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Stock-Based Compensation and Employee Benefit Plan
 12 Months Ended
Jan. 31, 2020
Share-based Payment Arrangement [Abstract]  
Stock-Based Compensation and Employee Benefit Plan STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLAN

In connection with the IPO, the Company's board of directors adopted the SecureWorks Corp. 2016 Long-Term Incentive Plan (the “2016 Plan”). The 2016 Plan became effective on April 18, 2016, and will expire on the tenth anniversary of the effective date unless the 2016 Plan is terminated earlier by the board of directors or in connection with a change in control of SecureWorks Corp. The Company has reserved 12,500,000 shares of Class A common stock for issuance pursuant to awards under the 2016 Plan. 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. The Company utilizes both authorized and unissued shares to satisfy all shares issued under the 2016 Plan. During fiscal 2019, the 2016 Plan was amended to increase the total shares of Class A common stock available for issuance by an additional 4,000,000 shares. As of January 31, 2020, there were approximately 4,500,000 shares of Class A common stock available for future grants under the 2016 Plan.
Stock Options
Under the 2016 Plan, the exercise price of each option will be determined by the compensation committee, except that the exercise price may not be less than 100% (or, for incentive stock options to any 10% stockholder, 110%) of the fair market value of a share of Class A common stock on the date on which the option is granted. The term of an option may not exceed ten years (or, for incentive stock options to any 10% stockholder, five years) from the date of grant. The compensation committee will determine the time or times at which each option may be exercised and the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised. Options may be made exercisable in installments, and the exercisability of options may be accelerated by the compensation committee.
During the fiscal years ended January 31, 2020, February 1, 2019 and February 2, 2018, no stock options were granted to employees or directors. However, the Company recognized $2.7 million, $3.7 million and $3.7 million in compensation expense for the fiscal years ended January 31, 2020, February 1, 2019 and February 2, 2018, respectively, for previously granted options.
The fair value of stock options are estimated as of the date of the grant using the Black-Scholes option pricing model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The expected term was estimated using the SEC simplified method. The risk-free interest rate is the continuously compounded, term-matching, zero-coupon rate from the valuation date. The volatility is the leverage-adjusted, term-matching, historical volatility of peer firms. The dividend yield assumption is consistent with management expectations of dividend distributions based upon the Company’s business plan at the date of grant.
The following table summarizes stock option activity and options outstanding and exercisable for the fiscal years ended, and as of, January 31, 2020, February 1, 2019 and February 2, 2018.
 
Number
of
Options
 
Weighted-
Average
Exercise Price Per Share
 
Weighted-
Average
Contractual Life (years)
 
Weighted-Average Grant date Fair Value Per Share
 
Aggregate Intrinsic Value1
 
 
 
 
 
 
 
 
 
(in thousands)
Balance, February 3, 2017
2,578,167

 
$
14.00

 
 
 
 
 
 
Granted
—

 
—

 
 
 
 
 
 
Exercised
—

 
—

 
 
 
 
 
 
Canceled, expired or forfeited
(53,065
)
 
14.00

 
 
 
 
 
 
Balance, February 2, 2018
2,525,102

 
$
14.00

 
 
 
 
 
 
Granted
—

 
—

 
 
 
 
 
 
Exercised
(9,826
)
 
14.00

 
 
 
 
 
 
Canceled, expired or forfeited
(27,514
)
 
14.00

 
 
 
 
 
 
Balance, February 1, 2019
2,487,762

 
$
14.00

 
 
 
 
 
 
Granted
—

 
—

 
 
 
 
 
 
Exercised
(94,826
)
 
14.00

 
 
 
 
 
 
Canceled, expired or forfeited
(144,939
)
 
14.00

 
 
 
 
 
 
Balance, January 31, 2020
2,247,997

 
$
14.00

 
6.10
 
$
6.08

 
$
3,890

 
 
 
 
 
 
 
 
 
 
Options vested and expected to vest, January 31, 2020
2,244,835

 
$
14.00

 
6.10
 
$
6.08

 
$
3,884

 
 
 
 
 
 
 
 
 
 
Options exercisable, January 31, 2020
1,646,650

 
$
14.00

 
6.06
 
$
6.11

 
$
2,849

(1) 
The aggregate intrinsic values represent the total pre-tax intrinsic values based on the Company's closing share price of $15.73 as reported on the Nasdaq Global Select Market on January 31, 2020, that would have been received by the option holders had all in-the-money options been exercised as of that date.
The total fair value of options vested was $3.6 million, $3.7 million and $3.8 million for the fiscal years ended January 31, 2020, February 1, 2019, and February 2, 2018, respectively. At January 31, 2020, unrecognized stock-based compensation expense related to stock options was $1.6 million, net of estimated forfeitures, which is expected to be recognized over the weighted-average remaining requisite period of 1.02 years.
In connection with the acquisition of Dell by Dell Technologies in 2013, the Company’s compensation programs included grants under the Dell Technologies Inc. 2013 Stock Incentive Plan (the "2013 Plan"). Under the 2013 Plan, time-based and performance-based options to purchase shares of the Series C common stock of Dell Technologies were awarded to two of the Company's executive officers. Upon the closing of the Company’s IPO, all unvested time-based awards were forfeited and 32,000 vested time-based stock options remained outstanding and 400,001 performance-based options remained unvested and outstanding subject to award terms. During the fiscal year ended February 1, 2019, the 400,001 performance-based options vested with a total fair value of $2.4 million. During the fiscal year ended January 31, 2020, 90,000 options were exercised with a pre-tax intrinsic value of $3.8 million. Cash proceeds received by Dell Technologies from the exercise of these stock options were $1.3 million and the tax benefit realized was $0.9 million for the fiscal year ended January 31, 2020. As of January 31, 2020, 32,000 time-based and 310,001 performance-based stock options remained outstanding. Given that all outstanding options vested in fiscal 2019, the Company recognized no related compensation expense for the fiscal year ended January 31, 2020, while $0.5 million and $0.3 million was recognized for the fiscal years ended February 1, 2019 and February 2, 2018, respectively.
Restricted Stock and Restricted Stock Units
Under the 2016 Plan, a restricted stock award ("RSA") is an award of shares of Class A common stock that may be subject to restrictions on transferability and other restrictions as the compensation committee determines in its sole discretion on the date of grant. The restrictions, if any, may lapse over a specified period of time or through the satisfaction of conditions, in installments or otherwise as the Company's compensation committee may determine. Unless otherwise provided in an award agreement, a grantee who receives restricted stock will have all of the rights of a stockholder as to those shares, including, without limitation, the right to vote and the right to receive dividends or distributions on the shares of Class A common stock, except that the compensation committee may require any dividends to be withheld and accumulated contingent on vesting of the underlying shares or reinvested in shares of restricted stock.
Under the 2016 Plan, a restricted stock unit ("RSU") represents the grantee’s right to receive a compensation amount, based on the value of the shares of Class A common stock, if vesting criteria or other terms and conditions established by the compensation committee are met. If the vesting criteria or other terms and conditions are met, the Company may settle, subject to the terms and conditions of the applicable award agreement, restricted stock units in cash, shares of Class A common stock or a combination of the two. All award agreements currently outstanding require settlement in shares of Class A common stock.
In connection with the IPO, the Company granted RSAs and RSUs to employees and directors. The fair value of the RSAs and RSUs was $14.00 per share and all will vest over an average service period of four years. During the fiscal years ended January 31, 2020, February 1, 2019 and February 2, 2018 the Company issued additional restricted stock and restricted stock units to employees at weighted-average fair values per share of $16.93, $9.78 and $10.40, respectively. The Company's annual grant of RSAs and RSUs issued during the fiscal years ended January 31, 2020, February 1, 2019 and February 2, 2018 vests ratably over three years and approximately 50% of such awards are subject to performance conditions. Of the 3.1 million RSAs and RSUs outstanding on January 31, 2020, approximately 1.0 million were performance-based awards and 2.1 million were service-based awards. During the fiscal year ended January 31, 2020, the Company's compensation committee approved an accounting modification to allow 100% payout upon vesting of performance-based awards tied to fiscal year 2020 results. This modification resulted in total incremental expense to be recognized over the remaining service period of approximately $2.6 million, of which $0.4 million was recognized during the fiscal year ended January 31, 2020.
The Company recognized compensation expense related to RSAs and RSUs of $16.8 million, $15.2 million and $9.8 million for the fiscal years ended January 31, 2020, February 1, 2019 and February 2, 2018, respectively. At January 31, 2020, unrecognized stock-based compensation expense related to restricted stock awards and restricted stock units was $25.0 million, which is expected to be recognized over the weighted-average remaining requisite period of 2.22 years.
The following table summarizes activity for restricted stock and restricted stock units for the fiscal years ended, and as of, January 31, 2020, February 1, 2019 and February 2, 2018.
 
Number
of
Shares
 
Weighted-
Average
Grant Date
Fair Value Per Share
 
Weighted-
Average
Contractual Life (years)
 
Aggregate Intrinsic Value1
 
 
 
 
 
 
 
(in thousands)
Balance, February 3, 2017
2,242,486

 
$
13.21

 
 
 
 
Granted
1,134,966

 
10.40

 
 
 
 
Vested
(507,196
)
 
13.62

 
 
 
 
Forfeited
(550,697
)
 
11.46

 
 
 
 
Balance, February 2, 2018
2,319,559

 
$
12.16

 
 
 
 
Granted
2,274,508

 
9.78

 
 
 
 
Vested
(793,723
)
 
11.99

 
 
 
 
Forfeited
(453,866
)
 
10.69

 
 
 
 
Balance, February 1, 2019
3,346,478

 
$
10.84

 
 
 
 
Granted
2,087,872

 
16.93

 

 


Vested
(1,282,743
)
 
11.10

 
 
 
 
Forfeited
(1,088,990
)
 
12.44

 
 
 
 
Balance, January 31, 2020
3,062,617

 
$
14.32

 
1.25
 
$
48,175

 
 
 
 
 
 
 
 
Restricted stock and restricted stock units expected to vest, January 31, 2020
2,909,217

 
$
14.27

 
1.31
 
$
45,762

(1) The aggregate intrinsic values represent the total pre-tax intrinsic values based on the Company's closing share price of $15.73 as reported on the Nasdaq Global Select Market on January 31, 2020, that would have been received by the restricted stock and restricted stock unit holders had all restricted stock and restricted stock units been issued as of that date.
As of January 31, 2020, restricted stock and restricted stock units representing 3.1 million shares of Class A common stock were outstanding, with an aggregate intrinsic value of $48.2 million based on the Company’s closing stock price as reported on the Nasdaq Global Select Market on January 31, 2020. The total fair value of Secureworks' restricted stock and restricted stock units that vested during the fiscal years ended January 31, 2020, February 1, 2019 and February 2, 2018 was $14.2 million, $9.4 million and $6.9 million, respectively, and the pre-tax intrinsic value was $25.3 million, $8.5 million and $4.6 million respectively.

Stock-based Compensation Expense
The following table summarizes the classification of stock-based compensation expense related to stock options, restricted stock and restricted stock units for the fiscal years ended January 31, 2020, February 1, 2019 and February 2, 2018.

 
 
Fiscal Year Ended
 
 
January 31,
2020
 
February 1,
2019
 
February 2,
2018
 
 
(in thousands)
Cost of revenue
 
$
1,206

 
$
780

 
$
891

Research and development
 
4,280

 
4,133

 
3,261

Sales and marketing
 
1,694

 
2,652

 
735

General and administrative
 
12,368

 
11,805

 
8,903

Total stock-based compensation expense
 
$
19,548

 
$
19,370

 
$
13,790

The tax benefit related to stock-based compensation expense was $4.6 million, $4.7 million and $3.3 million for the fiscal years ended January 31, 2020, February 1, 2019 and February 2, 2018 respectively.
Long-term Performance Cash Awards
In March 2017, the Company began granting long-term performance cash awards to certain employees. The employees who receive the performance cash awards do not receive equity awards as part of the long-term incentive program. The long-term performance cash awards are subject to various performance conditions and vest in equal annual installments over a three-year period. For the fiscal years ended January 31, 2020 and February 1, 2019, the Company granted approximately $6.9 million and $15.7 million of these awards, respectively, and recognized $7.3 million and $6.6 million of related compensation expense, respectively.

Employee Benefit Plan
Substantially all employees are eligible to participate in a defined contribution plan that complies with Section 401(k) of the Internal Revenue Code (“401(k) Plan”). The Company matches 100% of each participant’s voluntary contributions, subject to a maximum contribution of 6% of the participant’s compensation, and participants vest immediately in all contributions to the 401(k) Plan. For the fiscal years ended January 31, 2020, February 1, 2019 and February 2, 2018, total expense under this plan was $10.8 million, $10.2 million and $10.7 million, respectively.