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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(Mark One) 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 4, 2023
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: 001-37748

sw_logo-black.jpg
 
SecureWorks Corp.
(Exact name of registrant as specified in its charter)
Delaware
27-0463349
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
One Concourse Parkway NE
Suite 500
Atlanta,
Georgia
30328
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code): (404) 327-6339
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, SCWXThe Nasdaq Stock Market LLC
par value $0.01 per share(Nasdaq Global Select Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑  No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑   No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  Accelerated filer
Non-accelerated filer   Smaller reporting company 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No 
As of September 5, 2023, there were 86,235,310 shares of the registrant's common stock outstanding, consisting of 16,235,310 outstanding shares of Class A common stock and 70,000,000 outstanding shares of Class B common stock.




TABLE OF CONTENTS
ITEM PAGE
 






Except where the content otherwise requires or where otherwise indicated, all references in this report to "Secureworks," "we," "us," "our" and "our Company" to refer to SecureWorks Corp. and our subsidiaries on a consolidated basis.
Part I. Financial Information
Item 1. Financial Statements
SECUREWORKS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
(in thousands, except for per share data)
 August 4,
2023
February 3,
2023
ASSETS
Current assets: 
Cash and cash equivalents$64,899 $143,517 
Accounts receivable, net of allowances of $1,824 and $2,402, respectively
56,436 72,627 
Inventories, net774 620 
Other current assets17,353 17,526 
Total current assets139,462 234,290 
Property and equipment, net3,151 4,632 
Operating lease right-of-use assets, net5,883 9,256 
Goodwill425,494 425,519 
Intangible assets, net92,559 106,208 
Other non-current assets71,147 60,965 
Total assets$737,696 $840,870 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$11,212 $18,847 
Accrued and other current liabilities62,290 81,566 
Short-term deferred revenue134,477 145,170 
Total current liabilities207,979 245,583 
Long-term deferred revenue7,893 11,162 
Operating lease liabilities, non-current9,865 12,141 
Other non-current liabilities7,489 14,023 
Total liabilities233,226 282,909 
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock - $0.01 par value: 200,000 shares authorized; shares issued
  
Common stock - Class A of $0.01 par value: 2,500,000 shares authorized; 16,235 and 14,749 shares issued and outstanding, at August 4, 2023 and February 3, 2023, respectively.
162 147 
Common stock - Class B of $0.01 par value: 500,000 shares authorized; 70,000 shares issued and outstanding
700 700 
Additional paid in capital976,532 967,367 
Accumulated deficit(447,450)(384,121)
Accumulated other comprehensive loss(5,578)(6,237)
Treasury stock, at cost - 1,257 and 1,257 shares, respectively
(19,896)(19,896)
Total stockholders' equity504,470 557,961 
Total liabilities and stockholders' equity$737,696 $840,870 
 The accompanying notes are an integral part of these condensed consolidated financial statements.
3


SECUREWORKS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
Three Months EndedSix Months Ended
 August 4,
2023
July 29,
2022
August 4,
2023
July 29,
2022
Net revenue:
Subscription$76,825 $90,322 $154,084 $184,735 
Professional services16,141 25,860 33,277 52,462 
Total net revenue92,966 116,182 187,361 237,197 
Cost of revenue:
Subscription30,084 34,060 61,103 66,886 
Professional services9,973 15,519 21,740 32,128 
Total cost of revenue40,057 49,579 82,843 99,014 
Gross profit52,909 66,603 104,518 138,183 
Operating expenses:
Research and development28,236 33,638 59,408 66,969 
Sales and marketing31,237 40,940 65,763 80,185 
General and administrative20,366 24,274 42,629 49,634 
Reorganization and other related charges14,232  14,232  
Total operating expenses94,071 98,852 182,032 196,788 
Operating loss(41,162)(32,249)(77,514)(58,605)
Interest and other, net(636)131 (2,382)(566)
Loss before income taxes(41,798)(32,118)(79,896)(59,171)
Income tax benefit(9,439)(7,399)(16,567)(12,854)
Net loss$(32,359)$(24,719)$(63,329)$(46,317)
Loss per common share (basic and diluted)$(0.38)$(0.29)$(0.74)$(0.55)
Weighted-average common shares outstanding (basic and diluted)86,121 84,483 85,776 84,123 
 The accompanying notes are an integral part of these condensed consolidated financial statements.
4


SECUREWORKS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
(in thousands)
Three Months EndedSix Months Ended
August 4,
2023
July 29,
2022
August 4,
2023
July 29,
2022
Net loss$(32,359)$(24,719)$(63,329)$(46,317)
Foreign currency translation adjustments, net of tax132 (1,158)659 (3,998)
Comprehensive loss$(32,227)$(25,877)$(62,670)$(50,315)
The accompanying notes are an integral part of these condensed consolidated financial statements.
5


SECUREWORKS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Six Months Ended
 August 4,
2023
July 29,
2022
Cash flows from operating activities:
Net loss$(63,329)$(46,317)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization17,961 18,515 
Amortization of right of use asset1,303 1,932 
Reorganization and other related charges3,272  
Amortization of costs capitalized to obtain revenue contracts8,820 8,985 
Amortization of costs capitalized to fulfill revenue contracts1,805 2,565 
Stock-based compensation expense14,890 17,938 
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies2,205 516 
Income tax benefit(16,567)(12,854)
Provision for credit losses(132)(102)
Changes in assets and liabilities:
Accounts receivable16,026 14,329 
Net transactions with Dell(118)(592)
Inventories(154)30 
Other assets(4,699)(6,933)
Accounts payable(7,981)5,685 
Deferred revenue(14,483)(17,165)
Operating leases, net(3,024)(2,801)
Accrued and other liabilities(25,756)(25,145)
Net cash used in operating activities(69,961)(41,414)
Cash flows from investing activities:  
Capital expenditures(530)(827)
Software development costs(2,416)(2,840)
Net cash used in investing activities(2,946)(3,667)
Cash flows from financing activities:  
Taxes paid on vested restricted shares(5,711)(8,087)
Net cash used in financing activities(5,711)(8,087)
Net decrease in cash and cash equivalents(78,618)(53,168)
Cash and cash equivalents at beginning of the period143,517 220,655 
Cash and cash equivalents at end of the period$64,899 $167,487 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6


SECUREWORKS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(in thousands, except per share data)
Three Months Ended August 4, 2023Common Stock - Class ACommon Stock - Class B
 Outstanding SharesAmountOutstanding SharesAmountAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive (Loss) IncomeTreasury
Stock
Total Stockholders' Equity
Balances, May 5, 202316,031 $160 70,000 $700 $969,490 $(415,091)$(5,710)$(19,896)$529,653 
Net loss— — — — — (32,359)— — (32,359)
Other comprehensive loss— — — — — — 132 — 132 
Vesting of restricted stock units278 3 — — (3)— — —  
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares(74)(1)— — (575)— — — (576)
Stock-based compensation— — — — 7,620 — — — 7,620 
Balances, August 4, 202316,235 $162 70,000 $700 $976,532 $(447,450)$(5,578)$(19,896)$504,470 
Six Months Ended August 4, 2023Common Stock - Class ACommon Stock - Class B
 Outstanding SharesAmountOutstanding SharesAmountAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive (Loss) IncomeTreasury
Stock
Total Stockholders' Equity
Balances, February 3, 202314,749 $147 70,000 $700 $967,367 $(384,121)$(6,237)$(19,896)$557,961 
Net loss— — — — — (63,329)— — (63,329)
Other comprehensive loss— — — — — — 659 — 659 
Vesting of restricted stock units2,213 22 — — (22)— — —  
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares(727)(7)— — (5,703)— — — (5,711)
Stock-based compensation— — — — 14,890 — — — 14,890 
Balances, August 4, 202316,235 $162 70,000 $700 $976,532 $(447,450)$(5,578)$(19,896)$504,470 
The accompanying notes are an integral part of these condensed consolidated financial statements.
7


SECUREWORKS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(in thousands, except per share data)
Three Months Ended July 29, 2022Common Stock - Class ACommon Stock - Class B
 Outstanding SharesAmountOutstanding SharesAmountAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive (Loss) IncomeTreasury
Stock
Total Stockholders' Equity
Balances, April 29, 202214,859 $149 70,000 $700 $941,082 $(291,220)$(5,512)$(19,896)$625,303 
Net loss— — — — — (24,719)— — (24,719)
Other comprehensive loss— — — — — — (1,158)— (1,158)
Vesting of restricted stock units168 2 — — (2)— — —  
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares(57)(1)— — (645)— — — (645)
Stock-based compensation— — — — 8,812 — — — 8,812 
Balances, July 29, 202214,970 $150 70,000 $700 $949,248 $(315,939)$(6,670)$(19,896)$607,593 

Six Months Ended July 29, 2022Common Stock - Class ACommon Stock - Class B
 Outstanding SharesAmountOutstanding SharesAmountAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive (Loss) IncomeTreasury
Stock
Total Stockholders' Equity
Balances, January 28, 202214,282 $143 70,000 $700 $939,404 $(269,622)$(2,672)$(19,896)$648,057 
Net loss— — — — — (46,317)— — (46,317)
Other comprehensive loss— — — — — — (3,998)— (3,998)
Vesting of restricted stock units1,381 14 — — (14)— — —  
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares(693)(7)— — (8,080)— — — (8,087)
Stock-based compensation— — — — 17,938 — — — 17,938 
Balances, July 29, 202214,970 $150 70,000 $700 $949,248 $(315,939)$(6,670)$(19,896)$607,593 
The accompanying notes are an integral part of these condensed consolidated financial statements.
8

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 1 — DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
SecureWorks Corp. is a leading global cybersecurity provider of technology-driven solutions singularly focused on protecting the Company’s customers. Except where the context otherwise requires or where otherwise indicated, all references in this report to “Secureworks,” “we,” “us,” “our” and “Company” refer to SecureWorks Corp. and our subsidiaries on a consolidated basis. References to “Dell” refer to Dell Inc. and its subsidiaries on a consolidated basis.
The Company has one primary business activity, which is to provide customers with technology-driven cybersecurity solutions. The Company’s chief operating decision-maker, who is the Chief Executive Officer, makes operating decisions, assesses performance and allocates resources on a consolidated basis. There are no segment managers who are held accountable for operations and operating results below the consolidated unit level. Accordingly, Secureworks operates its business as a single reportable segment.
On April 27, 2016, the Company completed its initial public offering, or IPO. Upon the closing of the IPO, Dell Technologies Inc., or Dell Technologies, owned, indirectly through Dell and its subsidiaries, all shares of the Company’s outstanding Class B common stock, which as of August 4, 2023, represented approximately 81.2% of the Company's total outstanding shares of common stock and approximately 97.7% of the combined voting power of both classes of the Company's outstanding common stock.
Basis of Presentation and Consolidation
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimations that affect the amounts reported in the Company’s financial statements and notes. The inputs into certain of the Company’s assumptions and estimations considered the economic implications of the Ukraine/Russia conflict and inflation concerns on the Company’s critical and significant accounting estimates. The condensed consolidated financial statements include assets, liabilities, revenue and expenses of all majority-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation.
For the periods presented, Dell has provided various corporate services to the Company in the ordinary course of business, including finance, tax, human resources, legal, insurance, IT, procurement and facilities-related services. The cost of these services is charged in accordance with a shared services agreement that went into effect on August 1, 2015. For more information regarding related party transactions, see “Note 10—Related Party Transactions.”
During the periods presented in the financial statements, Secureworks did not file separate federal tax returns, as the Company is generally included in the tax grouping of other Dell entities within the respective entity’s tax jurisdiction. The income tax benefit has been calculated using the separate return method, modified to apply the benefits-for-loss approach. Under this approach, net operating losses or other tax attributes are characterized as realized or as realizable by Secureworks when those attributes are utilized or expected to be utilized by other members of the Dell consolidated group. See “Note 9—Income and Other Taxes” for more information.
Fiscal Year
The Company’s fiscal year is the 52- or 53-week period ending on the Friday closest to January 31. The Company refers to the fiscal year ending February 2, 2024 and the fiscal year ended February 3, 2023 as fiscal 2024 and fiscal 2023, respectively. Fiscal 2024 consists of 52 weeks and fiscal 2023 consisted of 53 weeks. In fiscal 2024, each quarter has 13 weeks. In fiscal 2023, each quarter consisted of 13 weeks except for the fourth quarter, which consisted of 14 weeks. Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal periods.
9

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. In the Condensed Consolidated Statements of Operations, estimates are used when accounting for revenue arrangements, determining the cost of revenue, allocating cost and estimating the impact of contingencies. In the Condensed Consolidated Statements of Financial Position, estimates are used in determining the valuation and recoverability of assets, such as accounts receivables, inventories, fixed assets, capitalized software, goodwill and other identifiable intangible assets. Estimates are also used in determining the reported amounts of liabilities, such as taxes payable and the impact of contingencies. All estimates also impact the Condensed Consolidated Statements of Operations. Actual results could differ from these estimates due to risks and uncertainties, including uncertainty in the current economic environment due to the Ukraine/Russia conflict and impacts of inflation. The Company considered the potential impact of the current economic and geopolitical uncertainty on its estimates and assumptions and determined there was not a material impact to the Company’s condensed consolidated financial statements as of and for the three and six months ended August 4, 2023. As the current economic environment continues to develop, many of the Company’s estimates could require increased judgment and be subject to a higher degree of variability and volatility. As a result, the Company’s estimates may change materially in future periods.
Recently Adopted Accounting Pronouncements
None.
Summary of Significant Accounting Policies
There have been no significant changes to the Company’s significant accounting policies as of and for the three and six months ended August 4, 2023, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2023.
NOTE 2 — LOSS PER SHARE
Loss per share is calculated by dividing net loss for the periods presented by the respective weighted-average number of common shares outstanding, and excludes any dilutive effects of share-based awards that may be anti-dilutive. Diluted net loss per common share is computed by giving effect to all potentially dilutive common shares, including common stock issuable upon the exercise of stock options and unvested restricted common stock and restricted stock units. The Company applies the two-class method to calculate earnings per share. Because the Class A common stock and the Class B common stock share the same rights in dividends and earnings, earnings per share (basic and diluted) are the same for both classes of common stock. Since losses were incurred in all periods presented, all potential common shares were determined to be anti-dilutive.
The following table sets forth the computation of loss per common share (in thousands, except per share amounts):
Three Months Ended Six Months Ended
August 4,
2023
July 29,
2022
August 4,
2023
July 29,
2022
Numerator:
Net loss$(32,359)$(24,719)$(63,329)$(46,317)
Denominator:  
Weighted-average number of shares outstanding: 
Basic and Diluted86,121 84,483 85,776 84,123 
Loss per common share:  
Basic and Diluted$(0.38)$(0.29)$(0.74)$(0.55)
Weighted-average anti-dilutive stock options, non-vested restricted stock and restricted stock units9,375 6,057 7,117 5,980 

10

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 3 — CONTRACT BALANCES AND CONTRACT COSTS
The Company derives revenue primarily from subscriptions and professional services. Subscription revenue is derived from (i) Taegis software-as-a-service, or SaaS, security platform and supplemental Managed Detection and Response, or MDR, services, and (ii) Managed Security Services. Taegis’ core offerings are the security platform, Taegis Extended Detection and Response, or XDR, and the MDR service, ManagedXDR. Managed Security Services are subscription-based arrangements that typically include a suite of security services utilizing the legacy platform. Professional services typically include incident response, adversarial testing services and other security consulting arrangements.
The following table presents revenue by service type (in thousands):
Three Months EndedSix Months Ended
August 4,
2023
July 29,
2022
August 4,
2023
July 29,
2022
Net revenue:
Taegis Subscription Solutions$66,426 $42,809 $129,022 $80,025 
Managed Security Services10,399 47,513 25,062 104,710 
Total Subscription revenue$76,825 $90,322 $154,084 $184,735 
Professional Services16,141 25,860 33,277 52,462 
Total net revenue$92,966 $116,182 $187,361 $237,197 
Promises to provide the Company’s subscription-based SaaS solutions are accounted for as separate performance obligations and managed security services are accounted for as a single performance obligation. Our subscription-based solutions have an average contract term of approximately two years as of August 4, 2023. Performance obligations related to the Company’s professional services contracts are separate obligations associated with each service. Although the Company has multi-year customer relationships for various professional service solutions, the arrangement is typically structured as a separate performance obligation over the contract period and recognized over a duration of less than one year.
The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. The Company invoices its customers based on a variety of billing schedules. During the six months ended August 4, 2023, on average, approximately 65% of the Company’s recurring revenue was billed annually in advance and approximately 35% was billed on either a monthly or quarterly basis in advance. In addition, many of the Company’s professional services engagements are billed in advance of service commencement. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, billing frequency and invoice timing.
Changes to the Company’s deferred revenue during the six months ended August 4, 2023 and July 29, 2022 are as follows (in thousands):
As of February 3, 2023
Upfront payments received and billings during the six months ended August 4, 2023
Revenue recognized during the six months ended August 4, 2023
As of August 4, 2023
Deferred revenue$156,332 $114,112 $(128,074)$142,370 
As of January 28, 2022
Upfront payments received and billings during the six months ended July 29, 2022
Revenue recognized during the six months ended July 29, 2022
As of July 29, 2022
Deferred revenue$176,068 $143,991 $(160,151)$159,908 

11

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Remaining Performance Obligation
The remaining performance obligation represents the transaction price allocated to contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancellable contracts that will be invoiced and recognized as revenue in future periods. The remaining performance obligation consists of two elements: (i) the value of remaining services to be provided through the contract term for customers whose services have been activated, or active; and (ii) the value of subscription-based solutions contracted with customers that have not yet been installed, or backlog. Backlog is not recorded in revenue, deferred revenue or elsewhere in the consolidated financial statements until the Company establishes a contractual right to invoice, at which point backlog is recorded as revenue or deferred revenue, as appropriate. The Company applies the practical expedient in ASC paragraph 606-10-50-14(a) and does not disclose information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less.
The Company expects that the amount of backlog relative to the total value of its contracts will change from year to year due to several factors, including the amount invoiced at the beginning of the contract term, the timing and duration of the Company’s customer agreements, varying invoicing cycles of agreements and changes in customer financial circumstances. Accordingly, fluctuations in backlog are not always a reliable indicator of future revenues.
As of August 4, 2023, the Company expects to recognize remaining performance obligations as follows (in thousands):
TotalExpected to be recognized in the next 12 monthsExpected to be recognized in 12-24 monthsExpected to be recognized in 24-36 monthsExpected to be recognized thereafter
Performance obligation - active$224,375 $130,605 $73,693 $19,789 $288 
Performance obligation - backlog7,205 3,220 3,164 821  
Total$231,580 $133,825 $76,857 $20,610 $288 
Deferred Commissions and Fulfillment Costs
The Company capitalizes a significant portion of its commission expense and related fringe benefits earned by its sales personnel. Additionally, the Company capitalizes certain costs to install and activate hardware and software used in its managed security services, primarily related to a portion of the compensation for the personnel who perform the installation activities. These deferred costs are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relate.
Changes in the balance of total deferred commission and total deferred fulfillment costs during the six months ended August 4, 2023 and July 29, 2022 are as follows (in thousands):
As of February 3, 2023
Amount capitalizedAmount recognized
As of August 4, 2023
Deferred commissions$49,565 $4,225 $(8,820)$44,970 
Deferred fulfillment costs3,232  (1,805)1,427 
As of January 28, 2022
Amount capitalizedAmount recognized
As of July 29, 2022
Deferred commissions$53,978 $4,994 $(8,985)$49,987 
Deferred fulfillment costs7,597 210 (2,565)5,242 
During the fourth quarter of fiscal 2022, Secureworks announced the end-of-sale for a number of managed security service offerings effective the first day of fiscal 2023. Accordingly, the Company no longer has deferred installation costs to be capitalized. The Company evaluated these deferred costs as part of a broader asset group for impairment and potential changes to their estimated lives. The Company did not record any impairment losses on the deferred commissions or deferred fulfillment costs and did not identify any material changes to the expense recognition pattern during the six months ended August 4, 2023 or July 29, 2022.

12

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 4 — GOODWILL AND INTANGIBLE ASSETS
Goodwill relates to the acquisition of Dell by Dell Technologies and represents the excess of the purchase price attributable to Secureworks over the fair value of the assets acquired and liabilities assumed, as well as subsequent business combinations completed by the Company. Goodwill was unchanged for the six months ended August 4, 2023, compared to February 3, 2023. Goodwill totaled $425.5 million as of both August 4, 2023 and February 3, 2023.
Goodwill and indefinite-lived intangible assets are tested for impairment on an annual basis during the third fiscal quarter of each fiscal year, or earlier if an indicator of impairment occurs. The Company completed the most recent annual impairment test in the third quarter of fiscal 2023 by assessing goodwill at the reporting unit level, as well as the Company’s indefinite-lived trade name asset at the individual asset level. The Company has one reporting unit.
For the annual impairment review in the third quarter of fiscal 2023, the Company elected to bypass the assessment of qualitative factors to determine whether it was more likely than not that the fair value of its reporting unit was less than its carrying amount, including goodwill and its indefinite lived trade name asset. In electing to bypass the qualitative assessment, the Company proceeded directly to performing a quantitative analysis to determine the fair value of its reporting unit relative to its carrying amount, as well as its indefinite-lived trade name asset at the individual asset level, to determine the amount of impairment loss to be recognized, if any.
The fair value of the reporting unit is generally estimated using a combination of public company multiples and discounted cash flow methodologies. The discounted cash flow and public company multiples methodologies require significant judgment, including estimation of future revenues, gross margins and operating expenses, which are dependent on internal forecasts, current and anticipated economic conditions and trends, selection of market multiples through assessment of the reporting unit’s performance relative to peer competitors, the estimation of the long-term revenue growth rate and discount rate of the Company’s business, and the determination of the Company’s weighted-average cost of capital. Changes in these estimates and assumptions could materially affect the fair value of the reporting unit, potentially resulting in a non-cash impairment charge.
The fair value of the indefinite-lived trade names is generally estimated using the discounted cash flow methodology. The discounted cash flow methodology requires significant judgment, including estimation of future revenue, estimation of the long-term revenue growth rate of the Company’s business and determination of the Company’s weighted-average cost of capital and royalty rates. Changes in these estimates and assumptions could materially affect the fair value of the indefinite-lived intangible assets, potentially resulting in a non-cash impairment charge.
Based on the results of the annual impairment test, the Company determined that the derived fair values of the reporting unit and indefinite-lived intangible asset exceeded their respective carrying values. Further, no triggering events have transpired since the performance of the quantitative assessment that would indicate a potential impairment occurred during the period through August 4, 2023. Subsequent to August 4, 2023, the Company has experienced recent fluctuations in its stock price which the Company uses as a readily available indicator of enterprise value. The Company will continue to monitor its stock price, operating results and other macroeconomic factors to determine if there has been any indication of a sustained decline in fair value. The Company will perform its annual impairment review in the third quarter of fiscal 2024.
Intangible Assets
The Companys intangible assets as of August 4, 2023 and February 3, 2023 were as follows:
 August 4, 2023February 3, 2023
 GrossAccumulated
Amortization
NetGrossAccumulated
Amortization
Net
 (in thousands)
Customer relationships$189,518 $(140,577)$48,941 $189,518 $(133,530)$55,988 
Acquired Technology141,784 (135,950)5,834 141,784 (128,612)13,172 
Developed Technology14,243 (6,577)7,666 11,827 (4,897)6,930 
Finite-lived intangible assets345,545 (283,104)62,441 343,129 (267,039)76,090 
Trade name30,118 — 30,118 30,118 — 30,118 
Total intangible assets$375,663 $(283,104)$92,559 $373,247 $(267,039)$106,208 
Amortization expense related to finite-lived intangible assets was approximately $8.1 million and $16.1 million for the three and six months ended August 4, 2023, respectively, and $7.6 million and $15.4 million for the three and six months ended July 29, 2022, respectively. Amortization expense is included within cost of revenue and general and administrative expense in the Condensed Consolidated Statements of Operations. There were no impairment charges related to intangible assets during the three and six months ended August 4, 2023 or July 29, 2022.
13

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 5 — DEBT
Revolving Credit Facility
As of August 4, 2023, SecureWorks, Inc., a wholly-owned subsidiary of SecureWorks Corp., is a party to a revolving credit agreement with a wholly-owned subsidiary of Dell under which the Company obtained a $30 million senior, unsecured revolving credit facility. Effective March 23, 2023, the revolving credit agreement was amended and restated, with substantially similar terms as the facility prior to the amendment and restatement, to extend the maturity date from March 23, 2023 to March 23, 2024 and to modify the annual rate at which interest accrues to the applicable Secured Overnight Financing Rate, or SOFR, plus 1.15%.
Subsequent to the quarter ending on August 4, 2023, the Company executed an amendment to the revolving credit agreement that was effectuated on March 23, 2023. This amended agreement: (1) increased the maximum principal amount of borrowings outstanding under the revolving credit facility to $50 million, (2) removed the one-time increase of up to an additional $30 million in borrowings upon mutual agreement by lender and borrower, (3) extended the commitment and required repayment date under the revolving credit agreement to March 23, 2026, and (4) modified the rate at which interest accrues on funds drawn against the revolving credit agreement to SOFR plus 2.00%.
Amounts under the facility may be borrowed, repaid and reborrowed from time to time during the term of the facility. The proceeds from loans made under the facility may be used for general corporate purposes. The credit agreement contains customary representations, warranties, covenants and events of default. The unused portion of the facility is subject to a commitment fee of 0.35%, which is due upon expiration of the facility. There was no outstanding balance under the credit facility as of August 4, 2023 or February 3, 2023, and there were no amounts borrowed under the credit facility during the three and six months ended August 4, 2023.
The borrower will be required to repay, in full, all of the loans outstanding, including all accrued interest, and the facility will terminate upon a change of control of SecureWorks Corp. or following a transaction in which SecureWorks, Inc. ceases to be a direct or indirect wholly-owned subsidiary of SecureWorks Corp. The facility is not guaranteed by SecureWorks Corp. or its subsidiaries.
14

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 6 — COMMITMENTS AND CONTINGENCIES
Legal ContingenciesFrom time to time, the Company is involved in claims and legal proceedings that arise in the ordinary course of business. The Company accrues a liability when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews the status of such matters at least quarterly and adjusts its liabilities as necessary to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. Whether the outcome of any claim, suit, assessment, investigation or legal proceeding, individually or collectively, could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows will depend on a number of factors, including the nature, timing and amount of any associated expenses, amounts paid in settlement, damages or other remedies or consequences. To the extent new information is obtained and the Company’s views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in accrued liabilities would be recorded in the period in which such a determination is made. As of August 4, 2023, the Company does not believe that there were any such matters that, individually or in the aggregate, would have a material adverse effect on its business, financial condition, results of operations or cash flows.
Customer-based Taxation ContingenciesVarious government entities, or taxing authorities, require the Company to bill its customers for the taxes they owe based on the services they purchase from the Company. The application of the rules of each taxing authority concerning which services are subject to each tax and how those services should be taxed involves the application of judgment. Taxing authorities periodically perform audits to verify compliance and include all periods that remain open under applicable statutes, which generally range from three to four years. These audits could result in significant assessments of past taxes, fines and interest if the Company were found to be non-compliant. During the course of an audit, a taxing authority may question the Company’s application of its rules in a manner that, if the Company were not successful in substantiating its position, could result in a significant financial impact to the Company. In the course of preparing its financial statements and disclosures, the Company considers whether information exists that would warrant disclosure or an accrual with respect to such a contingency.
As of August 4, 2023, the Company is under audit with various state taxing authorities in which rulings related to the taxability of certain of its services are pending; the Company has recorded an estimated liability of $8.8 million related to such matters. The Company will continue to appeal these rulings, but should the Company not prevail, it could be subject to obligations to pay additional taxes together with associated penalties and interest for the audited tax period, as well as additional taxes for periods subsequent to the tax audit period, including penalties and interest. While Dell does provide an indemnification for certain state tax issues for tax periods prior to August 1, 2015, such indemnification would not cover a material portion of the current estimated liability.
Indemnifications—In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to indemnify its customers from certain losses incurred by the customer as to third-party claims relating to the services performed on behalf of the Company or for certain losses incurred by the customer as to third-party claims arising from certain events as defined within the particular contract. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments related to these indemnifications have been immaterial.
Concentrations—The Company sells solutions to customers of all sizes through a combination of partners and its sales organization. During the three and six months ended August 4, 2023 and July 29, 2022, the Company had no customer that represented 10% or more of its net revenue.
15

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 7 LEASES
The Company’s leases primarily relate to office facilities that have remaining lease terms of 1.0 year to 3.4 years, inclusive of renewal or termination options that the Company is reasonably certain to exercise.
The components of lease expense were as follows:
Three Months EndedSix Months Ended
August 4,
2023
July 29,
2022
August 4,
2023
July 29,
2022
(in thousands)
Operating lease cost$1,083 $1,187 $2,164 $2,382 
Variable lease costs130 89 151 205 
Short term lease costs 30  47 
Total lease costs$1,213 $1,306 $2,315 $2,634 
Supplemental cash flow information:
Cash paid for amounts included in the measurement of operating lease liabilities$1,333 $1,510 $2,661 $3,156 
Weighted-average information associated with the measurement of remaining operating lease obligations is as follows:
 August 4, 2023
Weighted-average remaining lease term3.2 years
Weighted-average discount rate5.39 %
The following table summarizes the maturity of the Company’s operating lease liabilities as of August 4, 2023 (in thousands):
Fiscal Years EndingAugust 4, 2023
2024$2,701 
20255,095 
20264,526 
20274,088 
2028 
Thereafter 
Total operating lease payments$16,410 
Less imputed interest1,206 
Total operating lease liabilities$15,204 
As discussed in the Company's Current Report on Form 8-K filed with the SEC on August 14, 2023, as part of its actions to rebalance investments cross-functionally in alignment with its current strategy and growth opportunities, the Company ceased use of certain corporate office space as a part of its real estate-related cost optimization actions. Additionally, in consideration of updated facts and circumstances relating to the Company's right-of-use asset that was partially impaired in the fourth quarter of fiscal 2023, the Company reassessed the discounted cash flow methodology used to derive fair value of this asset group. The Company determined the asset values were not recoverable and recorded an impairment loss of $2.9 million to its operating lease right-of-use assets for the three and six months ended August 4, 2023.

16

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 8 — STOCK-BASED COMPENSATION AND OTHER LONG-TERM PERFORMANCE INCENTIVES
The SecureWorks Corp. 2016 Long-Term Incentive Plan, or the 2016 Plan, provides for the grant of options, stock appreciation rights, restricted stock, restricted stock units, whether time-based, performance-based or time- and performance-based, deferred stock units, unrestricted stock, dividend equivalent rights, other equity-based awards, and cash bonus awards. Awards may be granted under the 2016 Plan to individuals who are employees, officers, or non-employee directors of the Company or any of its affiliates, consultants and advisors who perform services for the Company or any of its affiliates, and any other individual whose participation in the 2016 Plan is determined to be in the best interests of the Company by the compensation committee of the board of directors.
Under the 2016 Plan, the Company granted 911,705 and 8,053,962 restricted stock units during the three and six months ended August 4, 2023, respectively, and 332,376 and 3,982,900 restricted stock units during the three and six months ended July 29, 2022, respectively. The restricted stock units granted during these periods vest over a three-year period. Approximately 17% of such awards granted during each of the six months ended August 4, 2023 and July 29, 2022 are subject to performance conditions. The majority of the 7,142,257 restricted stock unit awards made during the three months ended May 5, 2023 were subject to stockholder approval of an amendment to the 2016 Plan to increase the number of shares of Class A common stock issuable under the plan by 7,500,000 shares at the Company’s 2023 annual meeting on June 27, 2023. Such stockholder approval was obtained at the annual meeting, and those awards were deemed granted and outstanding for accounting purposes during the three months ended August 4, 2023.
The Company grants long-term cash awards to certain employees under the 2016 Plan. The Company granted zero and $0.1 million of cash awards during the three and six months ended August 4, 2023, respectively, compared to no cash awards granted during the three and six months ended July 29, 2022. The Company recognized $0.4 million and $1.1 million of related compensation expense for the three and six months ended August 4, 2023, respectively, and $1.1 million and $2.5 million of related compensation expense for the three and six months ended July 29, 2022, respectively.

17

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 9 — INCOME AND OTHER TAXES
The Company’s loss before income taxes and income tax benefit (in thousands) and effective income tax rate for the three and six months ended August 4, 2023 and July 29, 2022 was as follows (in thousands, except percentages):    
Three Months EndedSix Months Ended
August 4,
2023
July 29,
2022
August 4,
2023
July 29,
2022
Loss before income taxes$(41,798)$(32,118)$(79,896)$(59,171)
Income tax benefit$(9,439)$(7,399)$(16,567)$(12,854)
Effective tax rate22.6 %23.0 %20.7 %21.7 %
During the periods presented in the accompanying Condensed Consolidated Statements of Financial Position, the Company did not file separate federal tax returns as the Company generally was included in the tax grouping of other Dell entities within the respective entity’s tax jurisdiction. The income tax benefit has been calculated using the separate return method, modified to apply the benefits-for-loss approach. Under the benefits-for-loss approach, net operating losses or other tax attributes are characterized as realized by the Company when those attributes are utilized by other members of the Dell consolidated group.
Effective for tax years beginning on or after January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development, or R&D, expenses in the year incurred and instead requires taxpayers to capitalize R&D expenses, including software development cost, and subsequently amortize such expenses over five years for R&D activities conducted in the United States and over fifteen years for R&D activities conducted outside of the United States.
The Company’s effective tax benefit rate was 22.6% and 20.7% for the three and six months ended August 4, 2023, respectively, and 23.0% and 21.7% for the three and six months ended July 29, 2022, respectively. The changes in the Company’s effective income tax rate between the periods was primarily attributable to the impact of certain discrete adjustments related to stock-based compensation expense of approximately $0.2 million and $1.7 million for the three and six months ended August 4, 2023, respectively, and $0.1 million and $0.6 million for the three and six months ended July 29, 2022, respectively. The changes related specifically to the impact of the vesting of certain equity awards for which the fair value on the vesting date was lower than the fair value for both the three and six month periods ended August 4, 2023 and higher than the fair value for both the three and six month periods ended July 29, 2022 in comparison to the fair value on the dates the equity awards were originally granted. The changes in fair value, which is measured by the price of the Class A common stock as reported on the Nasdaq Global Select Market, resulted in a lower actual tax deduction for both the three and six month periods ended August 4, 2023 and a higher actual tax deduction for both the three and six months ended July 29, 2022 than the amounts deducted for financial reporting purposes.
As of each of August 4, 2023 and February 3, 2023, respectively, the Company had $5.8 million of deferred tax assets related to net operating loss carryforwards for state tax returns that are not included with those of other Dell entities. These net operating loss carryforwards began expiring in the fiscal year ended February 3, 2023. Due to the uncertainty surrounding the realization of these net operating loss carryforwards, the Company has provided valuation allowances for the full amount as of August 4, 2023 and February 3, 2023, respectively.
Because the Company is included in the tax filings of other Dell entities, management has determined that it will be able to realize its deferred tax assets. If the Company becomes ineligible for inclusion in the Dell Technologies consolidated tax group, its ability to benefit from its losses and other tax attributes may be impaired resulting from the Company's need to file its own Federal and State tax returns without the ability to offset its losses against the profits from the parent. The Company may be required to record a valuation allowance against its deferred tax assets that are currently recorded based on the tax sharing agreement with Dell. Currently, net deferred tax assets are approximately $12.1 million. If the Company’s tax provision had been prepared using the separate return method, the unaudited pro forma pre-tax loss, tax expense and net loss for the six months ended August 4, 2023 would have been $(79.9) million, $1.2 million and $(81.1) million, respectively, as a result of the recognition of a valuation allowance that would have been recorded on a significant amount of deferred tax assets as well as certain attributes from the Tax Cuts and Jobs Act of 2017 that would be lost if not utilized by the Dell consolidated group.
Net deferred tax balances are included in other non-current assets and other non-current liabilities in the Condensed Consolidated Statements of Financial Position.
As of August 4, 2023 and February 3, 2023, the Company had a net operating loss receivable from Dell of $12.5 million and $3.5 million, respectively. The Company had $4.6 million and $4.5 million of unrecognized tax benefits as of August 4, 2023 and February 3, 2023, respectively.
18

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 10 — RELATED PARTY TRANSACTIONS
Allocated Expenses
For the periods presented, Dell has provided various corporate services to Secureworks in the ordinary course of business. The costs of services provided to Secureworks by Dell are governed by a shared services agreement between Secureworks and Dell Inc. The total amounts of the charges under the shared services agreement with Dell were $0.8 million and $1.6 million for the three and six months ended August 4, 2023, respectively, and $0.9 million and $1.9 million for the three and six months ended July 29, 2022, respectively. Management believes that the basis on which the expenses have been allocated is a reasonable reflection of the utilization of services provided to or the benefit received by the Company during the periods presented.
Related Party Arrangements
For the periods presented, related party transactions and activities involving Dell Inc. and its wholly-owned subsidiaries were not always consummated on terms equivalent to those that would prevail in an arm’s-length transaction where conditions of competitive, free-market dealing may exist.
The Company purchases computer equipment for internal use from Dell Inc. and its subsidiaries that is capitalized within property and equipment in the Condensed Consolidated Statements of Financial Position. Purchases of computer equipment from Dell and EMC Corporation, or EMC, an indirect, wholly-owned subsidiary of Dell that provides enterprise software and storage, totaled $0.2 million and $0.3 million for the three and six months ended August 4, 2023, respectively, and $0.2 million and $0.4 million for the three and six months ended July 29, 2022, respectively.
EMC previously maintained a majority ownership interest in VMware, Inc., or VMware, a company that provides cloud and virtualization software and services. The Company’s purchases of annual maintenance services, software licenses and hardware systems for internal use from Dell, EMC and VMware totaled $0.3 million and $0.6 million for the three and six months ended August 4, 2023, respectively and $0.2 million and $0.5 million for the three and six months ended July 29, 2022, respectively. On November 1, 2021, Dell Technologies completed its spin-off of all shares of common stock of VMware that were beneficially owned by Dell Technologies and its subsidiaries, including EMC, to Dell Technologies’ stockholders. As a result of the spin-off transaction, the businesses of VMware were separated from the remaining businesses of Dell Technologies, although Michael S. Dell, the Chairman, Chief Executive Officer and majority stockholder of Dell Technologies, continues to serve as Chairman of the Board of VMware.
The Company recognized revenue related to solutions provided to VMware that totaled $0.1 million and $0.2 million for the three and six months ended August 4, 2023, respectively, and $0.1 million and $0.3 million for the three and six months ended July 29, 2022, respectively. In October 2019, VMware acquired Carbon Black Inc., a security business with which the Company had an existing commercial relationship. Purchases by the Company of solutions from Carbon Black totaled $0.3 million and $1.6 million for the three and six months ended August 4, 2023, respectively, and $0.4 million and $1.7 million for the three and six months ended July 29, 2022, respectively.
The Company also recognized revenue related to solutions provided to significant beneficial owners of Secureworks common stock, which include Mr. Dell and affiliates of Mr. Dell. The revenues recognized by the Company from solutions provided to Mr. Dell, MSD Capital, L.P. (a firm founded for the purposes of managing investments of Mr. Dell and his family), DFI Resources LLC, an entity affiliated with Mr. Dell, and the Michael and Susan Dell Foundation totaled $64 thousand and $0.1 million for the three and six months ended August 4, 2023, respectively, and $0.1 million and $0.2 million for the three and six months ended July 29, 2022, respectively.
The Company provides solutions to certain customers whose contractual relationships have historically been with Dell rather than Secureworks, although the Company has the primary responsibility to provide the services. Effective August 1, 2015, in connection with the IPO, many of such customer contracts were transferred from Dell to the Company, forming a direct contractual relationship between the Company and the end customer. For customers whose contracts have not yet been transferred or whose contracts were subsequently originated through Dell under a reseller agreement, the Company recognized revenues of approximately $14.3 million and $29.3 million for the three and six months ended August 4, 2023, respectively, and $14.4 million and $30.6 million for the three and six months ended July 29, 2022, respectively. In addition, as of August 4, 2023, the Company had approximately $2.9 million of contingent obligations to Dell related to outstanding performance bonds for certain customer contracts which Dell issued on behalf of the Company. These contingent obligations are not recognized as liabilities on the Company’s financial statements.
As the Company’s customer and on behalf of certain of its own customers, Dell also purchases solutions from the Company. The Company recognized revenues from such purchases of approximately $0.2 million and $0.3 million for the three and six months ended August 4, 2023, respectively, and $1.2 million and $2.8 million for the three and six months ended July 29, 2022, respectively.
19

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


As a result of the foregoing related party arrangements, the Company has recorded the following related party balances in the Condensed Consolidated Statements of Financial Position as of August 4, 2023 and February 3, 2023 (in thousands).
August 4,
2023
February 3,
2023
Related party payable (in accrued and other current liabilities)$1,149 $1,141 
Accounts receivable from customers under reseller agreements with Dell (in accounts receivable, net)$5,538 $5,584 
Net operating loss tax sharing receivable under agreement with Dell$12,547 $3,472 
NOTE 11 — FAIR VALUE MEASUREMENTS
The Company measures fair value within the guidance of the three-level valuation hierarchy. This hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The categorization of a measurement within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1 - Quoted market prices in active markets for identical assets or liabilities
Level 2 - Other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3 - Significant unobservable inputs
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The assets and liabilities of the Company that are measured at fair value on a recurring basis using the respective input levels as of August 4, 2023 and February 3, 2023 were as follows (in thousands):
August 4,
2023
February 3,
2023
Level 1Level 1
Cash equivalents - Money Market Funds$1,647 $16,451 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The carrying amounts of the Company’s accounts receivable, accounts payable and accrued expenses approximate their respective fair value due to their short-term nature.
20

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 12 — REORGANIZATION AND OTHER RELATED COSTS
During the fiscal year ended February 3, 2023, the Company committed to a plan to align its investments more closely with its strategic priorities to meet the expected future needs of the business by reducing the Company’s workforce and implementing certain real estate‑related and other cost optimization actions. Under this plan, the Company intends to rebalance investments cross-functionally in alignment with the Company’s current strategy and growth opportunities, such as focusing on the higher value, higher margin Taegis solutions, optimizing the Company’s organizational structure to increase its scalability, and other priorities, to better position the Company for continued growth with improving operating margins over time. For the fiscal year ended February 3, 2023, the Company incurred expenses of approximately $15.5 million under the plan, consisting primarily of severance and other termination benefits, real estate-related expenses, and various other cost saving measures.
During the three months ended August 4, 2023, the Company approved continued reorganization actions in alignment with the plan initiated in fiscal 2023. During the three months ended August 4, 2023, the Company incurred expenses of $14.2 million in accordance with the continued reorganization plan consisting primarily of severance and other termination benefits and real estate-related impairment.
The following table summarizes the liability associated with these charges that is included in accrued and other current liabilities on the accompanying Condensed Consolidated Statement of Financial Position (in thousands):
WorkforceReal estate-relatedOtherTotal
Balance as of January 28, 2022
$ $ $ $ 
Reorganization charge7,550 4,570 3,351 15,471 
Charges settled in cash (90)(325)(415)
Charges settled in non-cash (4,480)(1,632)(6,112)
Balance as of February 3, 2023
$7,550 $ $1,394 $8,944 
Charges settled in cash(6,019) (1,394)(7,413)
Balance as of May 5, 2023$1,531 $ $ $1,531 
Reorganization charge10,960 3,272 $ $14,232 
Charges settled in cash(1,566)  (1,566)
Charges settled in non-cash (3,272) (3,272)
Balance as of August 4, 2023
$10,925 $ $ $10,925 
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Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “may,” “will,” “would,” “could,” “potentially,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “aim,” “seek” and similar expressions that convey uncertainty regarding future events or outcomes as they relate to us or our management are intended to identify forward-looking statements. Our results could be materially different from our expectations because of various risks, including risks related to: our history of losses; the need to continually enhance existing solutions and technologies and develop or acquire new ones; the possibility that our plans to strategically realign and optimize our investments with our priorities may not be successful; competition; our reliance on the financial services industry; real or perceived defects, errors or vulnerabilities in our, or failures of, our solutions; cyber-attacks and other data security incidents; the Ukraine/Russia conflict; inflation and other economic concerns; and other risks discussed in "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 3, 2023 that was filed with the SEC on March 23, 2023 and in our other periodic and current reports filed with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. All statements by us regarding our expected financial position, revenues, cash flows and other operating results, business strategy, legal proceedings and similar matters are forward-looking statements. Our expectations expressed or implied in these forward-looking statements may not turn out to be correct. Any forward-looking statement speaks only as of the date as of which such statement is made, and, except as required by law, we undertake no obligation to revise or update any forward-looking statement after the date as of which such statement was made, whether to reflect changes in circumstances or our expectations, the occurrence of unanticipated events, or otherwise.

22


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This management's discussion and analysis is based upon the financial statements of Secureworks which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, and should be read in conjunction with our audited financial statements and related notes for the year ended February 3, 2023 included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended February 3, 2023 that was filed with the SEC on March 23, 2023, which we refer to as the Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and future expectations. Our actual results could differ materially from those discussed or implied in our forward-looking statements. Factors that could cause or contribute to these differences include those discussed in “Cautionary Note Regarding Forward-Looking Statements” above and in "Risk Factors" in Part I, Item 1A of our Annual Report.
Our fiscal year is the 52- or 53-week period ending on the Friday closest to January 31. We refer to the fiscal year ending February 2, 2024 and the fiscal year ended February 3, 2023 as fiscal 2024 and fiscal 2023, respectively. Fiscal 2024 has 52 weeks and fiscal 2023 had 53 weeks. In fiscal 2023, each quarter had 13 weeks, except for the fourth quarter, which had 14 weeks. Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal periods.
All percentage amounts and ratios presented in this management’s discussion and analysis were calculated using the underlying data in thousands.
Except where the context otherwise requires or where otherwise indicated, (1) all references to "Secureworks," "we," "us," "our" and "our Company" in this management's discussion and analysis refer to SecureWorks Corp. and our subsidiaries on a consolidated basis, (2) all references to "Dell" refer to Dell Inc. and its subsidiaries on a consolidated basis and (3) all references to "Dell Technologies" refer to Dell Technologies Inc., the ultimate parent company of Dell Inc.
Overview
We are a leading global cybersecurity provider of technology-driven solutions singularly focused on protecting our customers.
Our vision is to be the essential cybersecurity company for a digitally connected world. We believe we are the security platform of choice to deliver a holistic approach to security at scale for our customers to achieve their best security outcomes. We combine considerable experience from securing thousands of customers, processing billions of customer events leveraging artificial intelligence and machine-learning in our security platform, and actionable insights from our team of elite researchers, analysts and consultants to create a powerful network effect that provides increasingly strong protection for our customers.
Our proprietary Taegis security platform leverages an open architecture that is designed to process a wide variety of telemetry to see security threats quickly and to leverage our customers’ existing investments. Our solutions collect and process vast amounts of data across the IT ecosystem by integrating a wide array of proprietary and third-party security products. This open-platform approach allows us to aggregate events from a wide range of endpoint, network, cloud and business systems to increase the effectiveness of our solutions.
By aggregating and analyzing data from sources around the world, we offer solutions that enable organizations to:
prevent security breaches,
detect malicious activity,
respond rapidly when a security breach occurs, and
identify emerging threats.
We believe a platform that supports innovation and collaboration enables the power of the security community to outmaneuver the adversary. Leveraging our extensive security expertise and threat intelligence, we utilize our unique insights to extend our Taegis XDR platform to defend against cyber attacks.
The integrated approach we have pioneered enables us to deliver a broad portfolio of security solutions to organizations of varying size and complexity. We seek to provide the right level of security for each customer’s particular situation, which evolves with our customers as their organizations grow and change over time. Our flexible and scalable solutions secure the evolving needs of large enterprises as well as small and medium-sized businesses and U.S. state and local government agencies with limited in-house capabilities and resources.
We offer our customers:
software-as-a-service, or SaaS, solutions,
managed solutions, and
professional services, including incident response and adversarial testing services.
23


Our solutions leverage the proprietary technologies, security operations workflows, extensive expertise and knowledge of the tactics, techniques and procedures of the adversary that we have developed over more than two decades. As key elements of our strategy, we seek to:
be the SaaS security platform of choice,
broaden our reach with security service providers to deliver our security platform globally, and
empower the global security community to beat the adversary at scale.
Taegis was purpose-built as a SaaS platform that combines the power of machine-learning with security analytics and threat intelligence to unify detection and response across endpoint, network, cloud, email and other systems for better security outcomes and simpler security operations. The Taegis software platform is a core element of our SaaS solutions, which leverage workflows designed from our extensive security operations expertise and our integrated orchestration and automation capabilities to increase the speed of response actions.
We offer an integrated suite of technology-driven security solutions enabled by our Taegis software platform and team of highly skilled security experts. Our technology-driven security solutions offer an innovative approach to prevent, detect and respond to cybersecurity breaches. The platform collects, aggregates, correlates and analyzes billions of events daily from our extensive customer base utilizing sophisticated algorithms to detect malicious activity and deliver security countermeasures, dynamic intelligence and valuable context regarding the intentions and actions of cyber adversaries. Through our Taegis solutions, which are sold on a subscription basis, we provide global visibility and insight into malicious activity, enabling our customers to detect, respond to and effectively remediate threats quickly.
In addition to our Taegis solutions, we offer a variety of professional services to advise customers on a broad range of security and risk-related matters, which include incident response, adversarial testing services and Taegis professional services, to accelerate adoption of our software solutions.
Key Factors Affecting Our Performance
We believe that our sustained success will depend on many factors, including the adoption of our Taegis solutions by organizations, continued investment in our technology and threat intelligence research, our introduction of new solutions, our ability to increase sales of our solutions to new and existing customers, and our ability to attract and retain top talent. Although these areas present significant opportunities, they also present risks that we must manage to ensure we remain successful. We operate in an intensely competitive industry and face, among other competitive challenges, pricing pressures within the information security market resulting from actions taken by our larger competitors to reduce the prices of their security prevention, detection and response solutions, as well as the prices of their managed security services. If we are unable to continue to manage our investments in an efficient manner or to effectively execute our strategies aimed to foster sustained success, our business could be adversely affected.
The key factors affecting our performance include the following:
Adoption of Technology-Driven Solution Strategy. The evolving landscape of applications, modes of communication and IT architectures makes it increasingly challenging for organizations of all sizes to protect their critical business assets, including proprietary information, from cyber threats. New technologies heighten security risks by increasing the number of ways a threat actor can attack a target, by giving users greater access to important business networks and information and by facilitating the transfer of control of underlying applications and infrastructure to third-party vendors. An effective strategy requires the coordinated deployment of a solution across the entire network infrastructure. Our Taegis offerings are designed to facilitate the successful implementation of such a strategy, but continuous investment in, and adaptation of, our technology will be required as the threat landscape continues to evolve rapidly. The degree to which prospective and current customers recognize the mission-critical nature of our technology-driven information security solutions, and subsequently allocate budget dollars to our solutions, will affect our future financial results.
Investment in Our Technology and Threat Intelligence Research. Our software platforms constitute the core of our technology-driven security solutions. They provide our customers with an integrated perspective and intelligence regarding their network environments and security threats. Our software platforms are augmented by our Counter Threat Unit research team, which conducts exclusive research into threat actors, uncovers new attack techniques, analyzes emerging threats and evaluates the risks posed to our customers. Our performance is significantly dependent on the investments we will continue making into our research and development efforts and on our ability to remain at the forefront of threat intelligence research and adapt these software platforms to new technologies as well as to changes in existing technologies. This is an area in which we will continue to invest, while leveraging a flexible staffing model to align with solutions development. We believe that continued investment in our Taegis software platform and solutions will contribute to long-term revenue growth, but the costs of our investment may continue to adversely affect our prospects for near-term profitability.
24


Introduction of New Security Solutions. Our performance is significantly dependent on our ability to continue to innovate and introduce new information security solutions, such as our Taegis solutions, that protect our customers from an expanding array of cybersecurity threats. We intend to continue to invest in solutions innovation and leadership, including by hiring top technical talent and focusing on core technology innovation. In addition, we will continue to evaluate and utilize third-party proprietary technologies, where appropriate, for the continuous development of complementary offerings. We believe that our investment in solutions development will contribute to long-term revenue growth, but this investment may continue to adversely affect our prospects for near-term profitability.
Investments in Expanding Our Customer Base.
Embracing Our Partner Ecosystem. To support future sales, we must continue to devote resources to the development of strategic partnerships with our channel partners, technology alliance partners, and system integrators. We have made and plan to continue to make investments in both marketing and go-to-market efforts with our partners. These investments may not result in an increase in revenue or an improvement in our results of operations in the near term, although we do believe both will improve in the long term from these investments.
Deepening Our Customer Relationships. The continued growth of our business also depends in part on our ability to sell additional solutions to our existing customers. As our customers realize the benefits of the solutions they previously purchased, our portfolio of solutions provides us with a significant opportunity to expand these relationships.
Investment in Our People. The difficulty in providing effective information security is exacerbated by the highly competitive environment for identifying, hiring and retaining qualified information security professionals. Our technology leadership, brand, exclusive focus on information security, customer-first culture, and robust training and development program have enabled us to attract and retain highly talented professionals with a passion for building a career in the information security industry. These professionals are led by a highly experienced and tenured management team with extensive IT security expertise and a record of developing successful new technologies and solutions to help protect our customers. We will continue to invest in attracting and retaining top talent to support and enhance our information security offerings.
Key Operating Metrics
Commencing in fiscal 2021, we began transitioning our subscription customers to our Taegis solutions from our non-strategic, lower margin other managed security subscription services. Although it has resulted in a decline in both our total customer base and total annual recurring revenue, we believe the transition of our subscription business to our Taegis solutions is resulting in a higher value and higher margin business. As part of our ongoing transition, we informed our customers early in the fourth quarter of fiscal 2022 that many of our other managed security subscription services would no longer be available for purchase effective as of the beginning of fiscal 2023, as many of those services offer a natural transition to our Taegis platform. Renewals associated with many of our existing other managed security subscription services were not extended beyond the end of fiscal 2023, as indicated in the operating metric table below.
The transition has resulted in the growth of our Taegis portfolio of technology-driven information security solutions offered to customers of all sizes and across all industries. We have achieved this organic growth by re-solutioning existing customers to our Taegis offerings, which generate more average revenue per customer, and through continued expansion in volume and breadth of the Taegis solutions we deploy. The transformation of our Taegis subscription-based model has required ongoing investment in our business, which has contributed to higher net losses. We believe these investments are critical to our long-term success, although they may continue to impact our prospects for near-term profitability.
Relevant key operating metrics are presented below as of the dates indicated and for the fiscal periods then ended.
 August 4, 2023July 29, 2022
Taegis subscription customer base2,000 1,500 
Managed security subscription customer base400 1,900 
Total subscription customer base2,300 3,100 
Total customer base4,500 4,700 
Taegis annual recurring revenue (in millions)275.5 201.2 
Managed security annual recurring revenue (in millions)$30.2 $159.1 
Total annual recurring revenue (in millions)$305.8 $360.2 
Taegis average subscription revenue per customer (in thousands)$135.4 $136.4 
Managed security average subscription revenue per customer (in thousands)$71.2 $84.8 
Total average subscription revenue per customer (in thousands)$131.2 $114.7 
Net revenue retention rate94 %90 %
25


Taegis Subscription Customer Base and Managed Security Subscription Customer Base. We define our Taegis subscription customer base and managed security subscription customer base as the number of customers who have a subscription agreement for that respective offering as of a particular date. Some customers may have subscription agreements for both security offerings to address their current security needs.
Total Subscription Customer Base. We define our total subscription customer base as the number of unique customers who have a subscription agreement for our Taegis solutions and/or managed security services as of a particular date. We believe that growing our existing customer base and our ability to grow our average subscription revenue per customer represent significant future revenue opportunities for us.
Total Customer Base. We define total customer base as the number of customers that subscribe to our Taegis solutions and managed security services and customers that buy professional and other services from us, as of a particular date.
Total Annual Recurring Revenue. We define total annual recurring revenue as of the measurement date. Changes to recurring revenue may result from the expansion of our offerings and sales of additional solutions to our existing customers, as well as the timing of customer renewals.
Total Average Subscription Revenue Per Customer. We defined total average subscription revenue per customer as the average annual revenue per customer that subscribes to either our Taegis or other managed security subscription solutions, or both, as of the measurement date. Total average subscription revenue per customer is primarily driven by the persistence of cyber threats and the results of our sales and marketing efforts to increase the awareness of our solutions. Our customer composition of both enterprise and small and medium sized businesses provides us with an opportunity to expand our professional services revenue. As of August 4, 2023 and July 29, 2022, approximately 47% and 53%, respectively, of our professional services customers subscribed to our Taegis solutions or managed security services.
Net Revenue Retention Rate. Net revenue retention rate is an important measure of our success in retaining and growing revenue from our subscription-based customers. To calculate our revenue retention rate for any period, we compare the annual recurring revenue of our subscription-based customers at the beginning of the fiscal year, or base recurring revenue, to the same measure from that same cohort of customers at the end of the period, which we refer to as retained recurring revenue. By dividing the end-of-period retained recurring revenue by the base recurring revenue from the beginning of the period, we measure our success in retaining and growing installed revenue from the specific cohort of customers we served at the beginning of the period. Our calculation includes the positive revenue impacts of selling and installing additional solutions to this cohort of customers and the negative revenue impacts of customer or service attrition during the period. The calculation, however, does not include the positive impact on revenue from sales of solutions to any customers acquired during the period. Our net revenue retention rates may increase or decline from period to period as a result of various factors, including the timing of solutions installations, customer renewal rates and changes to solution offerings.

26


Non-GAAP Financial Measures
We use supplemental measures of our performance, which are derived from our financial information, but which are not presented in our financial statements prepared in accordance with generally accepted accounting principles in the United States of America, referred to as GAAP. Non-GAAP financial measures presented in this management’s discussion and analysis include non-GAAP cost of revenue, non-GAAP Taegis Subscription Solutions cost of revenue, non-GAAP Managed Security Services cost of revenue, non-GAAP subscription cost of revenue, non-GAAP professional services cost of revenue, non-GAAP gross profit, non-GAAP Taegis Subscription Solutions gross profit, non-GAAP Managed Security Services gross profit, non-GAAP subscription gross profit, non-GAAP professional services gross profit, non-GAAP gross margin, non-GAAP Taegis Subscription Solutions gross margin, non-GAAP Managed Security Services gross margin, non-GAAP subscription gross margin, non-GAAP professional services gross margin, non-GAAP operating expenses, non-GAAP research and development expenses, non-GAAP sales and marketing expenses, non-GAAP general and administrative expenses, non-GAAP operating income (loss), non-GAAP net income (loss), non-GAAP earnings (loss) per share and adjusted EBITDA. We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. We believe these non-GAAP financial measures provide useful information to help evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling more meaningful period-to-period comparisons.
There are limitations to the use of the non-GAAP financial measures presented in this management’s discussion and analysis. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
The non-GAAP financial measures we present, as defined by us, exclude the items described in the reconciliation below. As the excluded items can have a material impact on earnings, our management compensates for this limitation by relying primarily on GAAP results and using non-GAAP financial measures supplementally. The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for revenue, subscription revenue, professional services revenue, Taegis Subscription Solutions revenue, Managed Security Services revenue, gross profit, subscription gross profit, professional services gross profit, Taegis Subscription Solutions gross profit, Managed Security Services gross profit, subscription cost of revenue, professional services cost of revenue, Taegis Subscription Solutions cost of revenue, Managed Security Services cost of revenue, operating expense, research and development expenses, sales and marketing expenses, general and administrative expenses, gross margin, subscription gross margin, professional services gross margin, Taegis Subscription Solutions gross margin, Managed Security Services gross margin, operating income (loss), net income (loss), or earnings (loss) per share in accordance with GAAP, and the non-GAAP financial measures should be read only in conjunction with financial information presented on a GAAP basis.
Reconciliation of Non-GAAP Financial Measures
The table below presents a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, the exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent or unusual.
The following is a summary of the items excluded from the most comparable GAAP financial measures to calculate our non-GAAP financial measures:
Amortization of Intangible Assets. Amortization of intangible assets consists of amortization associated with external software development costs capitalized and acquired customer relationships and technology. In connection with the acquisition of Dell by Dell Technologies in fiscal 2014 and our acquisition of Delve Laboratories Inc. in fiscal 2021, our tangible and intangible assets and liabilities associated with customer relationships and technology were accounted for and recognized at fair value on the related transaction date.
Stock-based Compensation Expense. Non-cash stock-based compensation expense relates to Secureworks’ equity plan. We exclude such expense when assessing the effectiveness of our operating performance since stock-based compensation does not necessarily correlate with the underlying operating performance of the business.
Aggregate Adjustment for Income Taxes. The aggregate adjustment for income taxes is the estimated combined income tax effect for the adjustments mentioned above. The tax effects are determined based on the tax jurisdictions where the above items were incurred.
Reorganization and other related charges. The aggregate adjustment for expenses associated with the Company's alignment of its investments more closely with its strategic priorities, as described in the “Notes to Condensed Consolidated Financial Statements—Note 12—Reorganization and Other Related Costs.”
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 Three Months EndedSix Months Ended
 August 4, 2023July 29, 2022August 4, 2023July 29, 2022
(in thousands, except per share data)
GAAP net revenue:
Taegis Subscription Solutions$66,426 $42,809 $129,022 $80,025 
Managed Security Services10,399 47,513 25,062 104,710 
Total Subscription revenue$76,825 $90,322 $154,084 $184,735 
Professional services16,141 25,860 33,277 52,462 
GAAP net revenue(1)
$92,966 $116,182 $187,361 $237,197 
GAAP Taegis Subscription Solutions cost of revenue$20,740 $15,537 $40,648 $27,992 
Amortization of intangibles(1,127)(704)(2,196)(1,559)
Stock-based compensation expense(169)(67)(248)(108)
Non-GAAP Taegis Subscription Solutions cost of revenue$19,444 $14,766 $38,204 $26,325 
GAAP Managed Security Services cost of revenue$9,344 $18,523 $20,455 $38,894 
Amortization of intangibles(3,410)(3,411)(6,821)(6,821)
Stock-based compensation expense(40)(100)(107)(182)
Non-GAAP Managed Security Services cost of revenue$5,894 $15,012 $13,527 $31,891 
GAAP subscription cost of revenue$30,084 $34,060 $61,103 $66,886 
Amortization of intangibles(4,537)(4,115)(9,017)(8,380)
Stock-based compensation expense(209)(167)(355)(290)
Non-GAAP subscription cost of revenue$25,338 $29,778 $51,731 $58,216 
GAAP professional services cost of revenue$9,973 $15,519 $21,740 $32,128 
Stock-based compensation expense(322)(345)(647)(732)
Non-GAAP professional services cost of revenue$9,651 $15,174 $21,093 $31,396 
GAAP gross profit $52,909 $66,603 $104,518 $138,183 
Amortization of intangibles4,537 4,115 9,017 8,380 
Stock-based compensation expense 531 511 1,002 1,021 
Non-GAAP gross profit$57,977 $71,229 $114,537 $147,584 
GAAP research and development expenses$28,236 $33,638 $59,408 $66,969 
Stock-based compensation expense (2,681)(2,640)(5,283)(5,383)
Non-GAAP research and development expenses$25,555 $30,998 $54,125 $61,586 
GAAP sales and marketing expenses$31,237 $40,940 $65,763 $80,185 
Stock-based compensation expense (1,097)(1,627)(1,938)(3,265)
Non-GAAP sales and marketing expenses$30,140 $39,313 $63,825 $76,920 
GAAP general and administrative expenses$20,366 $24,274 $42,629 $49,634 
Amortization of intangibles(3,523)(3,523)(7,047)(7,047)
Stock-based compensation expense (3,311)(4,034)(6,667)(8,269)
Non-GAAP general and administrative expenses$13,532 $16,717 $28,915 $34,318 
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Three Months Ended