STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLAN

In connection with the IPO, the Company's board of directors adopted the SecureWorks Corp. 2016 Long-Term Incentive Plan (the "2016 Plan"). The 2016 Plan became effective on April 18, 2016 and will expire on the tenth anniversary of the effective date unless the 2016 Plan is terminated earlier by the board of directors or in connection with a change in control of SecureWorks Corp. The Company has reserved 8,500,000 shares of Class A common stock for issuance pursuant to awards under the 2016 Plan. The 2016 Plan provides for the grant of options, stock appreciation rights, restricted stock, restricted stock units, deferred stock units, unrestricted stock, dividend equivalent rights, other equity-based awards and cash bonus awards. Awards may be granted under the 2016 Plan to individuals who are employees, officers, or non-employee directors of the Company or any of its affiliates, consultants and advisors who perform services for the Company or any of its affiliates, and any other individual whose participation in the 2016 Plan is determined to be in the best interests of the Company by the compensation committee of the board of directors.

Stock Options

Under the 2016 Plan, the exercise price of each option will be determined by the compensation committee, except that the exercise price may not be less than 100% (or, for incentive stock options to any 10% stockholder, 110%) of the fair market value of a share of Class A common stock on the date on which the option is granted. The term of an option may not exceed ten years (or, for incentive stock options to any 10% stockholder, five years) from the date of grant. The compensation committee will determine the time or times at which each option may be exercised and the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised. Options may be made exercisable in installments, and the exercisability of options may be accelerated by the compensation committee.

During the fiscal year ended February 3, 2017, in connection with the IPO, 2,669,788 stock options were granted to employees and 240,715 stock options were granted to directors, in all cases at an exercise price of $14.00 per share. The stock options will vest over an average service period of four years. In addition, 49,916 stock options were granted to a director upon his appointment to the board of directors at an exercise price of $13.99 per share. The stock options subject to this award will vest over a period of three years in equal annual installments.

The Company recognized $2.9 million in compensation expense for the fiscal year ended February 3, 2017. The tax benefit related to stock-based compensation expense was $1.2 million for the fiscal year ended February 3, 2017.

The fair value of stock options granted during the fiscal year ended February 3, 2017 was estimated as of the date of the grant using the Black-Scholes option pricing model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The expected term was estimated using the SEC simplified method. The risk-free interest rate is the continuously compounded, term-matching, zero-coupon rate from the valuation date. The volatility is the leverage-adjusted, term-matching, historical volatility of peer firms. The dividend yield assumption is consistent with management expectations of dividend distributions based upon the Company’s business plan at the date of grant.

The weighted assumptions utilized for valuation of options under this model as well as the weighted-average grant date fair value of stock options granted during the fiscal year ended February 3, 2017 are summarized below.



		Fiscal Year Ended
		February 3, 2017

Expected life		6.3 years
Risk-free interest rate		1.68%
Volatility		44.74%
Dividend yield		—%
Expected forfeiture rate		6.12%
Weighted-average grant-date fair value		$6.15

The following table summarizes stock option activity and options outstanding and exercisable for the fiscal year ended, and as of, February 3, 2017:



	Number of Options		Weighted- Average Exercise Price Per Share		Weighted- Average Contractual Life (years)	Weighted-Average Grant date Fair Value Per Share		Aggregate Intrinsic Value
								(in thousands)
Balance, January 29, 2016	—		$	—	—	$	—	—
Granted	2,960,419		$	14.00	8.77	$	6.15	$	—
Exercised	—		$	—	—			—
Canceled, expired or forfeited	(382,252	)	$	14.00	—	$	6.34	—
Balance, February 3, 2017	2,578,167		$	14.00	9.22	$	6.12	$	—

Options expected to vest, February 3, 2017	2,414,550		$	14.00	9.22	$	6.11	$	—

Options exercisable, February 3, 2017	—		$	—	—	$	—	$	—

At February 3, 2017, unrecognized stock-based compensation expense related to stock options was $11.8 million, net of estimated forfeitures, which is expected to be recognized over the weighted-average remaining requisite period of 3.51 years.

In connection with the acquisition of Dell by Dell Technologies in 2013, the Company’s compensation programs included grants under the Denali Holding Inc. 2013 Stock Incentive Plan (the "2013 Plan"). Under the 2013 Plan, time-based and performance-based options to purchase shares of the Series C common stock of Dell Technologies were awarded to two of the Company's executive officers. Upon the closing of the Company's IPO, 165,820 unvested time-based awards were forfeited. During the fiscal year ended February 3, 2017, 78,544 stock options were exercised at a weighted average exercise price of $13.75 per share. The total intrinsic value of the options exercised was $1.2 million. As of February 3, 2017, 432,001 awards remained outstanding. The Company recognized compensation expense related to these awards of $0.5 million, $0.8 million, and $0.8 million for the fiscal years ended February 3, 2017, January 29, 2016, and January 30, 2015, respectively.

Restricted Stock and Restricted Stock Units

Under the 2016 Plan, a restricted stock award is an award of shares of Class A common stock that may be subject to restrictions on transferability and other restrictions as the compensation committee determines in its sole discretion on the date of grant. The restrictions, if any, may lapse over a specified period of time or through the satisfaction of conditions, in installments or otherwise as the compensation committee may determine. Unless otherwise provided in an award agreement, a grantee who receives restricted stock will have all of the rights of a stockholder as to those shares, including, without limitation, the right to vote and the right to receive dividends or distributions on the shares of Class A common stock, except that the compensation committee may require any dividends to be withheld and accumulated contingent on vesting of the underlying shares or reinvested in shares of restricted stock.

Under the 2016 Plan, a restricted stock unit represents the grantee’s right to receive a compensation amount, based on the value of the shares of Class A common stock, if vesting criteria or other terms and conditions established by the compensation committee are met. If the vesting criteria or other terms and conditions are met, the Company may settle, subject to the terms and conditions of the applicable award agreement, restricted stock units in cash, shares of Class A common stock or a combination of the two. All award agreements currently outstanding require settlement in shares of Class A common stock.

In connection with the IPO, 662,225 shares of restricted stock and 1,378,436 restricted stock units were granted to employees. In addition, 66,965 restricted stock units were granted to directors. The fair value of the restricted stock and restricted stock units was $14.00 per share. During the fiscal year ended February 3, 2017, 344,034 additional restricted stock units were issued to employees at a weighted-average fair values per share of $10.90. In addition, during the third quarter of the fiscal year ended February 3, 2017, 8,934 restricted stock units were granted to a director upon his appointment to the board of directors at a fair value of $13.99 per share.

The Company recognized compensation expense related to all outstanding restricted stock awards of $5.4 million for the fiscal year ended February 3, 2017. At February 3, 2017, unrecognized stock-based compensation expense related to restricted stock awards and restricted stock units was $22.0 million, which is expected to be recognized over the weighted-average remaining requisite period of 3.49 years.

The following table summarizes activity for restricted stock and restricted stock units for the fiscal year ended, and as of, February 3, 2017.



	Number of Shares		Weighted- Average Grant Date Fair Value Per Share		Weighted- Average Contractual Life (years)	Aggregate Intrinsic Value
						(in thousands)
Balance, January 29, 2016	—		$	—	—	$	—
Granted	2,460,594		$	13.28	1.71	$	26,058
Vested	(2,143	)	$	14.00	—	—
Forfeited	(215,965	)	$	14.00	—	—
Converted	—		—		—	—
Balance, February 3, 2017	2,242,486		$	13.21	1.88	$	23,748

Restricted stock and restricted stock units expected to vest, February 3, 2017	2,050,166		$	13.22	2.05	$	21,711

Stock-based Compensation Expense

The following table summarizes the classification of stock-based compensation expense related to stock options, restricted stock and restricted stock units for the fiscal years ended February 3, 2017, January 29, 2016 and January 30, 2015. Stock-based compensation expense for the periods prior to fiscal 2017 related solely to grants under the Denali Holding Inc. 2013 Stock Incentive Plan awarded to two of the Company's executive officers.



	Fiscal Years Ended
	February 3, 2017		January 29, 2016		January 30, 2015
	(in thousands)
Cost of revenue	$	462	$	—	$	—
Research and development	2,033		277		259
Sales and marketing	1,068		—		—
General and administrative	5,320		564		526
Total stock-based compensation expense	$	8,883	$	841	$	785

Employee Benefit Plan

Substantially all employees are eligible to participate in a defined contribution plan that complies with Section 401(k) of the Internal Revenue Code (“401(k) Plan”). The Company matches 100% of each participant’s voluntary contributions, subject to a maximum contribution of 5% of the participant’s compensation, and participants vest immediately in all contributions to the 401(k) Plan. For the fiscal years ended February 3, 2017, January 29, 2016 and January 30, 2015, total expense under this plan was $9.4 million, $6.7 million, and $5.3 million, respectively.