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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
FORM 10-Q
______________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 1, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to
Commission File Number 001-38460
_________________________________________________
Pivotal Software, Inc.
(Exact name of registrant as specified in its charter)
__________________________________________________
Delaware
 
94-3094578
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
875 Howard Street, Fifth Floor
San Francisco, California 94103
(415777-4868
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, par value $0.01
PVTL
New York Stock Exchange
_______________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    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 (§232.405 of this chapter) during the preceding 12 months (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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer

 
Accelerated filer
 
 
 
 
 
 
 
Non-accelerated filer

 
Smaller reporting company
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No  .
There were 281,106,853 shares of common stock outstanding, consisting of 105,592,581 outstanding shares of Class A common stock and 175,514,272 outstanding shares of Class B common stock, as of November 29, 2019.
 




Pivotal Software, Inc.
Table of Contents
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I — FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
Pivotal Software, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
 
November 1,
2019
 
February 1,
2019
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
821,939

 
$
701,733

Accounts receivable, net of allowance of $5,511 and $4,266 as of November 1, 2019 and February 1, 2019, respectively
156,627

 
308,492

Due from Parent
1,627

 
951

Deferred sales commissions, current
35,669

 
39,572

Other assets, current
17,426

 
16,738

Total current assets
1,033,288

 
1,067,486

Property, plant and equipment, net
26,167

 
27,879

Operating lease right-of-use assets
126,416

 

Intangible assets, net
14,496

 
18,680

Goodwill
696,226

 
696,226

Deferred income taxes
300

 
258

Deferred sales commissions, noncurrent
34,646

 
35,522

Other assets, noncurrent
7,266

 
4,417

Total assets
$
1,938,805

 
$
1,850,468

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
15,238

 
$
18,421

Due to Parent
16,355

 
20,241

Accrued expenses
54,549

 
64,723

Income taxes payable
590

 
1,232

Deferred revenue, current
289,693

 
376,985

Operating lease liabilities, current
22,571

 

Other liabilities, current
10,687

 
4,373

Total current liabilities
409,683

 
485,975

Deferred revenue, noncurrent
47,071

 
89,603

Operating lease liabilities, noncurrent
116,305

 

Other liabilities, noncurrent
2,183

 
9,412

Total liabilities
575,242

 
584,990

Commitments and contingencies (Note 15)


 


Stockholders’ equity:
 
 
 
Class A common stock
1,055

 
901

Class B common stock
1,755

 
1,755

Additional paid-in capital
2,732,206

 
2,540,921

Accumulated deficit
(1,377,458
)
 
(1,284,503
)
Accumulated other comprehensive income
5,329

 
5,687

Total Pivotal stockholders’ equity
1,362,887

 
1,264,761

Non-controlling interest
676

 
717

Total stockholders’ equity
1,363,563

 
1,265,478

Total liabilities and stockholders’ equity
$
1,938,805

 
$
1,850,468

The accompanying notes are an integral part of the condensed consolidated financial statements.

1



Pivotal Software, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
November 1,
2019
 
November 2,
2018
 
November 1,
2019
 
November 2,
2018
Revenue:
 

 
 

 
 

 
 

Subscription
$
139,758


$
100,775

 
$
403,604

 
$
288,390

Services
58,521


67,368

 
173,386

 
199,896

Total revenue
198,279


168,143

 
576,990

 
488,286

 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
Subscription
9,649


7,813

 
27,313

 
24,047

Services
51,292


53,179

 
154,755

 
157,470

Total cost of revenue
60,941


60,992

 
182,068

 
181,517

 
 
 
 
 
 
 
 
Gross Profit
137,338

 
107,151

 
394,922

 
306,769

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
83,198


70,620

 
247,458

 
210,308

Research and development
58,832


51,880

 
173,763

 
143,309

General and administrative
30,640


20,546

 
75,342

 
57,979

Total operating expenses
172,670

 
143,046

 
496,563

 
411,596

 
 
 
 
 
 
 
 
Loss from operations
(35,332
)
 
(35,895
)
 
(101,641
)
 
(104,827
)
Other income, net
2,634


1,866

 
10,054

 
2,412

Loss before provision for income taxes
(32,698
)
 
(34,029
)
 
(91,587
)
 
(102,415
)
Provision for income taxes
409


776

 
1,409

 
549

Net loss
(33,107
)
 
(34,805
)
 
(92,996
)
 
(102,964
)
Less: Net loss (income) attributable to non-controlling interest
4


(45
)
 
41

 
(8
)
Net loss attributable to Pivotal
$
(33,103
)
 
$
(34,850
)
 
$
(92,955
)
 
$
(102,972
)
 
 
 
 
 
 
 
 
Net loss per share attributable to common stockholders, basic and diluted
$
(0.12
)
 
$
(0.13
)
 
$
(0.34
)
 
$
(0.50
)
 
 
 
 
 
 
 
 
Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted
277,567

 
258,408

 
272,935

 
207,072

The accompanying notes are an integral part of the condensed consolidated financial statements.

2



Pivotal Software, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
November 1,
2019
 
November 2,
2018
 
November 1,
2019
 
November 2,
2018
Net loss
$
(33,107
)
 
$
(34,805
)
 
$
(92,996
)
 
$
(102,964
)
Foreign currency translation adjustments
(92
)
 
(194
)
 
(358
)
 
(28
)
Comprehensive loss
(33,199
)
 
(34,999
)
 
(93,354
)
 
(102,992
)
Less: Net loss (income) attributable to the non-controlling interest
4

 
(45
)
 
41

 
(8
)
Comprehensive loss attributable to Pivotal
$
(33,195
)
 
$
(35,044
)
 
$
(93,313
)
 
$
(103,000
)
The accompanying notes are an integral part of the condensed consolidated financial statements.

3



Pivotal Software, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Nine Months Ended
 
November 1,
2019
 
November 2,
2018
Cash flows from operating activities:
 

 
 

Net loss
$
(92,996
)
 
$
(102,964
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization of intangible assets
12,743

 
13,824

Amortization of lease right-of-use assets and other expense
22,946

 

Stock-based compensation expense
73,561

 
49,233

Provision for doubtful accounts
612

 
2,361

Deferred income taxes
(57
)
 
(147
)
Gain on sale of investment
(746
)
 
(3,234
)
Other
326

 
1,491

Changes in assets and liabilities
 
 
 
Accounts receivable
151,221

 
43,895

Due from Parent
(1,076
)
 
37

Deferred sales commissions
4,780

 
6,697

Other assets
(1,553
)
 
(2,758
)
Accounts payable
(2,851
)
 
(2,041
)
Due to Parent
(5,584
)
 
(3,337
)
Deferred revenue
(129,804
)
 
(10,189
)
Accrued expenses
(9,442
)
 
(16,186
)
       Operating lease liabilities
(23,080
)
 

Other liabilities
6,039

 
9,970

Net cash provided by (used in) operating activities
5,039


(13,348
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(7,222
)
 
(6,929
)
Proceeds from sale of investment
1,929

 
3,234

Net cash used in investing activities
(5,293
)

(3,695
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from the initial public offering, net of issuance costs paid

 
544,674

Proceeds from the issuance of common stock
85,172

 
41,852

Proceeds from employee stock plans
8,967

 

Contribution from Dell
26,500

 
41,277

Borrowings on credit facility

 
15,000

Repayments on credit facility

 
(35,000
)
Net cash provided by financing activities
120,639


607,803

Effect of exchange rate changes on cash and cash equivalents
(179
)
 
1,032

Net increase in cash and cash equivalents
120,206

 
591,792

Cash and cash equivalents at beginning of period
701,733

 
73,012

Cash and cash equivalents at end of period
$
821,939

 
$
664,804

 
 
 
 
Supplemental disclosure of non-cash operating:
 
 
 
Operating right-of-use assets obtained in exchange for lease liabilities
8,105

 

Supplemental disclosure of non-cash financing
 
 
 
Amounts owing to Dell included in Due to Parent
(1,800
)
 

The accompanying notes are an integral part of the condensed consolidated financial statements.

4



Pivotal Software, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(in thousands)
(unaudited)
 
 
Class A Common Stock
 
Class B Common Stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
income
 
Non-
controlling
interest
 
Total
stockholders’
equity
 
 
Shares
 
Par
value
 
Shares
 
Par
value
 
 
 
 
 
Balances at February 1, 2019
 
90,124
 
$
901

 
175,514
 
$
1,755

 
$
2,540,921

 
$
(1,284,503
)
 
$
5,687

 
$
717

 
$
1,265,478

Stock-based compensation (Pivotal equity)
 
 
 
 
 
 
 
 
 
21,707

 
 
 
 
 
 
 
21,707

Issuance of common stock under employee equity plans
 
4,159

 
42

 
 
 
 
 
29,972

 
 
 
 
 
 
 
30,014

Vested restricted stock units
 
2,018

 
20

 
 
 
 
 
(20
)
 
 
 
 
 
 
 

Investment from Dell, net
 
 
 
 
 
 
 
 
 
26,730

 
 
 
 
 
 
 
26,730

Investment from VMware
 
 
 
 
 
 
 
 
 
33

 
 
 
 
 
 
 
33

Translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
(192
)
 
 
 
(192
)
Net Loss
 
 
 
 
 
 
 
 
 
 
 
(31,737
)
 
 
 
(46
)
 
(31,783
)
Balances at May 3, 2019
 
96,301
 
$
963

 
175,514
 
$
1,755

 
$
2,619,343

 
$
(1,316,240
)
 
$
5,495

 
$
671

 
$
1,311,987

Stock-based compensation (Pivotal equity)
 
 
 
 
 
 
 
 
 
25,166

 
 
 
 
 
 
 
25,166

Issuance of common stock under employee equity plans
 
1,793

 
18

 
 
 
 
 
14,852

 
 
 
 
 
 
 
14,870

Vested restricted stock units
 
539

 
5

 
 
 
 
 
(5
)
 
 
 
 
 
 
 

Investment from Dell, net
 
 
 
 
 
 
 
 
 
690

 
 
 
 
 
 
 
690

Investment from VMware
 
 
 
 
 
 
 
 
 
(34
)
 
 
 
 
 
 
 
(34
)
Translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
(74
)
 
 
 
(74
)
Net Loss
 
 
 
 
 
 
 
 
 
 
 
(28,115
)
 
 
 
9

 
(28,106
)
Balances at August 2, 2019
 
98,633
 
$
986

 
175,514
 
$
1,755

 
$
2,660,012

 
$
(1,344,355
)
 
$
5,421

 
$
680

 
$
1,324,499

Stock-based compensation (Pivotal equity)
 
 
 
 
 
 
 
 
 
26,047
 
 
 
 
 
 
 
26,047

Issuance of common stock under employee equity plans
 
6,276
 
63
 
 
 
 
 
48,637
 
 
 
 
 
 
 
48,700

Vested restricted stock units
 
629
 
6
 
 
 
 
 
(6)
 
 
 
 
 
 
 

Investment from Dell, net
 
 
 
 
 
 
 
 
 
(2,484)
 
 
 
 
 
 
 
(2,484
)
Translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
(92
)
 
 
 
(92
)
Net Loss
 
 
 
 
 
 
 
 
 
 
 
(33,103
)
 
 
 
(4
)
 
(33,107
)
Balances at November 1, 2019
 
105,538
 
$
1,055

 
175,514
 
$
1,755

 
$
2,732,206

 
$
(1,377,458
)
 
$
5,329

 
$
676

 
$
1,363,563

The accompanying notes are an integral part of the condensed consolidated financial statements.

5



Pivotal Software, Inc.
Condensed Consolidated Statement of Redeemable Convertible Preferred Stock and Stockholders’ Equity
(in thousands)
(unaudited)
 
Redeemable
Convertible
Preferred Stock
 
 
Class A
Common
Stock
 
Class B
Common
Stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
income
 
Non-
controlling
interest
 
Total
stockholders’
equity
 
Shares
 
Amount
 
 
Shares
 
Par
value
 
Shares
 
Par
value
 
 
 
 
 
Balances at February 2, 2018
147,879
 
$
1,248,327

 
 
4,293
 
$
43

 
65,048
 
$
650

 
$
595,113

 
$
(1,142,600
)
 
$
5,554

 
$
712

 
$
(540,528
)
Stock-based compensation (Pivotal equity)
 
 
 
 
 
 
 
 
 
 
 
 
 
10,526

 
 
 
 
 
 
 
10,526

Issuance of common stock under employee equity plans
 
 
 
 
 
1,087
 
11

 
 
 
 
 
6,599

 
 
 
 
 
 
 
6,610

Conversion of preferred stock to common stock
(147,879)
 
(1,248,327
)
 
 
37,412
 
374

 
110,466
 
1,105

 
1,246,848

 
 
 
 
 
 
 
1,248,327

Initial public offering, net of issuance costs
 
 
 
 
 
38,667
 
387

 
 
 
 
 
544,034

 
 
 
 
 
 
 
544,421

Investment from Dell, net
 
 
 
 
 
 
 
 
 
 
 
 
 
11,662

 
 
 
 
 
 
 
11,662

Investment from VMware
 
 
 
 
 
 
 
 
 
 
 
 
 
(51
)
 
 
 
 
 
 
 
(51
)
Translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
161

 
 
 
161

Net Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(32,515
)
 
 
 
(42
)
 
(32,557
)
Balances at May 4, 2018

 
$

 
 
81,459
 
$
815

 
175,514
 
$
1,755

 
$
2,414,731

 
$
(1,175,115
)
 
$
5,715

 
$
670

 
$
1,248,571

Stock-based compensation (Pivotal equity)
 
 
 
 
 
 
 
 
 
 
 
 
 
18,747

 
 
 
 
 
 
 
18,747

Issuance of common stock under employee equity plans
 
 
 
 
 
400
 
4

 
 
 
 
 
2,810

 
 
 
 
 
 
 
2,814

Investment from Dell, net
 
 
 
 
 
 
 
 
 
 
 
 
 
255

 
 
 
 
 
 
 
255

Investment from VMware
 
 
 
 
 
 
 
 
 
 
 
 
 
25

 
 
 
 
 
 
 
25

Translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5

 
 
 
5

Net Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(35,607
)
 
 
 
5

 
(35,602
)
Balances at August 3, 2018

 
$

 
 
81,859

 
$
819

 
175,514

 
$
1,755

 
$
2,436,568

 
$
(1,210,722
)
 
$
5,720

 
$
675

 
$
1,234,815

Stock-based compensation (Pivotal equity)
 
 
 
 
 
 
 
 
 
 
 
 
 
19,151

 
 
 
 
 
 
 
19,151

Issuance of common stock under employee equity plans
 
 
 
 
 
4,885
 
48

 
 
 
 
 
32,853

 
 
 
 
 
 
 
32,901

Investment from Dell, net
 
 
 
 
 
 
 
 
 
 
 
 
 
426

 
 
 
 
 
 
 
426

Investment from VMware
 
 
 
 
 
 
 
 
 
 
 
 
 
41

 
 
 
 
 
 
 
41

Translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(194
)
 
 
 
(194
)
Net Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(34,850
)
 
 
 
45

 
(34,805
)
Balances at November 2, 2018

 
$

 
 
86,744

 
$
867

 
175,514

 
$
1,755

 
$
2,489,039

 
$
(1,245,572
)
 
$
5,526

 
$
720

 
$
1,252,335

The accompanying notes are an integral part of the condensed consolidated financial statements.


6



Notes to Condensed Consolidated Financial Statements
(unaudited)
1.
Overview and Basis of Presentation
Company and Background
Pivotal Software, Inc. and its consolidated subsidiaries (“Pivotal,” “we,” “us,” “our” and the “Company”) provide a leading cloud-native application platform, Pivotal Cloud Foundry (“PCF”), and differentiated services, Pivotal Labs (“Labs”). Our leading software platform and differentiated services enable enterprises to adopt modern software and development methodologies that transform their products and the economics of their business. We help make software development and operations a strategic advantage for our customers to revolutionize the experiences they offer their own customers, drive new sources of revenue and improve the speed and cost of business operations. We were incorporated in the State of Delaware on April 1, 2013.
Reverse Stock Split
In April 2018, the Company’s board of directors and stockholders approved an amendment to the Company’s amended and restated certificate of incorporation effecting a 1-for-2 reverse stock split of the Company’s issued and outstanding shares of common stock and preferred stock. The reverse split was effected on April 6, 2018. The par values of the common stock and redeemable convertible preferred stock were not adjusted as a result of the reverse stock split. All issued and outstanding share and per share amounts included in the accompanying unaudited condensed consolidated financial statements have been adjusted to reflect this reverse stock split for all periods presented.
Fiscal Years
Our fiscal year is the 52- or 53-week period ending on the Friday nearest January 31. Our 2019 fiscal year (“fiscal 2019”) ended on February 1, 2019 and our 2020 fiscal year (“fiscal 2020”) will end on January 31, 2020.
Initial Public Offering
On April 19, 2018, we commenced an initial public offering (“IPO”), which closed on April 24, 2018.  As part of the IPO, we issued and sold 38,667,000 shares of Class A common stock, which included 5,550,000 shares sold pursuant to the exercise by the underwriters’ option to purchase additional shares at a public offering price of $15.00 per share. We received net proceeds of $548.1 million from the IPO, after underwriters’ discounts and commissions and before deducting offering costs of approximately $3.7 million. Prior to the completion of the IPO, all shares of Series A and C-1 redeemable convertible preferred stock then outstanding were converted into 110,466,653 shares of Class B common stock on a one-to-one basis and all shares of Series B and C redeemable convertible preferred stock then outstanding were converted into 37,412,396 shares of Class A common stock on a one-to-one basis.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The condensed consolidated financial statements include the results of Pivotal Software, Inc. and its wholly-owned and majority-owned subsidiaries. The condensed consolidated balance sheet as of February 1, 2019 included herein was derived from the audited financial statements as of that date. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of our management, the information contained herein reflects all adjustments necessary for a fair statement of Pivotal’s results of operations, financial position and cash flows for the periods presented. All such adjustments are of a normal, recurring nature. The results of operations for the periods presented in this report are not necessarily indicative of results to be expected for the full fiscal year 2020. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended February 1, 2019, filed with the SEC on March 29, 2019.
Our majority-controlling stockholder is Dell Technologies Inc. (“Dell”). VMware, Inc. (“VMware”), which is also a majority-owned subsidiary of Dell, and Dell are collectively referred to as the “Parent” in these notes to the consolidated financial statements. Our results of operations and financial position are consolidated with Dell’s financial statements.

7



Our financial information includes estimates and allocations of certain corporate functions provided to us by Dell. These estimates and allocations of costs are considered reasonable by our management. Our historical results are not necessarily indicative of what our results of operations, financial position, cash flows or costs and expenses would have been, or will be in future periods, had we transacted with a third party during the periods presented.
Proposed Merger with VMware
    
On August 22, 2019, Pivotal entered into an Agreement and Plan of Merger (the “Merger Agreement”) with VMware and Raven Transaction Sub, Inc., a Delaware corporation and a wholly owned subsidiary of VMware (“Merger Sub”). The Merger Agreement provides that, subject to certain terms and conditions, Merger Sub will merge with and into Pivotal (the “Merger”), with Pivotal surviving the Merger and becoming a wholly owned subsidiary of VMware.
Pivotal and VMware are both majority-owned subsidiaries of Dell. Based on the amount of outstanding capital stock reported in this report on Form 10-Q, VMware owns approximately 15.7% of Pivotal’s outstanding common stock, consisting entirely of shares of Pivotal’s Class B common stock, par value $0.01. Dell indirectly through VMware and through EMC Equity Assets LLC, a Delaware limited liability company (“EMC”), beneficially owns 100% of the outstanding shares of the Class B common stock, representing approximately 62.4% of Pivotal’s outstanding common stock.
The terms of the Merger Agreement provide that, unless otherwise specified in the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Pivotal’s Class A common stock will be canceled and automatically converted into the right to receive $15.00 in cash, without interest and subject to deduction for any required withholding tax. The terms of the Merger Agreement also provide that, unless otherwise specified in the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of the Class B common stock will be converted into the right to receive 0.0550 of a share of Class B common stock of VMware.
The Merger and the Merger Agreement have been approved by the boards of directors of each of VMware (acting upon the unanimous recommendation of a special committee of the board of directors of VMware, consisting solely of independent and disinterested directors, authorized to, among other things, negotiate, evaluate and approve or disapprove potential transactions with Pivotal) and Pivotal (acting upon the unanimous recommendation of a special committee of the board of directors of Pivotal (the “Pivotal Special Committee”), consisting solely of independent and disinterested directors authorized to, among other things, negotiate, evaluate and approve or disapprove a potential transaction with VMware).
Completion of the transaction is conditioned on the adoption of the Merger Agreement by the holders of (i) at least a majority of the outstanding shares of the Class A common stock not owned by VMware or any of its affiliates (including Dell and EMC), (ii) at least a majority of the outstanding shares of the Class A common stock, (iii) at least a majority of outstanding shares of the Class B common stock, and (iv) at least a majority of the outstanding shares of the Class A common stock and the Class B common stock, voting together as a single class, which condition is not subject to waiver by Pivotal or VMware.
Completion of the transaction is also subject to other customary closing conditions including (i) the absence of any order, judgment or decree by any governmental entity that prohibits or makes the consummation of the transaction illegal, (ii) subject to certain exceptions, the accuracy of each party’s representations and warranties and (iii) compliance in all material respects by each party with its obligations under the Merger Agreement. The transaction is not subject to a financing condition.
The Merger Agreement contains customary representations and warranties of both Pivotal and VMware. Pivotal has also agreed to customary covenants regarding the operation of Pivotal and its subsidiaries prior to the effective time of the Merger, including covenants not to, during the pendency of the Merger, solicit alternative transactions or, subject to certain exceptions, enter into discussions concerning, or provide confidential information in connection with, an alternative transaction.
The Merger Agreement contains certain customary termination rights for Pivotal and VMware, including a right for either party to terminate the Merger Agreement if the Merger is not completed by February 18, 2020, unless otherwise extended pursuant to the terms of the Merger Agreement. The Merger Agreement further provides that, upon termination of the Merger Agreement under certain specified circumstances, Pivotal will be obligated to pay VMware a termination fee of $95.0 million.
Concurrently with the execution of the Merger Agreement, Ford Motor Company (“Ford”) entered into a voting agreement pursuant to which Ford has agreed, among other things and subject to the terms and conditions set forth therein, to vote its shares of the Class A common stock in favor of the adoption of the Merger Agreement and the transactions contemplated thereby, including the Merger. Until the closing, Pivotal will continue to operate as an independent company.

Pivotal’s definitive proxy statement on Schedule 14A and amended Schedule 13E-3 were filed with the SEC on November 27, 2019. Pivotal has set the close of business on November 4, 2019 as the record date for the special meeting of

8



stockholders scheduled for December 27, 2019, at which stockholders will vote on, among other things, a proposal to approve and adopt the Merger Agreement.

A description of the material terms of the Merger Agreement can be found in Pivotal’s Current Report on Form 8-K filed with the SEC on August 27, 2019 and Pivotal’s definitive proxy statement on Schedule 14A.
2.
Significant Accounting Policies
Consolidation
The condensed consolidated financial statements and accompanying notes are prepared in accordance with GAAP and include our accounts and the accounts of our majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation.
Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Estimates are revised as additional information becomes available. In the condensed consolidated statements of operations, estimates are used when accounting for revenue arrangements, including the determination of the standalone selling price of performance obligations, the amortization period of deferred commissions, income taxes and the related valuation allowance and the valuation of common stock options. In the condensed consolidated balance sheets, estimates are used in determining the valuation and recoverability of assets, such as accounts receivable, fixed assets, deferred sales commissions, goodwill and other identifiable intangible assets, and estimates are used in determining the reported amounts of liabilities, including the impact of contingencies and operating lease liabilities, all of which also impact the condensed consolidated statements of operations. Actual results could differ from these estimates.
Significant Accounting Policies

Notwithstanding the addition of the policy below for leases, there were no significant changes to our accounting policies disclosed in “Note 2—Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the fiscal year ended February 1, 2019.
Leases

We determine if an arrangement is a lease at its inception. Our operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the lease is not readily determinable for our operating leases, we generally use an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating right-of-use (“ROU”) assets are generally recognized based on the amount of the initial measurement of the lease liability. Lease expense is recognized on a straight-line basis over the lease term. We account for lease and non-lease components as a single lease component for all of our operating leases.

Our operating leases are included in operating ROU assets, current operating lease liabilities and noncurrent operating lease liabilities in our condensed consolidated balance sheet. Leases with a term of 12 months or less are not recorded on the condensed consolidated balance sheet.

Variable lease payments, which do not vary based on an index or rate, are excluded from our ROU asset and lease liability determination. Our variable lease payments are typically usage-based and we record them in the period in which the obligation for those payments is incurred. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

9



Recently Adopted Accounting Pronouncement
Leases—In 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize most lease liabilities on their balance sheets but recognize the lease expense on their statements of operations in a manner similar to current practice. The standard states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The standard is effective for annual and interim periods beginning with our fiscal 2020. We have adopted this standard on the first day of our fiscal year ending January 31, 2020, using a modified retrospective transition method. We elected the transition method discussed in ASU 2018-11 and our reporting for the comparative periods presented in the year of adoption continue to be in accordance with “Leases (Topic 840),” including the associated disclosure requirements. We elected the package of practical expedients permitted under the transition guidance, which, among other things, allows us to carry forward the historical lease classification. We did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of right-of-use assets.
The adoption of this standard effective the beginning of our new fiscal year, resulted in the recognition of operating lease assets and liabilities of approximately $136.4 million and $149.1 million, respectively, as of February 2, 2019. The difference between the amounts, represented the deferred rent for leases that existed as of the date of adoption, which was an offset to the opening balance of right-of-use assets. The adoption of the standard on February 2, 2019 did not have a material impact on our condensed consolidated statements of operations, stockholders’ equity and cash flows.
New Accounting Pronouncements to be Adopted
Financial Instruments—Credit Losses—In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 changes the impairment model for most financial assets, and will require the use of an expected loss model in place of the currently used incurred loss method. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. This update to the standard is effective for our interim and annual periods beginning February 1, 2020. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
Intangibles—Goodwill and Other—Internal-Use Software—In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update to the standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Entities can choose to adopt the ASU 2018-15 prospectively or retrospectively. This standard is effective for our interim and annual periods beginning February 1, 2020. The Company is currently evaluating the impact of the adoption of ASU 2018-15 on its consolidated financial statements.
3.
Deferred Sales Commissions
Deferred sales commissions, current and noncurrent, were $70.3 million and $75.1 million as of November 1, 2019 and February 1, 2019, respectively. Amortization expense for deferred commissions costs was $13.6 million and $12.5 million for the three months ended November 1, 2019 and November 2, 2018, respectively, and was $40.2 million and $36.9 million for the nine months ended November 1, 2019 and November 2, 2018, respectively. We amortize the commissions related to sales to new subscription customers, or the expansion of existing subscription customers, over an estimated period of benefit which has been determined to be the expected customer life. We amortize the commissions related to renewals of existing subscription customer contracts over the term of the contracts. Commissions paid for services contracts are amortized over the expected service delivery periods of the services. There were no impairment losses recorded related to the commissions costs capitalized for the periods presented.

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4.
Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
 
November 1,
2019
 
February 1,
2019
Furniture and fixtures
$
7,844

 
$
7,298

Equipment
25,313

 
21,471

Software
7,700

 
6,900

Leasehold improvements
39,683

 
38,171

Total property, plant and equipment
80,540

 
73,840

Accumulated depreciation
(54,373
)
 
(45,961
)
Property, plant and equipment, net
$
26,167

 
$
27,879


For both the three months ended November 1, 2019 and November 2, 2018, depreciation expense was $2.8 million, and for the nine months ended November 1, 2019 and November 2, 2018, depreciation expense was $8.6 million and $8.7 million, respectively.
5.
Intangible Assets
Intangible assets, excluding goodwill, consist of the following (in thousands):
 
November 1, 2019
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Purchased technology
$
87,573

 
$
(87,560
)
 
$
13

Trademarks and tradenames
12,900

 
(12,681
)
 
219

Customer relationships and customer lists
55,800

 
(41,536
)
 
14,264

Intangible Assets
$
156,273

 
$
(141,777
)
 
$
14,496

 
February 1, 2019
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Purchased technology
$
87,573

 
$
(87,420
)
 
$
153

Trademarks and tradenames
12,900

 
(11,612
)
 
1,288

Customer relationships and customer lists
55,800

 
(38,561
)
 
17,239

Intangible Assets
$
156,273

 
$
(137,593
)
 
$
18,680


For the three months ended November 1, 2019 and November 2, 2018, amortization expense was $1.5 million and $1.6 million, respectively, and for the nine months ended November 1, 2019 and November 2, 2018, amortization expense was $4.2 million and $5.1 million, respectively.
As of November 1, 2019, future expected amortization expense of intangible assets is expected to be as follows (in thousands):
Fiscal Year
 
Amortization
Expense
Remainder of 2020
 
$
1,274

2021
 
3,835

2022
 
3,111

2023
 
2,948

2024
 
2,693

Thereafter
 
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6.    Leases
    
We lease certain office spaces which we have classified as operating leases. Most of our leases include one or more options to renew. The exercise of lease renewal options are at our sole discretion and we included all renewals that are reasonably certain at the reporting period end date in the calculation of our ROU assets and liabilities.

Certain of our sublease arrangements include an option to early terminate the lease arrangement. We do not disclose sublease income for periods for which a termination option exists, unless we are reasonably certain it will not be exercised.

Supplemental balance sheet information related to leases were as follows:
 
November 1, 2019
Operating leases:
 
Weighted average remaining lease term (in years)
6.6
Weighted average discount rate (in percentage points)
6.0

The components of lease expense for the periods presented were as follows (in thousands):
 
Three months ended
 
Nine months ended
 
November 1, 2019
 
November 1, 2019
Operating lease cost
$
7,529

 
$
22,946

Short term lease cost (a)

 

Variable lease cost
2,370

 
6,304

Sublease income
(1,322
)
 
(5,260
)
Total net lease cost
$
8,577

 
$
23,990

(a) During the three and nine months ended November 1, 2019, no material short-term leases were capitalized.

Maturities of lease liabilities were as follows (in thousands):
 
November 1, 2019
 
Operating Leases (a)
Remainder of 2020
$
9,232

2021
30,738

2022
28,639

2023
24,422

2024
21,181

2025 and thereafter
57,814

Total lease payments
172,026

Less: Imputed interest
(33,150
)
Present value of lease liabilities
$
138,876

(a) Operating lease payments exclude $16.6 million of legally binding minimum lease payments for leases signed but not yet commenced.

Our future minimum lease commitments as of February 1, 2019, as disclosed in our most recent Annual Report on Form 10-K, represent our undiscounted non-cancelable operating lease arrangements, and have not materially changed since the last Form 10-K filing.


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7.
Accrued Expenses
Accrued expenses consist of the following (in thousands):
 
November 1,
2019
 
February 1,
2019
Accrued salaries, commissions and benefits
$
31,534

 
$