Common Stock is notfixed and may increase or decrease over the vesting period, without compensation to the Recipient.Further, the Recipient acknowledges and agrees that, for all legal purposes, (i) any benefits provided to the Recipient under the Plan are unrelated to the Recipient’semployment or service; (ii) the Plan is not a part of the terms and conditions of the Recipient’s employment or service; and (iii) the income from the Recipient’sparticipation in the Plan, if any, is not part of the Recipient’s remuneration from employment or service.CANADAResale RestrictionThe Recipient is permitted to sell shares of Common Stock acquired under the Plan through the designated broker appointed under the Plan, if any, provided theresale of shares of Common Stock takes place outside of Canada through the facilities of the stock exchange on which the shares of Common Stock are listed. Theshares of Common Stock are currently traded on the Nasdaq Global Select Market, which is located outside of Canada, and may be sold through this exchange.Cessation of EmploymentIn the event of the termination of the Recipient’s employment (whether or not later found to be invalid or unlawful for any reason, including for breaching eitherapplicable employment laws or the Recipient’s employment agreement, if any), unless otherwise set forth in the Award Agreement, the Recipient’s right to vest inthe RSUs under the Plan, if any, will terminate effective on the earliest of: (a) the date on which the Recipient’s active employment terminates, (b) the date theRecipient receives notice of termination, and (c) the date the Recipient no longer actively provides service to the Company or any Related Company, regardless ofany period during which notice, pay in lieu of notice or related payments or damages are provided or required to be provided under local law. The Recipient willnot earn or be entitled to any pro-rated vesting for that portion of time before the date on which the Recipient’s right to vest terminates, nor will the Recipient beentitled to any compensation for lost vesting. The Committee or its delegate shall have the exclusive discretion to determine when the Recipient is no longeremployed for purposes of the Award Agreement (including whether the Recipient may still be considered to be providing service while on a leave of absence).Notwithstanding the foregoing, if applicable employment standards legislation explicitly requires continued entitlement to vesting during a statutory notice period,the Recipient’s right to vest in the RSUs under the Plan, if any, will terminate effective as of the last day of the Recipient’s minimum statutory notice period, butthe Recipient will not earn or be entitled to pro-rated vesting if the vesting date falls after the end of the Recipient’s statutory notice period, nor will the Recipientbe entitled to any compensation for lost vesting.The following provisions apply if the Recipient is a resident of Quebec:Consent to Receive Information in English for Quebec RecipientsThe parties acknowledge that it is their express wish that the Award Agreement, as well as all documents, notices and legal proceedings entered into, given orinstituted pursuant hereto or relating directly or indirectly hereto, be drawn up in English.Les parties reconnaissent avoir exigé la rédaction en anglais du Contrat d’Attribution, ainsi que de tous documents exécutés, avis donnés et procédures judiciairesintentées, directement ou indirectement, relativement à ou suite à la présente convention.FRANCEFrench-Qualified RSUsThe RSUs are granted under and subject to the terms of the Pegasystems Inc. Restricted Stock Unit Sub-Plan of the Pegasystems Inc. 2004 Long-Term IncentivePlan for French Participants, as may be amended from time to time (the “French Sub-Plan”). RSUs granted under the French Sub-Plan are intended to qualify forthe specific tax and social security treatment available pursuant to Sections L. 225-197-1 to L. 225-197-6 of the French Commercial Code.Notwithstanding any provision in the Award Agreement to the contrary, in the event of the Recipient’s Disability (as defined in the French Sub-Plan) or death, theterms of the French Sub-Plan shall govern.The Recipient acknowledges and agrees that the shares of Common Stock issued and delivered in settlement of the RSUs may not be sold, transferred, or otherwisedisposed of during a “closed period”. The term “closed period” means the specific period as set forth by Section L. 225-197-1 of the French Commercial Code, asamended from time to time, which includes: (a) 30 calendar days before the announcement of an intermediary financial report or end-of-year report that theCompany is required to make public and (b) any period during which the Chief Executive Officer (directeur général), any deputy chief executive officer (directeurgénéral délégué), or any member of the Board of Directors (conseil d’administration), the supervisory board (conseil de surveillance) or the executive board(directoire) of the Company, or any employee possesses knowledge of inside information (within the meaning of Article 7 of the Regulation (EU) No 596/2014 ofthe European Parliament and of the Council of April 16, 2014 on market abuse (Market Abuse Regulation) and cancelling the Directive 2003/6/UE and Directives2003/124/CE Parliament and 2004/72/CE of the Commission) which has not been disclosed to the public. If French law or regulations are amended to modify thedefinition and/or applicability of the closed periods to French-qualified RSUs, such amendments shall become applicable to any RSUs granted under the FrenchSub-Plan, to the extent permitted or required under French law.Consent to Receive Information in EnglishThe parties acknowledge that it is their express wish that the Award Agreement, as well as all documents, notices and legal proceedings entered into, given orinstituted pursuant hereto or relating directly or indirectly hereto, be drawn up in English. By accepting the RSUs, the Recipient confirms having read andunderstood the Plan and the Award Agreement, including all terms and conditions included therein, which were provided in the English language. The Recipientaccepts the terms of those documents accordingly.Les parties reconnaissent avoir exigé la rédaction en anglais du Contrat d’Attribution, ainsi que de tous documents exécutés, avis donnés et procédures judiciairesintentées, directement ou indirectement, relativement à, ou suite au, présent Contrat d’Attribution. En acceptant cette des droits sur des actions assujettis àrestrictions (« restricted stock units » ou « RSUs »), le Bénéficiaire confirme avoir lu et compris le Plan et le Contrat y relatifs, incluant tous leurs termes etconditions, qui ont été transmis en langue anglaise. Le Bénéficiaire accepte les dispositions de ces documents en connaissance de cause.GERMANYThere are no country-specific provisions.HONG KONGSecurities Law NotificationWARNING: The RSUs and the shares of Common Stock issued upon settlement of the RSUs do not constitute a public offering of securities under Hong Kong lawand are available only to certain eligible employees. The Notice of Grant, the Award Agreement, the Plan and other incidental communication materials have notbeen prepared in accordance with and are not intended to constitute a “prospectus” for a public offering of securities under the applicable securities legislation inHong Kong. In addition, the documents have not been reviewed by any regulatory authority in Hong Kong. The RSUs are intended only for the personal use of theRecipient, and may not be distributed to any other person. If the Recipient is in any doubt about any of the contents of the Notice of Grant, the Award Agreement orthe Plan, the Recipient should obtain independent professional advice.Restriction on Sale of Shares of Common StockShares of Common Stock received pursuant to the RSU are accepted as a personal investment. To facilitate compliance with securities laws in Hong Kong, theRecipient agrees not to sell the shares of Common Stock issued in settlement of the RSUs within six months after the date of grant.Award Is Not WagesThe RSUs and the shares of Common Stock underlying the RSUs do not form part of the Recipient’s wages for purposes of calculating any statutory or contractualpayments under applicable law in Hong Kong.INDIAThere are no country-specific provisions.ITALYPlan Document AcknowledgmentIn accepting the grant of RSUs, the Recipient acknowledges that he or she has received a copy of the Plan, has reviewed the Plan and the Award Agreement intheir entirety and fully understands and accepts all provisions of the Plan and the Award Agreement.The Recipient further acknowledges that he or she has read and specifically and expressly approves the following clauses in Exhibit A to the Award Agreement:Section 2: Vesting; Section 4: Withholding; Section 6: Non-Transferability; Section 12: Acknowledgment of Nature of Plan and Award; Section 16: ElectronicDelivery and Acceptance; Section 20: Governing Law and Venue; and the “Data Privacy” provision for European Union / European Economic Area MemberStates / Switzerland / United Kingdom, included in this Exhibit B.JAPANThere are no country-specific provisions.NETHERLANDSThere are no country-specific provisions.NEW ZEALANDSecurities Law NotificationWARNING: The Recipient is being offered an Award that allows him/her to acquire shares of Common Stock in accordance with the terms of the Plan and theAward Agreement. The shares of Common Stock, if issued, give the Recipient a stake in the ownership of the Company. The Recipient may receive a return ifdividends are paid.If the Company runs into financial difficulties and is wound up, the Recipient will be paid only after all creditors have been paid. The Recipient may lose some orall of his/her investment.New Zealand law normally requires people who offer financial products to give information to investors before they invest. This information is designed to helpinvestors to make an informed decision. The usual rules do not apply to this offer because it is made under an employee share purchase scheme. As a result, theRecipient may not be given all the information usually required. The Recipient will also have fewer other legal protections for this investment.The Recipient should ask questions, read all documents carefully, and seek independent financial advice before committing to participate in the Plan.Prior to the settlement of the RSUs, the Recipient will not have any rights of ownership (e.g., voting or dividend rights) with respect to the underlying shares ofCommon Stock.No interest in any RSUs may be transferred (legally or beneficially), assigned, mortgaged, charged or encumbered.The shares of Common Stock are quoted on the Nasdaq Global Select Market (“Nasdaq”). This means that, if the Recipient acquires shares of Common Stockunder the Plan, the Recipient may be able to sell any shares of Common Stock acquired on the Nasdaq if there are interested buyers. The Recipient may get lessthan his/her investment. The price will depend on the demand for the shares of Common Stock.For information on risk factors impacting the Company’s business that may affect the value of the shares of Common Stock, the Recipient should refer to the riskfactors discussion in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, and the auditor’s reports on those financial statements,which are filed with the U.S. Securities and Exchange Commission and are available online at www.sec.gov, as well as on the Company’s website athttps://www.pega.com/about/investors.POLANDThere are no country-specific provisions.SINGAPORESecurities Law NotificationThe grant of the RSUs is being made pursuant to the “Qualifying Person” exemption under section 273(1)(f) of the Securities and Futures Act (Chapter 289, 2006Ed.) (“SFA”) and is not made to the Recipient with a view to the underlying shares of Common Stock being subsequently offered for sale to any other party. ThePlan has not been, and will not be, lodged or registered as a prospectus with the Monetary Authority of Singapore. The Recipient should note that the RSUs aresubject to section 257 of the SFA and the Recipient should not make (a) any subsequent sale of the shares of Common Stock in Singapore or (b) any offer of suchsubsequent sale of the shares of Common Stock subject to the RSU in Singapore, unless such sale or offer is made after six months from the date of grant orpursuant to the exemptions under Part XIII Division 1 Subdivision (4) (other than section 280) of the SFA. The shares of Common Stock are currently traded onthe Nasdaq Global Select Market, which is located outside of Singapore, and may be sold through this exchange.SPAINSecurities Law NotificationNo “offer of securities to the public,” as defined under Spanish law, has taken place or will take place in the Spanish territory. The Award Agreement (includingthis Exhibit B) and the Plan have not been, nor will they be, registered with the Comisión Nacional del Mercado de Valores (the Spanish securities regulator) anddo not constitute a public offering prospectus.Labor Law AcknowledgementThe following provisions supplement Section 12 (Acknowledgment of Nature of Plan and Award) of Exhibit A to the Award Agreement:In accepting the RSUs, the Recipient consents to participation in the Plan and acknowledges that he or she has received a copy of the Plan.The Recipient understands that the Company has unilaterally, gratuitously and in its sole discretion decided to grant the RSUs under the Plan to individuals whomay be employees of the Company or a Subsidiary. The decision is a limited decision that is entered into upon the express assumption and condition that any grantwill not economically or otherwise bind the Company or any Subsidiary on an ongoing basis, over and above the specific terms of the Plan. Consequently, theRecipient understands that the RSUs are granted on the assumption and condition that the RSUs and the shares of Common Stock underlying the RSUs shall notbecome a part of any employment or service agreement (either with the Company, the Employer or any Subsidiary) and shall not be considered a mandatorybenefit, salary for any purposes (including severance compensation) or any other right whatsoever.The Recipient understands and agrees that, unless otherwise provided by the Company, the termination of the Recipient’s active employment for any reason willautomatically result in the forfeiture of the RSUs that may have been granted to the Recipient and have not vested as of the Recipient’s termination date. Inparticular, and without limitation to the provisions of the Plan, the Recipient understands and agrees that any unvested portion of the RSUs as of the date theRecipient’s active employment terminates will be cancelled without entitlement to the underlying shares of Common Stock or to any amount as indemnification ifthe Recipient terminates for any reason, including, but not limited to, resignation, retirement, disciplinary dismissal adjudged to be with cause, disciplinarydismissal adjudged or recognized to be without cause (i.e., subject to a “despido improcedente”), individual or collective dismissal on objective grounds, whetheradjudged or recognized to be with or without cause, material modification of the terms of employment under Article 41 of the Workers’ Statute, relocation underArticle 40 of the Workers’ Statute, and/or Article 50 of the Workers’ Statute, unilateral withdrawal by the Employer and under Article 10.3 of the Royal Decree1382/1985.Finally, the Recipient understands that the grant of the RSUs would not be made to the Recipient but for the assumptions and conditions referred to above. Thus,the Recipient acknowledges and freely accepts that should any or all of the assumptions be mistaken or should any of the conditions not be met for any reason, thenthe grant of the RSUs shall be null and void.SWEDENWithholding of Tax-Related ItemsThe paragraph below supplements Section 4 (Withholding) of Exhibit A to the Award Agreement:Without limiting the Company’s and the Employer’s authority to satisfy their withholding obligations for Tax-Related Items as set forth in Section 4 of Exhibit Ato the Award Agreement, in accepting the grant of RSUs, the Recipient authorizes the Company and/or the Employer to withhold shares of Common Stock or tosell shares of Common Stock otherwise deliverable to the Recipient upon vesting to satisfy Tax-Related Items, regardless of whether the Company and/or theEmployer have an obligation to withhold such Tax-Related Items.SWITZERLANDSecurities Law NotificationNeither the Award Agreement, this Exhibit B nor any other materials relating to the RSUs (a) constitutes a prospectus according to article 35 et seq. of the SwissFederal Act on Financial Services (“FinSA”), (b) may be publicly distributed nor otherwise made publicly available in Switzerland to any person other than anemployee of the Company, or (c) has been or will be filed with, approved or supervised by any Swiss reviewing body according to article 51 of FinSA or anySwiss regulatory authority, including the Swiss Financial Market Supervisory Authority (FINMA).THAILANDThere are no country-specific provisions.TURKEYSecurities Law NotificationIn certain circumstances, the Recipient is permitted to acquire and sell securities on a non-Turkish stock exchange only through a financial intermediary licensed inTurkey. Therefore, the Recipient may be required to appoint a Turkish broker to assist with the sale of the shares of Common Stock acquired under the Plan. TheRecipient should consult his or her personal legal advisor before selling any shares of Common Stock acquired under the Plan to confirm the applicability of thisrequirement.UNITED KINGDOMResponsibility for Tax-Related ItemsThe paragraphs below supplement Section 4 (Withholding) of Exhibit A to the Award Agreement:Without limitation to Section 4 (Withholding) of Exhibit A to the Award Agreement, the Recipient agrees that the Recipient is liable for all Tax-Related Items andhereby covenants to pay all such Tax-Related Items as and when requested by the Company or, if different, the Employer or by Her Majesty’s Revenue andCustoms (“HMRC”) (or any other tax authority or any other relevant authority). The Recipient also agrees to indemnify and keep indemnified the Company or theEmployer against any Tax-Related Items that it is required to pay or withhold or have paid or will pay to HMRC (or any other tax authority or any other relevantauthority) on the Recipient’s behalf.Notwithstanding the foregoing, if the Recipient is a director or executive officer of the Company (within the meaning of Section 13(k) of the Exchange Act), theterms of the immediately foregoing provision will not apply. In such case, if any amount of income tax is not collected from or paid by Recipient within 90 daysafter the end of the U.K. tax year in which an event giving rise to the indemnification described above occurs, the amount of any uncollected income tax mayconstitute a benefit to Recipient on which additional income tax and National Insurance contributions (“NICs”) may be payable. The Recipient acknowledges thathe or she will be responsible for reporting and paying any income tax due on this additional benefit directly to the HMRC under the self-assessment regime and forpaying the Company or the Employer, as applicable, for the value of any employee NICs due on this additional benefit, which the Company or the Employer maycollect by any of the means set forth in Section 4 (Withholding) of Exhibit A to the Award Agreement.Joint ElectionAs a condition of the Recipient’s participation in the Plan and the vesting of the RSUs, the Recipient agrees to accept any liability for secondary Class 1 NICs (the“Employer’s Liability”) that may be payable by the Company and/or the Employer in connection with the RSUs and any event giving rise to Tax-Related Items. Toaccomplish the foregoing, the Recipient agrees to execute a joint election with the Company or the Employer (the “Election”), the form of such Election beingformally approved by HMRC, and any other consent or elections required to accomplish the transfer of the Employer’s Liability to the Recipient. The Recipientfurther agrees to execute such other joint elections as may be required between the Recipient and any successor to the Company and/or the Employer. If theRecipient does not enter into the Election when the Recipient accepts the Award Agreement or when otherwise requested by the Company and/or Employer, or ifthe Election is revoked at any time by HMRC, the RSUs will cease vesting and become null and void, and no shares of Common Stock will be acquired under thePlan, unless the Recipient agrees to pay an amount equal to the Employer’s Liability to the Company, the Employer and/or any Related Company. The Recipientfurther agrees that the Company and/or the Employer may collect the Employer’s Liability by any of the means set forth in Section 4 (Withholding) of Exhibit A tothe Award Agreement.LEASE TERMINATION AGREEMENTThis LEASE TERMINATION AGREEMENT (this “Agreement”) is dated and effective as of February 12, 2021 (the “Effective Date”), by and betweenCHARLES PARK OWNER LLC, a Delaware limited liability company (“New Venture” or “Landlord”), and PEGASYSTEMS INC., a Massachusettscorporation (“Tenant”).WHEREAS, Charles Park One, LLC (“One Charles Landlord”, as predecessor in interest to New Venture) and Tenant are parties to a certain Lease, dated as ofJune 29, 2011 (as amended and assigned, if any, the “One Charles Lease”) pursuant to which One Charles Landlord leased to Tenant, and Tenant leased from OneCharles Landlord, a certain premises (the “One Charles Premises”) located at One Charles Park, Cambridge, Massachusetts (the “One Charles Property”).WHEREAS, Charles Park Two, LLC (“One Rogers Landlord”, as predecessor in interest to New Venture) and Tenant are parties to a certain Lease, dated as ofJune 29, 2011 (as amended and assigned, if any, the “One Rogers Lease”) pursuant to which One Rogers Landlord leased to Tenant, and Tenant leased from OneRogers Landlord, a certain premises (the “One Rogers Premises”) located at One Rogers Street, Cambridge, Massachusetts (the “One Rogers Property”).WHEREAS, the One Charles Lease and the One Rogers Lease are referred to herein collectively as the “Lease”, and the One Charles Premises and the One RogersPremises are referred to herein collectively as the “Premises”. Capitalized terms not defined herein shall have the meaning ascribed thereto in the Lease.WHEREAS, (i) the term of the One Charles Lease is scheduled to expire on December 31, 2023, and (ii) the term of the One Rogers Lease is scheduled to expireon December 31, 2023.WHEREAS, Principal Real Estate Investors, LLC (“Principal”), as beneficial owner of One Charles Landlord and One Rogers Landlord, consummated a jointventure with affiliates of The Davis Companies pursuant to which, among other things, (i) Principal contributed the One Charles Property and the One RogersProperty to New Venture, and (ii) New Venture succeeded to the interest of Landlord under the Lease.WHEREAS, subject to the terms of this Agreement, Landlord and Tenant wish to set forth the terms and conditions upon which the One Charles Lease and theOne Rogers Lease would terminate.NOW, THEREFORE, for good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, Landlord and Tenant agree asfollows:1.Recitals Incorporated. The foregoing recitals are incorporated by reference into this Agreement as if fully set forth herein.2.Early Termination. The term of the Lease shall expire and the Lease shall be deemed terminated effective as of 11:59 p.m. on the date (the “TerminationDate”) upon whichTenant and all parties claiming under Tenant have vacated the Premises and Tenant has surrendered the Premises to Landlord in its current condition(reasonable wear and tear and damage by Landlord, Davis and/or New Venture and casualty excepted) and notwithstanding anything to the contrarycontained in the Lease, Tenant shall have no obligation to remove and restore Specialty Alterations or Designated Fixtures and Tenant may remove and/orleave in the Premises any of the cabling, wires, furniture, fixtures and/or equipment it so elects without any obligation to replace the furniture, fixturesand/or equipment and/or repair the area and/or areas from where the same was removed (collectively, “Surrender Condition”). By way of example only,if Tenant elects to remove any and all of the soundproof doors in the Premises, Tenant may remove the same and have no responsibility to replace thedoor and/or doors. The Surrender Condition set forth in this Agreement shall govern and control over any provisions in the Lease with respect to thecondition of the Premises at the expiration date of the Lease. Tenant shall cause the Termination Date to occur on (and not before or after) October 1,2021 (the “Outside Termination Date”). Termination of the Lease on the Termination Date shall have the same force and effect as if the TerminationDate is the expiration date set forth in the Lease. In the event that Tenant fails to surrender the Premises to Landlord in Surrender Condition on theOutside Termination Date, Tenant shall immediately be treated as a holdover tenant and Landlord shall have all remedies available to Landlord under theLease, at law and in equity. As of the Termination Date, neither party shall have any rights, liabilities, obligations, claims, actions or damages arisingunder the Lease for the period accruing after the Termination Date (and Landlord and Tenant each hereby releases the other therefrom), except thosewhich, by the provisions of the Lease, expressly survive the termination of the Lease.3.Compliance with Obligations. Prior to the Termination Date, Tenant and Landlord shall continue to be responsible for their respective payment of allamounts due under the Lease and the satisfaction of all of their respective obligations under the Lease and under this Agreement, it being the intent ofLandlord and Tenant that, except as modified herein, the Lease shall continue unmodified and in full force and effect through the Termination Date.4.Termination Payment. Subject to the terms hereof, Landlord and Tenant agree that Landlord shall pay to Tenant by wire transfer made not later than two(2) business days after the Termination Date, the sum of Eighteen Million and No/100 Dollars ($18,000,000.00) (the “Termination Payment”) as valuableand fair consideration for Tenant’s agreement to terminate the Lease in accordance with the terms of this Agreement. Landlord’s performance under thisAgreement is expressly conditioned upon (i) the Termination Date occurring not later than the Outside Termination Date, and (ii) no then uncured Eventof Default under the Lease and under this Agreement. Tenant’s performance under this Agreement and the continuing effectiveness of this Agreement isexpressly conditioned upon Landlord’s timely performance in all material respects of its obligations under the Lease and under this Agreement.5.Release. Effective as of the Termination Date, Tenant and Landlord each hereby releases the other from all obligations, agreements and covenants underthe Lease with respect to the Premises and all claims, actions, liabilities, losses, damages, costs and expenses, known or unknown, which each party (andits successors and assigns) ever had, now have or hereinafter may have against the other arising out of or under or relating, directly or indirectly, to theterms and conditions of the Lease, except those which, by the provisions of the Lease, expressly survive the termination of the Lease.6.Representations and Covenants.a.Tenant hereby represents and covenants to Landlord as follows:i.Authority. Tenant has the full right and authority to enter into this Agreement and the transactions contemplated herein; and the personsigning this Agreement and any other document or instrument contemplated hereby on behalf of Tenant is duly authorized to do so.This Agreement and all other documents to be executed by Tenant in connection herewith are legal, valid, and binding obligations ofTenant and are enforceable against Tenant in accordance with their respective terms.ii.Performance of Obligations. The execution, delivery, and performance of Tenant’s obligations under this Agreement and theconsummation of the transactions contemplated hereby (a) will not result in a breach or violation of, or result in an acceleration of, anyindebtedness under (or adverse change in) any contract, agreement, or instrument to which Tenant is a party or which affects thePremises or any portion thereof, and (b) do not require any consents, approvals, or authorizations not previously obtained by Tenant.iii.Ownership of Leasehold. Tenant covenants that, as of the Termination Date, it will be sole owner of the Tenant’s interest in the Lease,and that it will not have made any assignment, sublease, transfer, conveyance, hypothecation, or other disposition of the Lease or anyinterest therein.iv.Liens. Tenant has not done or suffered, and will not do or suffer, anything whereby the Lease or the Premises have (or will) becomeencumbered by any mechanics’ or materialmens’ liens or in any other manner whatsoever.b.Landlord hereby represents and warrants to Tenant as follows:i.Authority. Landlord has the full right and authority to enter into this Agreement and the transactions contemplated herein; and thepersons signing this Agreement and any other document or instrument contemplated hereby on behalf of Landlord are duly authorizedto do so. This Agreement and all other documents to be executed by Landlord in connection herewith are legal, valid, and bindingobligations of Landlord and are enforceable against Landlord in accordance with their respective terms.ii.Performance of Obligations. The execution, delivery, and performance of Landlord’s obligations under this Agreement and theconsummation of the transactions contemplated hereby (a) will not result in a breach or violation of, or result in an acceleration of, anyindebtedness under (or adverse change in) any contract, agreement, or instrument to which Landlord is a party, and (b) do not requireany consents, approvals, or authorizations not previously obtained by Landlord.iii.Fee Simple Ownership. Landlord is the fee simple owner of the One Charles Property and the One Rogers Property.7.Letter of Credit. In order to secure Landlord’s obligation to make the Termination Payment pursuant to the terms of this Agreement, Landlord shalldeliver to Tenant, not more than forty-five (45) days after the Effective Date (i.e., March 29, 2021), an irrevocable letter of credit issued by First RepublicBank in the amount of the Termination Payment, and in the form attached hereto as Exhibit A and made a part hereof, and which is binding and availableto be drawn upon by Tenant for the period ending one (1) month after the Outside Termination Date (the “Letter of Credit”). In the event that Landlordhas not timely delivered the Letter of Credit to Tenant as aforesaid, Tenant shall have the right to deliver to Landlord a reminder notice with the followinglegend prominently at the top: “TENANT WILL HAVE THE RIGHT TO VOID THE TERMINATION AGREEMENT IF LANDLORD FAILS TOTIMELY DELIVER THE LETTER OF CREDIT.” In the event that Landlord has not delivered the Letter of Credit within five (5) business days afterreceipt of Tenant’s reminder notice, Tenant shall have the right to terminate this Agreement immediately by notice delivered to Landlord.8.Landlord’s Access. Tenant hereby grants to Landlord and its engineers, architects, contractors, representatives, consultants, advisors and other employeesand agents (collectively, “Representatives”) a temporary, nonexclusive license and permission to enter upon the Premises at reasonable times on abusiness day or days for the purpose of conducting a noninvasive exploratory examination of chase ways, mechanical systems, and structural elements ofthe Building or Premises, provided Landlord shall: (i) in all events give at least seventy-two (72) hours’ telephonic advance notice to Tenant so thatTenant shall have a reasonable opportunity to have a representative present; (ii) not unreasonably interfere with Tenant’s ability to achieve the SurrenderCondition and/or the use or operation of the Premises; (iii) comply with Tenant’s security requirements; and (iv) provide Tenant with insurancecertificate(s) for each of the Representatives naming Tenant as loss payee and additional insured. While at the Premises, Landlord shall comply and willcause any of its Representatives to comply with all applicable governmental laws and regulations. In furtherance of the foregoing, all entry shall beconducted outside of Tenant’s business hours and all such entry shall be limited to no more than two (2) hours on the date of entry. Landlord shallimmediately restore and/or clean any damage to the Premises caused by Landlord or its Representatives to substantially the same condition as existedprior to its access and Landlord shall indemnify, defend and hold harmless Tenant of and from any and all claims and/or liabilities which Tenant maysuffer or be subject by reason of or in any manner relating to Landlord’s access; provided, however, that Tenant shall not be entitled to indemnificationhereunder because of, and Landlord shall not be liable or responsible for, (a) the discovery of any pre-existing condition or other fact or circumstanceduring its inspections of the Premises not caused or exacerbated by Landlord or its Representatives, or (b) the gross negligence or intentional misconductof Tenant.9.Memorandum for Recording. On or before the Termination Date, Tenant shall deliver to Landlord one (1) executed and notarized counterpart of eachMemorandum of Lease Termination in a commercially reasonable form approved by Landlord and Tenant. Thereafter, Landlord, at its sole cost andexpense, shall cause each Memorandum of Lease Termination to be recorded with the Middlesex South Registry of Deeds and filed with the MiddlesexSouth Registry District of the Land Court.10.Attorney’s Fees. If there is any final, unappealable legal action or proceeding between the parties to enforce or interpret any provisions of this Agreementor to protect or establish any right or remedy of any of them hereunder, the unsuccessful party to such final, unappealable action or proceeding shall payto the prevailing party all costs and expenses (including, but not limited to, reasonable attorneys’ fees and disbursements) incurred by such prevailingparty in pursuing such final, unappealable action or proceeding. If any party secures a judgment or award in any such final, unappealable action orproceeding, then any costs and expenses (including, but not limited to, reasonable attorneys’ fees and disbursements) incurred by the prevailing party inenforcing such final, unappealable judgment, or any costs and expenses (including, but not limited to, reasonable attorneys’ fees and disbursements)incurred by the prevailing party in any final, unappealable appeal from such judgment in connection with such appeal shall be recoverable separately fromand in addition to any other amount included in such judgment or award. The preceding sentence is intended to be severable from the other provisions ofthis Agreement, and shall survive and not be merged into any such final, unappealable judgment or award.11.Successors and Assigns. The terms, provisions, covenants and conditions contained in this Agreement shall bind and inure to the benefit of Landlord andTenant and their respective heirs, legal representatives, successors and assigns.12.Brokerage. Landlord and Tenant each represents and warrants to the other that it has dealt with no broker or agent in connection with this Agreement, andLandlord and Tenant each agrees to indemnify the other party for its own breach of such representation and warranty.13.Final and Complete Expression. The Lease, as amended hereby, is hereby ratified, confirmed and approved in all respects by Landlord and Tenant. ThisAgreement is the final and complete expression of the parties with respect to the subject matter hereof. This Agreement may not be modified, interpreted,amended, waived or revoked orally, but only by a writing signed by Landlord and Tenant.14.Confidentiality. Landlord and Tenant each agrees: (a) to treat the terms of this Agreement (the “Confidential Information”) as confidential and (b) not todisclose, directly or indirectly, to any third party nor permit any third party to have access to any or all of such Confidential Information, including,without limitation, any tenants of the property of which the Premises is a part and any brokers. Notwithstanding the foregoing, Landlord and Tenant shalleach have the right to disclose the Confidential Information if required by law, including securities law, and to their respective constituent owners,employees, legal counsel, consultants, advisors, and actual and potential sources of debt and equity, in each case who are directed to treat the ConfidentialInformation in accordance with the terms hereof. This Section 14 shall survive the expiration or earlier termination of the Lease.15.Severability. If any provision in this Agreement is deemed invalid, then the remaining provisions thereof will continue in full force and effect and will beconstrued as if the invalid provision had not been a part of this Agreement.16.Governing Law. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts without regard to conflicts of laws principles.17.Execution by Facsimile or PDF; Counterparts. The parties agree that this Agreement may be transmitted between them by facsimile machine or by anelectronic PDF file, and the parties intend that a telecopy of, or an electronic PDF file with, the Agreement containing either the original and/or copies ofthe signature of all parties shall constitute a binding Agreement. This Agreement may be executed in any number of counterparts and by different partieshereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of whichcounterparts, taken together, shall constitute one and the same Agreement. This Agreement represents the entire agreement between the partiesconcerning the subject matter hereof and supersedes all prior discussions, negotiations and agreements between them regarding the subject matter of thisAgreement.18.Time of Essence. Time is of the essence of each and every term and provision hereof.[NO FURTHER TEXT ON THIS PAGE]WITNESS the execution of this Agreement as an instrument under seal as of the date first above written.LANDLORD:CHARLES PARK OWNER LLCBy: /s/ Jonathan G. DavisName: Jonathan G. DavisTitle: Authorized SignatoryTENANT:PEGASYSTEMS INC.By: /s/ Kenneth StillwellName: Kenneth StillwellTitle: CFOEXHIBIT ALETTER OF CREDITIRREVOCABLE STANDBY LETTER OF CREDITLetter of Credit No.: TBDDated: February 1, 2021PEGASYSTEMS INC. (“Beneficiary”)1 Rogers StreetCambridge, MA 02142Attn: Dan RyanLadies and Gentlemen:At the request and for the account of Davis Investment Ventures Fund IV, L.P., Davis Investment Ventures Fund IV-A, L.P., Davis Investment VenturesFund IV-B, L.P., and DIV REIT IV, LLC (“Applicant”), we hereby establish in your favor our irrevocable standby letter of credit in an aggregate amount not toexceed Eighteen Million and 00/100 US Dollars (US $18,000,000.00) available for payment by your draft upon presentation to us of the following:1.This original letter of credit together with all executed written amendments hereto.2.An original signed and dated drawing certificate from you addressed to us in the form annexed hereto as Exhibit A (after complying with all instructionsin brackets contained therein).Drawing certificates shall be drawn on us and presented to us at the Letter of Credit Office (as hereinafter defined) at or before 5:00 p.m., local time of the Letter ofCredit Office, on a Business Day (as hereinafter defined) occurring not later than the Expiration Date (as hereinafter defined). As used herein: “Letter of CreditOffice” means our office located at 160 Federal Street, 8th Floor, Boston, MA 02110, Attn: Business Banking; and “Business Day” means any day other than aSaturday, Sunday or other day on which the Letter of Credit Office is not open for business or on which commercial banks are authorized or required to close, orare in fact closed, under the laws of Massachusetts.Demands for payment may also be made by presentation of drawing certificates and a copy of this Letter of Credit by facsimile transmission of documents to 415-249-2870, Attention: Commercial Loan Servicing. If presentation is made by facsimile transmission, you may contact us at 415-364-4410 to confirm our receipt ofthe transmission. Your failure to seek such a telephone confirmation does not affect our obligation to honor such a presentation.All drawing certificates drawn under this letter of credit shall contain the above-referenced letter of credit number. We agree that all drawing certificates drawn onus under and in compliance with the terms of this letter of credit will be duly honored by us not later than three (3) Business Days following presentation to theLetter of Credit Office. Our obligation hereunder is our individual obligation and is not contingent upon reimbursement. We will pay all drawings under this Letterof Credit with our own funds and not with funds derived from Applicant or a subsidiary or affiliate thereof.This standby letter of credit expires on October 31, 2021.Partial drawings under this letter of credit are not permitted.This letter of credit may be reduced at the written request of the Beneficiary. Upon our receipt of each reduction certificate in the form annexed hereto as ExhibitB (after complying with all instructions in brackets contained therein.) the amount of this letter of credit shall be automatically and permanently reduced, withoutamendment, by the amount of the reduction requested.This letter of credit is not transferable.Standard fees apply for each reduction, transfer, renewal and/or partial draw of this letter of credit (in each of the foregoing circumstances, solely to the extentexpressly permitted hereby), which fees are payable by Applicant. Applicant’s failure to pay such fees shall not delay or impede any of the above actions.We may accept documents which appear on their face to be in order without responsibility for further investigation (even as regards any purported default byApplicant) regardless of any notice or information to the contrary.This letter of credit is subject to and governed by the International Standby Practices 1998 of the International Chamber of Commerce, Publication 590 or to anysubsequent version of such publication as in effect on the date hereof (“ISP98”) and, as to matters not covered therein and not inconsistent therewith, the internallaws of Massachusetts, including, without limitation, the Uniform Commercial Code as from time to time in effect in such jurisdiction.First Republic BankBy: ____________________________Name: ____________________________Title: ____________________________Exhibit A to First Republic Bank Irrevocable StandbyLetter of Credit No. [EXHIBIT TO BE TYPED ON BENEFICIARY’S LETTERHEAD]IRREVOCABLE STANDBY LETTER OF CREDIT DRAWING CERTIFICATEFirst Republic Bank160 Federal Street, 8th Floor,Boston, MA 02110,Attn: Business BankingRe: Irrevocable Standby Letter of Credit No. [insert Letter of Credit No.], dated [insert date], issued by First Republic Bank (the “Letter of Credit”) for theaccount of [insert name of applicant] (“Applicant”)Ladies and Gentlemen:The undersigned, being the beneficiary (“Beneficiary”) (or a duly authorized representative thereof) of the Letter of Credit, hereby:a.demands payment from you in the amount of [insert amount in words] US Dollars (US$[insert amount in figures]) under the Letter of Credit, andb.certifies to you that the amount demanded represents funds due and owing from Applicant to Beneficiary on account of a default by Landlord, anaffiliate of Applicant, to pay to Beneficiary the “Termination Payment” in accordance with the terms and conditions of Section 4 of a certainLease Termination Agreement, dated as of February , 2021. Each capitalized term used but not otherwise defined herein has the meaning ascribedthereto in the Letter of Credit.IN WITNESS WHEREOF, the undersigned has executed and delivered this original certificate as of [insert date].Very truly yours,[insert name of Beneficiary and date of this Drawing Certificate]By: [insert signature]_______________Name: [insert name]__________________Title: [inset title]_____________________Date: [insert date]____________________Exhibit B to First Republic BankIrrevocable Standby Letter of Credit No. _________ [EXHIBIT TO BE TYPED ON BENEFICIARY’S LETTERHEAD]IRREVOCABLE STANDBY LETTER OF CREDIT REDUCTION CERTIFICATEFirst Republic Bank160 Federal Street, 8th Floor,Boston, MA 02110,Attn: Business BankingRe: Irrevocable Standby Letter of Credit No. [insert Letter of Credit No.], dated [insert date], issued by First Republic Bank (the “Letter of Credit”) for theaccount of [insert name of applicant] (“Applicant”), with the current amount available for drawing thereunder being [insert in words current amount availablefor drawing under the Letter of Credit] US Dollars (US$[insert in figures current amount available for drawing under the Letter of Credit]).Ladies and Gentlemen:The undersigned, being the beneficiary (“Beneficiary”) (or a duly authorized representative thereof) of the Letter of Credit, hereby unconditionally and irrevocablyrequests that you decrease the amount available for drawing under the Letter of Credit by [insert amount in words] US Dollars (US$[insert amount in figures]),resulting in the amount available for drawing under the Letter of Credit to be reduced to [insert in words reduced amount available for drawing under theLetter of Credit] US Dollars (US$[insert in figures reduced amount available for drawing under the Letter of Credit]).IN WITNESS WHEREOF, the undersigned has executed and delivered this original certificate as of the [insert date].Very truly yours,[insert name of Beneficiary and date of this Drawing Certificate]By: [insert signature]_______________Name: [insert name]__________________Title: [inset title]_____________________Date: [insert date]____________________Requested reduction hereby acknowledged:FIRST REPUBLIC BANKBy: ____________________________Name: ____________________________Title: ____________________________Date: ____________________________EXHIBIT 21.1SUBSIDIARIES OF PEGASYSTEMS INC*Name of SubsidiaryState or Jurisdiction of EntityAntenna Software, LLCDelawarePegasystems BVNetherlandsPegasystems FranceFrancePegasystems GmbHGermanyPegasystems LimitedUnited KingdomPegasystems PTY LimitedAustraliaPegasystems Software Limited sp. z.o.o.PolandPegasystems Worldwide India Private LimitedIndia* Omits subsidiaries, which, considered in the aggregate, would not constitute a significant subsidiary.1EXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statements Nos. 333-09305, 333-89707, 333-53746, 333-104788, 333-116660, 333-135596, 333-166287, 333-166544, 333-176810, 333-213953, and 333-239889 on Form S-8 of our report dated February 17, 2021, relating to the financial statements ofPegasystems Inc., and the effectiveness of Pegasystems Inc.’s internal control over financial reporting, appearing in this Annual Report on Form 10-K ofPegasystems Inc. for the year ended December 31, 2020./s/ DELOITTE & TOUCHE LLPBoston, MassachusettsFebruary 17, 20211EXHIBIT 31.1CERTIFICATIONI, Alan Trefler, certify that:1.I have reviewed this Annual Report on Form 10-K of Pegasystems Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared;b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’sauditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; andb.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Dated: February 17, 2021/s/ ALAN TREFLERAlan TreflerChairman and Chief Executive Officer(Principal Executive Officer)1EXHIBIT 31.2CERTIFICATIONI, Kenneth Stillwell, certify that:1.I have reviewed this Annual Report on Form 10-K of Pegasystems Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared;b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’sauditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; andb.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Dated: February 17, 2021/s/ KENNETH STILLWELLKenneth StillwellChief Financial Officer and Chief Administrative Officer(Principal Financial Officer)1EXHIBIT 32CERTIFICATION PURSUANT TO SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Pegasystems Inc. (the “Company”) on Form 10-K for the year ended December 31, 2020 as filed with the Securities andExchange Commission on the date hereof (the “Report”), Alan Trefler, Chairman and Chief Executive Officer of Pegasystems Inc., and Kenneth Stillwell, ChiefFinancial Officer and Chief Administrative Officer of Pegasystems Inc., each certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002, that:1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: February 17, 2021/s/ ALAN TREFLERAlan TreflerChairman and Chief Executive Officer(Principal Executive Officer)/s/ KENNETH STILLWELLKenneth StillwellChief Financial Officer and Chief Administrative Officer(Principal Financial Officer)1

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