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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 July 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/0c791f859bf39176f2bd82e7e5e07b83-scwx-20210730_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 August 31, 2021, there were 85,349,201 shares of the registrant's common stock outstanding, consisting of 15,349,201 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)
 July 30,
2021
January 29,
2021
ASSETS
Current assets: 
Cash and cash equivalents$196,961 $220,300 
Accounts receivable, net of allowances of $4,459 and $4,830, respectively
97,835 108,005 
Inventories, net627 560 
Other current assets17,143 17,349 
Total current assets312,566 346,214 
Property and equipment, net13,149 17,143 
Operating lease right-of-use assets, net20,085 22,330 
Goodwill426,149 425,861 
Intangible assets, net146,128 157,820 
Other non-current assets76,516 75,993 
Total assets$994,593 $1,045,361 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$15,446 $16,769 
Accrued and other current liabilities76,415 109,134 
Short-term deferred revenue168,001 168,437 
Total current liabilities259,862 294,340 
Long-term deferred revenue7,418 9,590 
Operating lease liabilities, non-current19,736 22,461 
Other non-current liabilities50,059 51,189 
Total liabilities337,075 377,580 
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock - $0.01 par value: 200,000 shares authorized; shares issued
  
Common stock - Class A of $0.01 par value: 2,500,000 shares authorized; 14,092 and 12,450 issued and outstanding, respectively.
141 124 
Common stock - Class B of $0.01 par value: 500,000 shares authorized; 70,000 shares issued and outstanding
700 700 
Additional paid in capital925,131 917,344 
Accumulated deficit(247,984)(229,831)
Accumulated other comprehensive loss(574)(660)
Treasury stock, at cost - 1,257 and 1,257 shares, respectively
(19,896)(19,896)
Total stockholders' equity657,518 667,781 
Total liabilities and stockholders' equity$994,593 $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 EndedSix Months Ended
 July 30, 2021July 31, 2020July 30, 2021July 31, 2020
  
Net revenue:
   Subscription$102,426 $106,259 $206,496 $212,616 
   Professional services31,746 32,217 67,139 67,041 
       Total net revenue134,172 138,476 273,635 279,657 
Cost of revenue:
   Subscription37,058 39,989 74,730 82,455 
   Professional services19,425 19,911 38,960 40,354 
       Total cost of revenue56,483 59,900 113,690 122,809 
Gross profit77,689 78,576 159,945 156,848 
Operating expenses:
Research and development30,417 24,109 58,569 48,182 
Sales and marketing34,685 35,624 71,090 73,076 
General and administrative26,488 21,800 52,043 49,316 
       Total operating expenses91,590 81,533 181,702 170,574 
Operating loss(13,901)(2,957)(21,757)(13,726)
Interest and other, net(601)30 (1,508)1,023 
Loss before income taxes(14,502)(2,927)(23,265)(12,703)
Income tax benefit(2,739)(1,700)(5,112)(3,940)
Net loss$(11,763)$(1,227)$(18,153)$(8,763)
Loss per common share (basic and diluted)$(0.14)$(0.02)$(0.22)$(0.11)
Weighted-average common shares outstanding (basic and diluted)82,979 81,417 82,482 81,177 

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


4


SECUREWORKS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in thousands)
Three Months EndedSix Months Ended
July 30, 2021July 31, 2020July 30, 2021July 31, 2020
Net loss$(11,763)$(1,227)$(18,153)$(8,763)
Foreign currency translation adjustments, net of tax(378)1,736 86 514 
Comprehensive (loss)/income$(12,141)$509 $(18,067)$(8,249)

The accompanying notes are an integral part of these condensed consolidated financial statements.
5


SECUREWORKS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Six Months Ended
 July 30,
2021
July 31,
2020
Cash flows from operating activities:
Net loss$(18,153)$(8,763)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization19,863 20,872 
Amortization of right of use asset2,098 2,247 
Stock-based compensation expense13,615 11,594 
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies1,344 (1,242)
Income tax benefit(5,112)(3,940)
Other non cash impacts 150 
Provision for credit losses448 1,314 
Changes in assets and liabilities:
Accounts receivable9,532 2,352 
Net transactions with parent(8,903)3,822 
Inventories(67)41 
Other assets4,418 1,444 
Accounts payable(1,293)1,507 
Deferred revenue(2,912)(1,784)
Operating leases, net(2,970)(856)
Accrued and other liabilities(25,185)(22,735)
Net cash (used)/provided by operating activities(13,277)6,023 
Cash flows from investing activities:  
Software development costs(3,218) 
Capital expenditures(1,033)(1,709)
Net cash used in investing activities(4,251)(1,709)
Cash flows from financing activities:  
Payment of taxes for equity awards(9,945)(4,658)
Proceeds from stock option exercises4,134  
Net cash used in financing activities(5,811)(4,658)
Net decrease in cash and cash equivalents(23,339)(344)
Cash and cash equivalents at beginning of the period220,300 181,838 
Cash and cash equivalents at end of the period$196,961 $181,494 

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 July 30, 2021Common Stock - Class ACommon Stock - Class B
 Outstanding SharesAmountOutstanding SharesAmountAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Treasury
Stock
Total Stockholders' Equity
Balances, April 30, 202113,550 $135 70,000 $700 $916,527 $(236,221)$(196)$(19,896)$661,049 
Net loss— — — — — (11,763)— — (11,763)
Other comprehensive loss— — — — — — (378)— (378)
Vesting of restricted stock units57 1 — — (1)— — —  
Exercise of stock options1,417 14 — — 4,120 — — — 4,134 
Common stock withheld as payment of taxes and cost for equity awards(932)(9)— — (3,095)— — — (3,104)
Stock-based compensation— — — — 7,580 — — — 7,580 
Balances, July 30, 202114,092 $141 70,000 $700 $925,131 $(247,984)$(574)$(19,896)$657,518 

Six Months Ended July 30, 2021Common Stock - Class ACommon Stock - Class B
 Outstanding SharesAmountOutstanding SharesAmountAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Treasury
Stock
Total Stockholders' Equity
Balances, January 29, 202112,450 $124 70,000 $700 $917,344 $(229,831)$(660)$(19,896)$667,781 
Net loss— — — — — (18,153)— — (18,153)
Other comprehensive income— — — — — — 86 — 86 
Vesting of restricted stock units1,197 12 — — (12)— — —  
Exercise of stock options1,417 14 — — 4,120 — — — 4,134 
Grant of restricted stock awards 485 5 — — (5)— — —  
Common stock withheld as payment of taxes and cost for equity awards(1,457)(14)— — (9,931)— — — (9,945)
Stock-based compensation— — — — 13,615 — — — 13,615 
Balances, July 30, 202114,092 $141 70,000 $700 $925,131 $(247,984)$(574)$(19,896)$657,518 


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


7


SECUREWORKS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(in thousands, except per share data)
Three Months Ended July 31, 2020Common Stock - Class ACommon Stock - Class B
 Outstanding SharesAmountOutstanding SharesAmountAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Treasury
Stock
Total Stockholders' Equity
Balances, May 1, 202012,120 $121 70,000 $700 $898,370 $(215,465)$(4,312)$(19,896)$659,518 
Net loss— — — — — (1,227)— — (1,227)
Other comprehensive income— — — — — — 1,736 — 1,736 
Vesting of restricted stock units76 1 — — (1)— — —  
Common stock withheld as payment of taxes and cost for equity awards(10)— — — (167)— — — (167)
Stock-based compensation— — — — 5,707 — — — 5,707 
Balances, July 31, 202012,186 $122 70,000 $700 $903,909 $(216,692)$(2,576)$(19,896)$665,567 



Six Months Ended July 31, 2020Common Stock - Class ACommon Stock - Class B
 Outstanding SharesAmountOutstanding SharesAmountAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Treasury
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— — — — — (8,763)— — (8,763)
Other comprehensive income— — — — — — 514 — 514 
Vesting of restricted stock units918 9 — — (9)— — —  
Grant of restricted stock awards 455 5 — — (5)— — —  
Common stock withheld as payment of taxes and cost for equity awards(393)(4)— — (4,654)— — — (4,658)
Stock-based compensation— — — — 11,594 — — — 11,594 
Balances, July 31, 202012,186 $122 70,000 $700 $903,909 $(216,692)$(2,576)$(19,896)$665,567 


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



8

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

NOTE 1 — DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
SecureWorks Corp. (individually and collectively with its consolidated subsidiaries, “Secureworks” or the “Company”) is a leading global 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 July 30, 2021 represented approximately 83.2% of the Company's total outstanding shares of common stock and approximately 98.0% 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.
Effective with the three months ended July 30, 2021, the Company is presenting Net revenue and Costs of revenue recognized from Subscription and Professional Services offerings, respectively, in the Condensed Consolidated Statement of Operations. Historically, these amounts were presented as a single amount within the Net revenue and Cost of revenue line items, respectively. The Company concluded that the discrete presentation of these revenue streams provides a more meaningful representation of the nature of the revenues generated by our service offerings. Certain prior year amounts have been conformed to the current year presentation.
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.
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
9

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 and six months ended July 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 six months ended July 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 Six Months Ended
July 30, 2021July 31, 2020July 30, 2021July 31, 2020
Numerator:
Net loss$(11,763)$(1,227)$(18,153)$(8,763)
Denominator:  
Weighted-average number of shares outstanding: 
Basic and Diluted82,979 81,417 82,482 81,177 
Loss per common share:  
Basic and Diluted$(0.14)$(0.02)$(0.22)$(0.11)
Weighted-average anti-dilutive stock options, non-vested restricted stock and restricted stock units4,873 6,584 5,449 5,949 

10

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3 — CONTRACT BALANCES AND CONTRACT COSTS
The Company derives revenue primarily from subscription revenue and professional services. Subscription revenue is derived from (1) Taegis software-as-a-service (“SaaS”) security platform and (2) managed security services. Taegis subscription-based revenue currently includes two applications, Extended Detection and Response (“XDR”), and Vulnerability Detection and Response (“VDR”), along with the add-on managed service to supplement the XDR SaaS application, referred to as Managed Detection and Response (“ManagedXDR”). 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. Professional services typically include incident response and security and risk consulting solutions.
The following table presents revenue by service type (in thousands):
Three Months EndedSix Months Ended
July 30, 2021July 31, 2020July 30, 2021July 31, 2020
Net revenue:
 Taegis Subscription Solutions$18,503 $7,126 $32,463 $11,579 
 Managed Security Services83,923 99,133 174,033 201,037 
Total subscription revenue102,426 106,259 206,496 212,616 
Professional Services31,746 32,217 67,139 67,041 
Total net revenue$134,172 $138,476 $273,635 $279,657 
Taegis Subscription Solutions revenue for the three and six months ended July 31, 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 six months ended July 30, 2021, on average, approximately 58% of the Company's recurring revenue was billed in advance annually or for the entirety of the contract amount, and approximately 42% was billed in advance on either a monthly or a quarterly basis. In addition, many of the Company's professional services engagements are billed in advance of service commencement. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration and invoice timing.

Changes to the Company's deferred revenue during the six months ended July 30, 2021 and July 31, 2020 are as follows (in thousands):
As of January 29, 2021Upfront payments received and billings during the six months ended July 30, 2021Revenue recognized during the six months ended July 30, 2021As of July 30, 2021
Deferred revenue$178,027 $176,529 $(179,137)$175,419 

As of January 31, 2020Upfront payments received and billings during the six months ended July 31, 2020Revenue recognized during the six months ended July 31, 2020As of July 31, 2020
Deferred revenue$188,537 $165,081 $(167,341)$186,277 

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.
11

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 revenue.    
As of July 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$275,890 $152,573 $84,154 $32,789 $6,374 
Performance obligation - backlog11,903 4,344 4,248 3,311  
Total$287,793 $156,917 $88,402 $36,100 $6,374 

Deferred Commissions and Fulfillment Costs
The Company capitalizes a significant portion of its commission expense and related fringe benefits earned by its sales personnel. Additionally, the Company capitalizes certain costs to install and activate hardware and software used in its managed security services, primarily related to a portion of the compensation for the personnel who perform the installation activities. These deferred costs are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relate.
Changes in the balance of total deferred commission and total deferred fulfillment costs during the six months ended July 30, 2021 and July 31, 2020 are as follows (in thousands):
As of January 29, 2021Amount capitalizedAmount recognizedAs of July 30, 2021
Deferred commissions$57,888 $7,516 $(9,912)$55,492 
Deferred fulfillment costs11,009 1,039 (2,700)9,348 
As of January 31, 2020Amount capitalizedAmount recognizedAs of July 31, 2020
Deferred commissions$62,785 $7,259 $(10,834)$59,210 
Deferred fulfillment costs11,366 3,005 (2,865)11,506 

The Company did not record any impairment losses on the deferred commissions or deferred fulfillment costs during the three and six months ended July 30, 2021 or July 31, 2020.


12

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 — GOODWILL AND INTANGIBLE ASSETS
Goodwill relates to the acquisition of Dell by Dell Technologies and represents the excess of the purchase price attributable to Secureworks over the fair value of the assets acquired and liabilities assumed, as well as subsequent business combinations completed by the Company. Goodwill increased $0.3 million due to foreign currency translation for the six months ended July 30, 2021, as compared to January 29, 2021. Goodwill totaled $426.1 million as of July 30, 2021 and $425.9 million as of January 29, 2021. No triggering events have transpired since the last annual impairment test that would indicate a potential impairment occurred during the period through July 30, 2021.

Intangible Assets
The Company's intangible assets as of July 30, 2021 and January 29, 2021 were as follows:
 July 30, 2021January 29, 2021
 GrossAccumulated
Amortization
NetGrossAccumulated
Amortization
Net
 (in thousands)
Customer relationships$189,518 $(112,388)$77,130 $189,518 $(105,341)$84,177 
Technology147,039 (108,159)38,880 143,821 (100,296)43,525 
Finite-lived intangible assets336,557 (220,547)116,010 333,339 (205,637)127,702 
Trade name30,118 — 30,118 30,118 — 30,118 
Total intangible assets$366,675 $(220,547)$146,128 $363,457 $(205,637)$157,820 

Amortization expense related to finite-lived intangible assets was approximately $7.6 million and $14.9 million for the three and six months ended July 30, 2021, respectively, and $7.2 million and $14.2 million for the three and six months ended July 31, 2020, respectively. Amortization expense is included within cost of revenue and general and administrative expense in the Condensed Consolidated Statements of Operations. There were no impairment charges related to intangible assets during the three and six months ended July 30, 2021 or July 31, 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 six months ended July 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 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 July 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.
13

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6 — COMMITMENTS AND CONTINGENCIES
Legal ContingenciesFrom time to time, the Company is involved in claims and legal proceedings that arise in the ordinary course of business. The Company accrues a liability when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews the status of such matters at least quarterly and adjusts its liabilities as necessary to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. Whether the outcome of any claim, suit, assessment, investigation or legal proceeding, individually or collectively, could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows will depend on a number of factors, including the nature, timing and amount of any associated expenses, amounts paid in settlement, damages or other remedies or consequences. To the extent new information is obtained and the Company's views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in accrued liabilities would be recorded in the period in which such a determination is made. As of July 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 July 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 July 30, 2021 related to such sales tax matters. 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.
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 and six months ended July 30, 2021 and July 31, 2020, the Company had no customer that represented 10% or more of its total net revenue.
NOTE 7 LEASES
The Company recorded operating lease cost for facilities of approximately $1.3 million and $2.7 million for the three and six months ended July 30, 2021, respectively, and $1.6 million and $3.1 million for the three and six months ended July 31, 2020, respectively. Operating lease cost include expenses in connection with variable lease costs of $64 thousand and $0.1 million for the three and six months ended July 30, 2021, respectively, and $0.2 million and $0.3 million for the three and six months ended July 31, 2020, respectively, which primarily consisted of utilities and common area charges.

For the three and six months ended July 30, 2021, the Company recorded operating lease costs for equipment leases of approximately $0.1 million and $0.3 million, respectively, and $0.4 million and $1.1 million for the three and six months ended July 31, 2020, respectively. Equipment lease costs included short-term lease costs of $0.1 million and $0.2 million for the three and six months ended July 30, 2021 respectively, and $0.4 million and $0.9 million for the three and six months ended July 31, 2020, respectively. Lease expense for equipment was included in cost of revenues.
Cash paid for amounts included in the measurement of operating lease liabilities was $1.7 million and $3.6 million during the three and six months ended July 30, 2021, respectively, and $0.9 million and $1.8 million for the three and six months ended July 31, 2020, respectively.
14

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Weighted-average information associated with the measurement of the Company’s remaining operating lease obligations is as follows:
 July 30, 2021
Weighted-average remaining lease term4.8 years
Weighted-average discount rate5.34 %
The following table summarizes the maturity of the Company's operating lease liabilities as of July 30, 2021 (in thousands):
Fiscal Years EndingJuly 30, 2021
2022$3,336 
20236,426 
20246,078 
20255,258 
20264,604 
Thereafter4,140 
Total operating lease payments$29,842 
Less imputed interest(3,575)
Total operating lease liabilities$26,267 
The Company's leases have remaining lease terms of 1 month to 5.42 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.
Under the 2016 Plan, the Company granted 509,839 and 2,358,802 restricted stock units during the three and six months ended July 30, 2021, respectively, and 45,300 and 2,473,657 restricted stock units during the three and six months ended July 31, 2020, respectively. The Company granted no restricted stock awards for the three months ended July 30, 2021 and July 31, 2020, and 466,644 and 454,546 restricted stock awards for the six months ended July 30, 2021 and July 31, 2020, respectively. The restricted stock units and restricted stock awards granted during both such periods vest over an average of a three-year period. Approximately 29% and 17% of such awards granted during the six months ended July 30, 2021 and July 31, 2020, respectively, are subject to performance conditions. All restricted stock unit awards made during the three months ended April 30, 2021 were subject to approval by the Company's stockholders at the annual meeting held on June 21, 2021 of an amendment to the 2016 Plan to increase the number of Class A common stock shares issuable under the plan by 5,000,000 shares. Such stockholder approval was obtained and those awards were deemed granted and outstanding for accounting purposes during the three months ended July 30, 2021.
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 and six months ended July 30, 2021 are not subject to any performance conditions and vest in equal installments over a three-year period. The Company granted cash awards of $1.5 million and $9.0 million during the three and six months ended July 30, 2021, respectively, and $0.1 million and $8.2 million during the three and six months ended July 31, 2020, respectively. The Company recognized $1.6 million and $3.2 million of related compensation expense for the three and six months ended July 30, 2021, respectively, and $1.6 million and $3.2 million for the three and six months ended July 31, 2020, respectively.
15

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9 — INCOME AND OTHER TAXES
The Company's loss before income taxes, income tax benefit and effective income tax rate for the three and six months ended July 30, 2021 and July 31, 2020 was as follows (in thousands, except percentages):    
Three Months EndedSix Months Ended
July 30, 2021July 31, 2020July 30, 2021July 31, 2020
Loss before income taxes$(14,502)$(2,927)$(23,265)$(12,703)
Income tax benefit$(2,739)$(1,700)$(5,112)$(3,940)
Effective tax benefit rate18.9 %58.1 %22.0 %31.0 %

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 18.9% and 22.0% for the three and six months ended July 30, 2021, respectively, and 58.1% and 31.0% for the three and six months ended July 31, 2020, respectively. The changes in the Company's effective income tax rate between the periods were primarily attributable to both the increase in loss before income taxes for the three months ended July 30, 2021 and the impact of certain discrete adjustments related to stock-based compensation expense of approximately $0.4 million and $0.1 million for the three and six months ended July 30, 2021, respectively, and $(0.7) million and $(0.4) million for the three and six months ended July 31, 2020, respectively. The changes related specifically to the impact of the vesting of certain equity awards for which the fair value on the vesting date was lower than the grant date fair value for the three and six months ended July 30, 2021 and the fair value on the vesting date was higher than the grant date fair value for the three and six months ended July 31, 2020. 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 lower actual tax deduction for the three and six months ended July 30, 2021 and a higher actual tax deduction for the three and six months ended July 31, 2020 than the amounts deducted for financial reporting purposes.
As of each of July 30, 2021 and January 29, 2021, the Company had $5.7 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 July 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 six months ended July 30, 2021 would have been $23.3 million, $3.0 million and $20.3 million, respectively, as a result of the recognition of a valuation allowance that would have been recorded on a significant amount of deferred tax assets as well as certain attributes from the Tax Cuts and Jobs Act of 2017 that would be lost if not utilized by the Dell consolidated group.
Net deferred tax balances are included in other non-current assets and other non-current liabilities in the Condensed Consolidated Statements of Financial Position.
As of July 30, 2021 and January 29, 2021, the Company had $4.9 million net operating loss receivable from Dell and $(0.7) million income tax payable to Dell, respectively. The Company had $3.9 million and $3.8 million of unrecognized tax benefits as of July 30, 2021 and January 29, 2021, respectively.
16

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 10 — RELATED PARTY TRANSACTIONS
Allocated Expenses
For the periods presented, Dell has provided various corporate services to Secureworks in the ordinary course of business. The costs of services provided to Secureworks by Dell are governed by a shared services agreement between Secureworks and Dell Inc. The total amounts of the charges under the shared services agreement with Dell were $0.9 million and $1.9 million for the three and six months ended July 30, 2021, respectively, and $1.0 million and $2.0 million for the three and six months ended July 31, 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 $0.1 million and $0.3 million for the three and six months ended July 30, 2021, respectively, and $0.2 million and $0.5 million for the three and six months ended July 31, 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 $0.5 million and $1.1 million for the three and six months ended July 30, 2021, respectively, and $1.0 million and $1.4 million for the three and six months ended July 31, 2020, respectively.
The Company recognized revenue related to solutions provided to VMware that totaled $0.2 million and $0.3 million for the three and six months ended July 30, 2021, respectively. In October 2019, VMware acquired Carbon Black Inc., a security business with which the Company had an existing commercial relationship. For the three and six months ended July 30, 2021, purchases by the Company of solutions from Carbon Black totaled $1.5 million and $2.6 million, respectively.
The Company recognized no revenue related to security solutions provided to Boomi Inc., a subsidiary of Dell Technologies, for the three and six months ended July 30, 2021 and July 31, 2020, respectively. There were no purchases by the Company from this subsidiary for the three months ended July 30, 2021, and purchases of $56 thousand for the six months ended July 30, 2021. Purchases by the Company from this subsidiary were $5 thousand and $0.1 million for the three and six months ended July 31, 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 $51 thousand and $0.1 m