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SecureWorks Corp - Quarter Report: 2019 August (Form 10-Q)

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 2, 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: 001-37748
swlogotranspcolor1posa10.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 class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, 
SCWX
The 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 3, 2019, there were 81,202,365 shares of the registrant's common stock outstanding, consisting of 11,202,365 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)
 
August 2,
2019
 
February 1,
2019
 
 
 
 
ASSETS
Current assets:
 
 
 

Cash and cash equivalents
$
117,716

 
$
129,592

Accounts receivable, net of allowances of $6,118 and $6,160, respectively
120,104

 
141,344

Inventories, net
1,090

 
468

Other current assets
24,591

 
27,604

Total current assets
263,501

 
299,008

Property and equipment, net
33,210

 
35,978

Operating lease right-of-use assets, net
25,034

 

Goodwill
416,487

 
416,487

Purchased intangible assets, net
192,580

 
206,448

Other non-current assets
90,463

 
78,238

Total assets
$
1,021,275

 
$
1,036,159

 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
19,224

 
$
16,177

Accrued and other
61,757

 
86,495

Short-term deferred revenue
165,206

 
157,865

Total current liabilities
246,187

 
260,537

Long-term deferred revenue
15,997

 
16,064

Operating lease liabilities, non-current
27,800

 

Other non-current liabilities
62,980

 
66,851

Total liabilities
352,964

 
343,452

Commitments and contingencies (Note 6)


 


Stockholders' equity:
 
 
 
Preferred stock - $0.01 par value: 200,000 shares authorized; 0 shares issued

 

Common stock - Class A of $0.01 par value: 2,500,000 shares authorized; 11,203 and 11,016 issued and outstanding, respectively.
112

 
110

Common stock - Class B of $0.01 par value: 500,000 shares authorized; 70,000 shares issued and outstanding
700

 
700

Additional paid in capital
887,014

 
884,567

Accumulated deficit
(194,793
)
 
(176,263
)
Accumulated other comprehensive (loss) income
(4,826
)
 
(2,884
)
Treasury stock, at cost - 1,257 and 819 shares, respectively
(19,896
)
 
(13,523
)
Total stockholders' equity
668,311

 
692,707

Total liabilities and stockholders' equity
$
1,021,275

 
$
1,036,159


 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 Ended
 
Six Months Ended
 
August 2, 2019
 
August 3, 2018
 
August 2, 2019
 
August 3, 2018
 
 

 
 

 
 
 
 
Net revenue
$
136,605

 
$
128,778

 
$
269,447

 
$
254,939

Cost of revenue
63,595

 
62,548

 
126,436

 
123,078

Gross margin
73,010

 
66,230

 
143,011

 
131,861

Research and development
24,863

 
22,453

 
47,505

 
44,807

Sales and marketing
38,047

 
35,521

 
76,240

 
71,191

General and administrative
25,146

 
22,419

 
48,784

 
47,616

Total operating expenses
88,056

 
80,393

 
172,529

 
163,614

Operating loss
(15,046
)
 
(14,163
)
 
(29,518
)
 
(31,753
)
Interest and other, net
1,950

 
1,003

 
2,218

 
1,508

Loss before income taxes
(13,096
)
 
(13,160
)
 
(27,300
)
 
(30,245
)
Income tax benefit
(2,836
)
 
(3,391
)
 
(8,770
)
 
(6,657
)
Net loss
$
(10,260
)
 
$
(9,769
)
 
$
(18,530
)
 
$
(23,588
)
 
 
 
 
 
 
 
 
Loss per common share (basic and diluted)
$
(0.13
)
 
$
(0.12
)
 
$
(0.23
)
 
$
(0.29
)
Weighted-average common shares outstanding (basic and diluted)
80,674

 
80,839

 
80,571

 
80,680

 
 
 
 
 
 
 
 

 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 Ended
 
Six Months Ended
 
August 2, 2019
 
August 3, 2018
 
August 2, 2019
 
August 3, 2018
Net loss
$
(10,260
)
 
$
(9,769
)
 
$
(18,530
)
 
$
(23,588
)
Foreign currency translation adjustments, net of zero tax
(1,709
)
 
(1,165
)
 
(1,942
)
 
(2,735
)
Comprehensive loss
$
(11,969
)
 
$
(10,934
)
 
$
(20,472
)
 
$
(26,323
)


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 2, 2019
 
August 3, 2018
Cash flows from operating activities:
 
 
 
Net loss
$
(18,530
)
 
$
(23,588
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
21,148

 
20,512

Stock-based compensation expense
10,525

 
9,642

Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
(1,650
)
 
(1,275
)
Income tax benefit
(8,770
)
 
(6,657
)
Other non cash impacts
1,830

 

Provision for doubtful accounts
1,026

 
1,571

Changes in assets and liabilities:
 
 
 
Accounts receivable
20,147

 
22,542

Net transactions with parent
(12,902
)
 
(1,334
)
Inventories
(622
)
 
407

Other assets
5,514

 
(5,162
)
Accounts payable
7,423

 
(1,392
)
Deferred revenue
7,175

 
12,240

Accrued and other liabilities
(19,082
)
 
(16,620
)
Net cash provided by operating activities
13,232

 
10,886

Cash flows from investing activities:
 

 
 

Capital expenditures
(10,659
)
 
(5,366
)
Net cash used in investing activities
(10,659
)
 
(5,366
)
Cash flows from financing activities:
 

 
 

Principal payments on financing arrangement with Dell Financial Services

 
(1,104
)
Taxes paid on vested restricted shares
(8,072
)
 
(2,139
)
Purchases of stock for treasury
(6,377
)
 

Payments on financed capital expenditures

 
(500
)
Net cash used in financing activities
(14,449
)
 
(3,743
)
 
 
 
 
Net (decrease)/increase in cash and cash equivalents
(11,876
)
 
1,777

Cash and cash equivalents at beginning of the period
129,592

 
101,539

Cash and cash equivalents at end of the period
$
117,716

 
$
103,316


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 2, 2019
 
Common Stock - Class A
 
Common Stock - Class B
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding Shares
 
Amount
 
Outstanding Shares
 
Amount
 
Additional Paid in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive (Loss) Income
 
Treasury
Stock
 
Total Stockholders' Equity
Balances, May 3, 2019
 
11,521

 
$
116

 
70,000

 
$
700

 
$
882,012

 
$
(184,533
)
 
$
(3,117
)
 
$
(14,433
)
 
$
680,745

Net loss
 

 

 

 

 

 
(10,260
)
 

 

 
(10,260
)
Other comprehensive loss
 

 

 

 

 

 

 
(1,709
)
 

 
(1,709
)
Vesting of restricted stock units
 
90

 

 

 

 

 

 

 

 

Grant of restricted stock awards
 

 

 

 

 

 

 

 

 

Common stock withheld as payment for withholding taxes upon the vesting of restricted shares
 
(8
)
 

 

 

 
(607
)
 

 

 

 
(607
)
Stock-based compensation
 

 

 

 

 
5,609

 

 

 

 
5,609

Shares repurchased
 
(400
)
 
(4
)
 

 

 

 

 

 
(5,463
)
 
(5,467
)
Balances, August 2, 2019
 
11,203

 
$
112

 
70,000

 
$
700

 
$
887,014

 
$
(194,793
)
 
$
(4,826
)
 
$
(19,896
)
 
$
668,311




Six Months Ended August 2, 2019
 
Common Stock - Class A
 
Common Stock - Class B
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding Shares
 
Amount
 
Outstanding Shares
 
Amount
 
Additional Paid in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive (Loss) Income
 
Treasury
Stock
 
Total Stockholders' Equity
Balances, February 1, 2019
 
11,016

 
$
110

 
70,000

 
$
700

 
$
884,567

 
$
(176,263
)
 
$
(2,884
)
 
$
(13,523
)
 
$
692,707

Net loss
 

 

 

 

 

 
(18,530
)
 

 

 
(18,530
)
Other comprehensive loss
 

 

 

 

 

 

 
(1,942
)
 

 
(1,942
)
Vesting of restricted stock units
 
907

 
9

 

 

 
(9
)
 

 

 

 

Grant of restricted stock awards
 
122

 
1

 

 

 
(1
)
 

 

 

 

Common stock withheld as payment for withholding taxes upon the vesting of restricted shares
 
(404
)
 
(4
)
 

 

 
(8,068
)
 

 

 

 
(8,072
)
Stock-based compensation
 

 

 

 

 
10,525

 

 

 

 
10,525

Shares repurchased
 
(438
)
 
(4
)
 

 

 

 

 

 
(6,373
)
 
(6,377
)
Balances, August 2, 2019
 
11,203

 
$
112

 
70,000

 
$
700

 
$
887,014

 
$
(194,793
)
 
$
(4,826
)
 
$
(19,896
)
 
$
668,311




7



Three Months Ended August 3, 2018
 
Common Stock - Class A
 
Common Stock - Class B
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding Shares
 
Amount
 
Outstanding Shares
 
Amount
 
Additional Paid in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive (Loss) Income
 
Treasury
Stock
 
Total Stockholders' Equity
Balances, May 4, 2018
 
11,704

 
$
117

 
70,000

 
$
700

 
$
870,122

 
$
(150,981
)
 
$
(1,540
)
 
$

 
$
718,418

Net loss
 

 

 

 

 

 
(9,769
)
 

 

 
(9,769
)
Other comprehensive loss
 

 

 

 

 

 

 
(1,165
)
 

 
(1,165
)
Vesting of restricted stock units
 
97

 
1

 

 

 
(1
)
 

 

 

 

Grant of restricted stock awards
 

 

 

 

 

 

 

 

 

Common stock withheld as payment for withholding taxes upon the vesting of restricted shares
 
(4
)
 

 

 

 
(126
)
 

 

 

 
(126
)
Stock-based compensation
 

 

 

 

 
4,912

 

 

 

 
4,912

Balances, August 3, 2018
 
11,797

 
$
118

 
70,000

 
$
700

 
$
874,907

 
$
(160,750
)
 
$
(2,705
)
 
$

 
$
712,270




Six Months Ended August 3, 2018
 
Common Stock - Class A
 
Common Stock - Class B
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding Shares
 
Amount
 
Outstanding Shares
 
Amount
 
Additional Paid in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive (Loss) Income
 
Treasury
Stock
 
Total Stockholders' Equity
Balances, February 2, 2018*
 
11,085

 
$
111

 
70,000

 
$
700

 
$
867,411

 
$
(137,162
)
 
$
30

 
$

 
$
731,090

Net loss
 

 

 

 

 

 
(23,588
)
 

 

 
(23,588
)
Other comprehensive loss
 

 

 

 

 

 

 
(2,735
)
 

 
(2,735
)
Vesting of restricted stock units
 
545

 
5

 

 

 
(5
)
 

 

 

 

Grant of restricted stock awards
 
386

 
4

 

 

 
(4
)
 

 

 

 

Common stock withheld as payment for withholding taxes upon the vesting of restricted shares
 
(219
)
 
(2
)
 

 

 
(2,137
)
 

 

 

 
(2,139
)
Stock-based compensation
 

 

 

 

 
9,642

 

 

 

 
9,642

Balances, August 3, 2018
 
11,797

 
$
118

 
70,000

 
$
700

 
$
874,907

 
$
(160,750
)
 
$
(2,705
)
 
$

 
$
712,270

* Certain prior period amounts have been adjusted as a result of the adoption of the accounting standard for revenue recognition set forth in ASC 606.

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. (individually and collectively with its consolidated subsidiaries, "Secureworks" or the "Company") is a leading global provider of technology-driven information security solutions singularly focused on protecting the Company's customers from cyber attacks.
On April 27, 2016, the Company completed its initial public offering ("IPO"). Upon the closing of the IPO, Dell Technologies Inc. ("Dell Technologies"), a parent holding corporation, owned, indirectly through Dell Inc. (individually and collectively with its consolidated subsidiaries, "Dell") and Dell Inc.'s subsidiaries, no shares of the Company's outstanding Class A common stock and all outstanding shares of the Company's outstanding Class B common stock, which as of August 2, 2019 represented approximately 86.2% of the Company's total outstanding shares of common stock and approximately 98.4% of the combined voting power of both classes of the Company's outstanding common stock.
The Company has one primary business activity, which is to provide customers with software-driven information security solutions. The Company's chief operating decision maker, who is the President and 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.
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 ("GAAP"). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company's financial statements. 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 costs of these services are charged in accordance with a shared services agreement that went into effect on August 1, 2015. For more information regarding the charges for these services and related party transactions, see "Note 11—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 the benefits for loss 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 10—Income and Other Taxes" for more information.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the requirements of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statement presentation. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments consisting of normal recurring accruals and disclosures considered necessary for a fair statement have been included. All inter-company accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended February 1, 2019 included in Part II, Item 8 of the Company's Annual Report on Form 10-K filed with the SEC on March 28, 2019 (the "Annual Report").
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 January 31, 2020 and the fiscal year ended February 1, 2019 as fiscal 2020 and fiscal 2019, respectively. Both fiscal 2020 and fiscal 2019 have 52 weeks, and each quarter has 13 weeks.

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 costs 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, goodwill and other identifiable intangible assets, and estimates are used in determining the reported amounts of liabilities, such as taxes payable and the impact of contingencies, all of which also impact the Condensed Consolidated Statements of Operations. Actual results could differ from these estimates.
Recently Adopted Accounting Pronouncements
Leases—The Company adopted Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)," effective February 2, 2019. Accounting Standards Codification ("ASC") 842 "Leases" requires lessees to recognize operating lease right-of-use ("ROU") assets, representing their right to use the underlying asset for the lease term, and lease liabilities on the balance sheet for all leases with lease terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. The Company adopted ASU 2016-02 using the modified retrospective method and utilized the optional transition method under which the Company will continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative period presented. In addition, Secureworks elected the package of practical expedients permitted under the transition guidance which permits the following: a) carry forward the historical lease classification, b) not separate lease components from non-lease components within the Company's facility lease contracts, c) not present comparative periods but rather record a cumulative catch-up during fiscal 2020, and d) allow the Company to elect, by asset class, not to record on the balance sheet a lease whose term is twelve months or less including reasonably certain renewal options. As a result of the adoption for the fiscal year beginning February 2, 2019, the Company recorded initial operating lease ROU assets and operating lease liabilities, all related to real estate, of $28.0 million and $31.8 million, respectively.
Summary of Significant Accounting Policies
Except for the accounting policies for leases, updated as a result of adopting ASC 842, there have been no significant changes to the Company’s significant accounting policies as of and for the three months ended August 2, 2019, as compared to the significant accounting policies described in the Annual Report.
Leases—The Company determines if any arrangement is, or contains, a lease at inception based on whether or not the Company has the right to control the asset during the contract period and other facts and circumstances. Secureworks is the lessee in a lease contract when the Company obtains the right to control the asset. Operating leases are included in the line items operating lease right-of-use assets, net; accrued and other; and operating lease liabilities, non-current in the condensed consolidated statements of financial position. Leases with a lease term of 12 months or less at inception are not recorded in the condensed consolidated statements of financial position and are expensed on a straight-line basis over the lease term in the condensed consolidated statements of operations. The Company determines the lease term by assuming the exercise of renewal options that are reasonably certain. As most of the Company's leases do not provide an implicit interest rate, Secureworks uses the Company's incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. When the Company's contracts contain lease and nonlease components, the Company accounts for both components as a single lease component. Refer to "Note 7 —Leases" for further discussion.
Recently Issued Accounting Pronouncements
Intangibles - Goodwill and Other - Internal-Use Software—In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): 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 in such cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The updated guidance is effective for the Company for annual and interim periods beginning in the Company's 2021 fiscal year, with early adoption permitted. Entities may choose to adopt the new guidance prospectively or retrospectively. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
Intangibles - Goodwill and Other—In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." ASU 2017-04 eliminates Step 2 of the goodwill impairment test,

10

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

which required the Company to determine the implied fair value of goodwill by allocating the reporting unit's fair value to each of its assets and liabilities as if the reporting unit was acquired in a business acquisition. Instead, the updated guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit to its carrying value, and recognizing a non-cash impairment charge for the amount by which the carrying value exceeds the reporting unit's fair value, with the loss not exceeding the total amount of goodwill allocated to that reporting unit. The updated guidance is effective for the Company for annual and interim periods beginning in the Company's 2021 fiscal year, with early adoption permitted, and will be applied on a prospective basis. The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.
Financial Instruments - Credit Losses—In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update is effective for the Company for fiscal years beginning with the Company's 2021 fiscal year, including interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
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 share-based awards that may be anti-dilutive. Diluted 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. 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 2, 2019
 
August 3, 2018
 
August 2, 2019
 
August 3, 2018
Numerator:
 
 
 
 
 
 
 
Net loss
$
(10,260
)
 
$
(9,769
)
 
$
(18,530
)
 
$
(23,588
)
Denominator:
 

 
 

 
 
 
 
Weighted-average number of shares outstanding:
 
 
 

 
 
 
 
Basic and Diluted
80,674

 
80,839

 
80,571

 
80,680

 
 
 
 
 
 
 
 
Loss per common share:
 

 
 

 
 
 
 
Basic and Diluted
$
(0.13
)
 
$
(0.12
)
 
$
(0.23
)
 
$
(0.29
)
 
 
 
 
 
 
 
 
Weighted-average anti-dilutive stock options, non-vested restricted stock and restricted stock units
5,246

 
5,285

 
5,351

 
5,390


NOTE 3 — CONTRACT BALANCES AND CONTRACT COSTS

Promises to provide services related to the Company's managed security subscription-based solutions are accounted for as a single performance obligation over an average period of two years. Performance obligations related to the Company's security and risk consulting professional service contracts are separate obligations associated with each service. Although the Company has many multi-year customer relationships for its various professional services, the arrangement is typically structured as separate performance obligations over the contract period and recognized over a duration of less than one year.

11

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

The following table presents revenue by service type (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
August 2, 2019
 
August 3, 2018
 
August 2, 2019
 
August 3, 2018
Managed Security Solutions revenue
 
$
102,768

 
$
98,435

 
$
201,866

 
$
197,135

Security and Risk Consulting revenue
 
33,837

 
30,343

 
67,581

 
57,804

Total revenue
 
$
136,605

 
$
128,778

 
$
269,447

 
$
254,939



Deferred revenue represents the aggregate amount of billing in advance of service delivery. Therefore, the Company invoices its customers based on a variety of billing schedules. The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. During the six months ended August 2, 2019, on average, 57% of the Company's recurring revenue was billed in advance and approximately 43% was billed on either a monthly or a quarterly basis. 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, invoice duration and invoice timing.

Changes to the Company's deferred revenue during the six months ended August 2, 2019 and August 3, 2018 are as follows (in thousands):
 
 
As of February 1, 2019
 
Upfront payments received and billings during the six months ended August 2, 2019
 
Revenue recognized during the six months ended August 2, 2019
 
As of August 2, 2019
Deferred revenue
 
$
173,929

 
$
158,769

 
$
(151,495
)
 
$
181,203


 
 
As of February 2, 2018*
 
Upfront payments received and billings during the six months ended August 3, 2018
 
Revenue recognized during the six months ended August 3, 2018
 
As of August 3, 2018
Deferred revenue
 
$
152,645

 
$
133,910

 
$
(121,292
)
 
$
165,263

* Certain prior period amounts have been adjusted as a result of the adoption of the accounting standard for revenue recognition set forth in ASC 606.
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 ("active"); and (ii) the value of services contracted with customers that have not yet been installed ("backlog"). Backlog is not recorded in revenue, deferred revenue or elsewhere in the condensed consolidated financial statements until the Company establishes a contractual right to invoice, at which point it 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.

12

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

As of August 2, 2019, the Company expects to recognize remaining performance obligations as follows (in thousands):
 
 
Total
 
Expected to be recognized in the next 12 months
 
Expected to be recognized in 12-24 months
 
Expected to be recognized in 24-36 months
 
Expected to be recognized thereafter
Performance obligation - active
 
$
262,927

 
$
150,745

 
$
82,391

 
$
27,984

 
$
1,807

Performance obligation - backlog
 
34,971

 
12,489

 
12,371

 
9,770

 
341

Total
 
$
297,898

 
$
163,234

 
$
94,762

 
$
37,754

 
$
2,148


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 2, 2019 and August 3, 2018 are as follows (in thousands):
 
 
As of February 1, 2019
 
Amount capitalized
 
Amount recognized
 
As of August 2, 2019
Deferred commissions
 
$
62,895

 
$
7,556

 
$
(7,612
)
 
$
62,839

Deferred fulfillment costs
 
10,973

 
3,017

 
(2,712
)
 
11,278


 
 
As of February 2, 2018*
 
Amount capitalized
 
Amount recognized
 
As of August 3, 2018
Deferred commissions
 
$
57,229

 
$
9,479

 
$
(7,089
)
 
$
59,619

Deferred fulfillment costs
 
10,163

 
3,281

 
(2,460
)
 
10,984

* Certain prior period amounts have been adjusted as a result of the adoption of the accounting standard for revenue recognition set forth in ASC 606.
The Company did not record any impairment losses on the deferred commissions or deferred fulfillment costs during the three and six months ended August 2, 2019 and August 3, 2018.
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. There were no additions, adjustments or impairments to goodwill during the periods presented. Accordingly, goodwill totaled $416.5 million as of August 2, 2019 and February 1, 2019.

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 2019 by performing a quantitative assessment of goodwill at the reporting unit level. In performing this quantitative assessment, the Company, using a combination of discounted cash flows and market approach (comparable market prices) to determine fair value of the reporting unit, compared the fair value to its carrying value. The assumptions used in the valuation are consistent with those which the Company believes hypothetical market participants would use. On a quarterly basis, between each annual impairment test, the Company assesses various quantitative and qualitative factors that may be indicative of an impairment. Based on the Company's most recent evaluation, there were no indications of a potential impairment as of August 2, 2019.

13

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

Intangible Assets
The Company's intangible assets as of August 2, 2019 and February 1, 2019 were as follows:
 
 
August 2, 2019
 
February 1, 2019
 
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
 
 
(in thousands)
Customer relationships
 
$
189,518

 
$
(84,199
)
 
$
105,319

 
$
189,518

 
$
(77,152
)
 
$
112,366

Technology
 
135,584

 
(78,441
)
 
57,143

 
135,584

 
(71,620
)
 
63,964

Finite-lived intangible assets
 
325,102

 
(162,640
)
 
162,462

 
325,102

 
(148,772
)
 
176,330

Trade name
 
30,118

 

 
30,118

 
30,118

 

 
30,118

Total intangible assets
 
$
355,220

 
$
(162,640
)
 
$
192,580

 
$
355,220

 
$
(148,772
)
 
$
206,448



Amortization expense related to finite-lived intangible assets was approximately $6.9 million and $13.9 million for each of the three and six months ended August 2, 2019 and August 3, 2018, respectively. Amortization expense is included within cost of revenue and general and administrative in the Condensed Consolidated Statements of Operations. There were no impairment charges related to intangible assets during the three and six months ended August 2, 2019 or August 3, 2018.

NOTE 5 — DEBT
Revolving Credit Facility
On November 2, 2015, SecureWorks, Inc., a wholly-owned subsidiary of SecureWorks Corp., entered into a revolving credit agreement with a wholly-owned subsidiary of Dell Inc. under which the Company obtained a $30 million senior unsecured revolving credit facility. This facility was initially available for a one-year term beginning on April 21, 2016 and was extended on the same terms for successive one-year terms ending on March 27, 2019. During the three months ended May 3, 2019, the facility was amended and restated to extend the maturity date to March 26, 2020 and to increase the annual rate at which interest accrues to the applicable London Interbank Offered Rate plus 1.50%. All other terms remained substantially the same.
Under the facility, up to $30 million principal amount of borrowings may be outstanding at any time. 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.
The maximum amount of borrowings may be increased by up to an additional $30 million by mutual agreement of the lender and borrower. 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. There was no outstanding balance under the credit facility as of August 2, 2019 or February 1, 2019.
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 2, 2019, 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.

14

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

Customer-based Taxation ContingenciesVarious government entities ("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.
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 primarily through its direct sales organization, supplemented by sales through channel partners. The Company had no customer that represented 10% or more of its net revenue for the three and six months ended August 2, 2019 or August 3, 2018.

NOTE 7 — LEASES

The Company recorded operating lease cost for facilities of approximately $2.5 million and $3.9 million for the three and six months ended August 2, 2019, respectively, which included expenses of $1.2 million incurred in connection with the consolidation of certain facilities. The Company incurred additional variable lease costs of $0.3 million and $0.6 million for the three and six months ended August 2, 2019, respectively, which primarily consisted of utilities and common area charges.
The Company recorded operating lease cost of approximately $0.3 million and $0.7 million for the three and six months ended August 2, 2019, respectively, for equipment leases. Lease expense for equipment was included in cost of revenues. The Company also incurred costs for short-term equipment leases $0.3 million and $0.7 million for the three and six months ended August 2, 2019, respectively.
Cash paid for amounts included in the measurement of operating lease liabilities was $1.7 million and $3.4 million during the three and six months ended August 2, 2019.
Weighted-average information associated with the measurement of the Company’s remaining operating lease obligations is as follows:
 
 
August 2, 2019
Weighted-average remaining lease term
 
6.0 years

Weighted-average discount rate
 
5.34
%

The following table summarizes the maturity of the Company's operating lease liabilities as of August 2, 2019 (in thousands):
Fiscal Years Ending
 
 
2020
 
$
3,164

2021
 
4,861

2022
 
6,590

2023
 
5,813

2024
 
5,317

Thereafter
 
12,191

Total operating lease payments
 
$
37,936

Less imputed interest
 
(6,817
)
Total operating lease liabilities
 
$
31,119



15

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

The Company's leases have remaining lease terms of 1 year to 8 years, inclusive of renewal or termination options that the Company is reasonably certain to exercise.
Disclosure related to periods prior to adoption of the new lease standard
As of February 1, 2019, the Company had the following future minimum lease payments under non-cancelable leases prior to the adoption of the new lease standard:
Fiscal Years Ending
 
February 1, 2019

2020
 
$
5,237

2021
 
4,446

2022
 
6,190

2023
 
5,440

2024
 
4,936

Thereafter
 
11,825

Total operating lease payments
 
$
38,074



NOTE 8 — STOCKHOLDERS' EQUITY

On September 26, 2018, the Company's board of directors authorized a stock repurchase program, under which the Company is authorized to repurchase up to $15 million of the Company's Class A common stock through September 30, 2019. On March 26, 2019, the board of directors expanded the repurchase program to authorize the repurchase up to an additional $15 million of the Company's Class A common stock through May 1, 2020. Repurchases may be made from time to time through open market purchases, in privately negotiated transactions, or in other types of transactions. The timing and amount of any repurchases under the program will be determined by management based upon market conditions and other factors. During the six months ended August 2, 2019, the Company repurchased 438,380 shares of Class A common stock at an average price of $14.55, for an aggregate cost of $6.4 million. As of August 2, 2019, $10.1 million remained available for further purchases under the stock repurchase program.
NOTE 9 — STOCK-BASED COMPENSATION AND OTHER LONG-TERM PERFORMANCE INCENTIVES
The Company's board of directors adopted the SecureWorks Corp. 2016 Long-Term Incentive Plan (the "2016 Plan") effective April 18, 2016. The 2016 Plan provides for the grant of options, stock appreciation rights, restricted stock, restricted stock units, 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. During Fiscal 2019, the 2016 Plan was amended to increase the total shares of Class A common stock available for issuance by an additional 4,000,000 shares.
Under the 2016 Plan, the Company granted 114,728 and 1,273,004 restricted stock units during the three and six months ended August 2, 2019, respectively, and 115,455 and 1,718,408 restricted stock units during the three and six months ended August 3, 2018, respectively. The Company granted no restricted stock awards for the three months ended August 2, 2019 and August 3, 2018, and 175,000 and 405,000 restricted stock awards during the six months ended August 2, 2019 and August 3, 2018, respectively. The annual restricted stock unit and restricted stock awards granted during fiscal 2020 and fiscal 2019 vest over a three-year period and approximately 50% of such awards are subject to performance conditions.
In March 2017, the Company began granting long-term performance cash awards to certain employees under the 2016 Plan. The employees who receive these performance cash awards do not receive equity awards as part of the long-term incentive program. The long-term performance cash awards are subject to various performance conditions and vest in equal annual installments over a three-year period. During the three and six months ended August 2, 2019, the Company granted long-term performance cash awards of $0.1 million and $6.7 million, respectively. The Company made no grants for the three months ended August 3, 2018 and granted $15.7 million for the six months ended August 3, 2018. The Company recognized $1.8 million and $3.5 million of related compensation expense for the three and six months ended August 2, 2019, respectively, and related compensation expense of $2.0 million and $3.5 million for the three and six months ended August 3, 2018, respectively.

16

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

NOTE 10 — INCOME AND OTHER TAXES
The Company's effective income tax rate for the three and six months ended August 2, 2019 and August 3, 2018 was as follows (in thousands, except percentages):    
 
Three Months Ended
 
Six Months Ended
 
August 2, 2019
 
August 3, 2018
 
August 2, 2019
 
August 3, 2018
 
 
 
 
 
 
 
 
Loss before income taxes
$
(13,096
)
 
$
(13,160
)
 
$
(27,300
)
 
$
(30,245
)
Income tax benefit
$
(2,836
)
 
$
(3,391
)
 
$
(8,770
)
 
$
(6,657
)
Effective tax rate
21.7
%
 
25.8
%
 
32.1
%
 
22.0
%

During the periods presented in the accompanying condensed consolidated financial statements, 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.
The Company's effective tax benefit rate was 21.7% and 32.1% for the three and six months ended August 2, 2019, respectively, and 25.8% and 22.0% for the three and six months ended August 3, 2018, respectively. The change in the Company's effective income tax rate for the three and six months ended August 2, 2019 compared with the effective income tax rate for the three and six months ended August 3, 2018 was primarily attributable to the impact of certain discrete adjustments related to stock-based compensation expense of approximately $2.1 million. The change related specfically to the impact of the vesting of certain equity awards for which the fair value on the vesting date was higher than the fair value on the date the equity awards were originally granted. This change 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 higher actual tax deduction than was deducted for financial reporting purposes.
As of August 2, 2019 and February 1, 2019, the Company had $4.8 million and $4.7 million, respectively, 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 1, 2019. 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 2, 2019 and February 1, 2019. Because the Company is included in the tax filings of other Dell entities, management has determined that it will be able to realize the remainder of its deferred tax assets. If the Company's tax provision had been prepared using the separate return method, the unaudited pro forma pre-tax loss, tax benefit and net loss for the six months ended August 2, 2019 would have been $27.3 million, $2.8 million and $24.5 million, respectively, as a result of the recognition of a valuation allowance that would have been recorded on certain deferred tax assets as well as certain attributes from the U.S. Tax Reform Act 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 2, 2019 and February 1, 2019, the Company had $16.6 million and $6.9 million, respectively, of a net operating loss tax receivable from Dell. The Company had $7.7 million and $7.5 million of unrecognized tax benefits as of August 2, 2019 and February 1, 2019, respectively.

NOTE 11 — 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 $2.2 million and $4.1 million for the three and six months ended August 2, 2019, respectively, and $0.9 million and $2.0 million for the three and six months ended August 3, 2018, 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.


17

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

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 that is capitalized within property and equipment in the Condensed Consolidated Statements of Financial Position. These purchases were made at pricing that is intended to approximate arm's-length pricing. Purchases of computer equipment from Dell and EMC Corporation, a wholly-owned subsidiary of Dell ("EMC"), totaled $1.2 million and $2.6 million for the three and six months ended August 2, 2019, respectively, and $0.6 million and $1.4 million for the three and six months ended August 3, 2018, respectively.
EMC, a company that provides enterprise software and storage, maintains a majority ownership interest in a subsidiary, VMware, Inc. ("VMware"), 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 $1.0 million and $1.7 million for the three and six months ended August 2, 2019, respectively, and $0.2 million and $0.5 million for the three and six months ended August 3, 2018, respectively.
The Company recognized revenue related to solutions provided to other subsidiaries of Dell, consisting of RSA Security LLC, Pivotal Software, Inc. and Boomi, Inc. The revenue recognized by the Company for security solutions provided to these entities totaled $11 thousand and $38 thousand for the three and six months ended August 2, 2019, respectively, and $0.1 million and $0.2 million for the three and six months ended August 3, 2018, respectively. Purchases by the Company from these subsidiaries totaled $3 thousand and $0.1 million for the three and six months ended August 2, 2019, respectively, and $0.5 million and $0.5 million for the three and six months ended August 3, 2018, respectively.
The Company recognized revenue related to solutions provided to significant beneficial owners of Secureworks, which include Michael S. Dell, Chairman and Chief Executive Officer of Dell Technologies and Dell Inc. and Silver Lake Partners III, L.P. 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, as well as Silver Lake Partners III, L.P., totaled $0.1 million and $0.2 million for the three and six months ended August 2, 2019, respectively, and $0.1 million and $0.2 million for the three and six months ended August 3, 2018, respectively.
The Company provides solutions to certain customers whose contractual relationship has historically been with Dell rather than Secureworks, although the Company has the primary responsibility to provide the services. Effective August 1, 2015, upon the creation of new subsidiaries to segregate some of the Company's operations from Dell's operations, as described in "Note 1—Description of the Business and Basis of Presentation," 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 and for contracts subsequently originated through Dell under a reseller agreement, the Company recognized revenues of approximately $15.4 million and $30.2 million for the three and six months ended August 2, 2019, respectively, and $16.4 million and $29.1 million for the three and six months ended August 3, 2018, respectively. In addition, as of August 2, 2019, the Company had approximately $1.8 million of contingent obligations to Dell related to outstanding performance bonds for certain customer contracts, which Dell issued on behalf of the Company.
As the Company's customer and on behalf of certain of its own customers, Dell also purchases solutions from the Company at pricing that is intended to approximate arm's-length pricing. Such revenues totaled approximately $5.5 million and $8.8 million for the three and six months ended August 2, 2019, respectively, and $5.1 million and $10.1 million for the three and six months ended August 3, 2018, respectively.
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 2, 2019 and February 1, 2019. The Company settles in cash its related party balances with Dell on a quarterly basis.

18

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

 
 
August 2, 2019
 
February 1, 2019
 
 
(in thousands)
Intercompany payable (in accrued and other)
 
$
2,734

 
$
15,634

 
 
 
 
 
Accounts receivable from customers under reseller agreements with Dell (included in accounts receivable, net)
 
$
20,098

 
$
21,760

 
 
 
 
 
Net operating loss tax sharing receivable under agreement with Dell (included in "Other current assets" and "Other non-current assets" at August 2, 2019 and in "Other current assets" at February 1, 2019)
 
$
16,569

 
$
6,853


NOTE 12 — 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 2, 2019 and February 1, 2019 were as follows:
 
 
 
August 2,
2019
 
February 1, 2019
 
 
 
Level 1
 
Level 1
 
 
 
(in thousands)
Cash equivalents - Money Market Funds
 
$
66,443

 
$
90,673


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.

19



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 1, 2019 included in Part II, Item 8 of our Annual Report on Form 10-K as filed with the SEC on March 28, 2019, 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 and beliefs. 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 "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 January 31, 2020 and the fiscal year ended February 1, 2019 as fiscal 2020 and fiscal 2019, respectively. Fiscal 2020 and fiscal 2019 each have 52 weeks, and each quarter has 13 weeks. All percentage amounts and ratios presented in this management's discussion and analysis were calculated using the underlying data in thousands. Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal periods.
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 provider of technology-driven information security solutions singularly focused on protecting our customers from cyber attacks. We combine visibility from thousands of customers, machine learning and automation from our proprietary technology and actionable insights from our team of elite researchers and analysts to create a powerful network effect that provides increasingly strong protection for our customers. By aggregating and analyzing data from various sources around the world, we prevent security breaches, detect malicious activity in real time, respond rapidly and predict emerging threats.
Our mission is to unlock the value of our customers' security investments by simplifying their complex security operations and amplifying their defenses. Through our vendor-neutral approach, we create integrated and comprehensive solutions by proactively managing the collection of "point" products deployed by our customers to address specific security issues and provide supplemental solutions where gaps exist in our customers' defenses. We customize the right level of security for each customer's unique situation, which evolves as the customer's organization grows and changes.
We have pioneered an integrated approach that delivers a broad portfolio of information security solutions to organizations of varying size and complexity. Our flexible and scalable solutions support the evolving needs of the largest, most sophisticated enterprises staffed with in-house security experts, as well as small and medium-sized businesses and government agencies with limited in-house capabilities and resources.
Our solutions enable organizations to:
prevent security breaches by fortifying their cyber defenses,
detect malicious activity,
respond rapidly to security breaches, and
predict emerging threats.
Our solutions leverage the proprietary technologies, processes and extensive expertise and knowledge of the tactics, techniques, and procedures of the adversary that we have developed over more than 20 years. Key elements of our strategy include:
maintain and extend our technology leadership,
expand and diversify our customer base,
deepen our existing customer relationships, and
attract and retain top talent.
Our technology-driven information security solutions offer an innovative approach to prevent, detect, respond to and predict cybersecurity breaches. Through our managed security services, which are sold on a subscription basis, we provide global visibility and insight into malicious activity, enabling our customers to detect and effectively remediate threats quickly. In the

20



first quarter of Fiscal 2020, the Company launched its first software as a service application, Red Cloak Threat Detection and Response (TDR), which gives customers visibility across their entire environment, applies advanced analytics developed using machine and deep learning on diverse data from a wide range of sources, workflows designed using the Company's 20 years of security operations expertise and integrated orchestration and automation capabilities that increases the speed of response actions. Threat intelligence, which is typically deployed as part of our managed security services, delivers early warnings of vulnerabilities and threats along with actionable information to help prevent any adverse impact. In addition to these solutions, we also offer a variety of professional services, which include security and risk consulting and incident response. Through security and risk consulting, we advise customers on a broad range of security and risk-related matters. Incident response minimizes the impact and duration of security breaches through proactive customer preparation, rapid containment and thorough event analysis followed by effective remediation. We continuously evaluate potential investments and acquisitions of businesses, services and technologies that could complement our existing offerings. We have a single organization responsible for the delivery of our security solutions, which enables us to respond quickly to our customers' evolving needs and help them secure themselves against cyber attacks.
The fees we charge for our solutions vary based on a number of factors, including the solutions selected, the number of customer devices covered by the selected solutions, and the level of management we provide for the solutions. In the second quarter of fiscal 2020, approximately 75% of our revenue was derived from subscription-based solutions, attributable to managed security contracts, while approximately 25% was derived from professional services engagements. As we respond to the evolving needs of our customers, the relative mix of subscription-based solutions and professional services we provide our customers may fluctuate.
Key Operating Metrics
In recent years, we have experienced broad growth across our portfolio of intelligence-driven information security solutions being provided to all sizes of customers. We have achieved much of this growth by providing solutions to large enterprise customers, which generate substantially more average revenue than our small and medium-sized business, or SMB, customers and by continually expanding the volume and breadth of the security solutions that we provide to all customers. This has resulted in steady growth in our average revenue per customer. This growth has required continuous investment in our business, resulting in net losses. We believe these investments are critical to our success, although they may continue to impact our profitability.
We believe the operating metrics described below provide further insight into the long-term value of our subscription agreements and our ability to maintain and grow our customer relationships. Relevant key operating metrics are presented below as of the dates indicated and for the quarterly periods then ended:
 
August 2, 2019
 
August 3, 2018
Subscription customer base
4,100

 
4,300

Total customer base
4,900

 
4,900

Monthly recurring revenue (in millions)
$
36.5

 
$
36.2

Annual recurring revenue (in millions)
$
437.6

 
$
434.1

Average subscription revenue per customer (in thousands)
$
106.0

 
$
100.4

Revenue retention rate
99
%
 
98
%
Subscription Customer Base. We define our subscription customer base as the number of customers who subscribe to our managed security solutions 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 our total customer base as the number of customers that subscribe to our managed security solutions as well as customers that buy professional and other services from us, as of a particular date.

Annual and Monthly Recurring Revenue. We define recurring revenue as the value of our subscription contracts as of a particular date. Because we use recurring revenue as a leading indicator of future annual revenue, we include operational backlog. We define operational backlog as the recurring revenue associated with pending contracts, which are contracts that have been sold but for which the service period has not yet commenced. Our increase in recurring revenue has been driven primarily by our continuing ability to expand our offerings and sell additional solutions to existing customers, as well as by growth in our customer base. Overall, we expect both annual and monthly recurring revenue to continue to grow as we retain and expand our customer base, and as our customers extend the use of our solutions over time.

21




Average Subscription Revenue Per Customer. The increase in our average subscription revenue per customer is primarily related to the persistence of cyber threats and the results of our sales and marketing efforts to increase the awareness of our solutions. Additionally, our customer composition of both enterprise and SMB companies provides us with an opportunity to expand our professional services revenue.

Revenue Retention Rate. Our 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 monthly recurring revenue excluding operational backlog of our subscription-based customer base at the beginning of the fiscal year, which we call our base recurring revenue, to the monthly recurring revenue excluding operational backlog from that same cohort of customers at the end of the period, which we call our retained recurring revenue. By dividing the retained recurring revenue by the base recurring revenue, 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. However, the calculation does not include the positive impact on revenue from sales of solutions to any customers acquired during the period. Our revenue retention rates may decline or increase from period to period as a result of several factors, including the timing of solution installations and customer renewal rates.
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 GAAP. Non-GAAP financial measures presented in this management's discussion and analysis include non-GAAP revenue, non-GAAP gross margin, 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.
In particular, we have excluded the impact of certain purchase accounting adjustments related to a change in the basis of deferred revenue for the acquisition of Dell by Dell Technologies in fiscal 2014. We believe it is useful to exclude such purchase accounting adjustments related to the foregoing transactions as this deferred revenue generally results from multi-year service contracts under which deferred revenue is established upon sale and revenue is recognized over the term of the contract. Pursuant to the fair value provisions applicable to the accounting for business combinations, GAAP requires this deferred revenue to be recorded at its fair value, which is typically less than the book value. In presenting non-GAAP earnings, we add back the reduction in revenue that results from this revaluation on the expectation that a significant majority of these service contracts will be renewed in the future and therefore the revaluation is not helpful in predicting our ongoing revenue trends. We believe that this non-GAAP financial adjustment is useful to investors because it allows investors to (1) evaluate the effectiveness of the methodology and information used by management in its financial and operational decision-making, and (2) compare past and future reports of financial results of our Company as the revenue reduction related to acquired deferred revenue will not recur when related service contracts are renewed in future periods.
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.
Non-GAAP revenue, non-GAAP gross margin, 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) and non-GAAP earnings (loss) per share, 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, gross margin, research and development expenses, sales and marketing expenses, general and administrative expenses, operating income (loss) or net income (loss) prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis.

22



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 of customer relationships and acquired technology. In connection with the acquisition of Dell by Dell Technologies in fiscal 2014, all of our tangible and intangible assets and liabilities were accounted for and recognized at fair value on the transaction date. Accordingly, amortization of intangible assets consists of amortization associated with intangible assets recognized in connection with this transaction.
Stock-based Compensation Expense. Non-cash stock-based compensation relates to both the Dell Technologies and Secureworks equity plans. We exclude such expenses 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.

23



 
Three Months Ended
 
Six Months Ended
 
August 2, 2019
 
August 3, 2018
 
August 2, 2019
 
August 3, 2018
 
(in thousands)
 
 
 
 
GAAP and non-GAAP revenue
$
136,605

 
$
128,778

 
$
269,447

 
$
254,939

 
 
 
 
 
 
 
 
GAAP gross margin
$
73,010

 
$
66,230

 
$
143,011

 
$
131,861

Amortization of intangibles
3,560

 
3,411

 
6,970

 
6,821

Stock-based compensation expense
396

 
275

 
656

 
544

Non-GAAP gross margin
$
76,966

 
$
69,916

 
$
150,637

 
$
139,226

 
 
 
 
 
 
 
 
GAAP research and development expenses
$
24,863

 
$
22,453

 
$
47,505

 
$
44,807

Stock-based compensation expense
(985
)
 
(1,006
)
 
(2,161
)
 
(2,037
)
Non-GAAP research and development expenses
$
23,878

 
$
21,447

 
$
45,344

 
$
42,770

 
 
 
 
 
 
 
 
GAAP sales and marketing expenses
$
38,047

 
$
35,521

 
$
76,240

 
$
71,191

Stock-based compensation expense
(917
)
 
(720
)
 
(1,698
)
 
(1,341
)
Non-GAAP sales and marketing expenses
$
37,130

 
$
34,801

 
$
74,542

 
$
69,850

 
 
 
 
 
 
 
 
GAAP general and administrative expenses
$
25,146

 
$
22,419

 
$
48,784

 
$
47,616

Amortization of intangibles
(3,524
)
 
(3,523
)
 
(7,047
)
 
(7,047
)
Stock-based compensation expense
(3,311
)
 
(2,911
)
 
(6,010
)
 
(5,720
)
Non-GAAP general and administrative expenses
$
18,311

 
$
15,985

 
$
35,727

 
$
34,849

 
 
 
 
 
 
 
 
GAAP operating income (loss)
$
(15,046
)
 
$
(14,163
)
 
$
(29,518
)
 
$
(31,753
)
Amortization of intangibles
7,083

 
6,934

 
14,017

 
13,868

Stock-based compensation expense
5,609

 
4,912

 
10,525

 
9,642

Non-GAAP operating income (loss)
$
(2,354
)
 
$
(2,317
)
 
$
(4,976
)
 
$
(8,243
)
 
 
 
 
 
 
 
 
GAAP net income (loss)
$
(10,260
)
 
$
(9,769
)
 
$
(18,530
)
 
$
(23,588
)
Amortization of intangibles
7,083

 
6,934

 
14,017

 
13,868

Stock-based compensation expense
5,609

 
4,912

 
10,525

 
9,642

Aggregate adjustment for income taxes
(3,092
)
 
(2,938
)
 
(8,559
)
 
(5,329
)
Non-GAAP net income (loss)
$
(660
)
 
$
(861
)
 
$
(2,547
)
 
$
(5,407
)
 
 
 
 
 
 
 
 
GAAP earnings (loss) per share
$
(0.13
)
 
$
(0.12
)
 
$
(0.23
)
 
$
(0.29
)
Amortization of intangibles
0.08

 
0.09

 
0.17

 
0.17

Stock-based compensation expense
0.07

 
0.06

 
0.13

 
0.12

Aggregate adjustment for income taxes
(0.04
)
 
(0.04
)
 
(0.11
)
 
(0.07
)
Non-GAAP earnings (loss) per share *
$
(0.01
)
 
$
(0.01
)
 
$
(0.03
)
 
$
(0.07
)
* Sum of reconciling items may differ from total due to rounding of individual components
 
 
 
 
 
 
 
 
 
 
 
 
GAAP net income (loss)
$
(10,260
)
 
$
(9,769
)
 
$
(18,530
)
 
$
(23,588
)
Interest and other, net
(1,950
)
 
(1,003
)
 
(2,218
)
 
(1,508
)
Income tax benefit
(2,836
)
 
(3,391
)
 
(8,770
)
 
(6,657
)
Depreciation and amortization
10,783

 
10,225

 
21,148

 
20,512

Stock-based compensation expense
5,609

 
4,912

 
10,525

 
9,642

Adjusted EBITDA
$
1,346

 
$
974

 
$
2,155

 
$
(1,599
)


24



Our Relationship with Dell and Dell Technologies
On April 27, 2016, we completed our IPO, as further described below. Upon the closing of our IPO, Dell Technologies owned, indirectly through Dell Inc. and Dell Inc.'s subsidiaries, no shares of our outstanding Class A common stock and all shares of our outstanding Class B common stock, which as of August 2, 2019 represented approximately 86.2% of our total outstanding shares of common stock and approximately 98.4% of the combined voting power of both classes of our outstanding common stock.
As a majority-owned subsidiary of Dell, we receive from Dell various corporate services in the ordinary course of business, including finance, tax, human resources, legal, insurance, IT, procurement and facilities related services. The costs of these services have been charged in accordance with a shared services agreement that went into effect on August 1, 2015, the effective date of our carve-out from Dell. For more information regarding the allocated costs and related party transactions, see "Notes to Condensed Consolidated Financial Statements—Note 11—Related Party Transactions" in our condensed consolidated financial statements included in this report.
During the periods presented in the condensed consolidated financial statements included in this report, Secureworks did not file separate federal tax returns, as Secureworks 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 or as realizable by Secureworks when those attributes are utilized or expect to be utilized by other members of the Dell consolidated group. For more information, see "Notes to Condensed Consolidated Financial Statements —Note 10—Income and Other Taxes" in our condensed consolidated financial statements included in this report.
Additionally, we participate in various commercial arrangements with Dell, under which, for example, we provide information security solutions to third-party customers with which Dell has contracted to provide our solutions, procure hardware, software and services from Dell, and sell our solutions through Dell in the United States and some international jurisdictions. In connection with our IPO, effective August 1, 2015, we entered into agreements with Dell that govern these commercial arrangements. These agreements generally were initially effective for up to one to three years and include extension and cancellation options. To the extent that we choose to or are required to transition away from the corporate services currently provided by Dell, we may incur additional non-recurring transition costs to establish our own stand-alone corporate functions. For more information regarding the allocated costs and related party transactions, see "Notes to Condensed Consolidated Financial Statements—Note 11—Related Party Transactions" in our condensed consolidated financial statements included in this report.
Components of Results of Operations
Revenue
We sell managed security solutions and threat intelligence solutions on a subscription basis and various professional services, including security and risk consulting and incident response solutions. Our managed security subscription contracts typically range from one to three years and, as of August 2, 2019, averaged two years in duration. The revenue and any related costs for these deliverables are recognized ratably over the contract term, beginning on the date on which service is made available to customers. Professional services customers typically purchase solutions pursuant to customized contracts that are shorter in duration. In general, these contracts have terms of less than one year. Professional services consist primarily of fixed-fee and retainer-based contracts. Revenue from these engagements is recognized under the proportional performance method of accounting. Revenue from time-and materials-based contracts is recognized as costs are incurred at amounts represented by the agreed-upon billing rates.
The fees we charge for our solutions vary based on a number of factors, including the solutions selected, the number of customer devices covered by the selected solutions, and the level of management we provide for the solutions. In the second quarter of fiscal 2020, approximately 75% of our revenue was derived from subscription-based solutions, attributable to managed security contracts, while approximately 25% was derived from professional services engagements. As we respond to the evolving needs of our customers, the relative mix of subscription-based solutions and professional services we provide our customers may fluctuate. International revenue, which we define as revenue contracted through non-U.S. entities, represented approximately 26% of our total net revenue in the second quarter of fiscal 2020 and 22% of our total net revenue in the second quarter of fiscal 2019. Although our international customers are located primarily in the United Kingdom, Japan, and Canada, we provided managed security services to customers across 53 countries as of August 2, 2019.
Over all of the periods presented in this report, our pricing strategy for our various offerings was relatively consistent, and accordingly did not significantly affect our revenue growth. However, we may adjust our pricing to remain competitive and support our strategic initiatives.

25



During the second quarter of fiscal 2019, a significant portion of the contract with Bank of America, N.A., a large customer, was amended and extended for two more years. During the term of the extended contract, the mix of services is expected to be different from the mix in prior periods and the total anticipated value of services may be lower than in prior periods.
Gross Margin
We operate in a challenging business environment, where the complexity and number of cyber attacks are constantly increasing. Accordingly, initiatives to drive the efficiency of our Counter Threat Platform and the continued training and development of our employees are critical to our long-term success. Gross margin has been and will continue to be affected by these factors as well as others, including the mix of solutions sold, the mix between large and small customers, timing of revenue recognition and the extent to which we expand our counter threat operations centers.
Cost of revenue consists primarily of personnel expenses, including salaries, benefits and performance-based compensation for employees who maintain our Counter Threat Platform and provide solutions to our customers, as well as perform other critical functions. Also included in cost of revenue are amortization of equipment and costs associated with hardware provided to customers as part of their subscription services, amortization of technology licensing fees, amortization of intangible assets, fees paid to contractors who supplement or support our solutions, maintenance fees and overhead allocations. As our business grows, the cost of revenue associated with our solutions may fluctuate.
We operate in a high-growth industry and have experienced significant revenue growth since our inception. Accordingly, we expect our gross margin to increase in absolute dollars. We continue to invest in initiatives to drive the efficiency of our business to increase gross margin as a percentage of total revenue. However, as we balance revenue growth and efficiency initiatives, gross margin as a percentage of total revenue may fluctuate from period to period.
Operating Costs and Expenses
Our operating costs and expenses consist of research and development expenses, sales and marketing expenses and general and administrative expenses.
Research and Development, or R&D, Expenses. Research and development expenses include compensation and related expenses for the continued development of our solutions offerings, including a portion of expenses related to our threat research team, which focuses on the identification of system vulnerabilities, data forensics and malware analysis. R&D expenses also encompass expenses related to the development of prototypes of new solutions offerings and allocated overhead. Our customer solutions have generally been developed internally. We operate in a competitive and highly technical industry. Therefore, to maintain and extend our technology leadership, we intend to continue to invest in our R&D efforts by hiring more personnel to enhance our existing security solutions and to add complementary solutions.
Sales and Marketing, or S&M, Expenses. Sales and marketing expenses include salaries, sales commissions and performance-based compensation, benefits and related expenses for our S&M personnel, travel and entertainment, marketing and advertising programs (including lead generation), customer advocacy events, and other brand-building expenses, as well as allocated overhead. As we continue to grow our business, both domestically and internationally, we will invest in our sales capability, which will increase our sales and marketing expenses in absolute dollars.
General and Administrative, or G&A, Expenses. General and administrative expenses include primarily the costs of human resources and recruiting, finance and accounting, legal support, information management and information security systems, facilities management, corporate development and other administrative functions, and are partially offset by allocations of information technology and facilities costs to other functions.
Interest and Other, Net
Interest and other, net consists primarily of the effect of exchange rates on our foreign currency-denominated asset and liability balances and interest income earned on our cash and cash equivalents. All foreign currency transaction adjustments are recorded as foreign currency gains (losses) in the Condensed Consolidated Statements of Operations. To date, we have had minimal interest income.
Income Tax Benefit
Our effective tax benefit rate was 21.7% and 25.8% for the three months ended August 2, 2019 and August 3, 2018, respectively and 32.1% and 22.0% for the six months ended August 2, 2019 and August 3, 2018, respectively. The change in the Company's effective income tax rate for the three and six months ended August 2, 2019 compared with the three and six months ended August 3, 2018 was primarily attributable to the impact of the intra-period allocation of certain permanent items and international tax expenses as well as discrete adjustments related to stock-based compensation expense. We calculate a provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. We provide

26



valuation allowances for deferred tax assets, where appropriate. We file U.S. federal returns on a consolidated basis with Dell and we expect to continue doing so until such time (if any) as we are deconsolidated for tax purposes with respect to the Dell consolidated group. According to the terms of the tax matters agreement between Dell Technologies and Secureworks that went into effect on August 1, 2015, Dell Technologies will reimburse us for any amounts by which our tax assets reduce the amount of tax liability owed by the Dell group on an unconsolidated basis. For a further discussion of income tax matters, see "Notes to Condensed Consolidated Financial Statements—Note 10—Income and Other Taxes" in our condensed consolidated financial statements included in this report.

Results of Operations

The following tables summarize our key performance indicators for the three and six months ended August 2, 2019 and August 3, 2018.
 
 
Three Months Ended
 
 
August 2, 2019
 
 
 
August 3, 2018
 
 
$
 
% of
Revenue
 
%
Change
 
$
 
% of
Revenue
 
 
(in thousands, except percentages)
Net revenue
 
$
136,605

 
100.0
 %
 
6.1
 %
 
$
128,778

 
100.0
 %
Cost of revenue
 
$
63,595

 
46.6
 %
 
1.7
 %
 
$
62,548

 
48.6
 %
Total gross margin
 
$
73,010

 
53.4
 %
 
10.2
 %
 
$
66,230

 
51.4
 %
Operating expenses
 
$
88,056

 
64.5
 %
 
9.5
 %
 
$
80,393

 
62.4
 %
Operating income (loss)
 
$
(15,046
)
 
(11.0
)%
 
6.2
 %
 
$
(14,163
)
 
(11.0
)%
Net income (loss)
 
$
(10,260
)
 
(7.5
)%
 
5.0
 %
 
$
(9,769
)
 
(7.6
)%
 
 
 
 
 
 
 
 
 
 
 
Other Financial Information (1)
 
 
 
 
 
 
 
 
 
 
Non-GAAP net revenue
 
$
136,605

 
100.0
 %
 
6.1
 %
 
$
128,778

 
100.0
 %
Non-GAAP cost of revenue
 
$
59,639

 
43.7
 %
 
1.3
 %
 
$
58,862

 
45.7
 %
Non-GAAP gross margin
 
$
76,966

 
56.3
 %
 
10.1
 %
 
$
69,916

 
54.3
 %
Non-GAAP operating expenses
 
$
79,319

 
58.1
 %
 
9.8
 %
 
$
72,233

 
56.1
 %
Non-GAAP operating loss
 
$
(2,354
)
 
(1.7
)%
 
1.6
 %
 
$
(2,317
)
 
(1.8
)%
Non-GAAP net loss
 
$
(660
)
 
(0.5
)%
 
(23.3
)%
 
$
(861
)
 
(0.7
)%
Adjusted EBITDA
 
$
1,346

 
1.0
 %
 
38.2
 %
 
$
974

 
0.8
 %

 
 
Six Months Ended
 
 
August 2, 2019
 
 
 
August 3, 2018
 
 
$
 
% of
Revenue
 
%
Change
 
$
 
% of
Revenue
 
 
(in thousands, except percentages)
Net revenue
 
$
269,447

 
100.0
 %
 
5.7
 %
 
$
254,939

 
100.0
 %
Cost of revenue
 
$
126,436

 
46.9
 %
 
2.7
 %
 
$
123,078

 
48.3
 %
Total gross margin
 
$
143,011

 
53.1
 %
 
8.5
 %
 
$
131,861

 
51.7
 %
Operating expenses
 
$
172,529

 
64.0
 %
 
5.4
 %
 
$
163,614

 
64.2
 %
Operating income (loss)
 
$
(29,518
)
 
(11.0
)%
 
(7.0
)%
 
$
(31,753
)
 
(12.5
)%
Net income (loss)
 
$
(18,530
)
 
(6.9
)%
 
(21.4
)%
 
$
(23,588
)
 
(9.3
)%
 
 
 
 
 
 
 
 
 
 
 
Other Financial Information (1)
 
 
 
 
 
 
 
 
 
 
Non-GAAP net revenue
 
$
269,447

 
100.0
 %
 
5.7
 %
 
$
254,939

 
100.0
 %
Non-GAAP cost of revenue
 
$
118,810

 
44.1
 %
 
2.7
 %
 
$
115,713

 
45.4
 %
Non-GAAP gross margin
 
$
150,637

 
55.9
 %
 
8.2
 %
 
$
139,226

 
54.6
 %
Non-GAAP operating expenses
 
$
155,613

 
57.8
 %
 
5.5
 %
 
$
147,469

 
57.8
 %
Non-GAAP operating loss
 
$
(4,976
)
 
(1.8
)%
 
(39.6
)%
 
$
(8,243
)
 
(3.2
)%
Non-GAAP net loss
 
$
(2,547
)
 
(0.9
)%
 
(52.9
)%
 
$
(5,407
)
 
(2.1
)%
Adjusted EBITDA
 
$
2,155

 
0.8
 %
 
(234.8
)%
 
$
(1,599
)
 
(0.6
)%

27




_____________________
(1) 
See "Non-GAAP Financial Measures" and "Reconciliation of Non-GAAP Financial Measures" for more information about these non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure. Non-GAAP financial measures as a percentage of revenue are calculated based on non-GAAP revenue.
Three and six months ended August 2, 2019 compared to the three and six months ended August 3, 2018
Revenue
Net revenue, which we refer to as revenue, increased $7.8 million, or 6.1%, and $14.5 million, or 5.7%, for the three and six months ended August 2, 2019. The revenue increases resulted primarily from revenue generated by professional services, including the Company's incident response and other long-term consulting arrangements. Revenue attributable to our subscription-based solutions represented approximately 75% of total revenue for both the three and six months ended August 2, 2019. Our existing customers continued to increase their contracted subscriptions for our solutions, with average revenue per customer increasing 6% year over year.
Revenue for certain services provided to or on behalf of Dell under our commercial agreements with Dell totaled approximately $5.5 million and $8.8 million for the three and six months ended August 2, 2019, respectively, and $5.1 million and $10.1 million for the three and six months ended August 3, 2018, respectively. For more information regarding the commercial agreements, see "Notes to Condensed Consolidated Financial Statements—Note 11—Related Party Transactions" in our condensed consolidated financial statements included in this report.
We primarily generate revenue from sales in the United States. However, for the three months ended August 2, 2019, international revenue, which we define as revenue contracted through non-U.S. entities, increased to $35.9 million, or 26.7%, from the three months ended August 3, 2018. Currently, our international customers are primarily located in the United Kingdom, Japan, and Canada. We are focused on continuing to grow our international customer base in future periods.
Gross Margin
Our total gross margin increased $6.8 million, or 10.2%, and $11.2 million, or 8.5%, for the three and six months ended August 2, 2019, respectively. As a percentage of revenue, our gross margin increased 200 basis points to 53.4% and 140 basis points to 53.1% for the three and six months ended August 2, 2019, respectively. Gross margin on a GAAP basis includes amortization of intangible assets and stock-based compensation expense. On a non-GAAP basis, excluding these adjustments, gross margin increased $7.1 million, or 10.1%, and $11.4 million, or 8.2%, for the three and six months ended August 2, 2019, respectively. As a percentage of revenue, our non-GAAP gross margin increased 200 basis points to 56.3% and 130 basis points to 55.9% for three and six months ended August 2, 2019, respectively. The increase in gross margin as a percentage of revenue on both a GAAP and non-GAAP basis during the three and six months ended August 2, 2019 was primarily attributable to improvement in both our subscription-based solutions and professional services margins as we continue to focus on delivering comprehensive higher-value security solutions and driving scale and operational efficiencies.
Operating Expenses

The following table presents information regarding our operating expenses during the three and six months ended August 2, 2019 and August 3, 2018.

28



 
Three Months Ended
 
August 2, 2019
 
 
 
August 3, 2018
 
Dollars
 
% of
Revenue
 
%
Change
 
Dollars
 
% of
Revenue
 
(in thousands, except percentages)
Operating expenses:
 

 
 

 
 

 
 

 
 

Research and development
$
24,863

 
18.2
%
 
10.7
%
 
$
22,453

 
17.4
%
Sales and marketing
38,047

 
27.9
%
 
7.1
%
 
35,521

 
27.6
%
General and administrative
25,146

 
18.4
%
 
12.2
%
 
22,419

 
17.4
%
Total operating expenses
$
88,056

 
64.5
%
 
9.5
%
 
$
80,393

 
62.4
%
 
 
 
 
 
 
 
 
 
 
Other Financial Information
 
 
 
 
 
 
 
 
 
Non-GAAP research and development
$
23,878

 
17.5
%
 
11.3
%
 
$
21,447

 
16.7
%
Non-GAAP sales and marketing
37,130

 
27.2
%
 
6.7
%
 
34,801

 
27.0
%
Non-GAAP general and administrative
18,311

 
13.4
%
 
14.6
%
 
15,985

 
12.4
%
Non-GAAP operating expenses (1)
$
79,319

 
58.1
%
 
9.8
%
 
$
72,233

 
56.1
%

 
Six Months Ended
 
August 2, 2019
 
 
 
August 3, 2018
 
Dollars
 
% of
Revenue
 
%
Change
 
Dollars
 
% of
Revenue
 
(in thousands, except percentages)
Operating expenses:
 

 
 

 
 

 
 

 
 

Research and development
$
47,505

 
17.6
%
 
6.0
%
 
$
44,807

 
17.6
%
Sales and marketing
76,240

 
28.3
%
 
7.1
%
 
71,191

 
27.9
%
General and administrative
48,784

 
18.1
%
 
2.5
%
 
47,616

 
18.7
%
Total operating expenses
$
172,529

 
64.0
%
 
5.4
%
 
$
163,614

 
64.2
%
 
 
 
 
 
 
 
 
 
 
Other Financial Information
 
 
 
 
 
 
 
 
 
Non-GAAP research and development
$
45,344

 
16.8
%
 
6.0
%
 
$
42,770

 
16.8
%
Non-GAAP sales and marketing
74,542

 
27.7
%
 
6.7
%
 
69,850

 
27.4
%
Non-GAAP general and administrative
35,727

 
13.3
%
 
2.5
%
 
34,849

 
13.7
%
Non-GAAP operating expenses (1)
$
155,613

 
57.8
%
 
5.5
%
 
$
147,469

 
57.8
%

            
(1)
See "Non-GAAP Financial Measures" and "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.
Research and Development Expenses. R&D expenses increased $2.4 million, or 10.7%, and $2.7 million, or 6.0%, for the three and six months ended August 2, 2019, respectively. As a percentage of revenue, R&D expenses increased 80 basis points to 18.2% and remained unchanged at 17.6% for the three and six months ended August 2, 2019, respectively. On a non-GAAP basis, R&D expenses as a percentage of revenue increased 80 basis points to 17.5% and remained unchanged at 16.8% for the three and six months ended August 2, 2019, respectively. The increase in R&D expenses was primarily attributable to increased compensation and benefits, and other technology related costs for the continued development of our solutions offerings, including the development of a new security analytics platform and software applications.
Sales and Marketing Expenses. S&M expenses increased $2.5 million, or 7.1%, and $5.0 million, or 7.1%, for the three and six months ended August 2, 2019, respectively. As a percentage of revenue, S&M expenses increased 30 basis points to 27.9% and 40 basis points to 28.3% for the three and six months ended August 2, 2019, respectively. On a non-GAAP basis, S&M expenses as a percentage of revenue increased 20 basis points to 27.2% and 30 basis points to 27.7% for the three and six months ended August 2, 2019, respectively. The increases in S&M expenses were primarily attributable to sales cost associated with the new offerings launched in the first quarter of fiscal 2020 in partnership with Dell.

29



General and Administrative Expenses. G&A expenses increased $2.7 million, or 12.2%, and $1.2 million, or 2.5%, for the three and six months ended August 2, 2019, respectively. As a percentage of revenue, G&A expenses increased 100 basis points to 18.4% and decreased 60 basis points to 18.1% for the three and six months ended August 2, 2019, respectively. On a non-GAAP basis, G&A expenses as a percentage of revenue increased 100 basis points to 13.4% and decreased 40 basis points to 13.3% for the three and six months ended August 2, 2019, respectively. The increase in G&A expenses were primarily attributable to lease expense of $1.2 million incurred in connection with consolidation of certain facilities, and an increase in severance costs.
Operating Loss
Our GAAP operating loss was $15.0 million and $29.5 million for the three and six months ended August 2, 2019, respectively. As a percentage of revenue, our operating loss decreased to 11.0% for the three and six months ended August 2, 2019. The decrease in our GAAP operating loss on a dollar basis was primarily attributable to increased gross margin, which was partially offset by increased operating expenses as we continue to invest in the business to drive growth. Operating loss on a GAAP basis includes amortization of intangible assets and stock-based compensation expense. On a non-GAAP basis, excluding these charges, our operating loss as a percentage of revenue improved to 1.7% and 1.8% for the three and six months ended August 2, 2019, respectively. The changes in our non-GAAP operating income and non-GAAP operating loss as a percentage of revenue during the three and six months ended August 2, 2019 were attributable to the same drivers as above.
Interest and Other, Net
Our interest and other, net was $2.0 million and $2.2 million of income for the three and six months ended August 2, 2019, respectively, compared with $1.0 million and $1.5 million for the prior year periods. The changes primarily reflected the effects of foreign currency transactions and related exchange rate fluctuations.
Income Tax Benefit
Our income tax benefit was $2.8 million, or 21.7%, and $8.8 million, or 32.1%, of our pre-tax loss during the three and six months ended August 2, 2019, respectively, and $3.4 million, or 25.8%, and $6.7 million, or 22.0%, during the three and six months ended August 3, 2018, respectively. The change in the effective tax benefit rate was primarily attributable to the impact of certain discrete adjustments related to stock-based compensation expense in the current period.
Net Loss
Our net loss of $10.3 million increased $0.5 million, or 5.0%, for the three months ended August 2, 2019. For the six months ended August 2, 2019, our net loss of $18.5 million decreased $5.1 million, or 21.4%. Net loss on a non-GAAP basis was $0.7 million, which represented a decrease of $0.2 million, or 23.3% from the three months ended August 3, 2018, and $2.5 million, which represented a decrease of $2.9 million, or 52.9%, from the six months ended August 3, 2018. The changes in net loss were attributable to our improved operating results and the higher income tax benefit recognized in the current period.
Liquidity and Capital Commitments
Overview
We believe that our cash and cash equivalents together with our accounts receivable will provide us with sufficient liquidity to fund our business and meet our obligations for at least 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the rate of expansion of our workforce, the timing and extent of our expansion into new markets, the timing of introductions of new functionality and enhancements to our solutions, potential acquisitions of complementary businesses and technologies, continuing market acceptance of our solutions, and general economic conditions. We may need to raise additional capital or incur indebtedness to continue to fund our operations in the future or to fund our needs for less predictable strategic initiatives, such as acquisitions. In addition to our $30 million revolving credit facility from Dell, described below, sources of financing may include arrangements with unaffiliated third parties, depending on the availability of capital, the cost of funds and lender collateral requirements.

Selected Measures of Liquidity and Capital Resources
As of August 2, 2019, our principal sources of liquidity consisted of cash and cash equivalents of $117.7 million and accounts receivable of $120.1 million.
Selected measures of our liquidity and capital resources are as follows:

30



 
August 2,
2019
 
February 1, 2019
 
(in thousands)
 
 
 
 

Cash and cash equivalents
$
117,716

 
$
129,592

Accounts receivable, net
$
120,104

 
$
141,344

We invoice our customers based on a variety of billing schedules. During the six months ended August 2, 2019, on average, 57% of our recurring revenue was billed in advance and approximately 43% was billed on either a monthly or a quarterly basis. Invoiced accounts receivable generally are collected over a period of 30 to 120 days. The decrease in accounts receivable as of August 2, 2019, reflected increased collection activity, partially offset by an increase in revenue. We regularly monitor our accounts receivable for collectability, particularly in markets where economic conditions remain uncertain, and continue to take actions to reduce our exposure to credit losses. As of August 2, 2019 and February 1, 2019, the allowance for doubtful accounts was $6.1 million and $6.2 million, respectively. The decrease in the allowance for doubtful accounts was due to overall improvement in our longer-aged receivables balances. Based on our assessment, we believe we are adequately reserved for credit risk.
Revolving Credit Facility
SecureWorks, Inc., our wholly-owned subsidiary, has a revolving credit agreement with a wholly-owned subsidiary of Dell Inc. under which we have a $30 million senior unsecured revolving credit facility. Effective March 26, 2019, the facility was amended and restated to extend the maturity date to March 26, 2020 and to increase the annual rate at which interest accrues to the applicable London Interbank Offered Rate plus 1.50%. Under the facility, up to $30 million principal amount of borrowings may be outstanding at any time. The maximum amount of borrowings may be increased by up to an additional $30 million by mutual agreement of the lender and borrower. The proceeds from loans made under the facility may be used for general corporate purposes. The facility is not guaranteed by us or our subsidiaries. There was no outstanding balance under the facility as of August 2, 2019 or February 1, 2019.
The unused portion of the facility is subject to a commitment fee of 0.35%, which is due upon expiration of the facility. For additional information about the facility, see "Notes to Condensed Consolidated Financial Statements—Note 5—Debt" in our condensed consolidated financial statements included in this report.
Cash Flows
The following table presents information concerning our cash flows during the six months ended August 2, 2019 and August 3, 2018.
 
 
Six Months Ended
 
 
August 2, 2019
 
August 3, 2018
 
 
(in thousands)
Net change in cash from:
 
 

 
 

Operating activities
 
$
13,232

 
$
10,886

Investing activities
 
(10,659
)
 
(5,366
)
Financing activities
 
(14,449
)
 
(3,743
)
Change in cash and cash equivalents
 
$
(11,876
)
 
$
1,777


Operating Activities Cash provided by operating activities totaled $13.2 million and $10.9 million for the six months ended August 2, 2019 and August 3, 2018, respectively. The improvement in our operating cash flows was primarily driven by improved operating results as well as the decrease in our net accounts receivable balance due to improved collection rates, partially offset by the overall decrease in our accounts payable and accrued liabilities, as well as by our net transactions with Dell. We expect that our future transactions with Dell will be a source of cash over time as we anticipate that our charges to Dell will continue to exceed Dell's charges to us, although the timing of charges and settlements may vary from period to period.
Investing Activities — Cash used in investing activities totaled $10.7 million and $5.4 million for the six months ended August 2, 2019 and August 3, 2018, respectively. For the periods presented, investing activities consisted primarily of capital expenditures for property and equipment to support our data center and facility infrastructure as well as certain capitalized cost related to the development of our new security software application.

31



Financing Activities — Cash flows used in financing activities totaled $14.4 million and $3.7 million for the six months ended August 2, 2019 and August 3, 2018, respectively. The usage in the six months ended August 2, 2019 reflected employee tax withholding payments of $8.1 million on restricted stock awards paid by us, and our repurchase of $6.4 million of our Class A common stock pursuant to our stock repurchase program. The usage in the six months ended August 3, 2018 reflected employee tax withholding payments of $2.1 million on restricted stock awards paid by us and payments of long-term financing arrangements of $1.6 million, including an intercompany obligation of $1.1 million with a Dell subsidiary.
Off-Balance Sheet Arrangements
As of August 2, 2019, we were not subject to any obligations pursuant to any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition, results of operations or liquidity.
Critical Accounting Policies
The unaudited condensed consolidated financial statements included elsewhere in this report have been prepared in accordance with GAAP for interim financial information and the requirements of the SEC. Accordingly, they do not include all of the information and disclosures required by GAAP for a complete financial statement presentation. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments consisting of normal recurring accruals and disclosures considered necessary for a fair interim presentation have been included. All inter-company accounts and transactions have been eliminated in consolidation.
As described in "Notes to Condensed Consolidated Financial StatementsNote 1Description of the Business and Basis of Presentation," we have adopted the new lease accounting guidance set forth in ASC 842. Management assessed the critical accounting policies as disclosed in our Annual Report and determined that, other than the change in recognition of right-of-use assets and lease liabilities, there were no changes to our critical accounting policies or our estimates associated with those policies during the three and six months ended August 2, 2019.
Recently Issued Accounting Pronouncements
See "Notes to Condensed Consolidated Financial StatementsNote 1—Description of the Business and Basis of Presentation" in our condensed consolidated financial statements included in this report for a description of recently issued accounting pronouncements and our expectation of their impact, if any, on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our results of operations and cash flows have been and will continue to be subject to fluctuations because of changes in foreign currency exchange rates, particularly changes in exchange rates between the U.S. dollar and the Euro, the British Pound, the Romanian Leu and the Canadian Dollar, the currencies of countries where we currently have our most significant international operations. Our expenses in international locations are generally denominated in the currencies of the countries in which our operations are located.
As our international operations grow, we may begin to use foreign exchange forward contracts to partially mitigate the impact of fluctuations in net monetary assets denominated in foreign currencies.
Item 4. Controls and Procedures
Limitations on Effectiveness of Disclosure Controls and Procedures    
In designing and evaluating our disclosure controls and procedures, as defined below under SEC rules, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Securities Exchange of 1934, or Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.
In connection with the preparation of this report, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our

32



disclosure controls and procedures as of August 2, 2019. Based on that evaluation, our management has concluded that our disclosure controls and procedures were effective as of August 2, 2019.
Changes in Internal Control over Financial Reporting
Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures which (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, (c) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management and the board of directors, and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
There were no changes in our internal control over financial reporting that occurred during the quarter ended August 2, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1A. Risk Factors
We have discussed risks affecting us under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 1, 2019 filed with the SEC on March 28, 2019. The risks described in our Annual Report are not the only risks facing us. There are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial that may also materially adversely affect our business, financial condition or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On September 27, 2018, the Company announced a stock repurchase program, under which we are authorized to repurchase up to $15 million of our Class A common stock through September 30, 2019. On March 26, 2019, our board of directors expanded the repurchase program to authorize the repurchase of up to an additional $15 million of the Class A common stock through May 1, 2020. The following table presents information with respect to our purchases of Class A common stock during the three months ended August 2, 2019.
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Programs
Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Programs
May 4, 2019 through May 31, 2019
 
 
 
 
     Share repurchase program

$


$
15,557,566

June 1, 2019 through June 28, 2019
 
 
 
 
     Share repurchase program
394,245

13.68

394,245

10,163,263

June 29, 2019 through August 2, 2019
 
 
 
 
     Share repurchase program
5,755

12.72

5,755

10,090,036

Total
400,000

$
13.67

400,000

$
10,090,036



 

33



Item 6. Exhibits

Secureworks hereby files or furnishes the following exhibits:     
Exhibit No.
 
Description
10.1*
 
10.2*
 
10.3*
 
31.1
 
31.2
 
32.1
 
101.INS
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
 
XBRL Taxonomy Extension Schema Document.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 


* Portions of this exhibit containing confidential information have been omitted because the omitted provisions both are not material and would be competitively harmful to the registrant if publicly disclosed.


34



SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
SecureWorks Corp.
 
 
 
 
By: 
/s/ R. Wayne Jackson
 
 
R. Wayne Jackson
 
 
Chief Financial Officer
 
 
(Duly Authorized Officer)

Date: September 5, 2019




35