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DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
 9 Months Ended
Nov. 01, 2024
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION 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 cybersecurity provider of technology-driven security solutions, singularly focused on protecting the Company’s customers.
The Company has one primary business activity, which is to provide customers with technology-driven cybersecurity solutions. The Company’s chief operating decision-maker, who is the Chief Executive Officer, makes operating decisions, assesses performance, and allocates resources on a consolidated basis. There are no segment managers who are held accountable for operations and operating results below the consolidated unit level. Accordingly, Secureworks operates its business as a single reportable segment.
On April 27, 2016, the Company completed its initial public offering, or IPO. Upon the closing of the IPO, Dell Technologies Inc., or Dell Technologies, owned, indirectly through Dell and its subsidiaries, all shares of the Company’s outstanding Class B common stock, which as of November 1, 2024, represented approximately 78.7% of the Company’s total outstanding shares of common stock and approximately 97.4% of the combined voting power of both classes of the Company’s outstanding common stock.
Except where the context otherwise requires or where otherwise indicated, all references in this report to “Secureworks,” “we,” “us,” “our,” and “Company” refer to SecureWorks Corp. and our subsidiaries on a consolidated basis. References to “Dell” refer to Dell Inc. and its subsidiaries on a consolidated basis.
Basis of Presentation and Consolidation
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. Certain amounts from prior years have been reclassified to conform to current year presentation. Preparing financial statements in accordance with GAAP requires management to make assumptions and estimations that affect the amounts reported in the Company’s financial statements and notes. The condensed consolidated financial statements include assets, liabilities, revenue, and expenses of all majority-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation.
For the periods presented, Dell has provided various corporate services to the Company in the ordinary course of business, including finance, tax, human resources, legal, insurance, IT, procurement, and facilities-related services. The cost of these services is charged in accordance with a shared services agreement, as amended or amended and restated, in part, from time to time, that went into effect on August 1, 2015. For more information regarding related party transactions, see “Note 10—Related Party Transactions.”
Merger Agreement
On October 21, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sophos Inc., a Massachusetts corporation (“Parent”) and Project Green Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub” and together with Parent, the “Buyer Parties”). Pursuant to the Merger Agreement, Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and becoming a wholly owned subsidiary of Parent (the “Merger”). The Buyer Parties are affiliates of investment funds managed by Thoma Bravo, L.P.
If the Merger is consummated, the Company intends to delist its Class A common stock from the Nasdaq Global Select Market of the Nasdaq Stock Market LLC and deregister its Class A common stock under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as promptly as practicable following the Effective Time (as defined in the Merger Agreement).
At the Effective Time each share of Class A common stock of the Company, par value $0.01 per share, and Class B common stock, par value $0.01 per share, that is issued and outstanding as of immediately prior to the Effective Time (other than Dissenting Shares (as defined in the Merger Agreement) or shares (i) held in the Company’s treasury, (ii) owned by Parent, Merger Sub or their respective direct or indirect wholly owned subsidiaries or (iii) owned by any direct or indirect wholly owned subsidiary of the Company) will be converted into the right to receive cash in an amount equal to $8.50, without interest thereon.
The Merger Agreement contains a number of conditions that must be satisfied or waived prior to the completion of the merger transaction, or Merger, including (i) the Company receiving the Written Consent (as defined below) (which has been satisfied, as described below), (ii) (a) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended and (b) the clearance or approval under certain specified antitrust laws and foreign investment laws, (iii) the absence of any governmental authority of competent authority in certain specified jurisdictions issuing
any order or other legal restraint that makes consummation of the Merger illegal or otherwise prohibited, (iv) at least 20 calendar days have elapsed since the Company’s mailing to the Company’s stockholders of the information statement on Schedule 14C, and (v) the absence of any Company Material Adverse Effect (as defined in the Merger Agreement) since the date of the Merger Agreement that has occurred that is continuing.
Following the execution of the Merger Agreement, on October 21, 2024, Dell Technologies Inc., a Delaware corporation, who, as of October 21, 2024 indirectly held approximately 97.4% of the combined voting power of the outstanding shares of Class A common stock and Class B common stock executed and delivered to the Company a written consent, or Written Consent, approving and adopting the Merger Agreement and the transactions contemplated therein, including the Merger. As a result of the execution and delivery of the Written Consent, the holders of at least a majority of the outstanding shares of Class A common stock and Class B common stock with the right to vote thereon have adopted and approved the Merger Agreement. The delivery of the Written Consent constituted the necessary approvals of stockholders for the approval of the Merger, subject to the other conditions set forth in the Merger Agreement.
During the period prior to the closing of the Merger and pursuant to the terms of the Merger Agreement, the Company is subject to certain contractual restrictions that limit the Company’s ability to take certain actions, including the ability to undertake acquisitions, investments or capital expenditures or to incur indebtedness, subject to certain exceptions.
The Merger Agreement contains certain termination rights for the Company, on the one hand, and Parent, on the other hand, including that, subject to certain limitations, the Company or Parent may terminate the Merger Agreement if the Merger is not consummated by 11:59 p.m. Eastern Time, on June 20, 2025 or such other date as may be mutually agreed upon in writing by the parties (the “End Date”). Upon termination of the Merger Agreement under specified circumstances, including if the Merger Agreement is terminated under certain circumstances and prior to such termination, an Acquisition Proposal for an Acquisition Transaction (each as defined in the Merger Agreement) is publicly known and not publicly withdrawn and, within twelve months after the date of such termination, an Acquisition Transaction is consummated or the Company enters into an agreement providing for the consummation of an Acquisition Transaction, the Company will be required to pay Parent a termination fee of $26,000,000.
In addition, Parent will be required to pay the Company a termination fee of $52,000,000 under certain circumstances, including if the Company terminates the Merger Agreement (i) due to Parent or Merger Sub breaching its representations, warranties or covenants that would have a Parent Material Adverse Effect and is incapable of being cured by the End Date or (ii) because all conditions to the Merger have been satisfied (subject to customary exceptions) and the Buyer Parties fail to consummate the Merger within three business days after the later of receiving written notification from the Company and the day on which the Closing should have occurred.
On November 22, 2024, the Company filed with the SEC its definitive information statement on Schedule 14C in connection with the Merger.
Completion of the Merger is currently expected to occur in early 2025, subject to regulatory approvals and other conditions.
Revisions
The Company’s historical classification of the effects of exchange rate changes on the Company’s foreign-denominated cash and cash equivalents balances was not presented separately as the effect of exchange rate changes on cash and cash equivalents in the Company’s Condensed Consolidated Statements of Cash Flows, but rather was included as a component of net cash provided by (used in) operating activities and investing activities. The Company has revised the Condensed Consolidated Statements of Cash Flows for each fiscal quarter of fiscal 2024 to correct these classifications. For the nine months ended November 3, 2023, the impact of this correction was a decrease of $4.6 million in net cash used in operating activities and other de minimis impacts to cash flows from capital expenditures, as included in total cash used in investing activities. The corresponding amounts are presented separately as the effect of exchange rate changes on cash and cash equivalents. These revisions do not impact the Condensed Consolidated Statements of Operations, the Condensed Consolidated Statements of Comprehensive Loss, or the Condensed Consolidated Statements of Financial Position.
The Company has concluded that the effects of this revision are not material to any of our previously issued financial statements. This revision impacts our unaudited interim Condensed Consolidated Financial Statements for each fiscal quarter in fiscal 2024.
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 fiscal year ending January 31, 2025, and fiscal year ended February 2, 2024, as fiscal 2025 and fiscal 2024, respectively. Fiscal 2025 and fiscal 2024 each consist of 52 weeks and each quarter consists of 13 weeks. Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal periods.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. In the Condensed Consolidated Statements of Operations, estimates are used when accounting for revenue arrangements, determining the cost of revenue, allocating cost, estimating the impact of contingencies, and evaluating long-lived asset impairment. In the Condensed Consolidated Statements of Financial Position, estimates are used in determining the valuation and recoverability of assets, such as accounts receivables, inventories, fixed assets, capitalized software, goodwill, and other identifiable intangible assets. Estimates are also used in determining the reported amounts of liabilities, such as taxes payable and the impact of contingencies. All estimates also impact the Condensed Consolidated Statements of Operations. Actual results could differ from these estimates due to risks and uncertainties, including uncertainty in the current economic environment and impacts of inflation. The Company considered the potential impact of the current economic and geopolitical uncertainties on its estimates and assumptions, and it determined there was not a material impact to the Company’s condensed consolidated financial statements as of and for the three and nine months ended November 1, 2024. As the current economic environment and certain geopolitical uncertainties continue to develop, many of the Company’s estimates could require increased judgment and be subject to a higher degree of variability and volatility. As a result, the Company’s estimates may change materially in future periods.
Liquidity
The Company has incurred losses from operations and operating cash outflows in recent periods and, as of the balance sheet date, the Company has reported a deficit in working capital.
The Company’s prior reorganization actions are expected to result in significant cost savings as the Company completes a
transition to higher value, higher margin Taegis solutions. The Company expects that this transition better positions the Company for growth with improving operating margins over time. In the event the Company’s financial results are below its expectations, the Company may need to take additional actions to preserve existing cash reserves.
As of November 1, 2024, the Company held $53.1 million in cash and cash equivalents. There were no amounts drawn on the $50 million revolving credit facility with Dell as of November 1, 2024. The Company believes that its cash and cash equivalents and access to the revolving credit facility will provide sufficient liquidity to meet its cash requirements, including to fund its business and meet its obligations, for at least 12 months from the filing date of this report.
Recently Issued Accounting Pronouncements Not Yet Adopted
In November 2024, the FASB issued ASU 2024-03, “Income Statement (Topic 220): Disaggregation of Income Statement Expenses”, which requires additional, disaggregated disclosure about certain income statement expense line items. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026 and interim periods within fiscal years beginning after December 15, 2027. The Company is currently evaluating the potential impact of adopting this guidance on our Consolidated Financial Statements and related disclosures.
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. The updated standard is effective for our annual periods beginning in the fiscal year ending January 31, 2025 and interim periods beginning in the first quarter of fiscal 2026. The Company is currently evaluating the potential impact of adopting this guidance on our Consolidated Financial Statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”, which expands the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. The ASU 2023-09 is effective for annual reporting periods beginning after December 15, 2024. The Company is currently evaluating the potential impact of adopting this guidance on our Consolidated Financial Statements and related disclosures.
Recently Adopted Accounting Pronouncements
None.
Summary of Significant Accounting Policies
There have been no significant changes to the Company’s significant accounting policies as of and for the three and nine months ended November 1, 2024, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2024.