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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(Mark One) 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2021
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

https://cdn.kscope.io/abf51434a55d8050328a6ccbf67a098b-scwx-20210430_g1.jpg

 
SecureWorks Corp.
(Exact name of registrant as specified in its charter)
Delaware
27-0463349
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
One Concourse Parkway NE
Suite 500
Atlanta,
Georgia
30328
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code): (404) 327-6339
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, SCWXThe Nasdaq Stock Market LLC
par value $0.01 per share(Nasdaq Global Select Market)
    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑  No ☐
    Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑   No ☐
    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  Accelerated filer
Non-accelerated filer   Smaller reporting company 
Emerging growth company
     If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No ☑
    As of June 1, 2021, there were 83,559,038 shares of the registrant's common stock outstanding, consisting of 13,559,038 outstanding shares of Class A common stock and 70,000,000 outstanding shares of Class B common stock.




TABLE OF CONTENTS
ITEM PAGE
 






Except where the content otherwise requires or where otherwise indicated, all references in this report to "Secureworks," "we," "us," "our" and "our Company" to refer to SecureWorks Corp. and our subsidiaries on a consolidated basis.

Part I. Financial Information
Item 1. Financial Statements
SECUREWORKS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
(in thousands, except for per share data)
 April 30,
2021
January 29,
2021
ASSETS
Current assets: 
Cash and cash equivalents$180,607 $220,300 
Accounts receivable, net of allowances of $4,534 and $4,830, respectively
94,901 108,005 
Inventories, net687 560 
Other current assets16,920 17,349 
Total current assets293,115 346,214 
Property and equipment, net15,243 17,143 
Operating lease right-of-use assets, net21,207 22,330 
Goodwill426,278 425,861 
Intangible assets, net152,247 157,820 
Other non-current assets76,721 75,993 
Total assets$984,811 $1,045,361 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$17,473 $16,769 
Accrued and other current liabilities60,194 109,134 
Short-term deferred revenue166,211 168,437 
Total current liabilities243,878 294,340 
Long-term deferred revenue8,193 9,590 
Operating lease liabilities, non-current21,082 22,461 
Other non-current liabilities50,609 51,189 
Total liabilities323,762 377,580 
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock - $0.01 par value: 200,000 shares authorized; shares issued
  
Common stock - Class A of $0.01 par value: 2,500,000 shares authorized; 13,550 and 12,450 issued and outstanding, respectively.
135 124 
Common stock - Class B of $0.01 par value: 500,000 shares authorized; 70,000 shares issued and outstanding
700 700 
Additional paid in capital916,528 917,344 
Accumulated deficit(236,222)(229,831)
Accumulated other comprehensive (loss) income(196)(660)
Treasury stock, at cost - 1,257 and 1,257 shares, respectively
(19,896)(19,896)
Total stockholders' equity661,049 667,781 
Total liabilities and stockholders' equity$984,811 $1,045,361 
 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
 April 30,
2021
May 1,
2020
  
Net revenue$139,463 $141,181 
Cost of revenue57,207 62,909 
Gross margin82,256 78,272 
Research and development28,152 24,073 
Sales and marketing36,405 37,452 
General and administrative25,555 27,516 
Total operating expenses90,112 89,041 
Operating loss(7,856)(10,769)
Interest and other, net(907)993 
Loss before income taxes(8,763)(9,776)
Income tax benefit(2,373)(2,240)
Net loss$(6,390)$(7,536)
Loss per common share (basic and diluted)$(0.08)$(0.09)
Weighted-average common shares outstanding (basic and diluted)81,985 80,938 
 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
April 30, 2021May 1, 2020
Net loss$(6,390)$(7,536)
Foreign currency translation adjustments, net of tax464 (1,222)
Comprehensive loss$(5,926)$(8,758)

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)
Three Months Ended
 April 30, 2021May 1, 2020
Cash flows from operating activities:
Net loss$(6,390)$(7,536)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization9,918 10,486 
Stock-based compensation expense6,035 5,887 
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies798 (856)
Income tax benefit(2,373)(2,240)
Provision for credit losses434 909 
Changes in assets and liabilities:
Accounts receivable12,573 (5,987)
Net transactions with parent(9,859)2,494 
Inventories(127)(66)
Other assets3,320 5,267 
Accounts payable526 8,495 
Deferred revenue(3,773)1,291 
Accrued and other liabilities(41,640)(38,481)
Net cash used by operating activities(30,558)(20,337)
Cash flows from investing activities:  
Capital expenditures(2,294)(1,020)
Net cash used in investing activities(2,294)(1,020)
Cash flows from financing activities:  
Taxes paid on vested restricted shares(6,841)(4,491)
Net cash used in financing activities(6,841)(4,491)
Net decrease in cash and cash equivalents(39,693)(25,848)
Cash and cash equivalents at beginning of the period220,300 181,838 
Cash and cash equivalents at end of the period$180,607 $155,990 

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 April 30, 2021Common Stock - Class ACommon Stock - Class B
 Outstanding SharesAmountOutstanding SharesAmountAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive (Loss) IncomeTreasury
Stock
Total Stockholders' Equity
Balances, January 29, 202112,450 $124 70,000 $700 $917,344 $(229,831)$(660)$(19,896)$667,781 
Net loss— — — — — (6,390)— — (6,390)
Other comprehensive income— — — — — — 464 — 464 
Vesting of restricted stock units1,140 11 — — (11)— — —  
Grant of restricted stock awards 485 5 — — (5)— — —  
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares(525)(5)— — (6,836)— — — (6,841)
Stock-based compensation— — — — 6,035 — — — 6,035 
Balances, April 30, 202113,550 $135 70,000 $700 $916,527 $(236,221)$(196)$(19,896)$661,049 

Three Months Ended May 1, 2020Common Stock - Class ACommon Stock - Class B
 Outstanding SharesAmountOutstanding SharesAmountAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive (Loss) IncomeTreasury
Stock
Total Stockholders' Equity
Balances, January 31, 202011,206 $112 70,000 $700 $896,983 $(207,929)$(3,090)$(19,896)$666,880 
Net loss— — — — — (7,536)— — (7,536)
Other comprehensive loss— — — — — — (1,222)— (1,222)
Vesting of restricted stock units842 8 — — (8)— — —  
Grant of restricted stock awards 455 5 — — (5)— — —  
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares(383)(4)— — (4,487)— — — (4,491)
Stock-based compensation— — — — 5,887 — — — 5,887 
Balances, May 1, 202012,120 $121 70,000 $700 $898,370 $(215,465)$(4,312)$(19,896)$659,518 

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

7

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 cybersecurity provider of technology-driven security solutions singularly focused on protecting the Company's customers by outpacing and outmaneuvering adversaries.
On April 27, 2016, the Company completed its initial public offering (“IPO”). Upon the closing of the IPO, Dell Technologies Inc. (“Dell Technologies”) owned, indirectly through Dell Inc. and Dell Inc.'s subsidiaries (Dell Inc., individually and collectively with its consolidated subsidiaries, "Dell") all shares of the Company's outstanding Class B common stock, which as of April 30, 2021 represented approximately 83.8% of the Company's total outstanding shares of common stock and approximately 98.1% 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 technology-driven information security 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.
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 assumptions and estimations that affect the amounts reported in the Company's financial statements and notes. The inputs into certain of the Company's assumptions and estimations considered the economic implications of the coronavirus disease 2019 ("COVID-19") pandemic on the Company's critical and significant accounting estimates. The condensed consolidated financial statements include assets, liabilities, revenue and expenses of all majority-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation.
For the periods presented, Dell has provided various corporate services to the Company in the ordinary course of business, including finance, tax, human resources, legal, insurance, IT, procurement and facilities-related services. The cost of these services is charged in accordance with a shared services agreement that went into effect on August 1, 2015. For more information regarding the related party transactions, see "Note 10—Related Party Transactions."
During the periods presented in the financial statements, Secureworks did not file separate federal tax returns, as the Company is generally included in the tax grouping of other Dell entities within the respective entity’s tax jurisdiction. The income tax benefit has been calculated using the separate return method, modified to apply the benefits for loss approach. Under 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 9—Income and Other Taxes" for more information.
Fiscal Year
The Company’s fiscal year is the 52- or 53-week period ending on the Friday closest to January 31. The Company refers to the fiscal year ending January 28, 2022 and the fiscal year ended January 29, 2021 as fiscal 2022 and fiscal 2021, respectively. Both fiscal 2022 and fiscal 2021 have 52 weeks, and each quarter has 13 weeks.
8

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

Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. In the Condensed Consolidated Statements of Operations, estimates are used when accounting for revenue arrangements, determining the cost of revenue, allocating cost and estimating the impact of contingencies. In the Condensed Consolidated Statements of Financial Position, estimates are used in determining the valuation and recoverability of assets, such as accounts receivables, inventories, fixed assets, goodwill and other identifiable intangible assets, and purchase price allocation for business combinations. Estimates are also used in determining the reported amounts of liabilities, such as taxes payable and the impact of contingencies. All estimates also impact the Condensed Consolidated Statements of Operations. Actual results could differ from these estimates due to risks and uncertainties, including uncertainty in the current economic environment due to the COVID-19 pandemic. The Company considered the potential impact of the COVID-19 pandemic on its estimates and assumptions and determined there was not a material impact to the Company's condensed consolidated financial statements as of and for the three months ended April 30, 2021. As the COVID-19 pandemic continues to develop, many of the Company's estimates could require increased judgment and be subject to a higher degree of variability and volatility. As the pandemic continues to evolve, the Company's estimates may change materially in future periods.
Recently Adopted Accounting Pronouncements
The Company adopted Accounting Standard Update (“ASU”) 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” effective February 1, 2021. ASU No. 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocation of consolidated income taxes to separate financial statements of entities not subject to income tax. The adoption of the standard had no material impact on the condensed consolidated financial statements.
Summary of Significant Accounting Policies
There have been no significant changes to the Company’s significant accounting policies as of and for the three months ended April 30, 2021, as compared to the significant accounting policies described in the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 2021.
NOTE 2 — LOSS PER SHARE
Loss per share is calculated by dividing net loss for the periods presented by the respective weighted-average number of common shares outstanding, and excludes any dilutive effects of share-based awards that may be anti-dilutive. Diluted net loss per common share is computed by giving effect to all potentially dilutive common shares, including common stock issuable upon the exercise of stock options and unvested restricted common stock and restricted stock units. The Company applies the two-class method to calculate earnings per share. Because the Class A common stock and the Class B common stock share the same rights in dividends and earnings, earnings per share (basic and diluted) are the same for both classes. 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
April 30, 2021May 1,
2020
Numerator:
Net loss$(6,390)$(7,536)
Denominator:  
Weighted-average number of shares outstanding: 
Basic and Diluted81,985 80,938 
Loss per common share:  
Basic and Diluted$(0.08)$(0.09)
Weighted-average anti-dilutive stock options, non-vested restricted stock and restricted stock units6,863 5,294 
9

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

NOTE 3 — CONTRACT BALANCES AND CONTRACT COSTS

The Company derives revenue primarily from three sources: (1) subscription revenue related to managed security services, (2) subscription revenue derived from the Taegis software-as-a-service (“SaaS”) security analytics platform and (3) professional services. Subscription-based managed security service arrangements typically include a suite of security services, up-front installation fees and maintenance, and also may include the provision of an associated hardware appliance. Taegis subscription-based revenue currently includes two applications, Extended Detection and Response, or XDR, and Vulnerability Detection and Response, or VDR, along with the add-on managed service to supplement the XDR SaaS application, referred to as Managed Detection and Response, or ManagedXDR. Professional services typically include incident response and security and risk consulting solutions.
The following table presents revenue by service type (in thousands):
Three Months Ended
April 30, 2021May 1,
2020
Managed Security Services$90,110 $101,904 
Taegis Subscription Solutions13,960 4,453 
Professional Services35,393 34,824 
Total Revenue$139,463 $141,181 
Taegis Subscription Solutions revenue for the three months ended May 1, 2020 has been presented for consistency with current period presentation.
The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. The Company invoices its customers based on a variety of billing schedules. During the three months ended April 30, 2021, on average, approximately 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 three months ended April 30, 2021 and May 1, 2020 are as follows (in thousands):
As of January 29, 2021Upfront payments received and billings during the three months ended April 30, 2021Revenue recognized during the three months ended April 30, 2021As of April 30, 2021
Deferred revenue$178,027 $99,364 $(102,987)$174,404 
As of January 31, 2020Upfront payments received and billings during the three months ended May 1, 2020Revenue recognized during the three months ended May 1, 2020As of May 1, 2020
Deferred revenue$188,537 $95,768 $(94,375)$189,930 

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 subscription-based solutions contracted with customers that have not yet been installed ("backlog"). Backlog is not recorded in revenue, deferred revenue or elsewhere in the consolidated financial statements until the Company establishes a contractual right to invoice, at which point backlog is recorded as revenue or deferred revenue, as appropriate. The Company applies the practical expedient in ASC paragraph 606-10-50-14(a) and does not disclose information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less.
The Company expects that the amount of backlog relative to the total value of its contracts will change from year to year due to several factors, including the amount invoiced at the beginning of the contract term, the timing and duration of the Company's customer agreements, varying invoicing cycles of agreements and changes in customer financial circumstances. Accordingly, fluctuations in backlog are not always a reliable indicator of future revenues.    
10

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

As of April 30, 2021, the Company expects to recognize remaining performance obligations as follows (in thousands):
TotalExpected to be recognized in the next 12 monthsExpected to be recognized in 12-24 monthsExpected to be recognized in 24-36 monthsExpected to be recognized thereafter
Performance obligation - active$276,913 $157,597 $80,279 $30,200 $8,837 
Performance obligation - backlog14,137 5,212 4,995 3,930  
Total$291,050 $162,809 $85,274 $34,130 $8,837 
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 three months ended April 30, 2021 and May 1, 2020 are as follows (in thousands):
As of January 29, 2021Amount capitalizedAmount recognizedAs of April 30, 2021
Deferred commissions$57,888 $3,186 $(5,053)$56,021 
Deferred fulfillment costs11,009 1,256 (1,415)10,850 
As of January 31, 2020Amount capitalizedAmount recognizedAs of May 1, 2020
Deferred commissions$62,785 $1,436 $(5,489)$58,732 
Deferred fulfillment costs11,366 1,460 (1,395)11,431 
The Company did not record any impairment losses on the deferred commissions or deferred fulfillment costs during the three months ended April 30, 2021 or May 1, 2020.
NOTE 4 — GOODWILL AND INTANGIBLE ASSETS
Goodwill relates to the acquisition of Dell by Dell Technologies and represents the excess of the purchase price attributable to Secureworks over the fair value of the assets acquired and liabilities assumed, as well as subsequent business combinations completed by the Company. Goodwill increased $0.4 million due to foreign currency translation for the three months ended April 30, 2021, as compared to January 29, 2021. Goodwill totaled $426.3 million as of April 30, 2021 and $425.9 million as of January 29, 2021. No triggering events have subsequently transpired that would indicate a potential impairment subsequent to the test date through April 30, 2021.
Intangible Assets
The Company's intangible assets as of April 30, 2021 and January 29, 2021 were as follows:
 April 30, 2021January 29, 2021
 GrossAccumulated
Amortization
NetGrossAccumulated
Amortization
Net
 (in thousands)
Customer relationships$189,518 $(108,865)$80,653 $189,518 $(105,341)$84,177 
Technology145,591 (104,115)41,476 143,821 (100,296)43,525 
Finite-lived intangible assets335,109 (212,980)122,129 333,339 (205,637)127,702 
Trade name30,118 — 30,118 30,118 — 30,118 
Total intangible assets$365,227 $(212,980)$152,247 $363,457 $(205,637)$157,820 

Amortization expense related to finite-lived intangible assets was approximately $7.3 million and $7.0 million for each of the three months ended April 30, 2021 and May 1, 2020, respectively. Amortization expense is included within cost of revenue and
11

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

general and administrative expense in the Condensed Consolidated Statements of Operations. There were no impairment charges related to intangible assets during the three months ended April 30, 2021 or May 1, 2020.
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 subsequently extended on the same terms for additional one-year terms. During the three months ended April 30, 2021, the facility was amended and restated to extend the maturity date from March 26, 2021 to March 25, 2022 and to increase the annual rate at which interest accrues to the applicable London interbank offered rate (“LIBOR”) plus 1.54%. Under the amended terms, if LIBOR is no longer published on a current basis and such circumstances are unlikely to be temporary, the facility will be amended to replace LIBOR with an alternate benchmark rate. 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. There was no outstanding balance under the credit facility as of April 30, 2021 or January 29, 2021.
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.
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 April 30, 2021, the Company does not believe that there were any such matters that, individually or in the aggregate, would have a material adverse effect on its business, financial condition, results of operations or cash flows.
Customer-based Taxation ContingenciesVarious government entities ("taxing authorities") require the Company to bill its customers for the taxes they owe based on the services they purchase from the Company. The application of the rules of each taxing authority concerning which services are subject to each tax and how those services should be taxed involves the application of judgment. Taxing authorities periodically perform audits to verify compliance and include all periods that remain open under applicable statutes, which generally range from three to four years. These audits could result in significant assessments of past taxes, fines and interest if the Company were found to be non-compliant. During the course of an audit, a taxing authority may question the Company's application of its rules in a manner that, if the Company were not successful in substantiating its position, could result in a significant financial impact to the Company. In the course of preparing its financial statements and disclosures, the Company considers whether information exists that would warrant disclosure or an accrual with respect to such a contingency. As of April 30, 2021, the Company is under audit with various state taxing authorities in which rulings related to the taxability of certain of our services are in appeals. The Company will continue to appeal these rulings, but should the Company not prevail, there could be obligations to pay additional taxes together with associated penalties and interest for the audited tax period, as well as additional taxes for periods subsequent to the tax audit period, including penalties and interest. An estimated liability in the amount of $6.3 million was accrued in fiscal 2021 and remains as of April 30, 2021. While Dell does provide an indemnification for certain state tax issues for tax periods prior to August 1, 2015, it does not cover a material portion of the current estimated liability.
12

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

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. During the three months ended April 30, 2021 and May 1, 2020, the Company had no customer that represented 10% or more of its net revenue.
NOTE 7 LEASES

The Company recorded operating lease cost for facilities of approximately $1.4 million and $1.5 million for the three months ended April 30, 2021 and May 1, 2020, respectively. Operating lease cost include expenses in connection with variable lease costs of $0.1 million and $0.2 million for the three months ended April 30, 2021 and May 1, 2020, respectively, which primarily consisted of utilities and common area charges.
For the three months ended April 30, 2021 and May 1, 2020, the Company recorded operating lease cost for equipment leases of approximately $0.2 million and $0.7 million, respectively. For the three months ended April 30, 2021 and May 1, 2020, equipment lease cost included short-term lease costs of $0.1 million and $0.6 million, respectively, for short-term leases. Lease expense for equipment was included in cost of revenues.
Cash paid for amounts included in the measurement of operating lease liabilities was $1.9 million and $0.9 million during the three months ended April 30, 2021 and May 1, 2020, respectively.
Weighted-average information associated with the measurement of the Company’s remaining operating lease obligations is as follows:
 April 30, 2021
Weighted-average remaining lease term5.0 years
Weighted-average discount rate5.33 %
The following table summarizes the maturity of the Company's operating lease liabilities as of April 30, 2021 (in thousands):
Fiscal Years EndingApril 30, 2021
2022$5,038 
20236,451 
20246,101 
20255,270 
20264,616 
Thereafter4,147 
Total operating lease payments$31,623 
Less imputed interest(3,894)
Total operating lease liabilities$27,729 

The Company's leases have remaining lease terms of 2 months to 5.7 years, inclusive of renewal or termination options that the Company is reasonably certain to exercise.
NOTE 8 — STOCK-BASED COMPENSATION AND OTHER LONG-TERM PERFORMANCE INCENTIVES
The SecureWorks Corp. 2016 Long-Term Incentive Plan (the "2016 Plan") was adopted 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.
13

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

Under the 2016 Plan, during the three months ended April 30, 2021 and May 1, 2020, the Company granted 1,848,963 and 2,428,357 restricted stock units, respectively, and 484,825 and 454,546 restricted stock awards, respectively. The annual
restricted stock unit and restricted stock awards granted during both such periods vest over a three-year period. Approximately 27% and 17% of such awards granted during the three months ended April 30, 2021 and May 1, 2020, respectively, are subject to performance conditions. All 1,848,963 restricted stock unit awards made during the three months ended April 30, 2021 are subject to the approval at the Company’s 2021 annual meeting of stockholders of an amendment to the 2016 Plan to increase the number of shares of Class A common stock issuable under the plan and thus are not deemed granted or outstanding for accounting purposes.
The Company grants long-term cash awards to certain employees under the 2016 Plan. The employees who receive these cash awards do not receive equity awards as part of the long-term incentive program. The majority of the cash awards issued prior to fiscal 2021 were subject to various performance conditions and vest in equal annual installments over a three-year period. The cash awards issued during the three months ended April 30, 2021 and May 1, 2020 are not subject to any performance conditions and vest in equal installments over a three-year period. The Company granted cash awards of $7.5 million and $8.1 million during the three months ended April 30, 2021 and May 1, 2020, respectively. The Company recognized $1.6 million of related compensation expense for both the three months ended April 30, 2021 and May 1, 2020, respectively.
NOTE 9 — INCOME AND OTHER TAXES
The Company’s loss before income taxes and income tax benefit (in thousands) and effective income tax rate for the three months ended April 30, 2021 and May 1, 2020 was as follows (in thousands, except percentages):    
Three Months Ended
April 30, 2021May 1,
2020
Loss before income taxes$(8,763)$(9,776)
Income tax benefit$(2,373)$(2,240)
Effective tax rate27.1 %22.9 %
During the periods presented in the accompanying Condensed Consolidated Statements of Financial Position, the Company did not file separate federal tax returns as the Company generally was included in the tax grouping of other Dell entities within the respective entity's tax jurisdiction. The income tax benefit has been calculated using the separate return method, modified to apply the benefits-for-loss approach. Under the benefits-for-loss approach, net operating losses or other tax attributes are characterized as realized by the Company when those attributes are utilized by other members of the Dell consolidated group.
The Company's effective tax benefit rate was 27.1% for the three months ended April 30, 2021 and 22.9% for the three months ended May 1, 2020. The change in the Company's effective income tax rate between the periods was primarily attributable to the impact of certain discrete adjustments related to stock-based compensation expense for the three months ended April 30, 2021 and May 1, 2020 of approximately $(0.3) million and $0.3 million, respectively. The change related specifically 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 for the three months ended April 30, 2021 and lower than the fair value for the three months ended May 1, 2020 on the date the equity awards were originally granted. The 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 for the three months ended April 30, 2021 and a lower actual tax deduction for the three months ended May 1, 2020 than the amounts deducted for financial reporting purposes.
As of April 30, 2021 and January 29, 2021, the Company had $5.5 million and $5.3 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 January 29, 2021. 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 April 30, 2021 and January 29, 2021. 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 three months ended April 30, 2021 would have been $8.8 million, $1.1 million and $7.7 million, respectively, as a result of the recognition of a valuation allowance that would have been recorded on a significant amount of deferred tax assets as well as certain attributes from the Tax Cuts and Jobs Act of 2017 that would be lost if not utilized by the Dell consolidated group.
Net deferred tax balances are included in other non-current assets and other non-current liabilities in the Condensed Consolidated Statements of Financial Position.
14

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of April 30, 2021 and January 29, 2021, the Company had a $1.7 million net operating loss receivable from Dell and $(0.7) million income tax payable to Dell, respectively. The Company had $3.8 million of unrecognized tax benefits as of April 30, 2021 and January 29, 2021, respectively.

NOTE 10 — RELATED PARTY TRANSACTIONS
Allocated Expenses
For the periods presented, Dell has provided various corporate services to Secureworks in the ordinary course of business. The costs of services provided to Secureworks by Dell are governed by a shared services agreement between Secureworks and Dell Inc. The total amounts of the charges under the shared services agreement with Dell were $0.9 million and $1.0 million for the three months ended April 30, 2021 and May 1, 2020, respectively. Management believes that the basis on which the expenses have been allocated is a reasonable reflection of the utilization of services provided to or the benefit received by the Company during the periods presented.

Related Party Arrangements
For the periods presented, related party transactions and activities involving Dell Inc. and its wholly-owned subsidiaries were not always consummated on terms equivalent to those that would prevail in an arm's-length transaction where conditions of competitive, free-market dealing may exist.
The Company purchases computer equipment for internal use from Dell 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 $0.2 million and $0.3 million for the three months ended April 30, 2021 and May 1, 2020, respectively.
EMC 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 $0.6 million and $0.4 million for the three months ended April 30, 2021 and May 1, 2020, respectively.
The Company recognized revenue related to solutions provided to VMware that totaled $0.1 million as of April 30, 2021. The Company recognized no such revenue for the three months ended May 1, 2020. In October 2019, VMware acquired Carbon Black Inc., a security business with which the Company had an existing commercial relationship. Purchases by the Company of solutions from Carbon Black totaled $1.0 million and $1.6 million for the three months ended April 30, 2021 and May 1, 2020, respectively.
The Company recognized no revenue related to security solutions provided to other subsidiaries of Dell Technologies, consisting of Pivotal Software, Inc. and Boomi, Inc for the three months ended April 30, 2021 and May 1, 2020, respectively. Purchases by the Company from these other subsidiaries totaled $56 thousand and $60 thousand for the three months ended April 30, 2021 and May 1, 2020, respectively.
The Company also recognized revenue related to solutions provided to significant beneficial owners of Secureworks common stock, which include Michael S. Dell, Chairman and Chief Executive Officer of Dell Technologies, and affiliates of Mr. Dell. The revenues recognized by the Company from solutions provided to Mr. Dell, MSD Capital, L.P. (a firm founded for the purposes of managing investments of Mr. Dell and his family), DFI Resources LLC, an entity affiliated with Mr. Dell, and the Michael and Susan Dell Foundation totaled $41 thousand and $0.1 million for the three months ended April 30, 2021 and May 1, 2020, respectively.
The Company provides solutions to certain customers whose contractual relationships have historically been with Dell rather than Secureworks, although the Company has the primary responsibility to provide the services. Effective August 1, 2015, in connection with the IPO, many of such customer contracts were transferred from Dell to the Company, forming a direct contractual relationship between the Company and the end customer. For customers whose contracts have not yet been transferred and for contracts subsequently originated through Dell under a reseller agreement, the Company recognized revenues of approximately $15.0 million and $14.6 million for the three months ended April 30, 2021 and May 1, 2020, respectively. In addition, as of April 30, 2021, 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. Beginning in the third quarter of the fiscal year ended January 29, 2016, in connection with the effective date of the Company’s commercial agreements with Dell, the Company began charging Dell for these services at pricing that is intended to
15

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
approximate arm’s-length pricing, in lieu of the prior cost recovery arrangement. Such revenues totaled approximately $3.2 million and $6.0 million for the three months ended April 30, 2021 and May 1, 2020, respectively.
As a result of the foregoing related party arrangements beginning in the third quarter of the fiscal year ended January 29, 2016, the Company has recorded the following related party balances in the Condensed Consolidated Statements of Financial Position as of April 30, 2021 and January 29, 2021 (in thousands).
April 30,
2021
January 29,
2021
Related party payable (in accrued and other current liabilities)$4,243 $13,807 
Accounts receivable from customers under reseller agreements with Dell (in accounts receivable, net)$10,963 $15,625 
Net operating loss tax sharing (payable)/receivable under agreement with Dell (payable in accrued and other and receivable in other current assets)$1,742 $(667)
NOTE 11 — FAIR VALUE MEASUREMENTS
The Company measures fair value within the guidance of the three-level valuation hierarchy. This hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The categorization of a measurement within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1 - Quoted market prices in active markets for identical assets or liabilities
Level 2 - Other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3 - Significant unobservable inputs
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The assets and liabilities of the Company that are measured at fair value on a recurring basis using the respective input levels as of April 30, 2021 and January 29, 2021 were as follows (in thousands):
April 30,
2021
January 29,
2021
Level 1Level 1
Cash equivalents - Money Market Funds$45,843 $85,841 
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.
16


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 January 29, 2021 included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended January 29, 2021 filed with the SEC on March 25, 2021, which we refer to as the Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, expected future responses to and effects of the COVID-19 pandemic and other characterizations of future events or circumstances. 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 28, 2022 and the fiscal year ended January 29, 2021 as fiscal 2022 and fiscal 2021, respectively. Fiscal 2022 and fiscal 2021 each have 52 weeks, and each quarter has 13 weeks. Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal periods.
All percentage amounts and ratios presented in this management’s discussion and analysis were calculated using the underlying data in thousands.
Except where the context otherwise requires or where otherwise indicated, (1) all references to "Secureworks," "we," "us," "our" and "our Company" in this management's discussion and analysis refer to SecureWorks Corp. and our subsidiaries on a consolidated basis, (2) all references to "Dell" refer to Dell Inc. and its subsidiaries on a consolidated basis and (3) all references to "Dell Technologies" refer to Dell Technologies Inc., the ultimate parent company of Dell Inc.
Overview
We are a leading global cybersecurity provider of technology-driven security solutions singularly focused on protecting our customers by outpacing and outmaneuvering threat actors.
Our vision is to be the essential cybersecurity company for a digitally connected world by providing the software platform of choice to deliver our holistic approach to security at scale for our customers. We combine considerable experience from securing thousands of customers, deep and machine-learning capabilities in our software platform, and actionable insights from our team of elite researchers, analysts and consultants to create a powerful network effect that provides increasingly strong protection for our customers.
Through our vendor-inclusive 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 solutions to close the gaps in their defenses. We seek to provide the right level of security for each customer's unique situation, which evolves as their organization grows and changes over time.
By aggregating and analyzing data from sources around the world, we offer solutions that enable organizations to:
prevent security breaches,
detect malicious activity,
respond rapidly when a security breach occurs, and
identify emerging threats.
We have pioneered an integrated approach that delivers a broad portfolio of security solutions to organizations of varying size and complexity. Our flexible and scalable solutions support the evolving needs of the largest, most sophisticated enterprises, as well as small and medium-sized businesses and U.S. state and local government agencies with limited in-house capabilities and resources.
We offer our customers:
software-as-a-service, or ("SaaS"), solutions,
managed security services, and
professional services, including incident response services and security risk consulting.
Our solutions leverage the proprietary technologies, security operations workflows, extensive expertise and knowledge of the tactics, techniques and procedures of the adversary that we have developed over more than 22 years. As key elements of our strategy, we seek to:
17


be the cloud-native security analytics software platform of choice,
broaden our reach with security service providers to deliver our security analytics software platform globally, and
empower the global security community to beat the adversary at scale.
Our technology-driven security solutions offer an innovative approach to prevent, detect, and respond to cybersecurity breaches. The platforms collect, aggregate, correlate and analyze billions of events daily from our extensive customer base utilizing sophisticated algorithms to detect malicious activity and deliver security countermeasures, dynamic intelligence and valuable context regarding the intentions and actions of cyber adversaries. Through our Taegis applications and managed security services, which are sold on a subscription basis, we provide global visibility and insight into malicious activity, enabling our customers to detect, respond to and effectively remediate threats quickly.
Our proprietary Taegis software platform, which we launched in fiscal 2020, was purpose-built as a cloud-native software platform that combines the power of machine-learning with security analytics and threat intelligence to unify detection and response across endpoint, network and cloud environments for better security outcomes and simpler security operations. The Taegis software platform is a core element for our SaaS applications, which leverage workflows designed using 22 years of security operations expertise and our integrated orchestration and automation capabilities to increase the speed of response actions. We expanded our Taegis SaaS applications with Vulnerability, Detection and Response, or VDR, during fiscal 2021 with our acquisition of Delve Laboratories Inc., as discussed below.
In addition to Taegis applications and managed security services, we also offer a variety of professional services, which include incident response and security and risk consulting, to accelerate adoption of our software solutions. We advise customers on a broad range of security and risk-related matters through both project-based and long-term contracts in addition to our Taegis applications and managed security services.
COVID-19
In December 2019, a novel strain of the coronavirus, COVID-19, was reported in mainland China. The World Health Organization declared the outbreak to constitute a "pandemic” on March 11, 2020. This led to a significant disruption of normal business operations globally, as businesses, including Secureworks, have implemented modifications to protect employees by restricting travel and directing employees to work-from-home, in some instances as required by federal, state and local authorities. While we instituted a global work-from-home policy beginning in March 2020, we did not incur significant disruptions in our business operations or a material impact on our results of operations, financial condition, liquidity or capital resources for the three months ended April 30, 2021. We have experienced a limited reduction in customer demand for our solutions that we believe is attributable to COVID-19, which may impact our results in future periods. Although we are unable to predict the extent and severity of all impacts of COVID-19, the pandemic might further curtail customer spending, lead to delayed or deferred purchasing decisions, lengthen sales cycles and result in delays in receiving customer or partner payments. These effects, individually or in the aggregate, could have a material negative impact on our future results of operations and financial condition.
In light of these considerations, we continue to actively monitor the impacts and potential impacts of the COVID-19 pandemic in all aspects of our business. The extent of the impact of COVID-19 on our future operational and financial performance will depend on various developments, including the duration and spread of the virus, effectiveness of vaccines deployed to contain the virus, impact on our employees, customers and vendors, impact on our customers' liquidity, and impact on volume of sales, and length of our sales cycles, all of which remain uncertain and cannot be predicted, but which could have a material negative effect on our business, results of operations or financial condition. Due to our subscription-based business model, any such effect of COVID-19 may not be fully reflected in our results of operations until future periods.
Key Factors Affecting Our Performance
We believe that our future success will depend on many factors, including the adoption of our Taegis solutions by organizations, continued investment in our technology and threat intelligence research, our introduction of new solutions, our ability to increase sales of our solutions to new and existing customers and our ability to attract and retain top talent. Although these areas present significant opportunities, they also present risks that we must manage to ensure our future success. For additional information about these risks, refer to “Risk Factors” in Part I, Item 1A of our Annual Report. We operate in an intensely competitive industry and face, among other competitive challenges, pricing pressures within the information security market as a result of action by our larger competitors to reduce the prices of their security prevention, detection and response solutions, as well as the prices of their managed security services. We must continue to manage our investments in an efficient manner and effectively execute our strategy to succeed. If we are unable to address these challenges, our business could be adversely affected.
Adoption of Technology-Driven Solution Strategy. The evolving landscape of applications, modes of communication and IT architectures makes it increasingly challenging for organizations of all sizes to protect their critical business assets, including
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proprietary information, from cyber threats. New technologies heighten security risks by increasing the number of ways a threat actor can attack a target, by giving users greater access to important business networks and information and by facilitating the transfer of control of underlying applications and infrastructure to third-party vendors. An effective cyber defense strategy requires the coordinated deployment of multiple products and solutions tailored to an organization’s specific security needs. Our integrated suite of solutions, including our new Taegis offerings, is designed to facilitate the successful implementation of such a strategy, but continuous investment in, and adaptation of, our technology will be required as the threat landscape continues to evolve rapidly. The degree to which prospective and current customers recognize the mission-critical nature of our technology-driven information security solutions, and subsequently allocate budget dollars to our solutions, will affect our future financial results.
Investment in Our Technology and Threat Intelligence Research. Our software platforms constitute the core of our technology-driven security solutions. They provide our customers with an integrated perspective and intelligence regarding their network environments and security threats. Our software platforms are augmented by our Counter Threat Unit research team, which conducts exclusive research into threat actors, uncovers new attack techniques, analyzes emerging threats and evaluates the risks posed to our customers. Our performance is significantly dependent on the investments we make in our research and development efforts, and on our ability to be at the forefront of threat intelligence research, and to adapt these software platforms to new technologies as well as to changes in existing technologies. This is an area in which we will continue to invest, while leveraging a flexible staffing model to align with solutions development. We believe that investment in our Taegis software platform and solutions will contribute to long-term revenue growth, but it may continue to adversely affect our near-term profitability.
Introduction of New Security Solutions. Our performance is significantly dependent on our ability to continue to innovate and introduce new information security solutions, such as our Taegis solutions, that protect our customers from an expanding array of cybersecurity threats. We continue to invest in solutions innovation and leadership, including hiring top technical talent and focusing on core technology innovation. In addition, we will continue to evaluate and utilize third-party proprietary technologies, where appropriate, for the continuous development of complementary offerings. We cannot be certain that we will realize increased revenue from our solutions development initiatives. We believe that our investment in solutions development will contribute to long-term revenue growth, but such investment may continue to adversely affect our near-term profitability.
Investments in Expanding Our Customer Base and Deepening Our Customer Relationships. To support future sales, we will need to continue to devote resources to the development of our global sales force. We have made and plan to continue to make significant investments in expanding our go-to-market efforts with direct sales, channel partners and marketing. Any investments we make in our sales and marketing operations will occur before we realize any benefits from such investments. The investments we have made, or intend to make, to strengthen our sales and marketing efforts may not result in an increase in revenue or an improvement in our results of operations. Although we believe our investment in sales and marketing will help us improve our results of operations in the long term, the resulting increase in operating expenses attributable to these sales and marketing functions may continue to affect adversely our profitability in the near term. The continued growth of our business also depends in part on our ability to sell additional solutions to our existing customers. As our customers realize the benefits of the solutions they previously purchased, our portfolio of solutions provides us with a significant opportunity to expand these relationships.
Investment in Our People. The difficulty in providing effective information security is exacerbated by the highly competitive environment for identifying, hiring and retaining qualified information security professionals. Our technology leadership, brand, exclusive focus on information security, customer-first culture, and robust training and development program have enabled us to attract and retain highly talented professionals with a passion for building a career in the information security industry. These professionals are led by a highly experienced and tenured management team with extensive IT security expertise and a record of developing successful new technologies and solutions to help protect our customers. We will continue to invest in attracting and retaining top talent to support and enhance our information security offerings.
Key Operating Metrics
In recent years, we have experienced broad growth across our portfolio of technology-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. Execution of this strategy has resulted in steady growth in our average revenue per customer. This growth has required ongoing 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 fiscal years then ended.
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 April 30, 2021May 1, 2020
Managed security subscription customer base3,100 3,900 
Taegis subscription customer base500 100 
Total subscription customer base3,600 4,000 
Total customer base5,300 5,300 
Managed security annual recurring revenue (in millions)$349.1 $412.8 
Taegis annual recurring revenue (in millions)$72.4 $24.9 
Total annual recurring revenue (in millions)$421.5 $437.7 
Managed security average subscription revenue per customer (in thousands)$105.4 $104.6 
Taegis average subscription revenue per customer (in thousands)$143.3 $172.8 
Total average subscription revenue per customer (in thousands)$116.1 $109.4 
Net revenue retention rate98 %98 %
Total Subscription Customer Base. We define our total subscription customer base as the number of customers who subscribe to our Taegis SaaS applications or managed security services as of a particular date. We believe that growing our existing customer base and our ability to grow our average subscription revenue per customer represent significant future revenue opportunities for us.
Total Customer Base. We define total customer base as the number of customers that subscribe to our Taegis SaaS applications and managed security services and customers that buy professional and other services from us, as of a particular date.

Total Annual Recurring Revenue. We define total annual recurring revenue as of the measurement date. Changes to recurring revenue may result from the expansion of our offerings and sales of additional solutions to our existing customers, as well as the timing of customer renewals.

Total Average Subscription Revenue Per Customer. Total 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. Our customer composition of both enterprise and small and medium sized business provides us with an opportunity to expand our professional services revenue. As of April 30, 2021 and May 1, 2020, approximately 64% and 61%, respectively, of our professional services customers subscribed to our Taegis applications or managed security services.

Net Revenue Retention Rate. Net revenue retention rate is an important measure of our success in retaining and growing revenue from our subscription-based customers. To calculate our revenue retention rate for any period, we compare the annual recurring revenue of our subscription-based customers at the beginning of the fiscal year (base recurring revenue) to the same measure from that same cohort of customers at the end of the fiscal year (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. The calculation, however, does not include the positive impact on revenue from sales of solutions to any customers acquired during the period. Our net revenue retention rates may increase or decline from period to period as a result of various factors, including the timing of solutions installations and customer renewal rates.
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Non-GAAP Financial Measures
We use supplemental measures of our performance, which are derived from our financial information, but which are not presented in our financial statements prepared in accordance with generally accepted accounting principles in the United States of America, referred to as GAAP. Non-GAAP financial measures presented in this management's discussion and analysis include non-GAAP 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.
There are limitations to the use of the non-GAAP financial measures presented in this management's discussion and analysis. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
The non-GAAP financial measures we present, as defined by us, exclude the items described in the reconciliation below. As the excluded items can have a material impact on earnings, our management compensates for this limitation by relying primarily on GAAP results and using non-GAAP financial measures supplementally. The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for revenue, gross margin, research and development expenses, sales and marketing expenses, general and administrative expenses, operating income (loss), net income (loss), earnings (loss) per share and EBITDA prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis.
Reconciliation of Non-GAAP Financial Measures
The table below presents a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, the exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent or unusual.
The following is a summary of the items excluded from the most comparable GAAP financial measures to calculate our non-GAAP financial measures:
Amortization of Intangible Assets. Amortization of intangible assets consists of amortization of customer relationships and acquired technology. In connection with the acquisition of Dell by Dell Technologies in fiscal 2014 and our acquisition of Delve Laboratories, Inc. in fiscal 2021, 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 each such transaction.
Stock-based Compensation Expense. Non-cash stock-based compensation expense relates to both the Dell Technologies and Secureworks equity plans. We exclude such expense when assessing the effectiveness of our operating performance since stock-based compensation does not necessarily correlate with the underlying operating performance of the business.
Aggregate Adjustment for Income Taxes. The aggregate adjustment for income taxes is the estimated combined income tax effect for the adjustments mentioned above. The tax effects are determined based on the tax jurisdictions where the above items were incurred.
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 Three Months Ended
 April 30, 2021May 1,
2020
(in thousands)
GAAP revenue(1)
$139,463 $141,181 
GAAP gross margin$82,256 $78,272 
Amortization of intangibles3,819 3,460 
Stock-based compensation expense 299 355 
Non-GAAP gross margin$86,374 $82,087 
GAAP research and development expenses$28,152 $24,073 
Stock-based compensation expense (1,098)(1,291)
Non-GAAP research and development expenses$27,054 $22,782 
GAAP sales and marketing expenses$36,405 $37,452 
Stock-based compensation expense (732)(741)
Non-GAAP sales and marketing expenses$35,673 $36,711 
GAAP general and administrative expenses$25,555 $27,516 
Amortization of intangibles(3,524)(3,524)
Stock-based compensation expense (3,906)(3,500)
Non-GAAP general and administrative expenses$18,125 $20,492 
GAAP operating loss$(7,856)$(10,769)
Amortization of intangibles7,343 6,984 
Stock-based compensation expense 6,035 5,887 
Non-GAAP operating income$5,522 $2,102 
GAAP net loss$(6,390)$(7,536)
Amortization of intangibles7,343 6,984 
Stock-based compensation expense6,035 5,887 
Aggregate adjustment for income taxes(2,997)(2,803)
Non-GAAP net income$3,991 $2,532 
GAAP loss per share$(0.08)$(0.09)
Amortization of intangibles0.09 0.09 
Stock-based compensation expense0.07 0.07 
Aggregate adjustment for income taxes(0.04)(0.03)
Non-GAAP earnings per share *$0.05 $0.03 
* Sum of reconciling items may differ from total due to rounding of individual components
GAAP net loss$(6,390)$(7,536)
Interest and other, net907 (993)
Income tax benefit(2,373)(2,240)
Depreciation and amortization9,918 10,486 
Stock-based compensation expense 6,035 5,887 
Adjusted EBITDA$8,097 $5,604 
(1) Historically the Company has presented non-GAAP revenue as a financial measure. There are no such adjustments that give rise to non-GAAP revenue for either of the periods presented.

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Our Relationship with Dell and Dell Technologies
On April 27, 2016, we completed our IPO. Upon the closing of our IPO, Dell Technologies owned, indirectly through Dell Inc. and Dell Inc.’s subsidiaries, all shares of our outstanding Class B common stock, which as of April 30, 2021 represented approximately 83.8% of our total outstanding shares of common stock and approximately 98.1% 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 10—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 was 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. For more information, see "Notes to Condensed Consolidated Financial Statements —Note 9—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 10—Related Party Transactions" in our condensed consolidated financial statements included in this report.
Components of Results of Operations
Revenue
We sell SaaS applications and managed security services on a subscription basis and various professional services, including incident response solutions and security risk consulting services. Our Taegis SaaS applications and managed security contracts typically range from one to three years and, as of April 30, 2021, averaged approximately 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 first quarter of fiscal 2022, approximately 75% of our revenue was derived from subscription-based arrangements, attributable to Taegis applications and managed security services, 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 32% of our total net revenue in the first quarter of fiscal 2022 and approximately 29% of our total net revenue in the first quarter of fiscal 2021. Although our international customers are located primarily in the United Kingdom, Japan, Australia and Canada, we provide our SaaS applications or managed security services to customers across 75 countries as of April 30, 2021.
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.
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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, the timing of revenue recognition and the extent to which we expand our security 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 support services 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 utilized as part of providing 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. 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 or expense.
Income Tax Benefit
Our effective tax benefit rate was 27.1% and 22.9% for the three months ended April 30, 2021 and May 1, 2020, respectively. The change in effective tax rate from fiscal 2020 to fiscal 2021 was primarily attributable to the impact of certain discrete adjustments related to the vesting of stock-based compensation awards and results of foreign operations.
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 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
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discussion of income tax matters, see “Notes to Condensed Consolidated Financial Statements—Note 9—Income and Other Taxes" in our consolidated financial statements included in this report.

Results of Operations
Three months ended April 30, 2021 compared to the three months ended May 1, 2020

The following tables summarize our key performance indicators for the three months ended April 30, 2021 and May 1, 2020.
 Three Months Ended
 April 30, 2021May 1, 2020
 $% of
Revenue
%
Change
$% of
Revenue
 (in thousands, except percentages)
Net revenue$139,463 100.0 %(1.2)%$141,181 100.0 %
Cost of revenue$57,207 (41.0)%(9.1)%$62,909 (44.6)%
Total gross margin$82,256 59.0 %5.1 %$78,272 55.4 %
Operating expenses$90,112 64.6 %1.2 %$89,041 63.1 %
Operating loss$(7,856)(5.6)%(27.0)%$(10,769)(7.6)%
Net loss$(6,390)(4.6)%(15.2)%$(7,536)(5.3)%
Other Financial Information (1)
Non-GAAP net revenue$139,463 100.0 %(1.2)%$141,181 100.0 %
Non-GAAP cost of revenue$53,089 38.1 %(10.2)%$59,094 41.9 %
Non-GAAP gross margin$86,374 61.9 %5.2 %$82,087 58.1 %
Non-GAAP operating expenses$80,852 58.0 %1.1 %$79,985 56.7 %
Non-GAAP operating income (loss)$5,522 4.0 %162.7 %$2,102 1.5 %
Non-GAAP net income (loss)$3,991 2.9 %57.6 %$2,532 1.8 %
Adjusted EBITDA$8,097 5.8 %44.5 %$5,604 4.0 %
_____________________
(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.
Revenue
Net revenue, which we refer to as revenue, decreased $1.7 million, or 1.2%, for the three months ended April 30, 2021. The decrease resulted primarily from a decline in revenue generated by our subscription-based solutions, which represented approximately 75% of total revenue for the three months ended April 30, 2021. The decline reflected our continued focus on reducing non-strategic service offerings and prioritizing the growth of our Taegis subscription solutions, which includes reselling Taegis offerings to our current subscription customer base.
Revenue for certain services provided to or on behalf of Dell under our commercial agreements with Dell totaled approximately $3.2 million and $6.0 million for the three months ended April 30, 2021 and May 1, 2020, respectively. For more information regarding the commercial agreements, see "Notes to Condensed Consolidated Financial Statements—Note 10—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 April 30, 2021, international revenue, which we define as revenue contracted through non-U.S. entities, increased to $44.9 million, or 10.8% of total revenue from the three months ended May 1, 2020. Currently, our international customers are primarily located in the United Kingdom, Japan, Australia and Canada. We are focused on continuing to grow our international customer base in future periods.
Gross Margin
Our total gross margin increased $4.0 million, or 5.1%, for the three months ended April 30, 2021. As a percentage of revenue, our gross margin increased 400 basis points to 59.0% for the three months ended April 30, 2021. 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 $4.3 million, or 5.2%, for the three months ended April 30, 2021. As a percentage of
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revenue, our non-GAAP gross margin increased 400 basis points to 61.9% for three months ended April 30, 2021. The increase in gross margin as a percentage of revenue on both a GAAP and non-GAAP basis during the three months ended April 30, 2021 was primarily attributable to improvement in our subscription-based solutions margins as we continue to focus on delivering comprehensive higher-value security solutions and driving scale and operational efficiencies, as well as to a decrease in travel-related costs attributable to the COVID-19 pandemic.
Operating Expenses

The following table presents information regarding our operating expenses during the three months ended April 30, 2021 and May 1, 2020.
 Three Months Ended
 April 30, 2021 May 1, 2020
 Dollars% of
Revenue
%
Change
Dollars% of
Revenue
 (in thousands, except percentages)
Operating expenses:     
Research and development$28,152 20.2 %16.9 %$24,073 17.1 %
Sales and marketing36,405 26.1 %(2.8)%37,452 26.5 %
General and administrative25,555 18.3 %(7.1)%27,516 19.5 %
Total operating expenses$90,112 64.6 %1.2 %$89,041 63.1 %
Other Financial Information
Non-GAAP research and development$27,054 19.4 %18.8 %$22,782 16.1 %
Non-GAAP sales and marketing35,673 25.6 %(2.8)%36,711 26.0 %
Non-GAAP general and administrative18,125 13.0 %(11.6)%20,492 14.5 %
Non-GAAP operating expenses (1)
$80,852 58.0 %1.1 %$79,985 56.7 %
            
(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 $4.1 million, or 16.9%, for the three months ended April 30, 2021. As a percentage of revenue, R&D expenses increased 300 basis points to 20.2% for the three months ended April 30, 2021. On a non-GAAP basis, R&D expenses as a percentage of revenue decreased 300 basis points to 19.4% for the three months ended April 30, 2021. The increase in R&D expenses was primarily attributable to increased compensation and benefits resulting from the addition of R&D personnel associated with the continued development of our Taegis software platform and SaaS applications.
Sales and Marketing Expenses. S&M expenses decreased $1.0 million, or 2.8%, for the three months ended April 30, 2021. As a percentage of revenue, S&M expenses decreased 40 basis points to 26.1% for the three months ended April 30, 2021. On a non-GAAP basis, S&M expenses as a percentage of revenue decreased 40 basis points to 25.6% for the three months ended April 30, 2021. The decrease in S&M expenses was primarily attributable to lower travel-related cost associated with increased activities on a remote basis as a result of the COVID-19 pandemic.
General and Administrative Expenses. G&A expenses decreased $2.0 million, or 7.1%, for the three months ended April 30, 2021. As a percentage of revenue, G&A expenses increased 100 basis points to 18.3% for the three months ended April 30, 2021. On a non-GAAP basis, G&A expenses as a percentage of revenue increased 200 basis points to 13.0% for the three months ended April 30, 2021. The decrease in G&A expenses was primarily attributable to lower professional services and consulting related costs for the current quarter.
Operating Loss
Our operating loss was $7.9 million and $10.8 million for the three months ended April 30, 2021 and May 1, 2020, respectively. As a percentage of revenue, our operating loss was 5.6% and 7.6% for the three months ended April 30, 2021 and May 1, 2020, respectively. The decrease in our operating loss was primarily attributable to our increased gross margin, which was partially offset by higher 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 adjustments, our non-GAAP operating income was $5.5 million for the three months ended April 30, 2021 compared to an operating loss of $2.1 million for the three months ended May 1, 2020.
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Interest and Other, Net
Our interest and other, net was $(0.9) million and $1.0 million for the three months ended April 30, 2021 and May 1, 2020, respectively. The change primarily reflected the effects of foreign currency transactions and related exchange rate fluctuations.
Income Tax Expense (Benefit)
Our income tax benefit was $2.4 million, or 27.1%, and $2.2 million, or 22.9%, of our pre-tax loss during the three months ended April 30, 2021 and May 1, 2020, respectively. The change in the effective tax benefit rate was primarily attributable to the impact of certain discrete adjustments related to the vesting of stock-based compensation awards in the current quarter.
Net Income (Loss)
Our net loss of $(6.4) million decreased $1.1 million, or 15.2%, for the three months ended April 30, 2021. Net income on a non-GAAP basis was $4.0 million compared to a non-GAAP net loss of $2.5 million the three months ended May 1, 2020. The changes on both a GAAP and non-GAAP basis were attributable to our improved operating results, partially offset by the lower 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 and for the foreseeable future thereafter. 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 and market 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 April 30, 2021, our principal sources of liquidity consisted of cash and cash equivalents and accounts receivable. Our cash and cash equivalents balance as of April 30, 2021 included $45.8 million invested in money market funds pending their use in our business.
Selected measures of our liquidity and capital resources are as follows:
 April 30,
2021
January 29, 2021
 (in thousands)
 
Cash and cash equivalents$180,607 $220,300 
Accounts receivable, net $94,901 $108,005 
We invoice our customers based on a variety of billing schedules. During the three months ended April 30, 2021, on average, approximately 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 are generally collected over a period of 30 to 120 days. The decrease in accounts receivable as of April 30, 2021 reflected increased collection activity. 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 April 30, 2021 and January 29, 2021, the provision for credit losses was $4.5 million and $4.8 million, respectively. Based upon our assessment, we believe we are adequately reserved for credit risk.
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Revolving Credit Facility
SecureWorks, Inc., our wholly-owned subsidiary, is party to a revolving credit agreement with a wholly-owned subsidiary of Dell Inc. under which we have obtained a $30 million senior unsecured revolving credit facility. 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 $30 million by mutual agreement of the lender and borrower. The proceeds from loans made under the facility may be used for general corporate purposes. The facility is not guaranteed by us or our subsidiaries. There was no outstanding balance under the facility as of April 30, 2021 or January 29, 2021. Effective March 25, 2021, the facility was amended and restated to extend the maturity date to March 25, 2022 and to modify the annual rate at which interest accrues to the applicable LIBOR plus 1.54%.
Amounts under the facility may be borrowed, repaid and reborrowed from time to time during the term of the facility. The borrower will be required to repay in full all of the loans outstanding, including all accrued interest, and the facility will terminate upon a change of control of us or following a transaction in which SecureWorks, Inc. ceases to be a direct or indirect wholly-owned subsidiary of our Company. The credit agreement contains customary representations, warranties, covenants and events of default. The unused portion of the facility is subject to a commitment fee of 0.35%, which is due upon expiration of the facility.
Cash Flows
 Three Months Ended
 April 30, 2021May 1,
2020
 (in thousands)
Net change in cash from:  
Operating activities$(30,558)$(20,337)
Investing activities(2,294)(1,020)
Financing activities(6,841)(4,491)
Change in cash and cash equivalents$(39,693)$(25,848)

Operating Activities Cash used by operating activities totaled $30.6 million and $20.3 million for the three months ended April 30, 2021 and May 1, 2020, respectively. The increased use of our operating cash was primarily driven by the decrease in our accounts payables, accrued liabilities and our net transactions with Dell, which was offset by decrease in our net accounts receivable balance due to an increase in collection rates. 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 $2.3 million and $1.0 million for the three months ended April 30, 2021 and May 1, 2020, respectively. For the periods presented, investing activities consisted primarily of capitalized expenses related to the development of our Taegis software platform and SaaS applications, as well as capital expenditures to support our facilities infrastructure.
Financing Activities — Cash flows used in financing activities totaled $6.8 million and $4.5 million for the three months ended April 30, 2021 and May 1, 2020, respectively. The use of cash flows for the three months ended April 30, 2021 reflected employee tax withholding payments of $6.8 million on restricted stock awards paid by us. The use of cash flows for the three months ended May 1, 2020 reflected employee tax withholding payments of $4.5 million on restricted stock awards paid by us.
Off-Balance Sheet Arrangements
As of April 30, 2021, 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.
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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," management assessed the critical accounting policies as disclosed in our Annual Report and determined that there were no changes to our critical accounting policies or our estimates associated with those policies during the three months ended April 30, 2021.
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, the Japanese Yen, the Australian Dollar 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 curren