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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 October 29, 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/ad1df7838af5d2d9e51e2e3f4aa705aa-scwx-20211029_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 December 1, 2021, there were 84,202,245 shares of the registrant's common stock outstanding, consisting of 14,202,245 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)
 October 29,
2021
January 29,
2021
ASSETS
Current assets: 
Cash and cash equivalents$205,129 $220,300 
Accounts receivable, net of allowances of $4,010 and $4,830, respectively
95,108 108,005 
Inventories, net515 560 
Other current assets14,515 17,349 
Total current assets315,267 346,214 
Property and equipment, net11,048 17,143 
Operating lease right-of-use assets, net18,979 22,330 
Goodwill426,228 425,861 
Intangible assets, net139,853 157,820 
Other non-current assets79,312 75,993 
Total assets$990,687 $1,045,361 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$13,063 $16,769 
Accrued and other current liabilities85,128 109,134 
Short-term deferred revenue164,359 168,437 
Total current liabilities262,550 294,340 
Long-term deferred revenue5,399 9,590 
Operating lease liabilities, non-current18,461 22,461 
Other non-current liabilities51,946 51,189 
Total liabilities338,356 377,580 
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; 14,202 and 12,450 issued and outstanding, respectively.
142 124 
Common stock - Class B of $0.01 par value: 500,000 shares authorized; 70,000 shares issued and outstanding
700 700 
Additional paid in capital933,427 917,344 
Accumulated deficit(260,847)(229,831)
Accumulated other comprehensive loss(1,195)(660)
Treasury stock, at cost - 1,257 and 1,257 shares, respectively
(19,896)(19,896)
Total stockholders' equity652,331 667,781 
Total liabilities and stockholders' equity$990,687 $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 EndedNine Months Ended
 October 29, 2021October 30, 2020October 29, 2021October 30, 2020
  
Net revenue:
   Subscription$102,992 $108,265 $309,488 $320,881 
   Professional services30,707 33,376 97,846 100,417 
      Total net revenue133,699 141,641 407,334 421,298 
Cost of revenue:
   Subscription34,888 40,051 109,423 122,506 
   Professional services18,002 19,562 57,157 59,916 
      Total cost of revenue52,890 59,613 166,580 182,422 
Gross profit80,809 82,028 240,754 238,876 
Operating expenses:
   Research and development32,767 27,608 91,336 75,790 
   Sales and marketing35,008 34,810 106,098 107,886 
   General and administrative28,404 24,508 80,447 73,824 
      Total operating expenses96,179 86,926 277,881 257,500 
Operating loss(15,370)(4,898)(37,127)(18,624)
Interest and other, net(762)(79)(2,270)944 
Loss before income taxes(16,132)(4,977)(39,397)(17,680)
Income tax benefit(3,269)(1,369)(8,381)(5,309)
Net loss$(12,863)$(3,608)$(31,016)$(12,371)
Loss per common share (basic and diluted)$(0.15)$(0.04)$(0.37)$(0.15)
Weighted-average common shares outstanding (basic and diluted)83,297 81,474 82,754 81,276 
 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 EndedNine Months Ended
October 29, 2021October 30, 2020October 29, 2021October 30, 2020
Net loss$(12,863)$(3,608)$(31,016)$(12,371)
Foreign currency translation adjustments, net of tax(621)(587)(535)(73)
Comprehensive loss$(13,484)$(4,195)$(31,551)$(12,444)

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)
Nine Months Ended
 October 29,
2021
October 30,
2020
Cash flows from operating activities:
Net loss$(31,016)$(12,371)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization29,914 30,978 
Amortization of right of use asset3,081 1,577 
Stock-based compensation expense23,677 17,675 
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies2,374 (1,190)
Income tax benefit(8,381)(5,309)
Other non cash impacts 150 
Provision for credit losses73 1,871 
Changes in assets and liabilities:
Accounts receivable12,460 2,296 
Net transactions with parent(6,794)5,586 
Inventories45 56 
Other assets8,107 4,514 
Accounts payable(3,814)2,668 
Deferred revenue(8,830)(4,820)
Operating leases, net(4,266)(2,202)
Accrued and other liabilities(18,403)(13,046)
  Net cash (used)/provided by operating activities(1,773)28,433 
Cash flows from investing activities:
Acquisition of a Business, net of cash (15,081)
Software development costs(4,574) 
Capital expenditures(1,248)(2,181)
Net cash used in investing activities(5,822)(17,262)
Cash flows from financing activities:
Payment of taxes for equity awards(11,710)(4,962)
Proceeds from stock option exercises4,134  
Net cash used in financing activities(7,576)(4,962)
Net decrease in cash and cash equivalents(15,171)6,209 
Cash and cash equivalents at beginning of the period220,300 181,838 
Cash and cash equivalents at end of the period$205,129 $188,047 

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 October 29, 2021Common Stock - Class ACommon Stock - Class B
 Outstanding SharesAmountOutstanding SharesAmountAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Treasury
Stock
Total Stockholders' Equity
Balances, July 30, 202114,092 $141 70,000 $700 $925,131 $(247,984)$(574)$(19,896)$657,518 
Net loss— — — — — (12,863)— — (12,863)
Other comprehensive loss— — — — — — (621)— (621)
Vesting of restricted stock units183 2 — — (2)— — —  
Common stock withheld as payment of taxes and cost for equity awards(73)(1)— — (1,764)— — — (1,765)
Stock-based compensation— — — — 10,062 — — — 10,062 
Balance, October 29, 202114,202 $142 70,000 $700 $933,427 $(260,847)$(1,195)$(19,896)$652,331 

Nine Months Ended October 29, 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— — — — — (31,016)— — (31,016)
Other comprehensive loss— — — — — — (535)— (535)
Vesting of restricted stock units1,380 14 — — (14)— — —  
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(1,530)(15)— — (11,695)— — — (11,710)
Stock-based compensation    23,677    23,677 
Balance, October 29, 202114,202 $142 70,000 $700 $933,427 $(260,847)$(1,195)$(19,896)$652,331 



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 October 30, 2020Common Stock - Class ACommon Stock - Class B
 Outstanding SharesAmountOutstanding SharesAmountAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Treasury
Stock
Total Stockholders' Equity
Balances, July 31, 202012,186 $122 70,000 $700 $903,909 $(216,692)$(2,576)$(19,896)$665,567 
Net loss— — — — — (3,608)— — (3,608)
Other comprehensive loss— — — — — — (587)— (587)
Vesting of restricted stock units75  — —  — — —  
Common stock withheld as payment of taxes and cost for equity awards(25) — — (304)— — — (304)
Stock-based compensation— — — — 6,081 — — — 6,081 
Balances, October 30, 202012,236 $122 70,000 $700 $909,686 $(220,300)$(3,163)$(19,896)$667,149 



Nine Months Ended October 30, 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— — — — — (12,371)— — (12,371)
Other comprehensive loss— — — — — — (73)— (73)
Vesting of restricted stock units993 9 — — (9)— — —  
Grant of restricted stock awards 455 5 — — (5)— — —  
Common stock withheld as payment of taxes and cost for equity awards(418)(4)— — (4,958)— — — (4,962)
Stock-based compensation— — — — 17,675 — — — 17,675 
Balances, October 30, 202012,236 $122 70,000 $700 $909,686 $(220,300)$(3,163)$(19,896)$667,149 


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 October 29, 2021 represented approximately 83.1% 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 beginning 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 these and other related party transactions, see "Note 11—Related Party Transactions."
During the periods presented in the financial statements, Secureworks did not file separate federal tax returns, as the Company is generally included in the tax grouping of other Dell entities within the respective entity's tax jurisdiction. The income tax benefit has been calculated using the separate return method, modified to apply the benefits for loss approach. Under the benefits for loss approach, net operating losses or other tax attributes are characterized as realized or as realizable by Secureworks when those attributes are utilized or expected to be utilized by other members of the Dell consolidated group. See "Note 10—Income and Other Taxes" for more information.
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 nine months ended October 29, 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 nine months ended October 29, 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.
Business Combinations—The Company accounts for business combinations under the acquisition method of accounting. This method requires the recording of acquired assets and assumed liabilities at their acquisition date fair values. The allocation of the purchase price in a business combination requires the Company to make significant estimates in determining the fair value of acquired assets and assumed liabilities, especially with respect to intangible assets. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. These estimates are based upon a number of factors, including historical experience, market conditions and information obtained from the management of the acquired company. Critical estimates in valuing certain intangible assets included, but are not limited to, cash flows that an asset is expected to generate in the future, discount rates and the profit margin a market participant would receive. Results of operations related to business combinations are included prospectively beginning with the date of acquisition and transaction costs related to business combinations are recorded within selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. For more information, see "Note 2 —Business Combinations."
NOTE 2 — BUSINESS COMBINATIONS
There was no business combination activity during the three months ended October 29, 2021. The following disclosure information relates to related activity that occurred during the comparative periods presented in the Company's financial statements.
On September 21, 2020, the Company acquired all of the outstanding shares (representing 100% of the voting interest) of Delve Laboratories Inc. ("Delve") for approximately $15.4 million. Delve provides comprehensive vulnerability assessment solutions through its automated vulnerability platform. Delve's software-as-a-service solution is powered by artificial intelligence and machine learning to provide customers with more accurate and actionable data about the highest risk vulnerabilities across their network, endpoints and cloud. Secureworks plans to integrate the vulnerability discovery and prioritization technology into new offerings within its cloud-based portfolio, including its Red Cloak Platform and TDR application, expanding visibility and insights for users. The financial results of Delve have been included in the Company's condensed consolidated financial statements prospectively from the date of acquisition within the Company's single reporting unit. The goodwill recognized as described below in connection with the transaction is primarily attributable to the anticipated synergies from future growth of the product and the Company’s Red Cloak Platform. The acquisition was treated as an asset transaction for tax purposes and $9.1 million of goodwill acquired is expected to be deductible for tax purposes. Transaction costs were approximately $0.6 million and were expensed as incurred by the Company. The acquired business did not have a material impact on the Company's condensed consolidated financial statements, and therefore historical and pro forma disclosures have not been presented.


10

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes the allocation of the aggregate purchase price to the fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands of USD), which was completed as of January 29, 2021:

Total Purchase Price Allocation for Acquisition
Assets acquired:
Cash and cash equivalents$343 
Accounts and notes receivable101 
Other current assets608 
Intangibles6,200 
Total identifiable assets7,252 
Goodwill9,108 
Total assets acquired
16,360 
Liabilities assumed:
    Accounts payable28 
    Accrued and other liabilities688 
    Non-current liabilities220 
Total liabilities assumed
936 
Purchase consideration$15,424 

The intangibles identified in the transaction represent technology-based assets with an established useful life of 6 years. The value of the acquired assets was estimated using the relief-from-royalty method, an income approach (Level 3), which provides an estimate of cost savings that accrue to the owner of the asset which would otherwise be payable as royalties or license fees on revenue earned through the use of the asset.
NOTE 3 — 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 EndedNine Months Ended
October 29, 2021October 30, 2020October 29, 2021October 30, 2020
Numerator:
Net loss$(12,863)$(3,608)$(31,016)$(12,371)
Denominator:  
Weighted-average number of shares outstanding: 
Basic and Diluted83,297 81,474 82,754 81,276 
Loss per common share:  
Basic and Diluted$(0.15)$(0.04)$(0.37)$(0.15)
Weighted-average anti-dilutive stock options, non-vested restricted stock and restricted stock units4,699 6,436 5,199 6,151 

11

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 — CONTRACT BALANCES AND CONTRACT COSTS
The Company derives revenue primarily from subscription revenue and professional services. Subscription revenue is derived from (i) Taegis software-as-a-service (“SaaS”) security platform and (ii) 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 EndedNine Months Ended
October 29, 2021October 30, 2020October 29, 2021October 30, 2020
Net revenue:
 Managed Security Services$79,063 $99,088 $253,096 $300,124 
 Taegis Subscription Solutions$23,929 $9,177 $56,392 $20,757 
Total subscription revenue$102,992 $108,265 $309,488 $320,881 
Professional Services$30,707 $33,376 $97,846 $100,417 
Total net revenue$133,699 $141,641 $407,334 $421,298 
Taegis Subscription Solutions revenue for the three and nine months ended October 30, 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 nine months ended October 29, 2021, on average, 59% of the Company's recurring revenue was billed in advance annually or for the entirety of the contract amount, and approximately 41% 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 nine months ended October 29, 2021 and October 30, 2020 are as follows (in thousands):
As of January 29, 2021
Upfront payments received and billings during the nine months ended October 29, 2021
Revenue recognized during the nine months ended October 29, 2021
As of October 29, 2021
Deferred revenue$178,027 $224,152 $(232,420)$169,759 

As of January 31, 2020
Upfront payments received and billings during the nine months ended October 30, 2020
Revenue recognized during the nine months ended October 30, 2020
As of October 30, 2020
Deferred revenue$188,537 $217,903 $(222,974)$183,466 

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 Accounting Standards Codification (“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.
12

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 October 29, 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$263,589 $143,093 $82,973 $33,333 $4,190 
Performance obligation - backlog11,697 4,663 4,613 2,421  
Total$275,286 $147,756 $87,586 $35,754 $4,190 

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 nine months ended October 29, 2021 and October 30, 2020 are as follows (in thousands):
As of January 29, 2021Amount capitalizedAmount recognized
As of October 29, 2021
Deferred commissions$57,888 $10,914 $(14,694)$54,108 
Deferred fulfillment costs11,009 1,641 (4,001)8,649 
As of January 31, 2020Amount capitalizedAmount recognized
As of October 30, 2020
Deferred commissions$62,785 $11,369 $(16,040)$58,114 
Deferred fulfillment costs11,366 4,163 (4,312)11,217 

The Company did not record any impairment losses on the deferred commissions or deferred fulfillment costs during the three and nine months ended October 29, 2021 or October 30, 2020.
NOTE 5 — 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 nine months ended October 29, 2021, as compared to January 29, 2021. Goodwill totaled $426.2 million as of October 29, 2021 and $425.9 million as of January 29, 2021.
Goodwill and indefinite-lived intangible assets are tested for impairment on an annual basis during the third fiscal quarter of each fiscal year, or earlier if an indicator of impairment occurs. The Company completed the most recent annual impairment test in the third quarter of fiscal 2022 by performing a "Step 0" qualitative assessment of goodwill at the reporting unit level, as well as the Company's indefinite-lived trade name asset at the individual asset level. The Company has one reporting unit. The qualitative assessment includes the Company's consideration of the relevant events and circumstances that would affect the Company's single reporting unit, including macroeconomic, industry and market conditions, the Company's overall financial performance, and trends in the market price of the Company's Class A common stock. After assessing the totality of these events and circumstances, the Company determined it was not more-likely-than not that the fair value of the reporting unit and indefinite-lived intangible asset is less than their respective carrying values.
The Company did not recognize any impairment loss on goodwill or trade name asset during the period through October 29, 2021.
13

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Intangible Assets
The Company's intangible assets as of October 29, 2021 and January 29, 2021 were as follows (in thousands):
 October 29, 2021January 29, 2021
 GrossAccumulated
Amortization
NetGrossAccumulated
Amortization
Net
Customer relationships$189,518 $(115,912)$73,606 $189,518 $(105,341)$84,177 
Technology148,397 (112,268)36,129 143,821 (100,296)43,525 
Finite-lived intangible assets337,915 (228,180)109,735 333,339 (205,637)127,702 
Trade name30,118 — 30,118 30,118 — 30,118 
Total intangible assets$368,033 $(228,180)$139,853 $363,457 $(205,637)$157,820 

Amortization expense related to finite-lived intangible assets was approximately $7.6 million and $22.5 million for the three and nine months ended October 29, 2021, respectively, and $7.2 million and $21.3 million for the three and nine months ended October 30, 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 nine months ended October 29, 2021 or October 30, 2020.
NOTE 6 — 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 nine months ended October 29, 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 October 29, 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 7— 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 October 29, 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.
14

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Customer-based Taxation ContingenciesVarious government entities ("taxing authorities") require the Company to bill its customers for the taxes they owe based on the services they purchase from the Company. The application of the rules of each taxing authority concerning which services are subject to each tax and how those services should be taxed involves the application of judgment. Taxing authorities periodically perform audits to verify compliance and include all periods that remain open under applicable statutes, which generally range from three to four years. These audits could result in significant assessments of past taxes, fines and interest if the Company were found to be non-compliant. During the course of an audit, a taxing authority may question the Company's application of its rules in a manner that, if the Company were not successful in substantiating its position, could result in a significant financial impact to the Company. In the course of preparing its financial statements and disclosures, the Company considers whether information exists that would warrant disclosure or an accrual with respect to such a contingency. As of October 29, 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 $7.7 million related to such sales tax matters has been accrued as of October 29, 2021, of which $1.5 million was recorded during the three months ended October 29, 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.
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 nine months ended October 29, 2021 and October 30, 2020, the Company had no customer that represented 10% or more of its net revenue.
NOTE 8 LEASES
The Company recorded operating lease costs for facilities of approximately $1.4 million and $4.1 million for the three and nine months ended October 29, 2021, respectively, and $1.5 million and $4.6 million for the three and nine months ended October 30, 2020, respectively. Operating lease costs include expenses in connection with variable lease costs of $0.1 million and $0.2 million for the three and nine months ended October 29, 2021, respectively, and $0.2 million and $0.5 million for the three and nine months ended October 30, 2020, respectively, which primarily consisted of utilities and common area charges.

The Company recorded operating lease costs for equipment leases of approximately $0.1 million and $0.3 million for the three and nine months ended October 29, 2021, respectively, and $0.1 million and $1.2 million for the three and nine months ended October 30, 2020, respectively. Equipment lease costs included short-term lease costs of $0.1 million and $0.3 million for the three and nine months ended October 29, 2021, respectively, and $0.1 million and $1.0 million for the three and nine months ended October 30, 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 $1.6 million and $5.2 million for the three and nine months ended October 29, 2021, respectively, and $1.5 million and $3.3 million for the three and nine months ended October 30, 2020, respectively.
Weighted-average information associated with the measurement of the Company’s remaining operating lease obligations is as follows:
 October 29, 2021
Weighted-average remaining lease term4.6 years
Weighted-average discount rate5.35 %




15

SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes the maturity of the Company's operating lease liabilities as of October 29, 2021 (in thousands):
Fiscal Years EndingOctober 29, 2021
2022$1,722 
20236,395 
20246,048 
20255,239 
20264,592 
Thereafter4,131 
Total operating lease payments$28,127 
Less imputed interest(3,219)
Total operating lease liabilities$24,908 
The Company's leases have remaining lease terms of 7 months to 5.2 years, inclusive of renewal or termination options that the Company is reasonably certain to exercise.
NOTE 9 — 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 53,586 and 2,415,174 restricted stock units during the three and nine months ended October 29, 2021, respectively, and 345,694 and 2,819,351 restricted stock units during the three and nine months ended October 30, 2020, respectively. The Company granted no restricted stock awards during the three months ended October 29, 2021 and October 30, 2020, and 466,644 and 454,546 restricted stock awards during the nine months ended October 29, 2021 and October 30, 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 15% of such awards granted during the nine months ended October 29, 2021 and October 30, 2020, respectively, are subject to performance conditions. All restricted stock unit awards issued 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 nine months ended October 29, 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 are subject to various performance conditions and vest in equal annual installments over a three-year period. The cash awards issued during the three and nine months ended October 29, 2021 and October 30, 2020 are not subject to any performance conditions and vest in equal installments over a three-year period. The Company granted cash awards of $0.1 million and $9.1 million during the three and nine months ended October 29, 2021, respectively, and $0.5 million and $8.6 million during the three and nine months ended October 30, 2020, respectively. The Company recognized $1.6 million and $4.8 million of related compensation expense for the three and nine months ended October 29, 2021, respectively, and $1.9 million and $5.1 million for the three and nine months ended October 30, 2020, respectively.
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SECUREWORKS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 10 — INCOME AND OTHER TAXES
The Company's loss before income taxes, income tax benefit and effective income tax rate for the three and nine months ended October 29, 2021 and October 30, 2020 was as follows (in thousands, except percentages):    
Three Months EndedNine Months Ended
October 29, 2021October 30, 2020October 29, 2021October 30, 2020
Loss before income taxes$(16,132)$