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 30, 2020

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

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 class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock,	SCWX	The 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, 2020, there were 82,237,741 shares of the registrant's common stock outstanding, consisting of 12,237,741 outstanding shares of Class A common stock and 70,000,000 outstanding shares of Class B common stock.

TABLE OF CONTENTS
ITEM		PAGE
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Financial Position as of October 30, 2020 and January 31, 2020 (unaudited)	3
	Condensed Consolidated Statements of Operations for the three and nine months ended October 30, 2020 and November 1, 2019 (unaudited)	4
	Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended October 30, 2020 and November 1, 2019 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended October 30, 2020 and November 1, 2019 (unaudited)	6
	Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended October 30, 2020 and November 1, 2019 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
Part II.	OTHER INFORMATION
Item 1A.	Risk Factors	34
Item 6.	Exhibits	35
Signature		36

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 30, 2020		January 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	188,048	$	181,838
Accounts receivable, net of allowances of $5,332 and $5,120, respectively	107,907		111,798
Inventories, net	690		746
Other current assets	25,992		27,449
Total current assets	322,637		321,831
Property and equipment, net	19,669		27,606
Operating lease right-of-use assets, net	22,421		23,463
Goodwill	425,314		416,487
Intangible assets, net	164,928		180,052
Other non-current assets	76,488		78,592
Total assets	$	1,031,457	$	1,048,031
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	20,874	$	18,690
Accrued and other current liabilities	88,208		98,855
Short-term deferred revenue	173,536		175,847
Total current liabilities	282,618		293,392
Long-term deferred revenue	9,930		12,690
Operating lease liabilities, non-current	22,828		24,669
Other non-current liabilities	48,932		50,400
Total liabilities	364,308		381,151
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; 12,236 and 11,206 issued and outstanding, respectively.	122		112
Common stock - Class B of $0.01 par value: 500,000 shares authorized; 70,000 shares issued and outstanding	700		700
Additional paid in capital	909,686		896,983
Accumulated deficit	(220,300)		(207,929)
Accumulated other comprehensive loss	(3,163)		(3,090)
Treasury stock, at cost - 1,257 shares	(19,896)		(19,896)
Total stockholders' equity	667,149		666,880
Total liabilities and stockholders' equity	$	1,031,457	$	1,048,031

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

3

SECUREWORKS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in thousands, except per share data)

	Three Months Ended				Nine Months Ended
	October 30, 2020		November 1, 2019		October 30, 2020		November 1, 2019
Net revenue	$	141,641	$	141,332	$	421,298	$	410,779
Cost of revenue	59,613		61,568		182,422		188,004
Gross margin	82,028		79,764		238,876		222,775
Research and development	27,608		24,095		75,790		71,600
Sales and marketing	34,810		40,726		107,886		116,966
General and administrative	24,508		25,078		73,824		73,862
Total operating expenses	86,926		89,899		257,500		262,428
Operating loss	(4,898)		(10,135)		(18,624)		(39,653)
Interest and other, net	(79)		(1,257)		944		961
Loss before income taxes	(4,977)		(11,392)		(17,680)		(38,692)
Income tax benefit	(1,369)		(3,484)		(5,309)		(12,254)
Net loss	$	(3,608)	$	(7,908)	$	(12,371)	$	(26,438)
Loss per common share (basic and diluted)	$	(0.04)	$	(0.10)	$	(0.15)	$	(0.33)
Weighted-average common shares outstanding (basic and diluted)	81,474		80,518		81,276		80,553

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

4

SECUREWORKS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

(in thousands)

	Three Months Ended				Nine Months Ended
	October 30, 2020		November 1, 2019		October 30, 2020		November 1, 2019
Net loss	$	(3,608)	$	(7,908)	$	(12,371)	$	(26,438)
Foreign currency translation adjustments, net of tax	(587)		1,602		(73)		(340)
Comprehensive loss	$	(4,195)	$	(6,306)	$	(12,444)	$	(26,778)

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 30, 2020		November 1, 2019
Cash flows from operating activities:
Net loss	$	(12,371)	$	(26,438)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	30,978		32,017
Stock-based compensation expense	17,675		15,617
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies	(1,190)		(102)
Income tax benefit	(5,309)		(12,254)
Other non cash impacts	150		1,830
Provision for doubtful accounts	1,871		1,651
Changes in assets and liabilities, net of effect of business combination:
Accounts receivable	2,296		21,689
Net transactions with parent	5,586		(18,571)
Inventories	56		(438)
Other assets	5,593		10,838
Accounts payable	2,668		9,086
Deferred revenue	(4,820)		9,848
Accrued and other liabilities	(14,749)		(8,921)
Net cash provided by operating activities	28,434		35,852
Cash flows from investing activities:
Capital expenditures	(2,181)		(12,082)
Acquisition of business, net of cash acquired	(15,081)		—
Net cash used in investing activities	(17,262)		(12,082)
Cash flows from financing activities:
Taxes paid on vested restricted shares	(4,962)		(8,197)
Purchases of stock for treasury	—		(6,377)
Net cash used in financing activities	(4,962)		(14,574)
Net increase in cash and cash equivalents	6,210		9,196
Cash and cash equivalents at beginning of the period	181,838		129,592
Cash and cash equivalents at end of the period	$	188,048	$	138,788

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 30, 2020	Common Stock - Class A			Common Stock - Class B
	Outstanding Shares	Amount		Outstanding Shares	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Stockholders' Equity
Balances, July 31, 2020	12,186	$	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 units	75	—		—	—		—		—		—		—		—
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares	(25)	—		—	—		(304)		—		—		—		(304)
Stock-based compensation	—	—		—	—		6,081		—		—		—		6,081
Balance, October 30, 2020	12,236	$	122	70,000	$	700	$	909,686	$	(220,300)	$	(3,163)	$	(19,896)	$	667,149

Nine Months Ended October 30, 2020	Common Stock - Class A			Common Stock - Class B
	Outstanding Shares	Amount		Outstanding Shares	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Stockholders' Equity
Balances, January 31, 2020	11,206	$	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 units	993	9		—	—		(9)		—		—		—		—
Grant of restricted stock awards	455	5		—	—		(5)		—		—		—		—
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares	(418)	(4)		—	—		(4,958)		—		—		—		(4,962)
Stock-based compensation	—	—		—	—		17,675		—		—		—		17,675
Balance, October 30, 2020	12,236	$	122	70,000	$	700	$	909,686	$	(220,300)	$	(3,163)	$	(19,896)	$	667,149

7

Three Months Ended November 1, 2019	Common Stock - Class A			Common Stock - Class B
	Outstanding Shares	Amount		Outstanding Shares	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Stockholders' Equity
Balances, August 2, 2019	11,203	$	112	70,000	$	700	$	887,014	$	(194,793)	$	(4,826)	$	(19,896)	$	668,311
Net loss	—	—		—	—		—		(7,908)		—		—		(7,908)
Other comprehensive income	—	—		—	—		—		—		1,602		—		1,602
Vesting of restricted stock units	32	—		—	—		—		—		—		—		—
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares	(10)	—		—	—		(125)		—		—		—		(125)
Stock-based compensation	—	—		—	—		5,092		—		—		—		5,092
Shares repurchased	—	—		—	—		—		—		—		—		—
Balances, November 1, 2019	11,225	$	112	70,000	$	700	$	891,981	$	(202,701)	$	(3,224)	$	(19,896)	$	666,972

Nine Months Ended November 1, 2019	Common Stock - Class A			Common Stock - Class B
	Outstanding Shares	Amount		Outstanding Shares	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Stockholders' Equity
Balances, February 1, 2019	11,016	$	110	70,000	$	700	$	884,567	$	(176,263)	$	(2,884)	$	(13,523)	$	692,707
Net loss	—	—		—	—		—		(26,438)		—		—		(26,438)
Other comprehensive loss	—	—		—	—		—		—		(340)		—		(340)
Vesting of restricted stock units	939	9		—	—		(9)		—		—		—		—
Grant of restricted stock awards	122	1		—	—		(1)		—		—		—		—
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares	(414)	(4)		—	—		(8,193)		—		—		—		(8,197)
Stock-based compensation	—	—		—	—		15,617		—		—		—		15,617
Shares repurchased	(438)	(4)		—	—		—		—		—		(6,373)		(6,377)
Balances, November 1, 2019	11,225	$	112	70,000	$	700	$	891,981	$	(202,701)	$	(3,224)	$	(19,896)	$	666,972

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 provider of technology-driven information security solutions singularly focused on protecting the Company's customers from cyber attacks.

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. ("Dell") and Dell's subsidiaries, no shares of the Company's outstanding Class A common stock and all outstanding shares of the Company's outstanding Class B common stock, which as of October 30, 2020 represented approximately 85.1% of the Company's total outstanding shares of common stock and approximately 98.3% 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 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.

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 charges for these services and related party transactions, see "Note 12—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 11—Income and Other Taxes" for more information.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the requirements of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statement presentation. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments consisting of normal recurring accruals and disclosures considered necessary for a fair statement have been included. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended January 31, 2020 included in Part II, Item 8 of the Company's Annual Report on Form 10-K filed with the SEC on March 27, 2020 (the "Annual Report").

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 29, 2021 and the fiscal year ended January 31, 2020 as fiscal 2021 and fiscal 2020, respectively. Both fiscal 2021 and fiscal 2020 have 52 weeks, and each quarter has 13 weeks.

9

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. In the Condensed Consolidated Statements of Operations, estimates are used when accounting for revenue arrangements, determining the cost of revenue, allocating cost and estimating the impact of contingencies. In the Condensed Consolidated Statements of Financial Position, estimates are used in determining the valuation and recoverability of assets, such as accounts receivables, inventories, fixed assets, goodwill and other identifiable intangible assets, and purchase price allocation for business combinations. Estimates are also used in determining the reported amounts of liabilities, such as taxes payable and the impact of contingencies. Estimates all of which 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 30, 2020. 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 events continue to evolve, the Company's estimates may change materially in future periods.

Recently Adopted Accounting Pronouncements

Debt— The Company adopted Accounting Standard Update ("ASU") 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 was effective for the Company beginning on March 12, 2020 and will apply the amendments prospectively through December 31, 2022. There was no impact to the Company's unaudited condensed consolidated financial statements as a result of adopting this standard update. Currently, the Company's revolving credit facility references LIBOR and the Company is assessing how this standard update may be applied to any contract modification.

Intangibles - Goodwill and Other - Internal-Use Software—The Company adopted ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," effective February 1, 2020. ASU 2018-15 aligns the requirements for capitalizing implementation costs in such cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The adoption of the standard had no material impact on the condensed consolidated financial statements.

Intangibles - Goodwill and Other—The Company adopted ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," effective February 1, 2020. ASU 2017-04 eliminates Step 2 of the goodwill impairment test, which required the Company to determine the implied fair value of goodwill by allocating the reporting unit's fair value to each of its assets and liabilities as if the reporting unit was acquired in a business acquisition. The updated guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit to its carrying value, and recognizing a non-cash impairment charge for the amount by which the carrying value exceeds the reporting unit's fair value, with the loss not exceeding the total amount of goodwill allocated to that reporting unit. The adoption of the standard had no impact on the condensed consolidated financial statements.

Financial Instruments - Credit Losses—The Company adopted ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," effective February 1, 2020. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption of the standard had no material impact on the condensed consolidated financial statements.

Under the new standard, the Company assesses its allowance for credit losses on trade receivables by taking into consideration forecasts of future economic conditions, information about past events, such as its historical trend of write-offs, and customer-specific circumstances, such as bankruptcies and disputes. The allowance for credit losses on trade receivables is recorded in operating expenses in the Company's Condensed Consolidated Statement of Operations.

10

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Recently Issued Accounting Pronouncements

Income Taxes—In December 2019, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” 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. ASU No. 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this new standard on its 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 30, 2020, as compared to the significant accounting policies described in the Annual Report, except for the following:

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 us 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, the time and expense that would be necessary to recreate the assets 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

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 below in connection with the transaction is primarily attributable to the software intellectual property acquired and 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 $8.8 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 our condensed consolidated financial statements, and therefore historical and pro forma disclosures have not been presented.

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):

11

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Amount
Assets acquired:
Cash and cash equivalents	$	343
Accounts and notes receivable	101
Other current assets	607
Intangibles	6,200
Total identifiable assets	7,251
Goodwill	8,831
Total assets acquired	16,082
Liabilities assumed:
Accounts payable	25
Accrued and other liabilities	413
Non-current liabilities	220
Total liabilities assumed	658
Purchase consideration	$	15,424

The intangibles identified in the transaction represent Technology-based assets with a preliminary 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.

The purchase accounting allocations above were determined based upon estimates of fair value. Based on the timing of the acquisition, the preliminary estimates associated with the respective purchase accounting is expected to be finalized in fiscal 2021. The assumptions used in these preliminary allocations are pending completion and subject to change. The effect of any changes could be significant.

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 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				Nine Months Ended
	October 30, 2020		November 1, 2019		October 30, 2020		November 1, 2019
Numerator:
Net loss	$	(3,608)	$	(7,908)	$	(12,371)	$	(26,438)
Denominator:
Weighted-average number of shares outstanding:
Basic and Diluted	81,474		80,518		81,276		80,553
Loss per common share:
Basic and Diluted	$	(0.04)	$	(0.10)	$	(0.15)	$	(0.33)
Weighted-average anti-dilutive stock options, non-vested restricted stock and restricted stock units	6,436		5,122		6,151		5,275

12

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4 — CONTRACT BALANCES AND CONTRACT COSTS

Promises to provide services related to the Company's subscription-based solutions are accounted for as a single performance obligation over an average period of two years. Performance obligations related to the Company's security and risk consulting professional service contracts are separate obligations associated with each service. Although the Company has many multi-year customer relationships for its various professional service solutions, each arrangement is typically structured as a separate performance obligation over the contract period and recognized over a duration of less than one year.

The following table presents revenue by service type (in thousands):

	Three Months Ended				Nine Months Ended
	October 30, 2020		November 1, 2019		October 30, 2020		November 1, 2019
Managed Security Solutions revenue	$	108,265	$	109,344	$	320,881	$	311,210
Security and Risk Consulting revenue	33,376		31,988		100,417		99,569
Total revenue	$	141,641	$	141,332	$	421,298	$	410,779

The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Rather, it represents the aggregate amount of billing in advance of service delivery. The Company invoices its customers based on a variety of billing schedules. During the nine months ended October 30, 2020, on average, 57% of the Company's recurring revenue was billed in advance and approximately 43% was billed on either a monthly or a quarterly basis in advance. 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 30, 2020 and November 1, 2019 are as follows (in thousands):

	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

	As of February 1, 2019		Upfront payments received and billings during the nine months ended November 1, 2019		Revenue recognized during the nine months ended November 1, 2019		As of November 1, 2019
Deferred revenue	$	173,929	$	209,596	$	(199,673)	$	183,852

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 services 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 it 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.

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.    

13

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of October 30, 2020, the Company expects to recognize remaining performance obligations as follows (in thousands):

	Total		Expected to be recognized in the next 12 months		Expected to be recognized in 12-24 months		Expected to be recognized in 24-36 months		Expected to be recognized thereafter
Performance obligation - active	$	281,346	$	159,004	$	82,343	$	30,638	$	9,361
Performance obligation - backlog	13,789		4,783		4,693		3,364		949
Total	$	295,135	$	163,787	$	87,036	$	34,002	$	10,310

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 solutions, 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 30, 2020 and November 1, 2019 are as follows (in thousands):

	As of January 31, 2020		Amount capitalized		Amount recognized		As of October 30, 2020
Deferred commissions	$	62,785	$	11,369	$	(16,040)	$	58,114
Deferred fulfillment costs	11,366		4,163		(4,312)		11,217

	As of February 1, 2019		Amount capitalized		Amount recognized		As of November 1, 2019
Deferred commissions	$	62,895	$	11,113	$	(13,823)	$	60,185
Deferred fulfillment costs	10,973		4,520		(4,115)		11,378

As referenced in the Annual Report, deferred commissions are recognized on a straight-line basis over the life of the customer relationship, which historically had been estimated to be seven years. During the third quarter of fiscal 2020, the Company determined a change in the estimated life of the customer relationship to be six years. The net impact of this change was an increase in operating loss for the nine months ended October 30, 2020 of $3.0 million on a pre-tax basis, or $0.03 on a per share basis. The Company did not record any impairment losses on the deferred commissions or deferred fulfillment costs during the three and nine months ended October 30, 2020 or November 1, 2019.

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 $8.8 million for the nine months ended October 30, 2020, as compared to January 31, 2020, as a result of the acquisition of Delve. Accordingly, goodwill totaled $425.3 million as of October 30, 2020 and $416.5 million as of January 31, 2020.

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 2021 by performing a quantitative assessment of goodwill at the reporting unit level, as well as related to the Company's indefinite-lived intangible asset. In performing this quantitative assessment of goodwill, the Company used a market approach (comparable market prices) to determine the fair value of the reporting unit and compared the fair value to its carrying value. The assumptions used in the valuation are consistent with those which the Company believes hypothetical market participants would use.

In performing the quantitative assessment of the indefinite-lived intangible asset, the Company determined the fair value using the relief from royalty method, which is a risk-adjusted discounted cash flow approach. The relief from royalty method values an intangible asset by estimating the royalties saved through ownership of the asset. The relief from royalty method requires identifying the future revenue that would be generated by the indefinite-lived intangible asset, multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the

14

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

impairment assessment date. The royalty rate used in the valuation was based on a consideration of market rates for similar categories of assets. The discount rate used in the valuation was based on the Company’s weighted average cost of capital and the growth of the earnings associated with the indefinite-lived intangible asset.

Based on the results of the annual impairment test, the Company determined that the derived fair values of the Secureworks' reporting unit and indefinite-lived intangible asset exceeded their respective carrying values, which indicates no impairment as of October 30, 2020.

Intangible Assets

The Company's intangible assets as of October 30, 2020 and January 31, 2020 were as follows (in thousands):

	October 30, 2020						January 31, 2020
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
Customer relationships	$	189,518	$	(101,817)	$	87,701	$	189,518	$	(91,246)	$	98,272
Technology	143,572		(96,463)		47,109		137,371		(85,709)		51,662
Finite-lived intangible assets	333,090		(198,280)		134,810		326,889		(176,955)		149,934
Trade name	30,118		—		30,118		30,118		—		30,118
Total intangible assets	$	363,208	$	(198,280)	$	164,928	$	357,007	$	(176,955)	$	180,052

Amortization expense related to finite-lived intangible assets was approximately $7.2 million and $21.3 million for the three and nine months ended October 30, 2020, respectively, and $7.1 million and $21.1 million for the three and nine months ended November 1, 2019, respectively. Amortization expenses are 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 30, 2020 or November 1, 2019.

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 three months ended May 1, 2020, the facility was amended and restated to extend the maturity date from March 26, 2020 to March 26, 2021 and to decrease the annual rate at which interest accrues to the applicable London Interbank Offered Rate plus 1.30%. 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 30, 2020 or January 31, 2020.

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 Contingencies—From 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

15

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 30, 2020, 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 Contingencies—Various 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.

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 30, 2020 and November 1, 2019, 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 $1.5 million and $4.6 million for the three and nine months ended October 30, 2020, respectively, and $1.5 million and $5.5 million for the three and nine months ended November 1, 2019, respectively. Operating lease costs include expenses in connection with variable lease costs of $0.2 million and $0.5 million for the three and nine months ended October 30, 2020, respectively, and $0.5 million and $1.2 million for the three and nine months ended November 1, 2019, respectively, which primarily consisted of utilities and common area charges.

For the three and nine months ended October 30, 2020, the Company recorded operating lease costs for equipment leases of approximately $0.1 million and $1.2 million, respectively, and $0.2 million and $0.9 million for the three and nine months ended November 1, 2019, respectively. For the three and nine months ended October 30, 2020, equipment lease costs included short-term lease costs of $0.1 million and $1.0 million, respectively, and $0.3 million and $0.9 million for the three and nine months ended November 1, 2019, respectively. Lease expense for equipment was included in cost of revenues.

Cash paid for amounts included in the measurement of operating lease liabilities was $1.5 million and $3.3 million for the three and nine months ended October 30, 2020, respectively, and $1.8 million and $5.2 million for the three and nine months ended November 1, 2019, respectively.

Weighted-average information associated with the measurement of the Company’s remaining operating lease obligations is as follows:

	October 30, 2020
Weighted-average remaining lease term	5.2 years
Weighted-average discount rate	5.32	%

The following table summarizes the maturity of the Company's operating lease liabilities as of October 30, 2020 (in thousands):

16

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Fiscal Years Ending	October 30, 2020
2021	$	1,863
2022	6,890
2023	6,360
2024	6,019
2025	5,213
Thereafter	8,722
Total operating lease payments	$	35,067
Less imputed interest	(4,580)
Total operating lease liabilities	$	30,487

The Company's leases have remaining lease terms of 1 month to 6.2 years, inclusive of renewal or termination options that the Company is reasonably certain to exercise.

NOTE 9 — STOCKHOLDERS' EQUITY

On September 26, 2018, the Company's board of directors authorized a stock repurchase program, under which the Company was authorized to repurchase up to $15 million of the Company's Class A common stock through September 30, 2019. On March 26, 2019, the board of directors expanded the repurchase program to authorize the repurchase up to an additional $15 million of the Company's Class A common stock through May 1, 2020, on which date the program terminated.

NOTE 10 — 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 345,694 and 2,819,351 restricted stock units during the three and nine months ended October 30, 2020, respectively, and 171,100 and 1,444,104 restricted stock units during the three and nine months ended November 1, 2019, respectively. The Company granted no restricted stock awards during the three months ended October 30, 2020 and November 1, 2019, and 454,546 and 175,000 restricted stock awards during the nine months ended October 30, 2020 and November 1, 2019, respectively. The annual restricted stock unit and restricted stock awards granted during both such periods vest over a three-year period. Approximately 15% and 50% of such awards granted during the nine months ended October 30, 2020 and November 1, 2019, respectively, are subject to performance conditions. As of October 30, 2020, all performance awards granted during fiscal 2021 have been valued and are considered outstanding for accounting purposes.

The Company grants long-term cash awards to certain employees under the 2016 Plan. The employees who receive these cash awards do not receive equity awards as part of the long-term incentive program. The majority of the cash awards issued prior to fiscal 2021 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 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 $0.5 million and $8.6 million during the three and nine months ended October 30, 2020, respectively, and $0.3 million and $7.2 million during the three and nine months ended November 1, 2019, respectively. The Company recognized $1.9 million and $5.1 million of related compensation expense for the three and nine months ended October 30, 2020, respectively, and $2.0 million and $5.8 million for the three and nine months ended November 1, 2019, respectively.

17

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11 — INCOME AND OTHER TAXES

The Company's effective income tax rate for the three and nine months ended October 30, 2020 and November 1, 2019 was as follows (in thousands, except percentages):    

	Three Months Ended						Nine Months Ended
	October 30, 2020			November 1, 2019			October 30, 2020			November 1, 2019
Loss before income taxes	$	(4,977)		$	(11,392)		$	(17,680)		$	(38,692)
Income tax benefit	$	(1,369)		$	(3,484)		$	(5,309)		$	(12,254)
Effective tax rate	27.5		%	30.6		%	30.0		%	31.7		%

The Company's effective tax benefit rate was 27.5% and 30.0% for the three and nine months ended October 30, 2020, respectively, and 30.6% and 31.7% for the three and nine months ended November 1, 2019, respectively. The changes in the Company's effective income tax rate between the periods were primarily attributable to both the improvement in loss before income taxes for the three months ended October 30, 2020 and the impact of certain discrete adjustments related to stock-based compensation expense of approximately $0.3 million and $0.8 million for the three and nine months ended October 30, 2020, respectively, and $0.5 million and $2.6 million for the three and nine months ended November 1, 2019, 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 higher than the fair value on the grant date for the three and nine months ended October 30, 2020 and higher than the fair value on the grant date for the three and nine months ended November 1, 2019. The change in fair value, which is measured by the price of the Class A common stock as reported on the Nasdaq Global Select Market, resulted in a higher actual tax deduction for the three and nine months ended October 30, 2020 and a higher actual tax deduction for the three and nine months ended November 1, 2019 than the amounts deducted for financial reporting purposes.

As of each of October 30, 2020 and January 31, 2020, the Company had $4.6 million 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 February 1, 2019. 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 October 30, 2020 and January 31, 2020. 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 nine months ended October 30, 2020 would have been $17.7 million, $3.7 million and $14.0 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 October 30, 2020 and January 31, 2020, the Company had $8.8 million and $10.0 million, respectively, of a net operating loss tax receivable from Dell. The Company had $6.4 million and $6.6 million of unrecognized tax benefits as of October 30, 2020 and January 31, 2020, respectively.

During the nine months ended October 30, 2020, the Internal Revenue Service started an examination of the Company's federal income tax returns for fiscal years 2015 through 2019. While it is difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that it has valid positions supporting its tax returns and that it has provided adequate reserves related to matters contained in tax periods open to examination.

NOTE 12 — 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 $1.0 million and $3.0 million for the three and nine months ended October 30, 2020, respectively, and $3.5 million and $7.6 million for the three and nine months ended November 1, 2019, 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.

18

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 $0.6 million for the three and nine months ended October 30, 2020, respectively, and $0.2 million and $2.8 million for the three and nine months ended November 1, 2019, respectively.

EMC, a company that provides enterprise software and storage, 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 $0.4 million and $1.8 million for the three and nine months ended October 30, 2020, respectively, and $0.9 million and $2.7 million for the three and nine months ended November 1, 2019, respectively. The Company recognized revenue related to solutions provided to VMware that totaled $0.1 million and $0.3 million for the three and nine months ended October 30, 2020, respectively. In October 2019, VMware acquired Carbon Black Inc., a security business with which the Company had an existing commercial relationship. Purchases by the Company of solutions from Carbon Black totaled $1.3 million and $4.4 million for the three and nine months ended October 30, 2020, respectively, and $0.5 million for the three and nine months ended November 1, 2019

The Company recognizes revenue related to solutions provided to subsidiaries of Dell, consisting of RSA Security LLC, Pivotal Software, Inc. and Boomi, Inc. The Company recognized no revenue related to agreements with the stated related parties for the three and nine months ended October 30, 2020, respectively, and $11 thousand and $49 thousand for the three and nine months ended November 1, 2019, respectively. The Company made no purchases for the three months ended October 30, 2020 and $0.1 million for the nine months ended October 30, 2020, and $30 thousand and $0.1 million for the three and nine months ended November 1, 2019, respectively, from the stated related parties.

The Company also recognized revenue related to solutions provided to significant beneficial owners of Secureworks, which include Michael S. Dell, Chairman and Chief Executive Officer of Dell Technologies and Dell Inc. and Silver Lake Partners III, L.P. 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, as well as Silver Lake Partners III, L.P., totaled $23 thousand and $0.2 million for the three and nine months ended October 30, 2020, respectively, and $0.1 million and $0.3 million for the three and nine months ended November 1, 2019, respectively.

The Company provides solutions to certain customers whose contractual relationships have historically been with Dell rather than Secureworks, although the Company has the primary responsibility to provide the services. Effective August 1, 2015, in connection with the IPO, many of such customer contracts were transferred from Dell to the Company, forming a direct contractual relationship between the Company and the end customer. For customers whose contracts have not yet been transferred and for contracts subsequently originated through Dell under a reseller agreement, the Company recognized revenues of approximately $14.2 million and $44.0 million for the three and nine months ended October 30, 2020, respectively, and $13.6 million and $43.9 million for the three and nine months ended November 1, 2019, respectively. In addition, as of October 30, 2020, the Company had approximately $1.8 million of contingent obligations to Dell related to outstanding performance bonds for certain customer contracts, which Dell issued on behalf of the Company.

As the Company's customer and on behalf of certain of its own customers, Dell also purchases solutions from the Company at pricing that is intended to approximate arm's-length pricing. Such revenues totaled approximately $4.3 million and $14.9 million for the three and nine months ended October 30, 2020, respectively, and $10.6 million and $19.4 million for the three and nine months ended November 1, 2019, respectively.

The Company settles in cash its related party balances with Dell on a quarterly basis. As a result of the foregoing related party arrangements, the Company has recorded the following related party balances in the Condensed Consolidated Statements of Financial Position as of October 30, 2020 and January 31, 2020 (in thousands).

19

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	October 30, 2020		January 31, 2020
Net intercompany payable (included in "Accrued and other current liabilities")	$	8,481	$	3,209
Accounts receivable from customers under reseller agreements with Dell (included in "Accounts receivable, net")	$	13,774	$	13,674
Net operating loss tax sharing receivable under agreement with Dell (included in "Other current assets" at October 30, 2020 and January 31, 2020)	$	8,764	$	10,040

NOTE 13 — FAIR VALUE MEASUREMENTS

The Company measures fair value within the guidance of the three-level valuation hierarchy. This hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The categorization of a measurement within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

•Level 1 - Quoted market prices in active markets for identical assets or liabilities

•Level 2 - Other observable market-based inputs or unobservable inputs that are corroborated by market data

•Level 3 - Significant unobservable inputs

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The assets and liabilities of the Company that are measured at fair value on a recurring basis using the respective input levels as of October 30, 2020 and January 31, 2020 were as follows (in thousands):

	October 30, 2020		January 31, 2020
	Level 1		Level 1
Cash equivalents - Money Market Funds	$	70,838	$	100,476

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The carrying amounts of the Company's accounts receivable, accounts payable and accrued expenses approximate their respective fair value due to their short-term nature.

20

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This management's discussion and analysis is based upon the financial statements of Secureworks which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, and should be read in conjunction with our audited financial statements and related notes for the year ended January 31, 2020 included in Part II, Item 8 of our Annual Report on Form 10-K as filed with the SEC on March 27, 2020, which we refer to as the Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, expected future responses to and effects of the COVID-19 pandemic and other characterizations of future events or circumstances. Our actual results could differ materially from those discussed or implied in our forward-looking statements. Factors that could cause or contribute to these differences include those discussed in "Risk Factors" in Part I, Item 1A of our Annual Report.

Our fiscal year is the 52- or 53-week period ending on the Friday closest to January 31. We refer to the fiscal year ending January 29, 2021 and the fiscal year ended January 31, 2020 as fiscal 2021 and fiscal 2020, respectively. Fiscal 2021 and fiscal 2020 each have 52 weeks, and each quarter has 13 weeks. All percentage amounts and ratios presented in this management's discussion and analysis were calculated using the underlying data in thousands. Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal periods.

Except where the context otherwise requires or where otherwise indicated, (1) all references to "Secureworks," "we," "us," "our" and "our Company" in this management's discussion and analysis refer to SecureWorks Corp. and our subsidiaries on a consolidated basis, (2) all references to "Dell" refer to Dell Inc. and its subsidiaries on a consolidated basis and (3) all references to "Dell Technologies" refer to Dell Technologies Inc., the ultimate parent company of Dell Inc.

Overview

We are a leading global provider of technology-driven information security solutions singularly focused on protecting our customers from cyber attacks. We combine deep expertise from service to thousands of customers, machine learning and automation from our proprietary technology, and actionable insights from our team of elite researchers and analysts to create a powerful network effect that provides increasingly strong protection for our customers. By aggregating and analyzing data from various sources around the world, we prevent security breaches, detect malicious activity in real time, respond rapidly and predict emerging threats.

Our vision is to be the essential cyber security company for a digitally connected world. Through our vendor-neutral approach, we create integrated and comprehensive solutions by proactively managing the collection of "point" products deployed by our customers to address specific security issues and provide supplemental solutions where gaps exist in our customers' defenses. We seek to provide the right level of security for each customer's unique situation, which evolves as the customer's organization grows and changes.

We have pioneered an integrated approach that delivers a broad portfolio of information security solutions to organizations of varying size and complexity. Our flexible and scalable solutions support the evolving needs of the largest, most sophisticated enterprises staffed with in-house security experts, as well as small and medium-sized businesses and government agencies with limited in-house capabilities and resources.

Our solutions enable organizations to:

•prevent security breaches by fortifying their cyber defenses,

•detect malicious activity,

•respond rapidly to security breaches, and

•predict emerging threats.

Our solutions leverage the proprietary technologies, processes and extensive expertise and knowledge of the tactics, techniques and procedures of the adversary that we have developed over more than 21 years. Key elements of our strategy include:

•maintain and extend our technology leadership,

•expand and diversify our customer base,

•deepen our existing customer relationships, and

•attract and retain top talent.

21

Our technology-driven information security solutions offer an innovative approach to prevent, detect, respond to and predict cybersecurity breaches. Through our managed security solutions, which are largely sold on a subscription basis, we provide global visibility and insight into malicious activity, enabling our customers to detect and effectively remediate threats quickly.

In fiscal 2020, we launched our first software-as-a-service application, Red Cloak Threat Detection and Response (TDR) and related Managed Detection and Response (MDR) powered by Red Cloak. This application provides customers visibility across their entire environment, applies advanced analytics developed using machine and deep learning on diverse data from a wide range of sources, and leverages workflows designed using our 21 years of security operations expertise and integrated orchestration and automation capabilities that increase the speed of response actions. Threat intelligence, which is typically deployed as part of our managed security solutions, delivers early warnings of vulnerabilities and threats along with actionable information to help prevent any adverse impact.

In addition to these solutions, we also offer a variety of services, which include security and risk consulting and incident response to accelerate adoption of our capabilities. Through security and risk consulting, we advise customers on a broad range of security and risk-related matters. Incident response minimizes the impact and duration of security breaches through proactive customer preparation, rapid containment and thorough event analysis followed by effective remediation. We have a single organization responsible for the delivery of our security solutions, which enables us to respond quickly to our customers' evolving needs and help them secure themselves against cyber attacks.

From April 2009 to October 30, 2020, the number of events processed by our technology platform increased from five billion to as many as 350 billion events per day. This significant growth has required continual investment in our business. We believe these investments are critical to our success, although they may continue to impact our near-term profitability.

The fees we charge for our solutions vary based on a number of factors, including the solutions selected, the number of customer devices covered by the selected solutions, and the level of management we provide for the solutions. In the third     quarter of fiscal 2021, approximately 76% of our revenue was derived from subscription-based solutions, attributable to managed security contracts, while approximately 24% was derived from professional services engagements. As we respond to the evolving needs of our customers, the relative mix of subscription-based solutions and professional services we provide our customers may fluctuate.

Acquisition of Delve Laboratories

We seek to make strategic acquisitions of other companies to supplement our internal growth. On September 21, 2020, we acquired all of the outstanding shares of Delve Laboratories, Inc. (“Delve”) for $15.1 million, net of cash acquired. Delve provides comprehensive vulnerability assessment solutions through its automated vulnerability platform. Delve’s SaaS 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. We plan to integrate the vulnerability discovery and prioritization technology into new offerings within our cloud-based portfolio, including our Red Cloak Platform and TDR application, expanding visibility and insights for users.

COVID-19

In December 2019, a novel strain of the coronavirus, COVID-19, was reported in mainland China. The World Health Organization declared the outbreak to constitute a "pandemic” on March 11, 2020. This led to a significant disruption of normal business operations globally, as businesses, including Secureworks, have implemented modifications to protect employees by restricting travel and directing employees to work-from-home, in some instances as required by federal, state and local authorities. While we instituted a global work-from-home policy beginning in March 2020, we did not incur significant disruptions in our business operations or a material impact on our results of operations, financial condition, liquidity or capital resources during the three and nine ended October 30, 2020. We have experienced a limited reduction in customer demand for our solutions that we believe is attributable to COVID-19, which may impact on our results in future periods. Although we are unable to predict the extent and severity of all impacts of COVID-19, the pandemic might further curtail customer spending, lead to delayed or deferred purchasing decisions, lengthen sales cycles and result in delays in receiving customer or partner payments. These effects, individually or in the aggregate, could have a material negative impact on our future results of operations and financial condition.

In light of these considerations, we continue to actively monitor the impacts and potential impacts of the COVID-19 pandemic in all aspects of our business. The extent of the impact of COVID-19 on our future operational and financial performance will depend on various developments, including the duration and spread of the virus, impact on our employees, customers and vendors, impact on our customers' liquidity, volume of sales, and length of our sales cycles, all of which remain uncertain and cannot be predicted, but which could have a material negative effect on our business, results of operations or financial

22

condition. Due to our subscription-based business model, the effect of COVID-19 may not be fully reflected in our results of operations until future periods, if at all.

Key Operating Metrics

In recent years, we have experienced broad growth across our portfolio of technology-driven information security solutions provided to customers of all sizes. We have achieved much of this growth by providing solutions to large enterprise customers, which generate substantially more average revenue than our small and medium-sized business, or SMB, customers, and by continually expanding the volume and breadth of the security solutions that we provide to all customers. Execution of this strategy has resulted in steady growth in our average revenue per customer. This growth has required continuous investment in our business, resulting in net losses. We believe these investments are critical to our success, although they may continue to impact our profitability.

We believe the operating metrics described below provide further insight into the long-term value of our subscription agreements and our ability to maintain and grow our customer relationships. Relevant key operating metrics are presented below as of the dates indicated and for the quarterly periods then ended:

	October 30, 2020			November 1, 2019
Subscription customer base	3,900			4,100
Total customer base	5,200			5,000
Monthly recurring revenue (in millions)	$	36.9		$	36.9
Annual recurring revenue (in millions)	$	442.7		$	442.8
Average subscription revenue per customer (in thousands)	$	113.2		$	107.8
Net revenue retention rate	95		%	99		%

Subscription Customer Base. We define our subscription customer base as the number of customers who subscribe to our managed security solutions as of a particular date. We believe that growing our customer base and our ability to grow our average subscription revenue per customer represent significant future revenue opportunities for us.

Total Customer Base. We define our total customer base as the number of customers that, as of a particular date, subscribe to our managed security solutions or that buy professional and other services from us, as of a particular date.

Annual and Monthly Recurring Revenue. We define recurring revenue as the value of our subscription contracts as of a particular date. Because we use recurring revenue as a leading indicator of future annual revenue, we include operational backlog. We define operational backlog as the recurring revenue associated with pending contracts, which are contracts that have been entered into but for which the service period has not yet commenced. Our increase in recurring revenue has been driven primarily by our continuing ability to expand our offerings and sell additional solutions to existing customers, as well as by larger subscription contracts to our enterprise customers.

Average Subscription Revenue Per Customer. The increase in our average subscription revenue per customer is primarily related to the persistence of cyber threats and the results of our sales and marketing efforts to increase the awareness of our solutions. Additionally, our customer composition of both enterprise and SMB companies provides us with an opportunity to expand our professional services revenue. For each of the nine months ended October 30, 2020 and November 1, 2019, approximately 66% and 68%, respectively, of our professional services customers subscribed to our managed security solutions.

Net Revenue Retention Rate. Our net revenue retention rate is an important measure of our success in retaining and growing revenue from our subscription-based customers. To calculate our net revenue retention rate for any period, we compare the monthly recurring revenue excluding operational backlog of our subscription-based customer base at the beginning of the fiscal year, which we call our base recurring revenue, to the monthly recurring revenue excluding operational backlog from that same cohort of customers at the end of the period, which we call our retained recurring revenue. By dividing the retained recurring revenue by the base recurring revenue, we measure our success in retaining and growing installed revenue from the specific cohort of customers we served at the beginning of the period. Our calculation includes the positive revenue impacts of selling and installing additional solutions to this cohort of customers and the negative revenue impacts of customer or service attrition during the period. The calculation, however, does not include the positive impact on revenue from sales of solutions to any customers acquired during the period. Our net revenue retention rates may decline or increase from period to period as a result of several factors, including the timing of solution installations and customer renewal rates.

23

Non-GAAP Financial Measures

We use supplemental measures of our performance, which are derived from our financial information, but which are not presented in our financial statements prepared in accordance with GAAP. Non-GAAP financial measures presented in this management's discussion and analysis include non-GAAP revenue, non-GAAP gross margin, non-GAAP research and development expenses, non-GAAP sales and marketing expenses, non-GAAP general and administrative expenses, non-GAAP operating income (loss), non-GAAP net income (loss), non-GAAP earnings (loss) per share and adjusted EBITDA. We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. We believe these non-GAAP financial measures provide useful information to help evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling more meaningful period-to-period comparisons.

There are limitations to the use of the non-GAAP financial measures presented in this management's discussion and analysis. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

The non-GAAP financial measures we present, as defined by us, exclude the items described in the reconciliation below. As the excluded items can have a material impact on earnings, our management compensates for this limitation by relying primarily on GAAP results and using non-GAAP financial measures supplementally. The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for revenue, gross margin, research and development expenses, sales and marketing expenses, general and administrative expenses, operating income (loss) or net income (loss) prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis.

Reconciliation of Non-GAAP Financial Measures

The table below presents a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure. We encourage you to review the reconciliations in conjunction with the presentation of non-GAAP financial measures for each of the periods presented. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, the exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent or unusual.

The following is a summary of the items excluded from the most comparable GAAP financial measures to calculate our non-GAAP financial measures:

•Amortization of Intangible Assets. Amortization of intangible assets consists of amortization of customer relationships and acquired technology. In connection with the acquisition of Dell by Dell Technologies in fiscal 2014 and the Delve Acquisition in fiscal 2021, all of our tangible and intangible assets and liabilities were accounted for and recognized at fair value on the transaction date. Accordingly, amortization of intangible assets consists of amortization associated with intangible assets recognized in connection with these transactions.

•Stock-based Compensation Expense. Non-cash stock-based compensation relates to both the Dell Technologies and Secureworks equity plans. We exclude such expenses when assessing the effectiveness of our operating performance since stock-based compensation does not necessarily correlate with the underlying operating performance of the business.

•Aggregate Adjustment for Income Taxes. The aggregate adjustment for income taxes is the estimated combined income tax effect for the adjustments mentioned above. The tax effects are determined based on the tax jurisdictions where the above items were incurred.

24

	Three Months Ended				Nine Months Ended
	October 30, 2020		November 1, 2019		October 30, 2020		November 1, 2019
	(in thousands)				(in thousands)
GAAP and non-GAAP revenue	$	141,641	$	141,332	$	421,298	$	410,779
GAAP gross margin	$	82,028	$	79,764	$	238,876	$	222,775
Amortization of intangibles	3,646		3,559		10,754		10,529
Stock-based compensation expense	255		353		1,008		1,009
Non-GAAP gross margin	$	85,929	$	83,676	$	250,638	$	234,313
GAAP research and development expenses	$	27,608	$	24,095	$	75,790	$	71,600
Stock-based compensation expense	(793)		(996)		(3,181)		(3,157)
Non-GAAP research and development expenses	$	26,815	$	23,099	$	72,609	$	68,443
GAAP sales and marketing expenses	$	34,810	$	40,726	$	107,886	$	116,966
Stock-based compensation expense	(1,072)		(691)		(2,695)		(2,389)
Non-GAAP sales and marketing expenses	$	33,738	$	40,035	$	105,191	$	114,577
GAAP general and administrative expenses	$	24,508	$	25,078	$	73,824	$	73,862
Amortization of intangibles	(3,524)		(3,524)		(10,571)		(10,571)
Stock-based compensation expense	(3,961)		(3,052)		(10,791)		(9,062)
Non-GAAP general and administrative expenses	$	17,023	$	18,502	$	52,462	$	54,229
GAAP operating loss	$	(4,898)	$	(10,135)	$	(18,624)	$	(39,653)
Amortization of intangibles	7,170		7,083		21,325		21,100
Stock-based compensation expense	6,081		5,092		17,675		15,617
Non-GAAP operating income (loss)	$	8,353	$	2,040	$	20,376	$	(2,936)
GAAP net loss	$	(3,608)	$	(7,908)	$	(12,371)	$	(26,438)
Amortization of intangibles	7,170		7,083		21,325		21,100
Stock-based compensation expense	6,081		5,092		17,675		15,617
Aggregate adjustment for income taxes	(2,917)		(3,438)		(8,998)		(11,997)
Non-GAAP net income (loss)	$	6,726	$	829	$	17,631	$	(1,718)
GAAP loss per share	$	(0.04)	$	(0.10)	$	(0.15)	$	(0.33)
Amortization of intangibles	0.09		0.09		0.26		0.26
Stock-based compensation expense	0.08		0.06		0.22		0.19
Aggregate adjustment for income taxes	(0.04)		(0.04)		(0.11)		(0.15)
Non-GAAP earnings (loss) per share *	$	0.08	$	0.01	$	0.22	$	(0.02)
* Sum of reconciling items may differ from total due to rounding of individual components
GAAP net loss	$	(3,608)	$	(7,908)	$	(12,371)	$	(26,438)
Interest and other, net	79		1,257		(944)		(961)
Income tax benefit	(1,369)		(3,484)		(5,309)		(12,254)
Depreciation and amortization	10,106		10,869		30,978		32,017
Stock-based compensation expense	6,081		5,092		17,675		15,617
Adjusted EBITDA	$	11,289	$	5,826	$	30,029	$	7,981

25

Our Relationship with Dell and Dell Technologies

On April 27, 2016, we completed our IPO. Upon the closing of our IPO, Dell Technologies owned, indirectly through Dell Inc. and Dell Inc.'s subsidiaries, no shares of our outstanding Class A common stock and all shares of our outstanding Class B common stock, which as of October 30, 2020 represented approximately 85.1% of our total outstanding shares of common stock and approximately 98.3% of the combined voting power of both classes of our outstanding common stock.

As a majority-owned subsidiary of Dell, we receive from Dell various corporate services in the ordinary course of business, including finance, tax, human resources, legal, insurance, IT, procurement and facilities related services. The costs of these services have been charged in accordance with a shared services agreement that went into effect on August 1, 2015, the effective date of our carve-out from Dell. For more information regarding the allocated costs and related party transactions, see "Notes to Condensed Consolidated Financial Statements—Note 12—Related Party Transactions" in our condensed consolidated financial statements included in this report.

During the periods presented in the condensed consolidated financial statements included in this report, Secureworks did not file separate federal tax returns because Secureworks was generally included in the tax grouping of other Dell entities within the respective entity's tax jurisdiction. The income tax benefit has been calculated using the separate return method, modified to apply the benefits for loss approach. Under the benefits for loss approach, net operating losses or other tax attributes are characterized as realized or as realizable by Secureworks when those attributes are utilized or expected to be utilized by other members of the Dell consolidated group. For more information, see "Notes to Condensed Consolidated Financial Statements —Note 11—Income and Other Taxes" in our condensed consolidated financial statements included in this report.

Additionally, we participate in various commercial arrangements with Dell under which, for example, we provide information security solutions to third-party customers with which Dell has contracted to provide our solutions, procure hardware, software and services from Dell, and sell our solutions through Dell in the United States and some international jurisdictions. In connection with our IPO, effective August 1, 2015 we entered into agreements with Dell that govern these commercial arrangements. These agreements generally were initially effective for up to one to three years and include extension and cancellation options. To the extent that we choose to or are required to transition away from the corporate services currently provided by Dell, we may incur additional non-recurring transition costs to establish our own stand-alone corporate functions. For more information regarding the allocated costs and related party transactions, see "Notes to Condensed Consolidated Financial Statements—Note 12—Related Party Transactions" in our condensed consolidated financial statements included in this report.

Components of Results of Operations

Revenue

We sell managed security solutions and threat intelligence solutions on a subscription basis and various professional services, including security and risk consulting and incident response solutions. Our managed security subscription contracts typically range from one to three years and, as of October 30, 2020, averaged two years in duration. The revenue and any related costs for these deliverables are recognized ratably over the contract term, beginning on the date on which service is made available to customers. Professional services customers typically purchase solutions pursuant to customized contracts that are shorter in duration. In general, these contracts have terms of less than one year. Professional services consist primarily of fixed-fee and retainer-based contracts. Revenue from these engagements is recognized under the proportional performance method of accounting. Revenue from time-and materials-based contracts is recognized as costs are incurred at amounts represented by the agreed-upon billing rates.

The fees we charge for our solutions vary based on a number of factors, including the solutions selected, the number of customer devices covered by the selected solutions, and the level of management we provide for the solutions. In the third quarter of fiscal 2021, approximately 76% of our revenue was derived from subscription-based arrangements, attributable to managed security solutions, while approximately 24% was derived from professional services engagements. As we respond to the evolving needs of our customers, the relative mix of subscription-based solutions and professional services we provide our customers may fluctuate. International revenue, which we define as revenue contracted through non-U.S. entities, represented approximately 31% of our total net revenue in the third quarter of fiscal 2021 and 25% of our total net revenue in the third quarter of fiscal 2020. Although our international customers are located primarily in the United Kingdom, Japan, and Canada, we provided managed security solutions to customers across 57 countries as of October 30, 2020.

Over all of the periods presented in this report, our pricing strategy for our various offerings was relatively consistent, and accordingly did not significantly affect our revenue growth. However, we may adjust our pricing to remain competitive and support our strategic initiatives.

26

Gross Margin

We operate in a challenging business environment, where the complexity and number of cyber attacks are constantly increasing. Accordingly, initiatives to drive the efficiency of our Counter Threat Platform and the continued training and development of our employees are critical to our long-term success. Gross margin has been, and will continue to be, affected by these factors as well as others, including the mix of solutions sold, the mix between large and small customers, timing of revenue recognition and the extent to which we expand our counter threat operations centers.

Cost of revenue consists primarily of personnel expenses, including salaries, benefits and performance-based compensation for employees who maintain our Counter Threat Platform, provide solutions to our customers, and perform other critical functions. Also included in cost of revenue are amortization of equipment and costs associated with hardware utilized as part of providing subscription services, amortization of technology licensing fees, amortization of intangible assets, fees paid to contractors who supplement or support our solutions, maintenance fees and overhead allocations. As our business grows, the cost of revenue associated with our solutions may fluctuate.

We operate in a high-growth industry and have experienced significant revenue growth since our inception. Accordingly, we expect our gross margin to increase in absolute dollars. We continue to invest in initiatives to drive the efficiency of our business to increase gross margin as a percentage of total revenue. However, as we balance revenue growth and efficiency initiatives, gross margin as a percentage of total revenue may fluctuate from period to period.

Operating Costs and Expenses

Our operating costs and expenses consist of research and development expenses, sales and marketing expenses and general and administrative expenses.

▪Research and Development, or R&D, Expenses. Research and development expenses include compensation and related expenses for the continued development of our solutions offerings, including a portion of expenses related to our threat research team, which focuses on the identification of system vulnerabilities, data forensics and malware analysis. R&D expenses also encompass expenses related to the development of prototypes of new solutions offerings and allocated overhead. Our customer solutions have generally been developed internally. We operate in a competitive and highly technical industry. Therefore, to maintain and extend our technology leadership, we intend to continue to invest in our R&D efforts by hiring more personnel to enhance our existing security solutions and to add complementary solutions.

•     Sales and Marketing, or S&M, Expenses. Sales and marketing expenses include salaries, sales commissions and performance-based compensation, benefits and related expenses for our S&M personnel, travel and entertainment, marketing and advertising programs (including lead generation), customer advocacy events, and other brand-building expenses, as well as allocated overhead. As we continue to grow our business, both domestically and internationally, we will invest in our sales capability, which will increase our sales and marketing expenses in absolute dollars.

▪General and Administrative, or G&A, Expenses. General and administrative expenses include primarily the costs of human resources and recruiting, finance and accounting, legal support, internal information management and information security systems, facilities management, corporate development and other administrative functions, and are partially offset by allocations of information technology and facilities costs to other functions.

Interest and Other, Net

Interest and other, net consists primarily of the effect of exchange rates on our foreign currency-denominated asset and liability balances and interest income earned on our cash and cash equivalents. All foreign currency transaction adjustments are recorded as foreign currency gains (losses) in the Condensed Consolidated Statements of Operations. To date, we have had minimal interest income.

Income Tax Benefit

Our effective tax benefit rate was 27.5% and 30.0% for the three and nine months ended October 30, 2020, respectively, and 30.6% and 31.7% for the three and nine months ended November 1, 2019, respectively. The change in the Company's effective income tax rate between the periods was primarily attributable to both the improvement of loss before income taxes and the impact of discrete adjustments related to stock-based compensation expense of approximately $0.3 million and $0.8 million for the three and nine months ended October 30, 2020, respectively, and $0.5 million and $2.6 million for the three and nine months ended November 1, 2019, respectively.

27

Results of Operations

The following tables summarize our key performance indicators for the three and nine months ended October 30, 2020 and November 1, 2019.

	Three Months Ended
	October 30, 2020						November 1, 2019
	$		% of Revenue		% Change		$		% of Revenue
	(in thousands, except percentages)
Net revenue	$	141,641	100.0	%	0.2	%	$	141,332	100.0	%
Cost of revenue	$	59,613	42.1	%	(3.2)	%	$	61,568	43.6	%
Total gross margin	$	82,028	57.9	%	2.8	%	$	79,764	56.4	%
Operating expenses	$	86,926	61.4	%	(3.3)	%	$	89,899	63.6	%
Operating loss	$	(4,898)	(3.5)	%	(51.7)	%	$	(10,135)	(7.2)	%
Net loss	$	(3,608)	(2.5)	%	(54.4)	%	$	(7,908)	(5.6)	%
Other Financial Information (1)
Non-GAAP net revenue	$	141,641	100.0	%	0.2	%	$	141,332	100.0	%
Non-GAAP cost of revenue	$	55,712	39.3	%	(3.4)	%	$	57,656	40.8	%
Non-GAAP gross margin	$	85,929	60.7	%	2.7	%	$	83,676	59.2	%
Non-GAAP operating expenses	$	77,576	54.8	%	(5.0)	%	$	81,636	57.8	%
Non-GAAP operating income	$	8,353	5.9	%	309.5	%	$	2,040	1.4	%
Non-GAAP net income	$	6,726	4.7	%	711.3	%	$	829	0.6	%
Adjusted EBITDA	$	11,289	8.0	%	93.8	%	$	5,826	4.1	%

	Nine Months Ended
	October 30, 2020						November 1, 2019
	$		% of Revenue		% Change		$		% of Revenue
	(in thousands, except percentages)
Net revenue	$	421,298	100.0	%	2.6	%	$	410,779	100.0	%
Cost of revenue	$	182,422	43.3	%	(3.0)	%	$	188,004	45.8	%
Total gross margin	$	238,876	56.7	%	7.2	%	$	222,775	54.2	%
Operating expenses	$	257,500	61.1	%	(1.9)	%	$	262,428	63.9	%
Operating loss	$	(18,624)	(4.4)	%	(53.0)	%	$	(39,653)	(9.7)	%
Net loss	$	(12,371)	(2.9)	%	(53.2)	%	$	(26,438)	(6.4)	%
Other Financial Information (1)
Non-GAAP net revenue	$	421,298	100.0	%	2.6	%	$	410,779	100.0	%
Non-GAAP cost of revenue	$	170,660	40.5	%	(3.3)	%	$	176,466	43.0	%
Non-GAAP gross margin	$	250,638	59.5	%	7.0	%	$	234,313	57.0	%
Non-GAAP operating expenses	$	230,262	54.7	%	(2.9)	%	$	237,249	57.8	%
Non-GAAP operating income (loss)	$	20,376	4.8	%	(794.0)	%	$	(2,936)	(0.7)	%
Non-GAAP net income (loss)	$	17,631	4.2	%	(1126.3)	%	$	(1,718)	(0.4)	%
Adjusted EBITDA	$	30,029	7.1	%	276.3	%	$	7,981	1.9	%

____________________

(1)    See "Non-GAAP Financial Measures" and "Reconciliation of Non-GAAP Financial Measures" for more information about these non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure. Non-GAAP financial measures as a percentage of revenue are calculated based on non-GAAP revenue.

28

Three and nine months ended October 30, 2020 compared to the three and nine months ended November 1, 2019

Revenue

Net revenue, which we refer to as revenue, increased $0.3 million, or 0.2%, and $10.5 million, or 2.6%, for the three and nine months ended October 30, 2020, respectively. The revenue increase resulted primarily from revenue generated by our subscription-based solutions, which represented approximately 76.4% and 76.2% of total revenue for the three and nine months ended October 30, 2020. Our existing customers continued to increase their contracted subscriptions for our solutions, with average revenue per customer increasing 5% year over year.

Revenue for certain services provided to or on behalf of Dell under our commercial agreements with Dell totaled approximately $4.3 million and $14.9 million for the three and nine months ended October 30, 2020, respectively, and $10.6 million and $19.4 million for the three and nine months ended November 1, 2019, respectively. For more information regarding these commercial agreements, see "Notes to Condensed Consolidated Financial Statements—Note 12—Related Party Transactions" in our condensed consolidated financial statements included in this report.

We primarily generate revenue from sales in the United States. However, for the three months ended October 30, 2020, international revenue, which we define as revenue contracted through non-U.S. entities, increased to $43.2 million, or 23.3%, from the three months ended November 1, 2019. Currently, our international customers are primarily located in the United Kingdom, Japan, and Canada. We are focused on continuing to grow our international customer base in future periods.

Gross Margin

Gross margin on a GAAP basis includes amortization of intangible assets and stock-based compensation expense. Our total gross margin increased $2.3 million, or 2.8%, and $16.1 million, or 7.2%, for the three and nine months ended October 30, 2020, respectively. As a percentage of revenue, our gross margin increased 150 basis points to 57.9% and 250 basis points to 56.7% for the three and nine months ended October 30, 2020, respectively.

On a non-GAAP basis, excluding amortization of intangible assets and stock-based compensation expense, gross margin increased $2.3 million, or 2.7%, and $16.3 million, or 7.0%, for the three and nine months ended October 30, 2020, respectively. As a percentage of revenue, our non-GAAP gross margin increased 150 basis points to 60.7% and 250 basis points to 59.5% for three and nine months ended October 30, 2020, respectively.

The increases in gross margin as a percentage of revenue on both a GAAP and non-GAAP basis during the three and nine months ended October 30, 2020 was primarily attributable to improvement in our subscription-based solutions margins as we continue to focus on delivering comprehensive higher-value security solutions and driving scale and operational efficiencies, and a decrease in travel-related costs, which we attribute to the COVID-19 pandemic.

Operating Expenses

The following table presents information regarding our operating expenses during the three and nine months ended October 30, 2020 and November 1, 2019.

	Three Months Ended
	October 30, 2020						November 1, 2019
	Dollars		% of Revenue		% Change		Dollars		% of Revenue
	(in thousands, except percentages)
Operating expenses:
Research and development	$	27,608	19.5	%	14.6	%	$	24,095	17.0	%
Sales and marketing	34,810		24.6	%	(14.5)	%	40,726		28.8	%
General and administrative	24,508		17.3	%	(2.3)	%	25,078		17.7	%
Total operating expenses	$	86,926	61.4	%	(3.3)	%	$	89,899	63.6	%
Other Financial Information
Non-GAAP research and development	$	26,815	18.9	%	16.1	%	$	23,099	16.3	%
Non-GAAP sales and marketing	33,738		23.8	%	(15.7)	%	40,035		28.3	%
Non-GAAP general and administrative	17,023		12.0	%	(8.0)	%	18,502		13.1	%
Non-GAAP operating expenses (1)	$	77,576	54.8	%	(5.0)	%	$	81,636	57.8	%

29

	Nine Months Ended
	October 30, 2020						November 1, 2019
	Dollars		% of Revenue		% Change		Dollars		% of Revenue
	(in thousands, except percentages)
Operating expenses:
Research and development	$	75,790	18.0	%	5.9	%	$	71,600	17.4	%
Sales and marketing	107,886		25.6	%	(7.8)	%	116,966		28.5	%
General and administrative	73,824		17.5	%	(0.1)	%	73,862		18.0	%
Total operating expenses	$	257,500	61.1	%	(1.9)	%	$	262,428	63.9	%
Other Financial Information
Non-GAAP research and development	$	72,609	17.2	%	6.1	%	$	68,443	16.7	%
Non-GAAP sales and marketing	105,191		25.0	%	(8.2)	%	114,577		27.9	%
Non-GAAP general and administrative	52,462		12.5	%	(3.3)	%	54,229		13.2	%
Non-GAAP operating expenses (1)	$	230,262	54.7	%	(2.9)	%	$	237,249	57.8	%

(1)     See "Non-GAAP Financial Measures" and "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

Research and Development Expenses. For the three months ended October 30, 2020, R&D expenses increased $3.5 million, or 14.6%. As a percentage of revenue, R&D expenses increased 250 basis points to 19.5%. On a non-GAAP basis, R&D expenses as a percentage of revenue increased 260 basis points to 18.9%. The increase in R&D expenses was primarily attributable to an increase in compensation and benefits resulting from the addition of R&D personnel associated with the continued development of our solutions, including our new security analytics platform and software applications.

For the nine months ended October 30, 2020, R&D expenses increased $4.2 million, or 5.9%. As a percentage of revenue, R&D expenses increased 60 basis points to 18.0%. On a non-GAAP basis, R&D expenses as a percentage of revenue increased 50 basis points to 17.2%. The increase in R&D expenses was primarily attributable to increased compensation and benefits resulting from the addition of R&D personnel associated with the continued development of our solutions, including our new security analytics platform and software applications.

Sales and Marketing Expenses. For the three months ended October 30, 2020, S&M expenses decreased $5.9 million, or 14.5%. As a percentage of revenue, S&M expenses decreased 420 basis points to 24.6%. On a non-GAAP basis, S&M expenses as a percentage of revenue decreased 450 basis points to 23.8%. The decrease in S&M expenses was primarily attributable to lower travel-related costs associated with increased remote activities as a result of COVID-19 and a reduction of sales cost associated with our Safeguard offerings in partnership with Dell.

For the nine months ended October 30, 2020, S&M expenses decreased $9.1 million, or 7.8%. As a percentage of revenue, S&M expenses decreased 290 basis points to 25.6%. On a non-GAAP basis, S&M expenses as a percentage of revenue decreased 290 basis points to 25.0%. The decrease in S&M expenses was primarily attributable to lower travel-related costs associated with increased remote activities as a result of COVID-19 and a reduction of sales cost associated with our Safeguard offerings in partnership with Dell.

General and Administrative Expenses. For the three months ended October 30, 2020, G&A expenses decreased $0.6 million, or 2.3%. As a percentage of revenue, G&A expenses decreased 40 basis points to 17.3% . On a non-GAAP basis, G&A expenses as a percentage of revenue decreased 110 basis points to 12.0%. The decrease in G&A expenses was primarily attributable to lower employee and travel-related costs.

For the nine months ended October 30, 2020, G&A expenses decreased $38.0 thousand, or 0.1%. As a percentage of revenue, G&A expenses decreased 50 basis points to 17.5%. On a non-GAAP basis, G&A expenses as a percentage of revenue decreased 70 basis points to 12.5%. The decrease in G&A expenses was primarily attributable to lower employee and facilities-related costs, which was offset by professional services and consulting related costs incurred in fiscal 2021.    

30

Operating Income (Loss)

Our operating loss for the three months ended October 30, 2020 and November 1, 2019 was $(4.9) million and $(10.1) million, respectively. As a percentage of revenue, our operating loss was (3.5)% and (7.2)% for the three months ended October 30, 2020 and November 1, 2019, respectively. The decrease in our operating loss was primarily due to increased gross margin and lower operating expenses as previously described.

Our operating loss for the nine months ended October 30, 2020 and November 1, 2019 was $(18.6) million and $(39.7) million, respectively. As a percentage of revenue, our operating loss was (4.4)% and (9.7)% for the nine months ended October 30, 2020 and November 1, 2019, respectively. The decrease in our operating loss was primarily due to increased gross margin as previously described.

Operating income on a GAAP basis includes amortization of intangible assets and stock-based compensation expense. On a non-GAAP basis, excluding these adjustments, our non-GAAP operating income was $8.4 million and $20.4 million for the three and nine months ended October 30, 2020, respectively, compared to non-GAAP operating income of $2.0 million and a non-GAAP operating loss of $(2.9) million for the three and nine months ended November 1, 2019, respectively.

Interest and Other, Net

Our interest and other, net was $(0.1) million and $0.9 million for the three and nine months ended October 30, 2020, respectively, compared with $(1.3) million and $1.0 million for the three and nine months ended November 1, 2019, respectively. The changes primarily reflected the effects of foreign currency transactions and related exchange rate fluctuations.

Income Tax Benefit

Our income tax benefit was $1.4 million, or 27.5%, and $5.3 million, or 30.0%, of our pre-tax loss during the three and nine months ended October 30, 2020, respectively, and $3.5 million, or 30.6%, and $12.3 million, or 31.7%, of our pre-tax loss during the three and nine months ended November 1, 2019, respectively. The changes in the effective tax benefit rate were primarily attributable to both the improvement of loss before income taxes and the impact of certain discrete adjustments related to stock-based compensation expense of approximately $0.3 million and $0.8 million for the three and nine months ended October 30, 2020, respectively, and $0.5 million and $2.6 million for the three and nine months ended November 1, 2019, respectively.

Net Income (Loss)

Our net loss of $(3.6) million decreased $4.3 million, or 54.4%, for the three months ended October 30, 2020. For the nine months ended October 30, 2020, our net loss of $(12.4) million decreased $14.1 million, or 53.2%. Net income on a non-GAAP basis for the three months ended October 30, 2020 was $6.7 million compared to non-GAAP net income of $0.8 million for the three months ended November 1, 2019, and $17.6 million for the nine months ended October 30, 2020 compared to a non-GAAP loss of $(1.7) million for the nine months ended November 1, 2019. The changes on both a GAAP and non-GAAP basis were attributable to our improved operating results offset in part by the lower income tax benefit recognized in the current period.

Liquidity and Capital Commitments

Overview

We believe that our cash and cash equivalents together with our accounts receivable will provide us with sufficient liquidity to fund our business and meet our obligations for at least 12 months. Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of COVID-19 and other risks and uncertainties described under “Risk Factors” in Part I, Item 1A of our Annual Report. Our future capital requirements will depend on many factors, including our rate of revenue growth, the rate of expansion of our workforce, the timing and extent of our expansion into new markets, the timing of introductions of new functionality and enhancements to our solutions, the expansion of sales and marketing activities, potential acquisitions of complementary businesses and technologies, continuing market acceptance of our solutions, general economic and market conditions, as well as macroeconomic events such as COVID-19. We may need to raise additional capital or incur indebtedness to continue to fund our operations in the future or to fund our needs for future strategic initiatives, such as acquisitions. In addition to our $30 million revolving credit facility from Dell, described below, sources of financing may include arrangements with unaffiliated third parties, depending on the availability of capital, the cost of funds and lender collateral requirements.

31

Selected Measures of Liquidity and Capital Resources

As of October 30, 2020, our principal sources of liquidity consisted of cash and cash equivalents and accounts receivable.

Selected measures of our liquidity and capital resources are as follows:

	October 30, 2020		January 31, 2020
	(in thousands)
Cash and cash equivalents	$	188,048	$	181,838
Accounts receivable, net	$	107,907	$	111,798

We invoice our customers based on a variety of billing schedules. During the nine months ended October 30, 2020, on average, approximately 57% of our recurring revenue was billed in advance and approximately 43% was billed on either a monthly or a quarterly basis in advance. Invoiced accounts receivable are generally collected over a period of 30 to 120 days. The decrease in accounts receivable as of October 30, 2020 reflected increased collection activity. We regularly monitor our accounts receivable for collectability, particularly in markets where economic conditions remain uncertain, and continue to take actions to reduce our exposure to credit losses. As of October 30, 2020 and January 31, 2020, the allowance for doubtful accounts was $5.3 million and $5.1 million, respectively. Based upon our assessment, we believe we are adequately reserved for credit risk.

Revolving Credit Facility

SecureWorks, Inc., our wholly-owned subsidiary, is party to a revolving credit agreement with a wholly-owned subsidiary of Dell Inc. under which we have obtained a $30 million senior unsecured revolving credit facility. Under the facility, up to $30 million principal amount of borrowings may be outstanding at any time. The maximum amount of borrowings may be increased by up to an additional $30 million by mutual agreement of the lender and borrower. The proceeds from loans made under the facility may be used for general corporate purposes. The facility is not guaranteed by us or our subsidiaries. There was no outstanding balance under the facility as of October 30, 2020 or January 31, 2020. The facility has a maturity date of March 26, 2021 and interest on borrowings accrues at the applicable London Interbank Offered Rate plus 1.30%.

Amounts under the facility may be borrowed, repaid and reborrowed from time to time during the term of the facility. The borrower will be required to repay in full all of the loans outstanding, including all accrued interest, and the facility will terminate upon a change of control of us or following a transaction in which SecureWorks, Inc. ceases to be a direct or indirect wholly-owned subsidiary of our Company. The credit agreement contains customary representations, warranties, covenants and events of default. The unused portion of the facility is subject to a commitment fee of 0.35%, which is due upon expiration of the facility.

Cash Flows

The following table presents information concerning our cash flows for the nine months ended October 30, 2020 and November 1, 2019.

	Nine Months Ended
	October 30, 2020		November 1, 2019
	(in thousands)
Net change in cash from:
Operating activities	$	28,434	$	35,852
Investing activities	(17,262)		(12,082)
Financing activities	(4,962)		(14,574)
Change in cash and cash equivalents	$	6,210	$	9,196

Operating Activities — Cash provided by operating activities totaled $28.4 million and $35.9 million for the nine months ended October 30, 2020 and November 1, 2019, respectively. The decrease in cash provided by operating activities is primarily driven by the establishment of consistent customer collection rates year over year and a decline in deferred revenue. Both items were partially offset by our net transactions with Dell. We expect that our future transactions with Dell will be a source of cash over time as we anticipate that our charges to Dell will continue to exceed Dell's charges to us, although the timing of charges and settlements may vary from period to period.

32

Investing Activities — Cash used in investing activities totaled $17.3 million and $12.1 million for the nine months ended October 30, 2020 and November 1, 2019, respectively. The use of cash flows for the nine months ended October 30, 2020 reflected our acquisition of Delve for $15.1 million, net of cash acquired, and capital expenditures of $2.2 million. The use of cash flows for the nine months ended November 1, 2019 consisted primarily of capital expenditures for property and equipment to support our data center and facility infrastructure as well as certain capitalized costs related to the development of our new security software application.

Financing Activities — Cash used in financing activities totaled $5.0 million and $14.6 million for the nine months ended October 30, 2020 and November 1, 2019, respectively. The use of cash flows for the nine months ended October 30, 2020 reflected employee tax withholding payments paid by us of $5.0 million on restricted stock awards. The use of cash flows for the nine months ended November 1, 2019 reflected employee tax withholding payments of $8.2 million paid by us on employee restricted stock awards and our repurchase of $6.4 million of our Class A common stock pursuant to our stock repurchase program, which expired by its terms on May 1, 2020.

Off-Balance Sheet Arrangements

As of October 30, 2020, we were not subject to any obligations pursuant to any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition, results of operations or liquidity.

Critical Accounting Policies

The unaudited condensed consolidated financial statements included elsewhere in this report have been prepared in accordance with GAAP for interim financial information and the requirements of the SEC. Accordingly, they do not include all of the information and disclosures required by GAAP for a complete financial statement presentation. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments consisting of normal recurring accruals and disclosures considered necessary for a fair interim presentation have been included. All inter-company accounts and transactions have been eliminated in consolidation.

As described in "Notes to Condensed Consolidated Financial Statements—Note 1—Description of the Business and Basis of Presentation "in our condensed consolidated financial statements included in this report, we have adopted the new accounting guidance set forth in ASC 350, ASC 326, and ASC 848. Additionally, management assessed the critical accounting policies as disclosed in our Annual Report and incorporated the Company's method of accounting with respect to business combinations as a result of our acquisition of Delve during the three months ended October 30, 2020, as described in "Notes to Condensed Consolidated Financial Statements—Note 2—Business Combinations " in our condensed consolidated financial statements included in this report.

Recently Issued Accounting Pronouncements

See "Notes to Condensed Consolidated Financial Statements—Note 1—Description of the Business and Basis of Presentation" in our condensed consolidated financial statements included in this report for a description of recently issued accounting pronouncements and our expectation of their impact, if any, on our financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our results of operations and cash flows have been and will continue to be subject to fluctuations because of changes in foreign currency exchange rates, particularly changes in exchange rates between the U.S. dollar and the Euro, the British Pound, the Romanian Leu, Japanese Yen, and the Canadian Dollar, the currencies of countries where we currently have our most significant international operations. Our expenses in international locations are generally denominated in the currencies of the countries in which our operations are located.

As our international operations grow, we may begin to use foreign exchange forward contracts to partially mitigate the impact of fluctuations in net monetary assets denominated in foreign currencies.

Item 4. Controls and Procedures

Limitations on Effectiveness of Disclosure Controls and Procedures    

In designing and evaluating our disclosure controls and procedures, as defined below under SEC rules, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their cost.

33

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Securities Exchange of 1934, or Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.

In connection with the preparation of this report, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of October 30, 2020. Based on that evaluation, our management has concluded that our disclosure controls and procedures were effective as of October 30, 2020.

Changes in Internal Control over Financial Reporting

Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures which (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, (c) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management and the board of directors, and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

There were no changes in our internal control over financial reporting that occurred during the quarter ended October 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1A. Risk Factors

There have been no material changes to our "Risk Factors" discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2020 filed with the SEC on March 27, 2020. The risks described in our Annual Report are not the only risks facing us. There are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial that may also materially adversely affect our business, financial condition or operating results.

34

Item 6. Exhibits

Secureworks hereby files or furnishes the following exhibits:     

Exhibit No.	Description
10.1	Form of Restricted Stock Unit Agreement for Executives under SecureWorks Corp. 2016 Long-Term Incentive Plan. Filed herewith.
10.2	Form of Restricted Stock Agreement for Executives under SecureWorks Corp. 2016 Long-Term Incentive Plan. Filed herewith.
10.3	Form of Performance Stock Unit Agreement for Executives under the SecureWorks Corp. 2016 Long-Term Incentive Plan. Filed herewith.
10.4	Form of Performance-Based Restricted Stock Agreement for Executives under the SecureWorks Corp. 2016 Long-Term Incentive Plan. Filed herewith.
10.5	Form of Restricted Stock Unit Agreement for Non-Employee Directors under the SecureWorks Corp. 2016 Long-Term Incentive Plan. Filed herewith.
31.1	Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2	Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1	Certifications of Chief Executive Officer and Chief Financial Officer of the Company pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	Inline XBRL Taxonomy Extension Schema Document.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104	Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document, which is contained in Exhibit 101).

35

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SecureWorks Corp.
By:	/s/ Paul M. Parrish
	Paul M. Parrish
	Chief Financial Officer
	(Duly Authorized Officer)

Date: December 3, 2020

36