Appgate, Inc. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


o			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 000-52776

Appgate, Inc.

(Exact name of registrant as specified in its charter)


Delaware			20-3547231
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

2 Alhambra Plaza, Suite PH-1-B
Coral Gables, FL			33134
(Address of principal executive offices)			(Zip Code)

(866) 524-4782

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N/A	N/A	N/A

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 x No o

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

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	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	x
		Emerging growth company	o

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x

As of January 9, 2023, the registrant had 131,793,660 shares of its common stock outstanding.

Table of Contents


			Page

Cautionary Statement Regarding Forward-Looking Statements			2

PART I
Item 1. Financial Statements			4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3. Quantitative and Qualitative Disclosures About Market Risk			48
Item 4. Controls and Procedures			48

PART II
Item 1. Legal Proceedings			49
Item 1A. Risk Factors			49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			49
Item 3. Defaults Upon Senior Securities			49
Item 4. Mine Safety Disclosures			49
Item 5. Other Information			49
Item 6. Exhibits			50

Signatures			51

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Statements that do not relate strictly to historical or current facts are forward-looking and can be identified by the use of words such as “anticipate,” “estimate,” “could,” “would,” “should,” “will,” “may,” “forecast,” “approximate,” “expect,” “project,” “seek,” “predict,” “potential,” “intend,” “plan,” “believe,” the negatives of such terms and other words of similar meaning. Without limiting the generality of the foregoing, forward-looking statements contained in this Quarterly Report include statements regarding Appgate, Inc. (unless otherwise noted, including its consolidated subsidiaries, the “Company,” “Appgate,” “we,” or “our”) and its industry relating to matters such as anticipated future financial and operational performance, business prospects, the percentage of the Company’s future revenue derived from subscription term-based licenses compared to revenue from services, expected future increases in revenue and sales, including increasing the Company’s customer base and customers with annual recurring revenue above $100,000, sales to existing customers, revenue trends by geography, future gross profit, gross margin, operating losses and negative cash flows, planned investments in sales and marketing and increases in operating and general and administrative expenses, expectations regarding our annual recurring revenue and other key business metrics, expected future decreases in sales and marketing and general and administrative expenses as a percentage of revenue over time, and planned investments in research and development as a result of the Company’s expected growth, the expected cost of revenue over time, the expected future growth of the cybersecurity industry, the Company’s ability to innovate and add new functionality to existing products through research and development, the Company’s ability to continue as a going concern absent access to sources of liquidity, the Company’s ability to remain in compliance with covenants under the Convertible Senior Notes and the Revolving Credit Agreement (as defined herein), strategy and plans and similar matters.

The forward-looking statements included in this Quarterly Report involve risks and uncertainties that could cause actual results to differ materially from projected results. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company has based these forward-looking statements on current expectations and assumptions about future events, taking into account all information currently known by the Company. While the Company considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, many of which are difficult to predict and beyond our control. These risks and uncertainties include, but are not limited to:

•our future financial performance, including our expectations regarding our annual recurring revenue and other key business metrics, total revenue, cost of revenue, gross profit or gross margin, operating expenses, including changes in operating expenses and our ability to achieve and maintain future profitability;

•our ability to continue as a going concern absent access to sources of liquidity;

•the effects of increased competition in our markets and our ability to compete effectively;

•growth in the total addressable market for our products and services;

•market acceptance of Zero Trust solutions and technology generally;

•market acceptance of our products and services and our ability to increase adoption of our products;

•our ability to maintain the security and availability of our products;

•our ability to develop new products, or enhancements to our existing products, and bring them to market in a timely manner;

•our ability to maintain and expand our customer base, including by attracting new customers;

•the potential impact on our business of the ongoing COVID-19 pandemic;

•our ability to maintain, protect and enhance our intellectual property rights;

•our ability to comply with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

•our ability to maintain an effective system of disclosure controls and internal control over financial reporting;

•SIS Holdings’ significant influence over our business and affairs;

•the future trading prices and liquidity of our common stock;

•our indebtedness, which may increase risk to our business; and

•the other risks described under Part I, Item 1A, “Risk Factors” included in our Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2021 (“Amended 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on December 28, 2022, Part II, Item 1A, “Risk Factors” in Amendment No. 1 to our Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2022 (“Amended Q1 10-Q”) filed with the SEC on December 28, 2022 and Part II, Item 1A, “Risk Factors” in Amendment No. 1 to our Quarterly

Report on Form 10-Q/A for the quarter ended June 30, 2022 (“Amended Q2 10-Q”) filed with the SEC on December 28, 2022.

All forward-looking statements made by us in this Quarterly Report are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date made, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

PART I

Item 1. Financial Statements

Appgate, Inc.

Table of Contents


Unaudited Condensed Consolidated Financial Statements:						Page

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021						5

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021						6

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2022 and 2021						7

Unaudited Condensed Consolidated Statements of Changes in Stockholders' Deficit for the Three and Nine Months Ended September 30, 2022 and 2021						8

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021						10

Notes to Unaudited Condensed Consolidated Financial Statements						12

Appgate, Inc.

Unaudited Condensed Consolidated Balance Sheets

As of September 30, 2022 and December 31, 2021

(in thousands, except share information)


	September 30, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	10,720	$	25,990
Restricted cash	1,473		1,473
Accounts receivable, net of allowance of $196 and $163, respectively	7,600		6,848
Contract assets	1,459		1,458
Deferred contract acquisition costs, current	1,370		1,319
Prepaid and other current assets	2,228		6,196
Total current assets	24,850		43,284
Property and equipment, net	1,778		2,115
Operating lease right-of-use assets	1,923		2,497
Contract assets, noncurrent	8,818		8,630
Deferred contract acquisition costs, noncurrent	3,051		2,986
Goodwill	71,604		71,604
Intangible assets, net	28,510		36,459
Deferred income taxes	332		863
Other assets	224		147
Total assets	$	141,090	$	168,585
LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities:
Accounts payable	$	3,733	$	4,483
Accrued expenses	10,204		12,193
Operating lease liabilities, current	645		798
Deferred revenue, current	5,936		5,274
Revolving credit facility	37,500		—
Total current liabilities	58,018		22,748
Deferred revenue, noncurrent	948		717
Operating lease liabilities, noncurrent	1,504		1,891
Convertible senior notes, net	73,563		72,968
Derivative liability	9,580		78,497
Total liabilities	143,613		176,821
Commitments and contingencies (Note 11)
Stockholders' deficit:
Preferred stock, $0.001 par value per share; 1,000,000 shares authorized; no shares issued and outstanding	—		—
Common stock, $0.001 par value per share; 270,000,000 shares authorized; 131,793,660 shares issued and outstanding at September 30, 2022 and December 31, 2021	132		132
Additional paid-in capital	520,615		509,586
Accumulated other comprehensive loss	(2,458)		(1,985)
Accumulated deficit	(520,812)		(515,969)
Total stockholders' deficit	(2,523)		(8,236)
Total liabilities and stockholders' deficit	$	141,090	$	168,585

See accompanying notes to unaudited condensed consolidated financial statements.

Appgate, Inc.

Unaudited Condensed Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2022 and 2021

(in thousands, except share and per share information)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue	$	10,602	$	11,163	$	32,809	$	30,597
Cost of revenue, exclusive of amortization shown below	4,292		4,065		14,084		11,812
Amortization expense	954		1,131		2,862		3,393
Total cost of revenue	5,246		5,196		16,946		15,205
Gross profit	5,356		5,967		15,863		15,392
Operating expenses:
Sales and marketing	9,504		10,037		37,645		27,388
Research and development	2,953		2,718		10,387		7,638
General and administrative	8,103		4,264		26,160		12,238
Transaction costs	—		226		2,059		599
Depreciation and amortization	1,370		1,347		4,116		4,040
Loss on abandonment of assets	—		—		1,658		—
Total operating expenses	21,930		18,592		82,025		51,903
Loss from continuing operations	(16,574)		(12,625)		(66,162)		(36,511)
Change in fair value of embedded derivative liability	23,040		—		68,917		—
Interest expense, net	(1,829)		(641)		(4,303)		(2,117)
Other expenses, net	(961)		(64)		(1,341)		(283)
Income (loss) from continuing operations before income taxes	3,676		(13,330)		(2,889)		(38,911)
Income tax expense of continuing operations	(818)		(999)		(1,954)		(2,003)
Net income (loss) from continuing operations	2,858		(14,329)		(4,843)		(40,914)
Net income from discontinued operations, net of tax	—		(212)		—		65,477
Net income (loss)	$	2,858	$	(14,541)	$	(4,843)	$	24,563

Income (loss) per share:
Net income (loss) from continuing operations per share of common stock - basic	$	0.02	$	(0.98)	$	(0.04)	$	(2.85)
Net loss from continuing operations per share of common stock - diluted	$	(0.14)	$	(0.98)	$	(0.52)	$	(2.85)
Net income from discontinued operations per share of common stock - basic	$	—	$	(0.01)	$	—	$	4.56
Net income from discontinued operations per share of common stock - diluted	$	—	$	(0.01)	$	—	$	4.56
Weighted-average shares used in computation:
Basic	131,793,660		14,643,740		131,793,660		14,354,836
Diluted	142,776,465		14,643,740		142,776,465		14,354,836

See accompanying notes to unaudited condensed consolidated financial statements.

Appgate, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

For the Three and Nine Months Ended September 30, 2022 and 2021

(in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income (loss)	$	2,858	$	(14,541)	$	(4,843)	$	24,563
Other comprehensive loss:
Change in foreign currency translation	(312)		(1,072)		(473)		(1,369)
Other comprehensive loss	(312)		(1,072)		(473)		(1,369)
Comprehensive income (loss)	$	2,546	$	(15,613)	$	(5,316)	$	23,194

See accompanying notes to unaudited condensed consolidated financial statements.

Appgate, Inc.

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Deficit

For the Three and Nine Months Ended September 30, 2022 and 2021

(in thousands, except share information)


	Preferred stock			Common stock			Additional paid-in capital		Accumulated other comprehensive loss		Accumulated deficit		Total stockholders’ (deficit)
	Shares	Amount		Shares	Amount
Balance as of December 31, 2021	—	$	—	131,793,660	$	132	$	509,586	$	(1,985)	$	(515,969)	$	(8,236)
Equity-based compensation	—	—		—	—		3,725		—		—		3,725
Net loss	—	—		—	—		—		—		(69,102)		(69,102)
Other comprehensive income	—	—		—	—		—		218		—		218
Balance as of March 31, 2022	—	$	—	131,793,660	$	132	$	513,311	$	(1,767)	$	(585,071)	$	(73,395)
Equity-based compensation	—	—		—	—		3,663		—		—		3,663
Net loss	—	—		—	—		—		—		61,401		61,401
Other comprehensive loss	—	—		—	—		—		(379)		—		(379)
Balance as of June 30, 2022	—	$	—	131,793,660	$	132	$	516,974	$	(2,146)	$	(523,670)	$	(8,710)
Equity-based compensation	—	—		—	—		3,641		—		—		3,641
Net loss	—	—		—	—		—		—		2,858		2,858
Other comprehensive loss	—	—		—	—		—		(312)		—		(312)
Balance as of September 30, 2022	—	$	—	131,793,660	$	132	$	520,615	$	(2,458)	$	(520,812)	$	(2,523)


	Preferred stock			Common stock			Additional paid-in capital		Accumulated other comprehensive loss		Accumulated deficit		Total stockholders’ equity
	Shares	Amount		Shares	Amount
Balance as of December 31, 2020	—	$	—	13,757,550	$	14	$	471,687	$	(668)	$	(442,841)	$	28,192
Equity-based compensation	—	—		886,190	1		(1)		—		—		—
Stock issued by Newtown for the exercise of stock options	—	—		—	—		950		—		—		950
Transactions with former Parent (Note 3)	—	—		—	—		36,241		—		—		36,241
Net income	—	—		—	—		—		—		54,891		54,891
Other comprehensive income	—	—		—	—		—		782		—		782
Balance as of March 31, 2021	—	$	—	14,643,740	$	15	$	508,877	$	114	$	(387,950)	$	121,056
Equity-based compensation	—	—		—	—		957		—		—		957
Net loss	—	—		—	—		—		—		(15,787)		(15,787)
Other comprehensive loss	—	—		—	—		—		(1,079)		—		(1,079)
Balance as of June 30, 2021	—	$	—	14,643,740	$	15	$	509,834	$	(965)	$	(403,737)	$	105,147
Equity-based compensation	—	—		—	—		936		—		—		936
Net loss	—	—		—	—		—		—		(14,541)		(14,541)
Other comprehensive loss	—	—		—	—		—		(1,072)		—		(1,072)
Balance as of September 30, 2021	—	$	—	14,643,740	$	15	$	510,770	$	(2,037)	$	(418,278)	$	90,470

See accompanying notes to unaudited condensed consolidated financial statements.

Appgate, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2022 and 2021

(in thousands)


	Nine Months Ended
	September 30,
	2022		2021
Cash flows from operating activities:
Net (loss) income	$	(4,843)	$	24,563
Net income from discontinued operations, including gain on sale of $64.6 million, net of tax in 2021	—		(65,477)
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization	6,978		7,433
Loss on abandonment of assets	1,658		—
Equity-based compensation	11,029		2,903
Amortization of deferred contract acquisition costs	4,661		3,716
Change in fair value of embedded derivative liability	(68,917)		—
Amortization of debt issuance costs	595		42
Operating lease amortization	246		229
Provision for (Reversal of) allowance for doubtful accounts	521		(167)
Deferred income taxes	531		615
Changes in assets and liabilities:
Accounts receivable	(1,257)		888
Contract assets	(191)		(853)
Prepaid and other current assets	3,916		(3,221)
Due from affiliates, net	—		3,252
Deferred contract acquisition costs	(4,632)		(4,557)
Other assets	—		13
Accounts payable	(805)		(3,987)
Accrued expenses	(1,938)		(3,816)
Deferred revenue	925		(120)
Other current liabilities	—		(18)
Other liabilities	—		(17)
Net cash, cash equivalents and restricted cash used in operating activities of continuing operations	(51,523)		(38,579)
Net cash, cash equivalents and restricted cash provided by operating activities of discontinued operations	—		849
Net cash, cash equivalents and restricted cash used in operating activities	(51,523)		(37,730)
Cash flows from investing activities:
Purchases of property and equipment	(514)		(543)
Net cash, cash equivalents and restricted cash used in investing activities of continuing operations	(514)		(543)
Net cash, cash equivalents and restricted cash provided by investing activities of discontinued operations	—		125,022
Net cash, cash equivalents and restricted cash (used in) provided by investing activities	(514)		124,479
Cash flows from financing activities:
Proceeds from revolving credit facility	37,500		—
Proceeds from convertible senior notes	—		50,000
Payment of debt issuance costs	—		(180)
Repayment of Promissory Notes	—		(119,640)


Repayment of finance leases	—		(154)
Net cash, cash equivalents and restricted cash provided by (used in) financing activities of continuing operations	37,500		(69,974)
Effect of foreign currency exchange rates on cash	(733)		(1,476)
Net (decrease) increase in cash, cash equivalents and restricted cash	(15,270)		15,299
Cash, cash equivalents and restricted cash at beginning of period	27,463		5,621
Cash, cash equivalents and restricted cash at end of period	$	12,193	$	20,920

Cash and cash equivalents	$	10,720	$	19,483
Restricted cash	1,473		1,437
Cash, cash equivalents and restricted cash of continuing operations at end of period	$	12,193	$	20,920

Supplemental cash flow information:
Cash paid for interest	$	3,503	$	2,272
Cash paid for income taxes, net of refunds	$	1,682	$	914

Non-cash increase to paid-in capital as a result of settlement of transactions with former Parent	$	—	$	36,241

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Business and Summary of Significant Accounting Policies

Description of the Business

Appgate, Inc., a Delaware corporation (“Appgate”, the “Company”, “we”, “us”, or “our”), is a cybersecurity company that protects against breaches and fraud through innovative, identity-centric, Zero Trust solutions. Appgate exists to provide modern enterprises with a solution to increasingly common cyber-attacks, against which traditional cybersecurity tools are proving ineffective. We sell and deliver our solutions using a combination of term-based license subscriptions, perpetual licenses and software-as-a-service (“SaaS”), together with related support services. We conduct business worldwide. Our headquarters is in Coral Gables, Florida.

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements have been prepared by our management and reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state the financial position and the results of operations for the interim periods presented. The condensed consolidated balance sheet data as of December 31, 2021 and other financial data for the prior period(s) have been derived from our audited consolidated financial statements as of their respective date(s). The condensed consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”) but omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”). For further information, refer to our audited consolidated financial statements as of and for the year ended December 31, 2021 included in Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2021 filed with the SEC on December 28, 2022. Results for the interim periods are not necessarily indicative of results to be expected for the entirety of 2022.

All references to “$” or “dollars” are to the currency of the United States (“U.S.”) unless otherwise indicated. We operate on a calendar year basis. References to 2021, for example, refer to our year ended December 31, 2021.

Risks and Uncertainties due to COVID-19 Pandemic

The COVID-19 pandemic continues to evolve and disrupt normal activities in many segments of the U.S. and global economies even as COVID-19 vaccines have been and continue to be administered in 2022. Much uncertainty still surrounds the pandemic, including new variants of COVID-19, its duration and ultimate overall impact on our operations. Management continues to carefully evaluate potential outcomes and has plans to mitigate related risks. While the COVID-19 pandemic did not have a material impact on our business, financial condition or results of operations for 2021 or the nine months ended September 30, 2022, management took measures during such periods to minimize the risks from the pandemic. Those measures were aimed at safeguarding the Company, and the health, safety and well-being of our employees and customers.

Liquidity and Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.

Pursuant to the requirements of the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date these financial statements are issued. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements

Table of Contents

Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.

The Company had cash and cash equivalents and borrowing capacity under the Revolving Credit Facility (as defined in Note 10) of $10.7 million and $12.5 million, respectively, at September 30, 2022, a loss from continuing operations of $66.2 million for the nine months ended September 30, 2022, and an accumulated deficit of $520.8 million at September 30, 2022. Current economic and market conditions have put pressure on our growth plans. The Company’s ability to continue as a going concern is dependent on its ability to obtain additional capital. The Company believes that its current level of cash and cash equivalents and borrowing capacity under the Revolving Credit Facility are not sufficient to continue investing in growth, while at the same time meeting its obligations as they become due. These conditions raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these unaudited condensed consolidated financial statements. In an effort to alleviate these conditions, management is currently evaluating various cost reduction and other alternatives and may seek to raise additional funds (in excess of the funds available to the Company under the Revolving Credit Facility) through the issuance of equity, mezzanine or debt securities, through arrangements with strategic partners, through obtaining credit from financial institutions or otherwise. The Company implemented a reduction in force (the “Reduction”) in July 2022 as well as several other cost reduction initiatives, but, as of the date of issuance of these unaudited condensed consolidated financial statements, does not have any additional funding commitment in place. The actual amount that we may be able to raise under these alternatives will depend on market conditions and other factors, as well as limitations under our Note Issuance Agreement and the Revolving Credit Agreement (as defined in Note 10). As we seek additional sources of financing, there can be no assurance that such financing would be available to us on favorable terms or at all. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry. As a result of these uncertainties, and notwithstanding management’s plans and efforts to date, there is substantial doubt about our ability to continue as a going concern.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The measurement of credit losses for newly recognized financial assets and subsequent changes in the allowance for credit losses are recorded in the statements of operations. This standard is effective for smaller reporting companies for fiscal years beginning after December 15, 2022, with early adoption permitted. We plan to adopt this standard effective January 1, 2023 using the modified retrospective transition method. We are currently evaluating the potential impact of this standard on our consolidated financial statements and related disclosures.

Note 2. (Loss) Income per Common Share

Basic (loss) income per common share is computed by dividing net (loss) income (the numerator) by the weighted-average number of shares of common stock outstanding (the denominator) for the period. Diluted (loss) income per common share assumes that any dilutive equity instruments were exercised with outstanding common stock adjusted accordingly when the conversion of such instruments would be dilutive.

The Company's potential dilutive shares consist of 10,982,805 shares of Appgate’s common stock underlying the Convertible Senior Notes that are convertible at any time at the option of the holders of the Convertible Senior Notes prior to their maturity - see Note 10. These potentially dilutive shares have been excluded from diluted (loss) income per share for the 2021 periods as the effect would be to reduce the net loss per share and have an anti-dilutive effect. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share is the same in the 2021 periods.

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Weighted average shares of common stock outstanding has been retroactively restated for the equivalent number of shares received by the accounting acquirer as a result of the merger (the “Merger”) of Appgate Cybersecurity, Inc. f/k/a Cyxtera Cybersecurity, Inc. d/b/a AppGate (“Legacy Appgate”) with a direct, wholly owned subsidiary (“Merger Sub”) of Newtown Lane Marketing, Incorporated, a public company incorporated in Delaware (“Newtown” or “Newtown Lane”), which was completed on October 12, 2021, as if these shares had been outstanding as of the beginning of the earliest period presented.

The following table summarizes the basic and diluted earnings per share calculations (in thousands, except share and per share amounts). Discontinued operations calculation for the three and nine months ended September 30, 2022 have been omitted as we did not have net income from discontinued operations during those periods.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2021		2022		2021		2021
	Continuing operations				Discontinued operations		Continuing operations				Discontinued operations
Numerator:
Net income (loss) attributable to common stockholders - basic	$	2,858	$	(14,329)	$	(212)	$	(4,843)	$	(40,914)	$	65,477
Add: Effect of mark-to-market adjustment recognized during the period	(23,040)		—		—		(68,917)		—		—
Net (loss) income attributable to common stockholders - diluted	$	(20,182)	$	(14,329)	$	(212)	$	(73,760)	$	(40,914)	$	65,477

Denominator:
Weighted-average shares of common stock - basic	131,793,660		14,643,740		14,643,740		131,793,660		14,354,836		14,354,836
Effect from conversion of shares of common stock under the Convertible Senior Notes (Note 10)	10,982,805		10,982,805		10,982,805		10,982,805		10,982,805		10,982,805
Weighted-average shares of common stock - diluted	142,776,465		25,626,545		25,626,545		142,776,465		25,337,641		25,337,641

Basic income (loss) per share	$	0.02	$	(0.98)	$	(0.01)	$	(0.04)	$	(2.85)	$	4.56
Diluted (loss) income per share	$	(0.14)	$	(0.98)	$	(0.01)	$	(0.52)	$	(2.85)	$	4.56

Note 3. Transactions with Former Parent – Cyxtera

On December 31, 2019, Cyxtera Technologies, Inc. (“Cyxtera” or “former Parent”) consummated several transactions (the “Cyxtera Spin-Off”), following which Legacy Appgate became a stand-alone entity. The transactions separated Cyxtera’s data center business from Legacy Appgate’s cybersecurity business. Over time, Legacy Appgate has entered into several agreements and transactions with Cyxtera (and/or one or more of its subsidiaries), SIS Holdings LP (“SIS Holdings”) and certain equity owners of SIS Holdings. These agreements, relationships and transactions are described below.

Service Provider Fee

In connection with the formation of Cyxtera in 2017, certain equity owners of SIS Holdings and/or affiliates thereof (collectively, the “Service Providers”) entered into a Services Agreement (the “Services Agreement”) with Cyxtera and all of Cyxtera’s subsidiaries and controlled affiliates as of such date, including Legacy Appgate (collectively, the “Company Group”). Under the Services Agreement, the Service Providers agreed to provide members of the Company Group with certain executive and management, financial, consulting, human resources and advisory services as requested

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

by members of the Company Group from time to time. Pursuant to the Services Agreement, the Company Group also agreed to pay the Service Providers an annual service fee in the aggregate amount of $1.0 million in equal quarterly installments. The Service Providers waived all fees under the Services Agreement for 2021. The Services Agreement was terminated on July 29, 2021.

Cyxtera Management Inc. Intercompany Master Services Agreement Fee

Also in connection with the formation of Cyxtera in 2017, the Company Group entered into an Intercompany Master Services Agreement (the “Intercompany Master Services Agreement”). Under the Intercompany Master Services Agreement, Cyxtera Management, Inc., a wholly owned subsidiary of Cyxtera (the “Management Company”), agreed to provide certain services to other members of the Company Group from time to time, including financial, accounting, administrative, facilities and other services. No amounts were allocated to Legacy Appgate under the Intercompany Master Services Agreement for 2021. The Intercompany Master Services Agreement was terminated on July 29, 2021.

Cyxtera Management Inc. Transition Services Agreement

Upon consummation of the Cyxtera Spin-Off, Legacy Appgate and the Management Company entered into a transition services agreement (the “Transition Services Agreement”), pursuant to which the Management Company provided certain transition services to us, and we provided certain transition services to the Management Company. The term under the Transition Services Agreement commenced on January 1, 2020 and ended on June 30, 2021. Substantially all of the obligations under the Transition Services Agreement ceased on December 31, 2020. During each of the three and nine months ended September 30, 2021, the Management Company charged Legacy Appgate $0.1 million of fees for services provided to Legacy Appgate by the Management Company under the Transition Services Agreement. Costs incurred under the Transition Services Agreement are included in general and administrative expenses in the condensed consolidated statement of operations. During the three and nine months ended September 30, 2021, Legacy Appgate charged the Management Company $48 thousand and $0.1 million, respectively, of fees for services provided to the Management Company and its affiliates by Legacy Appgate under the Transition Services Agreement. Income for these services is included in other expenses, net in the condensed consolidated statement of operations.

On February 8, 2021, we made a payment of $1.0 million to Cyxtera (and/or its subsidiaries) as settlement in full of trade balances with Cyxtera and its subsidiaries and other amounts due to / from under the Intercompany Master Services Agreement and the Transition Services Agreement, which trade balances and other amounts totaled $2.6 million. Because the Management Company was an affiliate under common control with us at the time of repayment, the settlement of these amounts was recognized as a capital contribution of $1.6 million.

Promissory Notes

On March 31, 2019, Legacy Appgate issued promissory notes to each of Cyxtera and the Management Company (together, the “Promissory Notes”) evidencing funds borrowed at such time by Legacy Appgate from each of Cyxtera and the Management Company, as well as potential future borrowings. The Promissory Notes had a combined initial aggregate principal amount of $95.2 million and provided for additional borrowings during the term of the Promissory Notes for additional amounts not to exceed approximately $52.5 million in the aggregate (approximately $147.7 million including the initial aggregate principal amount). Interest accrued on the unpaid principal balance of the Promissory Notes at a rate per annum equal to 3%; provided, that with respect to any day during the period from the date of the Promissory Notes through December 31, 2019, interest was calculated assuming that the unpaid principal balance of the Promissory Notes on such day was the unpaid principal amount of the notes on the last calendar day of the quarter in which such day occurs. Interest was payable upon the maturity date of the Promissory Notes. Each of the Promissory Notes had an initial maturity date of March 30, 2020 and was extended through March 30, 2021 by amendments entered into effective as of March 30, 2020.

During the nine months ended September 30, 2021, we recognized $0.5 million of interest expense on the Promissory Notes.

On February 8, 2021, Legacy Appgate repaid Cyxtera $20.6 million, representing the entirety of the then outstanding principal and interest under the Promissory Note held by Cyxtera, and Legacy Appgate made a partial repayment of $99.0 million to the Management Company on the then outstanding principal and interest of $133.6 million under the Promissory Note held by the Management Company. On that same date, the Management Company issued

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Legacy Appgate a payoff letter, extinguishing the balance remaining unpaid following such repayment. Because Cyxtera was Legacy Appgate’s direct parent at the time of issuance of the Promissory Notes and an affiliate under common control with Legacy Appgate at the time of repayment, we recognized the note extinguishment of $34.6 million as a capital contribution in the nine months ended September 30, 2021.

Note 4. Discontinued Operations

On January 20, 2021, Legacy Appgate completed the sale of 100% of the outstanding equity interests of its formerly wholly owned subsidiary, Brainspace Corporation (“Brainspace”), for $125.0 million. We recorded a gain on the sale of Brainspace of $64.6 million. We have classified the results of Brainspace as discontinued operations in our condensed consolidated statements of operations for all periods presented.

The major items constituting net income attributable to discontinued operations for the nine months ended September 30, 2021 are presented below (in thousands):


Revenue	$	2,111
Cost of revenue	142

Gross profit	1,969
Operating expenses:
Sales and marketing	240
Research and development	290


Total operating expenses	530
Income from operations	1,439
Gain on the disposal of the discontinued operation	64,621

Income from discontinued operations	66,060
Income tax expense of discontinued operations	(583)
Net income from discontinued operations, net of tax	$	65,477

Note 5. Revenue

Disaggregation of Revenue

The following table summarizes our revenue by category (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Subscription revenue:
Multi-year subscription term-based licenses	$	2,825	$	2,072	$	9,836	$	6,737
1-year subscription term-based licenses	2,377		2,656		7,193		6,205
Total subscription term-based licenses	5,202		4,728		17,029		12,942
Subscription SaaS	2,139		3,286		6,577		8,012
Support and maintenance	963		1,099		2,861		3,110
Total subscription revenue	8,304		9,113		26,467		24,064
Perpetual licenses	710		347		1,217		1,719
Services and other	1,588		1,703		5,125		4,814
Total	$	10,602	$	11,163	$	32,809	$	30,597

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes revenue (in thousands) by country and main geography in which we operate based on the billing address of customers (including, for the avoidance of doubt, resellers and managed service providers) who have contracted with us:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues by country (a):
United States	$	5,337	$	4,811	$	16,898	$	13,271
Ecuador	1,354		733		2,719		2,798
Colombia	1,217		2,523		4,126		5,204
Other	2,694		3,096		9,066		9,324
Total	$	10,602	$	11,163	$	32,809	$	30,597
Revenues by main geography:
US&C	$	5,528	$	4,979	$	18,515	$	15,066
LATAM	3,852		4,481		10,393		11,788
EMEA	713		685		2,238		1,927
APAC	509		1,018		1,663		1,816
Total	$	10,602	$	11,163	$	32,809	$	30,597

(a) Only the United States, Ecuador and Colombia represented 10% or more of our total revenue in the periods presented.

Significant Customers

No single customer (including, for the avoidance of doubt, resellers and managed service providers) accounted for 10% or more of the total revenue in the periods presented.

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to customers. We record an unbilled receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized after invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we generally have an unconditional right to invoice and receive payment in the future related to those licenses.

Contract liabilities consist of deferred revenue and include payments received in advance of performance under a customer contract. Such amounts are recognized as revenue over the remaining contractual period. During the three months ended September 30, 2022 and 2021, we recognized revenue of $3.1 million and $2.8 million, respectively, that was included in the corresponding contract liability balance at the beginning of the related period. During the nine months ended September 30, 2022 and 2021, we recognized revenue of $5.4 million and $6.1 million, respectively, that was included in the corresponding contract liability balance at the beginning of the related period.

We receive payments from customers based upon contractual billing schedules and accounts receivable are recorded when the right to consideration becomes unconditional. Payment terms on invoiced amounts are typically 30 days to 45 days. Contract assets include amounts related to our contractual right to consideration for both completed and partially completed performance obligations that may not have been invoiced. Unbilled receivables were $10.3 million and $10.1 million as of September 30, 2022 and December 31, 2021, respectively.

In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to provide customers with financing. Examples include invoicing at the beginning of a subscription term for SaaS services that do not contain

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

variable consideration with revenue recognized ratably over the contract period, and multi-year on-premises licenses that do not contain variable consideration that are invoiced annually with license revenue recognized upfront and support and maintenance recognized ratably over the contract period.

Remaining Performance Obligations

The typical contractual term for term-based licenses and support and maintenance is one to three years. Most of our contracts are non-cancelable. However, customers typically have the right to terminate their contracts for cause if we fail to perform and cure within the applicable cure period. As of September 30, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $34.7 million. We expect to recognize 41% of the transaction price over the next 12 months, with the remainder recognized thereafter.

Costs to Obtain and Fulfill a Contract

The following table summarizes the activity of the deferred contract acquisition costs (in thousands):


	Nine Months Ended		Year Ended
	September 30,		December 31,
	2022		2021
Beginning balance	$	4,305	$	3,061
Capitalization of contract acquisition costs	5,023		6,193
Amortization of deferred contract acquisition costs	(4,661)		(5,333)
Impacts of foreign currency translation	(246)		384
Ending balance	$	4,421	$	4,305

Deferred contract acquisition costs, current	$	1,370	$	1,319
Deferred contract acquisition costs, noncurrent	$	3,051	$	2,986

We periodically review the carrying amount of deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these deferred costs. We did not recognize any impairment losses of deferred contract acquisition costs during the nine months ended September 30, 2022 and 2021.

Sales commissions accrued but not paid as of September 30, 2022 and December 31, 2021 totaled $1.0 million and $1.4 million, respectively, and are included within accrued expenses in the condensed consolidated balance sheets.

Our fulfillment costs are generally not significant.

Note 6. Financial Instruments and Fair Value Measurements

Our financial instruments consist of cash equivalents, accounts receivable, accounts payable, accrued expenses, deferred revenue, our debt and an embedded derivative liability. The fair value of cash equivalents, accounts receivable, accounts payable, accrued expenses, deferred revenue, and our Revolving Credit Facility approximate their carrying value because of the short-term nature of these instruments.

The carrying value of our Convertible Senior Notes, net of issuance costs, was $73.6 million and $73.0 million as of September 30, 2022 and December 31, 2021, respectively. The fair value of the Convertible Senior Notes was estimated as $61.5 million and $69.5 million as of September 30, 2022 and December 31, 2021, respectively. The fair value was estimated using a discounted cash flow analysis with a yield based on our credit rating.

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Recurring Fair Value Measurements

The fair value of the embedded derivative liability was estimated using a “with and without” approach as of September 30, 2022 and December 31, 2021:

•“With” scenario: the fair value of the Convertible Senior Notes as of the valuation date is estimated based on a Two-Factor binomial lattice model.

•“Without” scenario: the fair value of the Convertible Senior Notes “without” the embedded features was estimated using a DCF model whereby the contractual cash flows absent the embedded derivative (i.e., the coupon and principal payments) are discounted at a risk-adjusted rate.

The following table summarizes fair value measurements by level at September 30, 2022 and December 31, 2021 for instruments measured at fair value on a recurring basis (in thousands):


	Level 1		Level 2		Level 3		Total
September 30, 2022
Financial liability:
Embedded derivative liability	$	—	$	—	$	9,580	$	9,580
December 31, 2021
Financial liability:
Embedded derivative liability	$	—	$	—	$	78,497	$	78,497

The following table presents the changes in Level 3 liabilities measured at fair value on a recurring basis during the three and nine months ended September 30, 2022 (in thousands):


	Embedded derivative liability		Total liabilities
Balance at January 1, 2022	$	78,497	$	78,497
Loss included in earnings	46,143		46,143
Balance as of March 31, 2022	124,640		124,640
Gain included in earnings	(92,020)		(92,020)
Balance as of June 30, 2022	$	32,620	$	32,620
Gain included in earnings	(23,040)		(23,040)
Balance as of September 30, 2022	$	9,580	$	9,580

The loss/gain included in the previous table is reported in our condensed consolidated statement of operations within change in fair value of embedded derivative liability. There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2022 and 2021 and there were no Level 3 liabilities outstanding during the three and nine months ended September 30, 2021.

The significant unobservable inputs used in the fair value measurement of our embedded derivative liability at September 30, 2022 and December 31, 2021 are a volatility rate of 77.5% and 64.0%, respectively, and a bond yield of 20.72% and 8.85%, respectively. The expected volatility of our equity is estimated based on the historical volatility of our common stock and the remaining term of the Convertible Senior Notes of 1.4 years and 2.1 years at September 30, 2022 and December 31, 2021, respectively. We consider those inputs to be significant as changes in any of those inputs in isolation would result in significantly lower (higher) fair value measurement. Generally, a change in our volatility assumption will generate a directionally similar change in the overall value of the instrument, while a change in the bond yield will generate a directionally opposite change in the overall value of the instrument.

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 7. Balance Sheet Components

Accounts Receivable and Allowance for Doubtful Accounts

Our accounts receivable represent amounts invoiced and due from our customers (including, for the avoidance of doubt, resellers and managed service providers) under our revenue contracts. The activity in the allowance for doubtful accounts was as follows (in thousands):


	Nine Months Ended		Year Ended
	September 30,		December 31,
	2022		2021
Beginning balance	$	163	$	437
Provision for (Reversal of) allowance for doubtful accounts	521		(95)
Write offs	(487)		(218)
Impacts of foreign currency translation	(1)		39
Ending balance	$	196	$	163

Prepaid and Other Current Assets

Our prepaid and other current assets consisted of the following as of September 30, 2022 and December 31, 2021 (in thousands):


	September 30, 2022		December 31, 2021
Prepaid expenses	$	1,901	$	4,247
Withholding taxes	327		394
Deferred costs	—		1,555

Total	2,228		6,196

Property and Equipment, Net

Our property and equipment, net consisted of the following as of September 30, 2022 and December 31, 2021 (in thousands):


	September 30, 2022		December 31, 2021
Leasehold improvements	$	3,748	$	4,225
Equipment and fixtures	3,955		4,233
	7,703		8,458
Less: accumulated depreciation and amortization	(5,925)		(6,343)
Property and equipment, net	$	1,778	$	2,115

During the three and nine months ended September 30, 2022, we recognized depreciation and amortization expense on property and equipment of $0.2 million and $0.7 million, respectively. During the three and nine months ended September 30, 2021, we recognized depreciation and amortization expense on property and equipment of $0.2 million and $0.5 million, respectively.

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 8. Goodwill and Intangible Assets

Goodwill

The carrying amount of goodwill was $71.6 million as of September 30, 2022 and December 31, 2021.

Intangible Assets, Net

Our acquired intangible assets subject to amortization consist of customer relationships, trademarks and tradenames, and developed technology and were originally acquired by Cyxtera when it acquired the entities that formed Legacy Appgate. The useful lives of the assets were as follows: (i) customer relationships – 7.5 to 17.5 years, (ii) trademarks and tradenames – 8.5 to 14.5 years, and (iii) developed technology – 2.5 to 7.5 years. Acquired intangibles subject to amortization consist of the following as of September 30, 2022 and December 31, 2021 (in thousands):


	September 30, 2022						December 31, 2021						Weighted average remaining useful life (Years)
	Gross		Accumulated amortization		Net		Gross		Accumulated amortization		Net
Customer relationships	$	30,157	$	(18,224)	$	11,933	$	30,157	$	(15,706)	$	14,451	3.8
Trademarks and tradenames	17,932		(8,523)		9,409		18,732		(8,051)		10,681		8.2
Developed technology	34,279		(27,111)		7,168		38,881		(27,554)		11,327		2.1
Total	$	82,368	$	(53,858)	$	28,510	$	87,770	$	(51,311)	$	36,459

We stopped offering our Compliance Sheriff product. As a result, during the nine months ended September 30, 2022 we recorded a loss on abandonment of the related intangible assets (namely, trademarks and tradenames and developed technology) of $1.7 million (all of which was recorded during the first quarter of 2022). Other than the loss on abandonment, the main changes in the carrying amount of each major class of intangible assets during the three and nine months ended September 30, 2022 and 2021 was amortization, and to a lesser extent, foreign currency translation.

During the three and nine months ended September 30, 2022, we recorded amortization expense on intangible assets of $2.1 million and $6.3 million, respectively. During the three and nine months ended September 30, 2021, we recorded amortization expense on intangible assets of $2.3 million and $6.9 million, respectively. Amortization expense for all intangible assets, except our developed technology, was recorded within depreciation and amortization expense in the condensed consolidated statements of operations. Amortization expense for our developed technology was recorded within cost of revenue in the condensed consolidated statements of operations.

Future amortization expense of intangible assets is as follows (in thousands):

For the years ending:


Remaining 2022	$	2,077
2023	7,941
2024	7,377
2025	4,224
2026	2,304
Thereafter	4,587
Total	$	28,510

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Impairment Tests

We perform annual impairment tests of goodwill on October 1st of each year or whenever an indicator of impairment exists. No impairment was recorded during the nine months ended September 30, 2022 and 2021.

Note 9. Leases

We lease office space and certain colocation space under non-cancelable operating lease agreements. We are also party to agreements that have been determined to be short-term leases. We also leased certain equipment under finance lease arrangements that expired in November 2021.

Operating Leases

The following is a summary of our operating lease costs for the three and nine months ended September 30, 2022 and 2021 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Operating lease cost	$	218	$	233	$	492	$	865
Short-term lease cost	94		29		123		50
Variable lease cost	19		36		23		58
Total operating lease costs	$	331	$	298	$	638	$	973

The following table presents information about leases on our condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021 (in thousands):


	September 30, 2022		December 31, 2021
Operating lease right-of-use assets	$	1,923	$	2,497
Operating lease liabilities, current	$	645	$	798
Operating lease liabilities, noncurrent	$	1,504	$	1,891

At September 30, 2022, the weighted-average remaining lease term and weighted-average discount rate for operating leases were 3.7 years and 6.54%, respectively. At December 31, 2021, the weighted-average remaining lease term and weighted-average discount rate for operating leases were 4.0 years and 6.39%, respectively.

Cash paid for amounts included in the measurement of operating lease liabilities was $0.7 million for each of the nine months ended September 30, 2022 and 2021.

There were no right-of-use assets obtained in exchange for lease obligations during the nine months ended September 30, 2022 and 2021.

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Maturities of operating lease liabilities consisted of the following as of September 30, 2022 (in thousands):


For the years ending:
Remaining 2022	$	185
2023	608
2024	540
2025	512
2026	353
Thereafter	27
Total future minimum lease payments	2,225
Less: Imputed interest	(76)
Total	$	2,149

Note 10. Debt

Our debt consists of the following as of September 30, 2022 and December 31, 2021 (in thousands):


	September 30, 2022		December 31, 2021
Revolving Credit Facility	$	37,500	$	—
Principal amount of Convertible Senior Notes	75,000		75,000
Unamortized debt issuance costs	(1,437)		(2,032)
Net carrying amount	73,563		72,968
Total debt	$	111,063	$	72,968

Interest expense, net was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Interest expense on Revolving Credit Facility	$	715	$	—	$	924	$	—
Interest expense on Convertible Senior Notes	938		625		2,813		1,597
Interest expense on Promissory Notes (Note 3)	—		—		—		472
Amortization of debt issuance costs	163		17		595		42
Other, net	13		(1)		(29)		6
Total interest expense, net	$	1,829	$	641	$	4,303	$	2,117

Interest accrued but not paid as of September 30, 2022 and December 31, 2021 totaled $1.4 million and $1.3 million, respectively, and is included within accrued expenses in the condensed consolidated balance sheets.

Revolving Credit Facility

On April 26, 2022, Legacy Appgate, Appgate, the other guarantors party thereto and SIS Holdings entered into a revolving credit agreement (the “Revolving Credit Agreement”) which provides for a $50.0 million unsecured, revolving credit facility (the “Revolving Credit Facility”). This indebtedness is contractually subordinated to the Convertible Senior Notes and matures on the earlier to occur of (a) June 30, 2023, (b) the closing of a registered offering of Capital Stock (as defined in the Revolving Credit Agreement) of the Company in an aggregate amount equal to $50.0 million or more and (c) the date of which the Loans (as defined in the Revolving Credit Agreement) are accelerated upon an Event of Default (as defined in the Revolving Credit Agreement). Interest accrues on amounts drawn under the Revolving Credit Facility at a rate of 10.0% per annum, payable in cash on the Final Maturity Date (as defined in the Revolving Credit Agreement). The

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Revolving Credit Agreement is subject to customary terms, covenants and conditions. All obligations under the Revolving Credit Agreement are guaranteed by Appgate and Legacy Appgate’s domestic subsidiaries. During the nine months ended September 30, 2022, we borrowed $37.5 million under the Revolving Credit Facility, all of which remained outstanding as of September 30, 2022.

Convertible Senior Notes

On February 9, 2021, Legacy Appgate issued $50.0 million in aggregate principal amount of convertible senior notes due 2024 (the “First Tranche”) to various funds managed by Magnetar Financial LLC (“Magnetar”). In connection with the closing of the Merger, Legacy Appgate issued an additional $25.0 million in aggregate principal balance in convertible notes to various funds managed by Magnetar (together with the First Tranche, the “Convertible Senior Notes”). The Convertible Senior Notes are subject to the terms and conditions of the note issuance agreement (the “Note Issuance Agreement”) among Legacy Appgate, Legacy Appgate’s wholly owned domestic subsidiaries, the holders of the Convertible Senior Notes (the “Noteholders”) and Magnetar, the representative of the Noteholders (in such capacity, the “Representative”), and the note purchase agreement among Legacy Appgate and the Noteholders (the “Note Purchase Agreement”). Capitalized terms not otherwise defined in this Note 10 have the meanings ascribed to them in the Note Issuance Agreement.

During 2021, we received net proceeds of $72.8 million from the issuance of the Convertible Senior Notes, after deducting fees and expenses of $2.2 million. We recorded these fees and expenses as debt issuance costs that will be amortized over the term of the Convertible Senior Notes.

The Convertible Senior Notes are senior, unsecured obligations of Legacy Appgate, and the payment of the principal and interest is unconditionally guaranteed, jointly and severally by Legacy Appgate’s U.S. subsidiaries and, as of the closing of the Merger, also by Appgate. The Convertible Senior Notes will mature on February 9, 2024, unless earlier converted, redeemed, or repurchased.

Interest on the Convertible Senior Notes is payable either entirely in cash or entirely in kind (“PIK Interest”), or a combination of cash and PIK Interest at our discretion. The Convertible Senior Notes bear interest at the annual rate of 5% with respect to interest payments made in cash and 5.50% with respect to PIK Interest, with interest payable semi-annually on February 1 and August 1 of each year, commencing on August 1, 2021. Additional notes (“PIK Notes”) to be issued for PIK Interest will have the same terms and conditions as the Convertible Senior Notes. The Note Issuance Agreement includes certain affirmative and financial covenants we are required to satisfy (as further described below).

Supplemental Agreement

On October 12, 2021, in connection with the closing of the Merger, Newtown entered into a supplemental agreement (the “Supplemental Agreement”) with Legacy Appgate and Magnetar, as representative of the holders of the Convertible Senior Notes, pursuant to which Newtown, among other things, unconditionally guaranteed all of Legacy Appgate’s Obligations under the Note Issuance Agreement, including the Convertible Senior Notes, and assumed all of Legacy Appgate’s Conversion Obligations and Change of Control Conversion Obligations under the Note Issuance Agreement.

Amendment to Note Purchase Agreement and Note Issuance Agreement and Waiver to Note Purchase Agreement and Registration Rights Agreement

As of February 9, 2022, the Company, Legacy Appgate, the Noteholders and the Representative entered into an Amendment to Note Purchase Agreement and Note Issuance Agreement and Waiver to Note Purchase Agreement and Registration Rights Agreement (the “Amendment and Waiver”).

The Amendment and Waiver modifies: (i) the Note Purchase Agreement by (a) (1) extending the date by which the Representative or its affiliates may elect to consummate an Optional Closing (as defined in the Note Purchase Agreement) until the earlier of (x) 75 days after the Company closes a registered offering of equity securities in an aggregate amount of no less than $40.0 million and (y) October 31, 2022 and (2) requiring the Company’s consent to effect any Optional Closing, and (b) waiving, for the period of time set forth in the Amendment and Waiver, certain registration rights of the Noteholders; (ii) the Note Issuance Agreement to provide for the incurrence of certain subordinated indebtedness; and (iii) that certain Registration Rights Agreement, dated as of February 8, 2021 entered into by and among

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Legacy Appgate and the Noteholders, by waiving, for the period of time set forth in the Amendment and Waiver, certain registration rights of the Noteholders. As of October 14, 2022, the Company, Legacy Appgate, the Noteholders and the Representative entered into an additional Waiver to Note Purchase Agreement and Registration Rights Agreement (the “Second Waiver”) to extend the waiver by the Noteholders of certain registration rights pursuant to the Amendment and Waiver for the additional period set forth in the Second Waiver.

Other key terms of the Convertible Senior Notes, as of September 30, 2022, follow:

Conversion. Other than upon a Change of Control, prior to maturity, each holder of the Convertible Senior Notes shall have the option to convert all or any portion of such Convertible Senior Notes into Legacy Appgate common stock or, following entry into the Supplemental Agreement, our common stock, subject to and in accordance with the terms of the Note Issuance Agreement, including the applicable conversion rate thereunder.

Conversion upon Change of Control. If Legacy Appgate undergoes a Change of Control other than the Merger prior to maturity, each holder of Convertible Senior Notes shall have the option to convert all or any portion of such Convertible Senior Notes into Legacy Appgate common stock or, following entry into the Supplemental Agreement (as defined above), our common stock, subject to and in accordance with the terms of the Note Issuance Agreement, including the applicable conversion rate thereunder.

Guarantees; Conversion Obligations. The Convertible Senior Notes are guaranteed by each of Legacy Appgate’s wholly owned domestic subsidiaries and, as of the closing of the Merger, also by Appgate. Upon the consummation of certain events resulting in Legacy Appgate becoming a direct or indirect subsidiary of any person (including the Merger), such acquiring person, any direct or indirect parent company thereof and each subsidiary thereof (immediately prior to such event) shall unconditionally guarantee Legacy Appgate’s Obligations and assume all of Legacy Appgate’s Conversion Obligations and Change of Control Conversion Obligations and, upon such assumption, Legacy Appgate shall be released from its Conversion Obligations and Change of Control Conversion Obligations.

Repurchase Upon a Fundamental Change. Upon the occurrence of a Fundamental Change at any time after a Public Company Event, each holder of Convertible Senior Notes shall have the option to require Legacy Appgate to repurchase for cash all or any portion of such Convertible Senior Notes, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon, subject to and in accordance with the terms of the Note Issuance Agreement.

Covenants. The Note Issuance Agreement contains restrictive covenants that, among other things, generally limit the ability of our and certain of our subsidiaries (subject to certain exceptions) to: (i) incur additional debt and issue Disqualified Stock; (ii) create liens; (iii) pay dividends, acquire shares of capital stock, or make investments; (iv) issue guarantees; (v) sell assets and (vi) enter into transactions with affiliates. The Note Issuance Agreement also contains a financial covenant that requires that we maintain liquidity of not less than $10.0 million as of the last day of any calendar month. The foregoing restrictive covenants are subject to a number of important exceptions and qualifications, as set forth in the Note Issuance Agreement.

Events of Default. The Note Issuance Agreement provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others: (i) nonpayment of principal or interest; (ii) breach of covenants or other agreements in the Note Issuance Agreement; (iii) defaults in failure to pay certain other indebtedness; and (iv) certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing under the Note Issuance Agreement, Magnetar or the holders of at least 25% in aggregate principal amount of the Convertible Senior Notes then outstanding may declare the principal of, premium, if any, and accrued interest on all the Convertible Senior Notes immediately due and payable.

No Registration. The Convertible Senior Notes and any Appgate common stock to be issued upon conversion of the Convertible Senior Notes have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities laws and may not be offered or sold in the United States absent registration under the Securities Act or an applicable exemption from registration requirements. This description of the Note Issuance Agreement and the Convertible Senior Notes does not constitute an offer to sell, or the solicitation of an offer to buy, any securities and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful.

If the holders have not converted the Convertible Senior Notes and the Convertible Senior Notes have not been redeemed by the maturity date, Legacy Appgate must repay the outstanding principal amount and accrued interest.

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Embedded Derivative Liability

The Convertible Senior Notes contain (i) call options to be settled in cash upon the occurrence of a Change of Control (other than the Merger), (ii) put options to be settled in cash contingent upon the occurrence of a Fundamental Change after a Public Company Event or a Change of Control (other than the Merger) and (iii) a default interest rate increase of 3% applicable upon the occurrence of an event of default. Appgate evaluated these embedded redemption features under the guidance of ASC 815 and determined that a redemption feature contained a substantial premium requiring bifurcation at fair value. However, management determined the probability of a Change of Control to be remote and as such the fair value of the embedded redemption feature has been estimated to be zero. Management also evaluated the contingent interest feature and determined the likelihood of payment to be remote. Accordingly, the fair value of the contingent interest feature was also estimated to be zero. Lastly, management evaluated the embedded conversion feature, and determined that following the closing of the Merger, this embedded feature meets the net settlement criterion under ASC 815-15-25. Consequently, the automatic conversion meets the criteria under ASC 815-15-25-1(c). For an embedded feature to be bifurcated, it must meet all three criteria in ASC 815-15-25-1. Therefore, this embedded feature requires bifurcation. Accordingly, we have recorded an embedded derivative liability representing the combined fair value of the right of the Noteholders to receive 10,982,805 shares of our common stock upon conversion of the Convertible Senior Notes at any time (the “conversion feature”). The embedded derivative liability is presented as a non-current liability in our consolidated balance sheet and is adjusted to reflect fair value at each period end with changes in fair value recorded in the “Change in fair value of embedded derivative liability” financial statement line item of our consolidated statements of operations. We will continue to adjust the embedded derivative liability for changes in fair value until the underlying conversion feature is exercised, redeemed, cancelled or expires.

As of September 30, 2022 and December 31, 2021, the carrying amount of this embedded derivative included in our condensed consolidated balance sheets was $9.6 million and $78.5 million, respectively. The fair value of this derivative is estimated using Level 3 inputs in the fair value hierarchy on a recurring basis. Refer to Note 6 – Financial Instruments and Fair Value Measurements. Based on the estimated value of the derivative at September 30, 2022, if the Noteholders were to exercise the conversion feature, they would not receive any excess over the aggregate principal amount on the Convertible Senior Notes.

Note 11. Commitments and Contingencies

Letters of Credit

As of September 30, 2022 and December 31, 2021, we had $1.5 million in irrevocable stand-by letters of credit outstanding, which were issued primarily to guarantee a subsidiary’s performance under contracts with customers and as a guarantee under the Company’s corporate credit card line. As of September 30, 2022, no amounts had been drawn on any of these irrevocable stand-by letters of credit.

Non-cancelable Purchase Obligations

In the normal course of business, we enter into non-cancelable purchase commitments with various parties to purchase products and services, such as technology equipment, subscription-based cloud service arrangements, corporate events and consulting services. As of September 30, 2022 and December 31, 2021, we had outstanding non-cancelable purchase obligations with terms of 12 months or longer aggregating $0.9 million and $2.7 million, respectively.

Legal Contingencies

We may be subject to legal proceedings and litigation arising from time to time. We record a liability when we believe that it is both probable that a loss has been incurred and the amount can be reasonably estimated. We periodically evaluate developments in our legal matters that could affect the amount of liability that we accrue, if any, and adjust, as appropriate. Until the final resolution of any such matter for which we may be required to record a liability, there may be a loss exposure in excess of the liability recorded and such amount could be significant. We expense legal fees as incurred. As of September 30, 2022 and December 31, 2021, the Company was not a party to, and the Company is not currently party to, any litigation that would have a material adverse effect on the Company’s consolidated financial statements.

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Profit Interest Units of SIS Holdings LP

SIS Holdings adopted the SIS Holdings LP Class B Unit Plan (the “SIS Holdings Plan”) in May 2017. All outstanding awards, including, but not limited to, awards to employees of Appgate (or a subsidiary thereof), under the SIS Holdings Plan were issued in 2017, 2018 and 2019. Equity-based compensation costs were as follows for the three and nine months ended September 30, 2022 and 2021 and are included in the following captions in our condensed consolidated statements of operations (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cost of revenue	$	—	$	131	$	62	$	393
Sales and marketing	59		516		221		1,620
Research and development	—		100		—		311
General and administrative	—		189		—		579
Total	$	59	$	936	$	283	$	2,903

No related income tax benefit was recognized as of September 30, 2022 or December 31, 2021.

As of September 30, 2022, total equity-based compensation costs related to 389 unvested Class B units not yet recognized totaled $84 thousand, which is expected to be recognized over a weighted-average period of 0.50 years.

Effective July 29, 2021, the SIS Holdings Plan was amended to the extent required such that any distribution by SIS Holdings to its equity holders that is attributable to amounts received by SIS Holdings in respect of its equity interests in Cyxtera or Legacy Appgate, in each case upon the consummation of the transactions contemplated by Cyxtera’s merger with Starboard Value Acquisition Corp. in July 2021 (the “Cyxtera Transaction” and, together with the Merger, the “Transactions”) or the agreement and plan of reorganization, dated February 8, 2021 entered into by and among Newtown Lane, Merger Sub and Legacy Appgate, respectively, shall be deemed to have been made at an amount equal to the value of the Cyxtera common stock or Legacy Appgate common stock, as applicable, in each such Transaction.

Note 13. Appgate, Inc. 2021 Incentive Compensation Plan

On October 12, 2021, our Board of Directors adopted the Appgate, Inc. 2021 Incentive Compensation Plan (the “2021 Plan”). The purpose of the 2021 Plan is to assist Appgate and its related entities in attracting, motivating, retaining and rewarding high-quality executives and other employees, officers, directors, consultants and other persons who provide services to Appgate or its related entities by enabling such persons to acquire or increase a proprietary interest in the Company in order to strengthen the mutuality of interests between such persons and the Company’s shareholders, and providing such persons with performance incentives to expend their maximum efforts in the creation of shareholder value. During 2021, no grants or awards were made under the 2021 Plan.

During the three and nine months ended September 30, 2022, our Board of Directors (or a designee thereof) approved certain grants of long-term incentive awards to executives, employees, officers and consultants of the Company (or a subsidiary thereof). Such grants were given as restricted stock units (“RSUs”) and phantom stock units (“PSUs”). Awards of RSUs were given as time-based awards and/or performance-based awards under the 2021 Plan. All PSUs were given as performance-based awards. The vesting of the performance-based awards is dependent upon certain conditions, including service and/or performance conditions as defined in the grants. Our Executive Chairman and Chairman of our Board of Directors received a time-based award, the “Chairman Award”, which entitled him to receive a specific number of shares of the Company’s common stock on the vesting date. Such Chairman Award originally vested no later than December 31, 2022 but was cancelled on December 23, 2022.

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes nonvested RSUs and PSUs activity for the three and nine months ended September 30, 2022:


	RSUs						PSUs
	Time-vested			Performance-vested			Performance-vested
	Shares	Weighted-average grant date fair value		Shares	Weighted-average grant date fair value		Shares	Weighted-average grant date fair value
Nonvested at December 31, 2021	—	$	—	—	$	—	—	$	—
Granted	1,102,217	13.00		4,436,129	13.14		58,519	13.17
Vested	—	0.00		—	0.00		—	0.00
Forfeited	—	0.00		(107,748)	13.00		(1,433)	13.00
Nonvested at March 31, 2022	1,102,217	13.00		4,328,381	13.14		57,086	13.17
Granted	—	0.00		192,869	12.81		5,145	11.14
Vested	—	0.00		—	0.00		—	0.00
Forfeited	—	0.00		(97,974)	13.15		(4,661)	12.86
Nonvested at June 30, 2022	1,102,217	13.00		4,423,276	13.13		57,570	13.02
Granted	—	0.00		5,455,744	7.21		528	7.50
Vested	—	0.00		—	0.00		—	0.00
Forfeited	—	0.00		(598,046)	13.58		(5,420)	13.55
Nonvested at September 30, 2022	1,102,217	$	13.00	9,280,974	$	9.62	52,678	$	12.91

For the three and nine months ended September 30, 2022, we recognized $3.6 million and $10.7 million, respectively, of equity-based compensation expense related to the 2021 Plan. This amount is included in general and administrative expenses in the unaudited condensed consolidated statements of operations.

As of September 30, 2022, the maximum unrecognized cost for RSUs was $3.6 million. The cost is expected to be recognized over a weighted average period of three months.

Note 14. 401(k) Savings Plan

Effective January 1, 2021, Legacy Appgate’s employees became eligible to participate in the Appgate Cybersecurity, Inc. 401(k) Savings Plan (the “401(k) Plan”), a defined contribution benefit plan sponsored by Legacy Appgate. Under the 401(k) Plan, the Company (or a subsidiary thereof) makes matching contributions equal to 100% of an employee’s salary deferral that does not exceed 1% of the employee’s compensation plus 50% of the salary deferral between 1% and 6% of the employee’s compensation.

Matching contributions to the 401(k) Plan were as follows for the three and nine months ended September 30, 2022 and 2021 and are included in the following captions in the condensed consolidated statements of operations (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cost of revenue	$	89	$	83	$	308	$	259
Sales and marketing	133		164		671		464
Research and development	170		141		552		379
General and administrative	55		59		226		158
Total	$	447	$	447	$	1,757	$	1,260

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 15. Income Taxes

Effective tax rates for interim periods are based upon the Company’s estimate of the annual effective tax rate. Effective tax rates vary based upon an estimate of taxable earnings and on the mix of taxable earnings in the various states and countries in which we operate. Changes in the annual allocation and apportionment of the Company’s activity amongst these jurisdictions result in changes to the effective rate.

The income tax expense of continuing operations for the three and nine months ended September 30, 2022 was $0.8 million and $2.0 million, respectively. The income tax expense of continuing operations for the three and nine months ended September 30, 2022 was different than the amount expected at the statutory federal income tax rate primarily due to foreign withholding taxes, changes in the valuation allowance, the change in the fair value of our embedded derivative liability that is not tax deductible, and state taxes. The Company has determined that the tax effects of the change in the fair value of its embedded derivative liability cannot reliably be estimated. Accordingly, the discrete-period computation method has been used and the annual effective tax rate may change significantly once included.

The income tax expense of continuing operations for the three and nine months ended September 30, 2021 was $1.0 million and $2.0 million, respectively. The income tax expense on the pre-tax loss for the three and nine months ended September 30, 2021 was different than the amount expected at the statutory federal income tax rate primarily due to foreign withholding taxes.

Note 16. Segment and Geographic Information

Our chief operating decision maker is our chief executive officer, who reviews financial information presented on a consolidated basis for the purposes of allocating resources and evaluating financial performance. Accordingly, management has determined that we operate as one operating and reportable segment.

Refer to Note 5 – Revenue, for information on revenue by geography.

Note 17. Related Party Transactions

Revolving Credit Facility with SIS Holdings

On April 26, 2022, Legacy Appgate, Appgate, the other guarantors party thereto and SIS Holdings, our controlling stockholder owning approximately 89% of our issued and outstanding common stock, entered into the Revolving Credit Agreement. Refer to Note 10 for additional details regarding the Revolving Credit Agreement and Revolving Credit Facility.

Commercial Related Person Transactions with Cyxtera

Three current members of our Board of Directors currently serve on the board of directors of Cyxtera. Effective July 29, 2022, the SIS interest in Cyxtera’s Class A common stock was distributed to BCEC-SIS Holdings L.P. (“BC Partners”), Medina Capital Fund II - SIS Holdco, L.P. (“Medina Capital”), and the other owners of SIS, resulting in BC Partners owning 38.3% of Cyxtera's Class A common stock and Medina Capital owning 12.8% of Cyxtera's Class A common stock. BC Partners and Medina Capital are the majority equity owners of SIS. Our most significant related party relationships and transactions are with Cyxtera, the Management Company, SIS Holdings and certain of the equity owners of SIS Holdings. Those relationships and transactions are described in Note 3. In addition, Legacy Appgate maintains a number of ordinary course commercial relationships, both as a customer and service provider, with Cyxtera.

For instance, Cyxtera (and/or its subsidiaries) purchases certain cybersecurity products and services from Legacy Appgate, including licenses for Legacy Appgate cybersecurity software and training. For each of the three and nine months ended September 30, 2022 and 2021, the revenue recognized by Legacy Appgate from these licenses was $0.1 million. As of September 30, 2022, we had an insignificant receivable from Cyxtera (and/or its subsidiaries) under these agreements (no open receivables as of December 31, 2021.)

During the three and nine months ended September 30, 2022 and 2021, Cyxtera (and/or its subsidiaries) provided Legacy Appgate certain data center co-location and CXD services. During the three and nine months ended September 30,

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Appgate, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

2022, Cyxtera (and/or its subsidiaries) charged Legacy Appgate $0.1 million and $0.2 million, respectively, for those services (same amounts for the comparative periods of 2021). As of September 30, 2022 and December 31, 2021, Legacy Appgate had payables to Cyxtera (and/or its subsidiaries) for $0.1 million and $0.2 million, respectively, under these agreements.

Transactions with Director Affiliated Companies

Two current members of our Board of Directors currently serve on the board of directors of Chewy, Inc. (“Chewy”), an American online retailer of pet food and other pet-related products. During the three and nine months ended September 30, 2022, Legacy Appgate recognized $0.2 million and $0.6 million, respectively, as revenue from its contracts with Chewy (or the channel partner reselling certain cybersecurity products provided to Chewy). Revenue recognized for the nine months ended September 30, 2021 totaled $0.3 million (amount was insignificant for the three months ended September 30, 2021). There were no open receivables from Chewy (or the channel partner reselling certain cybersecurity products provided to Chewy) as of September 30, 2022 and December 31, 2021.

One current member of our Board of Directors currently serves on the board of directors of PetSmart, Inc. (“PetSmart”). During the nine months ended September 30, 2022, Legacy Appgate charged PetSmart $0.1 million and recognized revenue in the same amount from its contract with PetSmart (all during the first quarter of 2022). There were no open receivables from PetSmart as of September 30, 2022. The agreement with PetSmart was executed in 2022, and as such, no charges or revenue were recognized under such agreement in prior periods.

Other Related Party Transactions

CenturyLink Communications, LLC (“CenturyLink”), an approximate 10.4% owner of SIS Holdings and, as a result, an indirect beneficial owner of the Company, is a reseller of certain of our products and services. During the three and nine months ended September 30, 2022, Legacy Appgate charged CenturyLink $0.2 million and $0.8 million, respectively, under contracts for certain cybersecurity products provided by Legacy Appgate to CenturyLink for resale by CenturyLink to end users (amounts for the comparative periods of 2021 were $0.4 million and $0.9 million, respectively). During each of the three and nine months ended September 30, 2022, Legacy Appgate recognized $0.2 million, as revenue from these contracts (amounts for the comparative periods of 2021 were $0.3 million and $0.6 million, respectively). As of September 30, 2022 and December 31, 2021, we had receivables from CenturyLink for $48 thousand and $0.6 million, respectively, under these agreements.

Note 18. Subsequent Events

Appgate, Inc. 2021 Incentive Compensation Plan

On December 23, 2022, the Company and our Executive Chairman and Chairman of our Board agreed to cancel the Chairman Award. As of January 6, 2023, there were no time-based RSUs, 7,795,232 performance-based RSUs, and 52,678 performance-based PSUs issued and outstanding to participants under the 2021 Plan, which performance-based RSUs and performance-based PSUs were subject to certain vesting criteria. As of January 6, 2023, none of the awards had vested.

Revolving Credit Agreement

As of January 9, 2023, we had an aggregate of $46.5 million in borrowings outstanding under the Revolving Credit Facility and were in non-compliance with one of the debt covenants under the Revolving Credit Facility due to our failure to deliver our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 to SIS Holdings within 15 days after the date such Form 10-Q was required to be filed with the SEC.

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

The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our results of operations, financial condition, liquidity and cash flows for the periods presented. This discussion should be read in conjunction with (a) our unaudited condensed consolidated financial statements and related notes contained elsewhere in Part I, Item 1, “Financial Statements” of this Quarterly Report, (b) Part II, Item 1A “Risk Factors” of this Quarterly Report, (c) Part I, Item 1A “Risk Factors,” Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes in the Amended 10-K, (d) Part II, Item 1A “Risk Factors” in the Amended Q1 10-Q, and (e) Part II, Item 1A “Risk Factors” in the Amended Q2 10-Q. As discussed in the section above titled “Cautionary Statement Regarding Forward-Looking Statements,” the following discussion contains forward-looking statements that are based upon our current expectations, including with respect to our future revenues and operating results. Our actual results may differ materially from those anticipated in such forward-looking statements as a result of various factors. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below and included under Part I, Item 1A in our Amended 10-K, Part II, Item 1A in our Amended Q1 10-Q and Part II, Item 1A in our Amended Q2 10-Q.

We operate on a calendar year basis. Capitalized terms used in this section and not defined herein have the respective meanings given to such terms elsewhere in this Quarterly Report. Numbers and percentages presented throughout this discussion and analysis may not always add up to equivalent totals and/or to 100% due to rounding.

Overview of Our Business

We believe we are defining a new category of Zero Trust access for enterprises and governments. Our Zero Trust platform is designed to protect against increasingly damaging breaches through innovative, identity-centric, context-aware solutions. Our pure-play focus on Zero Trust has enabled us to deliver the highest ranked current Zero Trust Network Access offering as determined by the Forrester New Wave™: Zero Trust Network Access, Q3 2021.

This new Zero Trust paradigm is needed today because enterprises are undergoing digital transformation as they seek to automate operations, generate new revenue streams, transition business models and deliver a seamless customer experience. Simultaneously, the number and sophistication of cyberattacks have increased dramatically, as has their costs and frequency. This combination of more vulnerable networks and more malicious activity has created a cybersecurity crisis, changing the threat landscape organizations face. As a result, enterprises require security access solutions that proactively ensure the right user has authorized access to the right resources at the right time.

We believe that our Zero Trust solutions secure an enterprise’s exponentially increased attack surface, which occurs as a result of their digital transformation journey. We also offer digital threat protection and risk-based authentication tools to identify and eliminate attacks before they occur, across social media, phishing attacks, bogus websites, and malicious mobile apps.

We sell our solutions primarily through a recurring revenue license model or subscription, and we employ a ‘land and expand’ strategy to generate incremental revenue through the addition of new users and the sale of additional products. Our annual recurring revenue (“ARR”) was $34.1 million and $30.9 million at September 30, 2022 and 2021, respectively. Our dollar-based net retention rate was 94% at September 30, 2022, down from 130% at September 30, 2021. Our number of customers generating over $100,000 ARR increased 19% from September 30, 2021 to September 30, 2022, driven by elevated C-suite and board level dialogue and customer prioritization of a Zero Trust posture. See “— Key Business Metrics” for additional information regarding ARR and dollar-based net retention rate.

Our revenue decreased from $11.2 million for the three months ended September 30, 2021 to $10.6 million for the three months ended September 30, 2022, a decrease of 5%. In turn, our revenue increased from $30.6 million for the nine months ended September 30, 2021 to $32.8 million for the nine months ended September 30, 2022, an increase of 7%.

Factors Affecting Our Business

Reduction in Force

On July 25, 2022, we substantially completed a reduction in force (the “Reduction”) of approximately 22% of our workforce. In connection with the Reduction, we incurred approximately $1.8 million of costs and expenses, primarily comprising severance and termination-related costs, which we recognized in the third quarter of 2022.

Merger with Newtown Lane

On October 12, 2021, Legacy Appgate successfully completed its merger with a direct, wholly owned subsidiary of Newtown Lane. Upon closing of the Merger, Newtown Lane changed its name to Appgate, Inc., and our common stock is now quoted on the OTC Markets under the symbol “APGT.” The Merger has been accounted for as a reverse capitalization, and the historical financial statements contained in this Quarterly Report are those of: (1) except for the equity, which was retroactively restated following applicable accounting guidance, Legacy Appgate with respect to all periods prior to consummation of the Merger, and (2) those of us, inclusive of Newtown Lane for the period subsequent to the Merger. We expensed $226 thousand and $0.6 million, respectively, in transaction costs during the three and nine months ended September 30, 2021 in connection with the Merger.

Risks and Uncertainties due to COVID-19

Public Company Costs

Following the consummation of the Merger, we became a public company, which resulted in, and will continue to require, hiring of additional staff and implementation of processes and procedures to address public company regulatory requirements and customary practices. We have incurred, and expect to continue to incur, substantial additional annual expenses for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external costs for investor relations, accounting, audit, legal, corporate secretary and other functions.

Formation and Cyxtera Spin-Off

Prior to December 31, 2019, Legacy Appgate was wholly owned by Cyxtera. On December 31, 2019, Cyxtera consummated several transactions (the “Cyxtera Spin-Off”), following which Legacy Appgate became a stand-alone entity. The transactions separated Cyxtera’s data center business from Legacy Appgate’s cybersecurity business. Upon consummation of the Cyxtera Spin-Off, Legacy Appgate and Cyxtera Management, Inc., a wholly-owned subsidiary of Cyxtera (the “Management Company”), entered into a transition services agreement (the “Transition Services Agreement”), pursuant to which the Management Company provided certain transition services to Legacy Appgate and Legacy Appgate provided certain transition services to the Management Company. The term under the Transition Services Agreement commenced on January 1, 2020 and ended on June 30, 2021. Substantially all of the obligations under the Transition Services Agreement ceased on December 31, 2020.

During each of the three and nine months ended September 30, 2021, the Management Company charged Legacy Appgate $0.1 million for services rendered under the Transition Services Agreement. Such costs are included in general and administrative expenses in the condensed consolidated statement of operations.

During the three and nine months ended September 30, 2021, Legacy Appgate charged the Management Company $48 thousand and $0.1 million, respectively, of fees for services provided to the Management Company and its affiliates by Legacy Appgate under the Transition Services Agreement. Income for these services is included in other expenses, net in the condensed consolidated statement of operations.

On February 8, 2021, Legacy Appgate made a payment of $1.0 million to Cyxtera (and/or its subsidiaries) as settlement in full of trade balances with Cyxtera and its subsidiaries and other amounts due to / from under the Intercompany Master Services Agreement and the Transition Services Agreement, which trade balances and other amounts totaled $2.6 million. Because the Management Company was an affiliate under common control with Legacy Appgate at the time of repayment, the settlement of these amounts was recognized as a capital contribution of $1.6 million in the nine months ended September 30, 2021.

Promissory Notes

On March 31, 2019, Legacy Appgate issued promissory notes to each of Cyxtera and the Management Company (together, the “Promissory Notes”), which had a combined initial aggregate principal amount of $95.2 million and provided for additional borrowings during the term of the Promissory Notes for additional amounts not to exceed approximately $52.5 million in the aggregate. Interest accrued on the unpaid principal balance of the Promissory Notes at a rate per annum equal to 3% and was payable upon the maturity of the Promissory Notes. Each Promissory Note had an initial maturity date of March 30, 2020, which was extended until March 30, 2021 by amendments entered into effective as of March 30, 2020.

During the nine months ended September 30, 2021, we recognized $0.5 million of interest expense on the Promissory Notes.

On February 8, 2021, Legacy Appgate repaid Cyxtera $20.6 million, representing the entirety of the then outstanding principal and interest under the Promissory Note issued to Cyxtera, and Legacy Appgate made a partial repayment of $99.0 million to the Management Company on the then outstanding principal and interest of $133.6 million under the Promissory Note issued to the Management Company. On that same date, the Management Company issued Legacy Appgate a payoff letter, extinguishing the balance remaining unpaid following such repayment. Because Cyxtera was Legacy Appgate’s direct parent at the time of issuance of the Promissory Notes and an affiliate under common control with Legacy Appgate at the time of repayment, Legacy Appgate accounted for the note extinguishment of $34.6 million as a capital contribution in the nine months ended September 30, 2021.

Sale of Brainspace

On September 30, 2020, Legacy Appgate adopted a plan for the sale of Brainspace Corporation (“Brainspace”), a formerly wholly owned subsidiary of Legacy Appgate, which met the criteria for discontinued operations under ASC Topic 205-20, Presentation of Financial Statements — Discontinued Operations — see Note 4 to our condensed consolidated financial statements for discontinued operations disclosures included in Part I, Item 1 of this Quarterly Report - “Financial Statements”. On January 20, 2021, Legacy Appgate completed the sale of 100% of the outstanding equity interests of Brainspace for $125.0 million. We recorded a gain on the sale of Brainspace of $64.6 million. We have classified the results of Brainspace as discontinued operations in our condensed consolidated statements of operations for all periods presented. Unless otherwise stated, all discussion of Legacy Appgate’s results of operations included in this discussion and analysis focus on continuing operations and exclude the discontinued Brainspace operations.

Key Business Metrics

Our management reviews a number of key performance indicators, each as described below, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions.

Annual Recurring Revenue

ARR is a performance indicator that management believes provides more visibility into the growth of our revenue generated by recurring business. Our management believes ARR is a key metric to measure our business because it is driven by our ability to acquire new subscription customers and to maintain and expand our relationship with existing subscription customers. ARR also mitigates fluctuations due to seasonality, contract term, sales mix, and revenue recognition timing resulting from revenue recognition methodologies under GAAP. We define ARR as the annualized value of SaaS, subscription, and term-based license and maintenance contracts from our recurring software products in effect at the end of a given period. ARR should be viewed independently of revenue and deferred revenue as it is an operating measure and is not intended to be combined with or to replace GAAP revenue or deferred revenue, as they can be impacted by contract start and end dates and renewal rates. ARR is not intended to be a replacement or forecast of revenue or deferred revenue.

The table below sets forth our ARR as of the end of the periods indicated below (in thousands):


	September 30,
	2022			2021
ARR	$	34,057		$	30,873
Change $	$	3,184
Change %	10		%

Total Customers and Number of Customers with ARR above $100,000

Our management believes that our ability to increase our number of customers is an indicator of our market penetration, the growth of our business, and our potential future business opportunities. Over time, larger customers have constituted a greater share of our total revenue, which has contributed to an increase in ARR. Our management believes there are significant upsell and cross-sell opportunities within our customer base by expanding the number of use cases. Historically, we have consistently increased our number of customers and customers with ARR above $100,000 and expect this trend to continue as a result of the growing demand for our cybersecurity solutions. Our management defines a customer as a distinct organization that has entered into a distinct agreement to access our software products for which the term has not ended or with which we are negotiating a renewal contract or the purchase of our professional services.

The below table sets forth our total customers and customers with ARR above $100,000 as of the end of the periods indicated below:


	September 30,
	2022	2021
Total customers	624	610
Customers with ARR above $100,000	64	54

We stopped offering our Compliance Sheriff product which accounted for less than 5% of our total revenue for 2021. Total Compliance Sheriff-only customers included in our total customer count as of September 30, 2021 above was 59. As a result, our increase in customer count from September 30, 2021 to September 30, 2022 reflected in this Quarterly Report is not indicative of our customer growth given our one-time voluntary sunsetting of our Compliance Sheriff product and its respective customers.

Dollar-Based Net Retention Rate

Our management believes that our ability to retain and grow the ARR generated from our existing subscription customers is an indicator of the long-term value of our subscription customer relationships and future business opportunities. We track our performance in this area by measuring our dollar-based net retention rate, which reflects customer renewals, expansion, contraction, and customer attrition within our ARR base. We calculate dollar-based net retention rate by dividing the numerator by the denominator as set forth below:

• Denominator: As of the end of a reporting period, ARR as of the last day of the comparable reporting period in the prior year.

• Numerator: ARR for that same cohort of customers as of the end of the reporting period in the current year, including any expansion and net of any contraction and customer attrition over the trailing 12 months, excluding ARR from new subscription customers in the current period.

Our dollar-based net retention rates were 94% and 130% as of September 30, 2022 and 2021, respectively.

Key Components of Results of Operations

Revenue

We recognize revenue under ASC 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, we recognize revenue when our customers obtain control of goods or services in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.

We primarily sell our software through on-premise term-based license agreements, perpetual license agreements and SaaS subscriptions, which allow our customers to use our SaaS services without taking possession of the software. Our products offer substantially the same functionality whether our customers receive them through a perpetual license, a term-based license or a SaaS arrangement. Our agreements with customers for software licenses may include maintenance contracts and may also include professional services contracts. Maintenance revenues consist of fees for providing unspecified software updates and technical support for our products for a specified term, which is typically one to three years. We offer a portfolio of professional services and extended support contract options to assist our customers with integration, optimization, training and ongoing advanced technical support. We also generate revenue from threat advisory services, including penetration testing, application assessments, vulnerability analysis, reverse engineering, architecture review and source code review.

Subscription. Our term-based license arrangements that do not contain variable consideration include both upfront revenue recognition when the distinct license is made available to the customer as well as revenue recognized ratably over the contract period for support and maintenance based on the stand-ready nature of these elements. Revenue on our SaaS arrangements that do not contain variable consideration, is recognized ratably over the contract period as we satisfy the performance obligation, beginning on the date the service is made available to our customers.

Subscription revenue represented approximately 78% and 81% of our revenue for the three and nine months ended September 30, 2022, respectively, and approximately 82% and 79% of our revenue for the three and nine months ended September 30, 2021, respectively. We expect that a majority of our revenue will continue to be from subscriptions for the foreseeable future, and we expect that subscription revenue as a percentage of total revenue will increase over time. Changes in period-over-period subscription revenue growth are primarily impacted by the following factors:

• the type of new and renewed subscriptions (i.e., term-based or SaaS); and

• the duration of new and renewed term-based subscriptions.

While the number of new and increased subscriptions during a period impacts our subscription revenue growth, the type and duration of those subscriptions have a significantly greater impact on the amount and timing of revenue recognized in a period. Subscription revenue from the software license components of term-based licenses is generally recognized at the beginning of the subscription term, while subscription revenue from SaaS and support and maintenance is generally recognized ratably over the subscription term. As a result, our revenue may fluctuate due to the timing and type of the software license components of term-based licensing transactions. In addition, keeping other factors constant, when the percentage of subscription term-based licenses to total subscriptions sold or renewed in a period increases relative to the prior period, revenue growth will generally increase. Conversely, when the percentage of subscription SaaS and support and maintenance to total subscriptions sold or renewed in a period increases, revenue growth will generally decrease, as compared to a prior period. Additionally, a multi-year subscription term-based license will generally result in greater revenue recognition up front relative to a one-year subscription term-based license. Therefore, keeping other factors constant, revenue growth will generally also trend higher in a period where the percentage of multi-year subscription term-based licenses to total subscription term-based licenses increases.

Perpetual licenses. Our perpetual license arrangements generally include both upfront revenue recognition when the distinct license is made available to the customer as well as revenue recognized ratably over the contract period for support and maintenance based on the stand-ready nature of these elements. Revenue related to support and maintenance is included as part of subscription revenue.

For the three and nine months ended September 30, 2022, approximately 7% and 4%, respectively, of our revenue was from perpetual licenses. For the three and nine months ended September 30, 2021, approximately 3% and 6%, respectively, of our revenue was from perpetual licenses.

Services and other. Our services-related performance obligations predominantly relate to the provision of consulting and threat advisory services, and to a lesser extent, training and software installation. Software installation services are distinct from subscriptions and do not result in significant customization of the software. Our services are generally priced on a time and materials basis, which is generally invoiced monthly and for which revenue is recognized as the services are performed. Revenue from our training services and sponsorship fees is recognized on the date the services are complete. Over time, we expect services revenue to remain relatively stable as a percentage of total revenue.

For the three and nine months ended September 30, 2022, approximately 15% and 16%, respectively, of our revenue was from services and other. For the three and nine months ended September 30, 2021, approximately 15% and 16%, respectively, of our revenue was from services and other.

Concentrations. The following table summarizes revenue (in thousands) by country and main geography in which we operate, which are the United States and Canada (“US&C”), Latin America (“LATAM”), Europe, the Middle East and Africa (“EMEA”), and Asia Pacific (“APAC”), based on the billing address of customers (including, for the avoidance of doubt, resellers and managed service providers) who have contracted with us. As with our aggregate revenues, as described above, within each geography described below we expect that subscription revenue as a percentage of total revenue in each such geography will increase over time. While there may be shifts in individual countries representing 10% or more of our total revenue from time to time, we expect that we will continue to derive the vast majority of our revenue from the United States, which is our country of domicile. We do not currently anticipate significant shifts in revenues by main geography.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues by country (a):
United States	$	5,337	$	4,811	$	16,898	$	13,271
Ecuador	1,354		733		2,719		2,798
Colombia	1,217		2,523		4,126		5,204
Other	2,694		3,096		9,066		9,324
Total	$	10,602	$	11,163	$	32,809	$	30,597
Revenues by main geography:
US&C	$	5,528	$	4,979	$	18,515	$	15,066
LATAM	3,852		4,481		10,393		11,788
EMEA	713		685		2,238		1,927
APAC	509		1,018		1,663		1,816
Total	$	10,602	$	11,163	$	32,809	$	30,597

(a) Only the United States, Ecuador and Colombia represented 10% or more of our total revenue in the periods presented.

No single customer (including, for the avoidance of doubt, resellers and managed service providers) accounted for 10% or more of our total revenue in the periods presented.

Cost of Revenue

Cost of revenue consists primarily of employee compensation costs for employees associated with supporting our licensing arrangements and service arrangements, certain third-party expenses and the amortization of developed technology assets. Employee compensation and related costs include cash compensation and benefits to employees, equity-based compensation, costs of third-party contractors and associated overhead costs. Third-party expenses consist of cloud infrastructure costs, other expenses directly associated with our customer support, including, in limited instances, equipment purchased for resale. We expect cost of revenue to increase in absolute dollars.

Gross Profit and Gross Margin

Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, have been and will continue to be affected by various factors, including the timing of our acquisition of new customers and renewals of

and follow-on sales to existing customers, the average sales price of our services, mix of services offered in our solutions, including new product introductions, the extent to which we expand our customer support and operations and the extent to which we can increase the efficiency of our technology and infrastructure through technological improvements. We currently expect gross profit to increase in absolute dollars and gross margin to increase slightly over the long term, although our gross profit and gross margin could fluctuate from period to period depending on the interplay of all the above factors.

Operating Expenses

Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, equity-based compensation expense and, with respect to sales and marketing expenses, sales commissions that are recognized as expenses. Operating expenses also include overhead costs for facilities, IT, depreciation expense and amortization expense.

Sales and Marketing

Sales and marketing expenses consist primarily of employee compensation and related expenses, including salaries, bonuses and benefits for our sales and marketing employees, sales commissions that are recognized as expenses over the period of benefit, equity-based compensation expense, marketing and channel programs, travel and entertainment expenses, expenses for conferences and events and allocated overhead costs. We capitalize our sales commissions and associated payroll taxes and recognize them as expenses over the estimated period of benefit. The amount recognized in our sales and marketing expenses reflects the amortization of cost previously deferred as attributable to each period presented in our consolidated financial statements, as described in Note 1 — Business and Summary of Significant Accounting Policies to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report - “Financial Statements”. Advertising expenses are charged to sales and marketing expense in the condensed consolidated statements of operations as incurred.

We intend to continue to invest in our sales and marketing organization to drive additional revenue, further penetrate the market and expand our global customer base. As a result, we expect our sales and marketing expenses to be our largest operating expense category for the foreseeable future. In particular, we plan to continue to invest in our sales force, broadening our brand awareness and expanding and deepening our channel partner relationships. However, we currently expect sales and marketing expenses to decrease as a percentage of our revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses.

Research and Development

Research and development costs to develop software to be sold, leased or marketed are expensed as incurred up to the point of technological feasibility for the related software product. We have not capitalized development costs for software to be sold, leased or marketed to date, as the software development process is essentially completed concurrent with the establishment of technological feasibility. As such, these costs are expensed as incurred and recognized in research and development costs in the condensed consolidated statements of operations.

Software developed for internal use, with no substantive plans to market such software at the time of development, is capitalized and included in property and equipment, net in the condensed consolidated balance sheets. Costs incurred during the preliminary planning and evaluation and post implementation stages of the project are expensed as incurred. Costs incurred during the application development stage of the project are capitalized.

Our research and development expenses support our efforts to add new features to our existing offerings and to ensure the reliability, availability and scalability of our solutions. Our research and development teams employ software engineers in the design and the related development, testing, certification and support of our solutions. Accordingly, the majority of our research and development expenses result from employee-related costs, including salaries, bonuses and benefits and costs associated with technology tools used by our engineers.

We intend to continue to make investments in research and development to extend the features of our existing offerings and technology capabilities.

General and Administrative

General and administrative expenses consist primarily of employee-related costs, including salaries and bonuses, equity-based compensation expense and employee benefit costs for our finance, legal, human resources and administrative personnel, as well as professional fees for external legal services, accounting and other related consulting services. Litigation-related expenses, if any, include professional fees and related costs incurred by us in defending or settling significant claims that our management deem not to be in the ordinary course of our business and, if applicable, accruals related to estimated losses in connection with these claims. We expect that our general and administrative expenses will increase in absolute dollars for the foreseeable future, as we incur increased compliance costs and other related costs necessary to operate as a public company. However, we currently expect our general and administrative expenses to decrease as a percentage of revenue over the long term, although our general and administrative expenses may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses.

Transaction Costs

In June 2022, we expensed $2.1 million of transaction costs in connection with the contemplated registered offering of equity securities. Transaction costs expensed in connection with the Merger totaled $226 thousand and $0.6 million, respectively in the three and nine months ended September 30, 2021.

Depreciation and Amortization

Acquired intangible assets consist of identifiable intangible assets, including trademarks and tradenames and customer relationships resulting from business combinations. Acquired finite-lived intangible assets are initially recorded at fair value and are amortized on a straight-line basis over their estimated useful lives. Amortization expense for trademarks and tradenames and customer relationships is recorded primarily within depreciation and amortization in the condensed consolidated statements of operations.

Loss on Abandonment of Assets

We stopped offering our Compliance Sheriff product and, as a result, recorded a loss on abandonment of the related intangible assets of $1.7 million in the nine months ended September 30, 2022 (all during the first quarter of 2022).

Change in Fair Value of Embedded Derivative Liability

We have recognized an embedded derivative liability associated to the Convertible Senior Notes (as defined below). The embedded derivative is recognized at fair value and is subsequently remeasured at its estimated fair value on a recurring basis at the end of each reporting period, with changes in estimated fair value recognized as change in fair value of embedded derivative liability in our condensed consolidated statements of operations.

Interest Expense

Interest expense consists primarily of interest incurred on our obligations under the Convertible Senior Notes and, through February 8, 2021, obligations of Legacy Appgate under the Promissory Notes. See “—Promissory Notes” above and “—Liquidity and Capital Resources” below.

Income Tax

Through December 31, 2019, the operations of Legacy Appgate were included in the consolidated U.S. federal, state, local and foreign income tax returns filed by Cyxtera, where applicable.

Our income taxes, as presented in the condensed consolidated financial statements, may not be indicative of the income taxes we will generate in the future. In jurisdictions where Legacy Appgate was included in the tax returns filed by Cyxtera, any income taxes payable/receivable resulting from the related income tax provisions have been reflected in the balance sheets of each separate entity’s provision.

Benefit (provision) for income taxes consists primarily of income taxes related to U.S. federal and state income taxes and income taxes in foreign jurisdictions in which we conduct business.

Results of Operations

The following table sets forth our consolidated results of operations for the periods presented (in thousands). The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future. The results of operations data have been derived from our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, “Financial Statements”.


	Three Months Ended September 30,				Variance %		Nine Months Ended September 30,				Variance %
	2022		2021				2022		2021
Revenue	$	10,602	$	11,163	5	%	$	32,809	$	30,597	7	%
Cost of revenue, exclusive of amortization shown below	4,292		4,065		6	%	14,084		11,812		19	%
Amortization expense	954		1,131		16	%	2,862		3,393		16	%
Total cost of revenue	5,246		5,196		1	%	16,946		15,205		11	%
Gross profit	5,356		5,967		10	%	15,863		15,392		3	%
Operating expenses:
Sales and marketing	9,504		10,037		5	%	37,645		27,388		37	%
Research and development	2,953		2,718		9	%	10,387		7,638		36	%
General and administrative	8,103		4,264		90	%	26,160		12,238		114	%
Transaction costs	—		226		nm		2,059		599		nm
Depreciation and amortization	1,370		1,347		2	%	4,116		4,040		2	%
Loss on abandonment of assets	—		—		nm		1,658		—		nm
Total operating expenses	21,930		18,592		18	%	82,025		51,903		58	%
Loss from continuing operations	(16,574)		(12,625)		31	%	(66,162)		(36,511)		81	%
Change in fair value of embedded derivative liability	23,040		—		nm		68,917		—		nm
Interest expense, net	(1,829)		(641)		185	%	(4,303)		(2,117)		103	%
Other expenses, net	(961)		(64)		1402	%	(1,341)		(283)		374	%
Income (loss) from continuing operations before income taxes	3,676		(13,330)		nm		(2,889)		(38,911)		93	%
Income tax expense of continuing operations	(818)		(999)		18	%	(1,954)		(2,003)		2	%
Net income (loss) from continuing operations	2,858		(14,329)		nm		(4,843)		(40,914)		88	%
Net income from discontinued operations, net of tax	—		(212)		nm		—		65,477		nm
Net income (loss)	$	2,858	$	(14,541)	nm		$	(4,843)	$	24,563	120	%
nm = not meaningful

Revenue

Revenue from continuing operations were as follows for the three and nine months ended September 30, 2022 and 2021 (in thousands):


	Three Months Ended September 30,				Variance %		Nine Months Ended September 30,				Variance %
	2022		2021				2022		2021
Subscription revenue	$	8,304	$	9,113	9	%	26,467		24,064		10	%
Perpetual licenses	710		347		105	%	1,217		1,719		29	%
Services and other	1,588		1,703		7	%	5,125		4,814		6	%
Total	$	10,602	$	11,163	5	%	$	32,809	$	30,597	7	%

Three Months Ended September 30, 2022 and 2021

Revenue decreased by $0.6 million, or 5%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The decrease in revenue was primarily attributable to an overall decrease in subscription SaaS, one-year subscription term-based licenses and services and other revenue as further explained below. These decreases were partially offset by increases in multi-year subscription term-based licenses and perpetual licenses revenue.

Subscription revenue accounted for 78% and 82% of our total revenue for the three months ended September 30, 2022 and 2021, respectively. Subscription revenue decreased $0.8 million, or 9%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This decrease in subscription revenue was driven by a $0.8 million decrease in revenue from sales to new customers. Subscription revenue from sales to existing customers was relatively flat. Approximately $0.7 million of the decrease in revenue from new customers was in multi-year subscription term-based licenses and $0.2 million in one-year subscription term-based licenses. Our dollar-based net retention rate was 94% at September 30, 2022, down from 130% at September 30, 2021.

Perpetual licenses revenue accounted for 7% and 3% of our total revenue for the three months ended September 30, 2022 and 2021, respectively. Perpetual licenses revenue increased $0.4 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This increase in perpetual license revenue was driven by sale and deployment of new perpetual licenses in the three months ended September 30, 2022.

Services and other revenue accounted for 15% of our total revenue for each of the three months ended September 30, 2022 and 2021. Services and other revenue decreased $0.1 million, or 7%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This decrease in services and other revenue was primarily the result of an overall decrease in service hours billed to customers during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Nine Months Ended September 30, 2022 and 2021

Revenue increased by $2.2 million, or 7%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The overall increase in revenue was primarily attributable to an overall increase in subscription term-based licenses as further explained below, and an increase in services and other revenue, partially offset by a decrease in perpetual licenses.

Subscription revenue accounted for 81% and 79% of our total revenue for the nine months ended September 30, 2022 and 2021, respectively. Subscription revenue increased $2.4 million, or 10%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This increase in subscription revenue was driven by $1.3 million in revenue from sales to existing customers and $1.0 million in revenue from sales to new customers. Approximately $0.7 million of the revenue from existing customers was from one-year subscription term-based licenses, and $0.6 million from multi-year subscription term-based licenses. In turn, approximately $1.0 million of the revenue from new customers was from multi-year subscription term-based licenses.

Perpetual licenses revenue accounted for 4% and 6% of our total revenue for the nine months ended September 30, 2022 and 2021, respectively. Perpetual licenses revenue decreased $0.5 million, or 29%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This decrease in perpetual license revenue was driven by sale and deployment of perpetual licenses in the nine months ended September 30, 2021, for which only maintenance and support is recognized in the nine months ended September 30, 2022, partially offset by sale and deployment of new perpetual licenses in the nine months ended September 30, 2022.

Services and other revenue accounted for 16% of our total revenue for each of the nine months ended September 30, 2022 and 2021. Services and other revenue increased $0.3 million, or 6%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This increase in services and other revenue was primarily the result of an overall increase in service hours billed to customers during the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2021.

Cost of Revenue

Total cost of revenue from continuing operations increased by $0.1 million, or 1%, during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The increase in total cost of revenue was primarily due to an increase of $0.2 million in other cost of revenue, partially offset by a decrease in amortization of developed technology. The increase in other cost of revenue was primarily as a result of an increase in personnel costs from higher headcount, and to a lesser extent from an increase in subscription and hosting costs and contracted services. Operations headcount increased by 10 positions from 143 at September 30, 2021 to 153 at September 30, 2022. The decrease in amortization of developed technology is related to the abandonment of the Compliance Sheriff related developed technology in 2022.

Total cost of revenue from continuing operations increased by $1.7 million, or 11%, during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increase in total cost of revenue was primarily due to an increase of $2.3 million in other cost of revenue, partially offset by a decrease of $0.5 million in amortization of developed technology. These increases were the result of the same factors described above for the three months periods.

Gross Profit

Gross profit totaled $5.4 million for the three months ended September 30, 2022, a decrease of $0.6 million, or 10%, as compared to the three months ended September 30, 2021. Gross profit totaled $15.9 million for the nine months ended September 30, 2022, an increase of $0.5 million, or 3%, as compared to the nine months ended September 30, 2021. The decrease for the three months ended September 30, 2022 and the increase for the nine months ended September 30, 2022 were the result of the factors described above under “Revenue” and “Cost of Revenue”.

Operating Expenses

Total operating expenses from continuing operations increased by $3.3 million, or 18%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Total operating expenses from continuing operations increased by $30.1 million, or 58%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The factors that contributed to these increases in operating expenses are detailed below.

Sales and marketing expenses decreased by $0.5 million, or 5%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This decrease was primarily the result of a decrease in personnel costs from lower headcount on both the sales and marketing teams following the Reduction, and to a lesser extent, lower investment in marketing and advertising costs due to other cost reduction initiatives. Sales and marketing headcount decreased by 47 positions from 150 at September 30, 2021 to 103 at September 30, 2022. Sales and marketing expenses increased by $10.3 million, or 37%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This increase was primarily the result of an increase in personnel costs from higher headcount on both the sales and marketing teams, and to a lesser extent, higher investment in marketing and advertising costs since completion of the Merger. While sales and marketing headcount has recently decreased as described above, prior to the Reduction, there was overall higher headcount in both the sales and marketing teams in 2022 as compared to 2021.

Research and development expenses increased by $0.2 million, or 9%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Research and development expenses increased by $2.7 million, or 36%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. These increases were primarily the result of an increase in personnel costs from higher headcount. Research and development headcount increased by 14 positions from 107 at September 30, 2021 to 121 at September 30, 2022.

General and administrative expenses increased by $3.8 million, or 90%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. General and administrative expenses increased by $13.9 million, or 114%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. These increases were primarily the result of equity-based compensation expense recognized during the three and nine months ended September 30, 2022 in connection with the 2021 Plan, and an increase in personnel costs from higher headcount throughout 2021 and 2022 prior to the Reduction. General and administrative headcount decreased by 8 positions from 74 at September 30, 2021 to 66 at September 30, 2022.

Transaction costs. In June 2022, we expensed $2.1 million of transaction costs related to a contemplated registered equity offering. Transaction costs expensed in connection with the Merger totaled $226 thousand and $0.6 million, respectively, for the three and nine months ended September 30, 2021.

Depreciation and amortization expense remained relatively flat for the three and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021. While there was an increase in depreciation and amortization primarily due to depreciation and amortization on purchases of property and equipment during 2021, we had lower amortization expense related to intangibles following the abandonment of the Compliance Sheriff related intangibles in 2022.

Loss on Abandonment of Assets. We stopped offering our Compliance Sheriff product and, as a result, recorded a loss on abandonment of the related intangible assets of $1.7 million in the nine months ended September 30, 2022 (all during the three months ended March 31, 2022).

Change in Fair Value of Embedded Derivative Liability

For the three and nine months ended September 30, 2022, we recognized a gain of $23.0 million and $68.9 million, respectively, in connection with the embedded derivative associated with the conversion feature under the Convertible Senior Notes. Refer to Note 6 to the unaudited condensed consolidated financial statements in this Quarterly Report for a discussion of the key inputs affecting the value of the derivative.

Interest Expense, Net

Interest expense, net increased by $1.2 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Interest expense, net increased by $2.2 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increase in interest expense, net was primarily attributable to the change in the mix of our debt during 2021 and 2022. As described above, the Promissory Notes were repaid in part with the balance extinguished, in each case on February 8, 2021. On February 9, 2021, Legacy Appgate issued $50.0 million aggregate principal amount of 5.00% convertible senior notes due 2024 (the “Initial Convertible Senior Notes”), which are described below, and in connection with the closing of the Merger on October 12, 2021, issued an additional $25.0 million aggregate principal amount of convertible senior notes due 2024 (the “Additional Convertible Senior Notes” and, together with the Initial Convertible Senior Notes, the “Convertible Senior Notes”). Additionally, on April 26, 2022, Legacy Appgate, Appgate, the other guarantors party thereto and SIS Holdings entered into a revolving credit agreement (the “Revolving Credit Agreement”) which provides for a $50.0 million unsecured, revolving credit facility (the “Revolving Credit Facility”). Interest accrues on amounts drawn under the Revolving Credit Facility at a rate of 10.0% per annum, payable in cash on the Final Maturity Date. During the three and nine months ended September 30, 2022, we borrowed $16.5 million and $37.5 million, respectively, under the Revolving Credit Facility, all of which remained outstanding as of September 30, 2022.

Other Expenses, Net

Other expenses, net were $0.9 million and $1.1 million higher for the three and nine months ended September 30, 2022 when compared to the three and nine months ended September 30, 2021. These increases were primarily the result of costs expensed following the abandonment of certain projects during 2022.

Income Tax Expense

Our effective tax rate for the three months ended September 30, 2022 and 2021 was (22.3)% and 7.5%, respectively. Our effective tax rate for the nine months ended September 30, 2022 and 2021 was 67.6% and 5.1%, respectively. The effective tax rate for the three and nine months ended September 30, 2022 differs from the U.S. Federal income tax rate of 21% primarily due to foreign withholding taxes, changes in the valuation allowance, the change in the fair value of our embedded derivative liability that is not tax deductible, and state taxes. The effective tax rate for the three and nine months ended September 30, 2021 differs from the U.S. Federal income tax rate of 21% primarily due to foreign withholding taxes.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP financial measures are useful to investors in evaluating our operating performance.

These non-GAAP financial measures are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP and may be different from similarly titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure determined in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

Non-GAAP Gross Profit and Gross Margin

Non-GAAP gross profit and non-GAAP gross margin are supplemental measures of operating performance that are not determined in accordance with GAAP and do not represent, and should not be considered as, an alternative to gross profit and gross margin, the most directly comparable financial measures determined in accordance with GAAP. We define non-GAAP gross profit as gross profit, adjusted to add back non-cash equity-based compensation expense and developed technology amortization expense and define non-GAAP gross margin as non-GAAP gross profit as a percentage of revenue.

We use non-GAAP gross profit and non-GAAP gross margin to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short-term and long-term operating plans. We believe that non-GAAP gross profit and non-GAAP gross margin are useful measures to our management and to our investors because they provide consistency and comparability with past financial performance and between periods, as the metrics generally eliminate the effects of the variability of amortization expense of intangibles and non-cash equity-based compensation expense from period to period, which may fluctuate for reasons unrelated to overall operating performance. We believe that the use of these measures enables our management to more effectively evaluate our performance period-over-period and relative to our competitors, some of which use similar non-GAAP financial measures to supplement their GAAP results. Non-GAAP gross profit and non-GAAP gross margin have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, non-GAAP gross profit and non-GAAP gross margin should not be considered as a replacement for gross profit and gross margin, as determined in accordance with GAAP, or as a measure of our profitability.

A reconciliation of our non-GAAP gross profit and non-GAAP gross margin to gross profit and gross margin, the most directly comparable financial measures determined in accordance with GAAP, for the periods presented, is as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
GAAP revenue	$	10,602		$	11,163		$	32,809		$	30,597
GAAP gross profit	5,356			5,967			15,863			15,392
Add: amortization expense	954			1,131			2,862			3,393
Add: equity-based compensation	—			131			62			393
Non-GAAP gross profit	$	6,310		$	7,229		$	18,787		$	19,178
GAAP gross margin	51		%	53		%	48		%	50		%
Non-GAAP gross margin	60		%	65		%	57		%	63		%

Non-GAAP Loss from Operations and Non-GAAP Operating Margin

We define non-GAAP loss from operations as GAAP loss from continuing operations excluding amortization expense of acquired intangible assets, loss on abandonment of assets, non-cash equity-based compensation expense, and transaction costs. We define non-GAAP operating margin as non-GAAP loss from continuing operations as a percentage of revenue.

A reconciliation of our non-GAAP loss from operations and non-GAAP operating margin to loss from continuing operations and operating margin, the most directly comparable financial measures determined in accordance with GAAP, for the periods presented, is as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
GAAP revenue	$	10,602		$	11,163		$	32,809		$	30,597
GAAP loss from continuing operations	(16,574)			(12,625)			(66,162)			(36,511)
Add: amortization expense	2,099			2,299			6,295			6,898
Add: loss on abandonment of assets	—			—			1,658			—
Add: equity-based compensation	3,641			936			11,029			2,903
Add: transaction costs	—			226			2,059			599
Non-GAAP loss from operations	$	(10,834)		$	(9,164)		$	(45,121)		$	(26,111)
GAAP operating margin	(156)		%	(113)		%	(202)		%	(119)		%
Non-GAAP operating margin	(102)		%	(82)		%	(138)		%	(85)		%

Free Cash Flow and Free Cash Flow Margin

Free cash flow is a non-GAAP financial measure that we define as net cash provided by (used in) operating activities of continuing operations less cash used for purchases of property and equipment and repayment of finance leases. We believe that free cash flow is a useful indicator of liquidity that provides information to management and investors, even if negative, as it provides useful information about the amount of cash generated (or consumed) by our operating activities that is available (or not available) to be used for other strategic initiatives. For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives. While we believe that free cash flow is useful in evaluating our business, free cash flow is a non-GAAP financial measure that has limitations as an analytical tool, and free cash flow should not be considered as an alternative to, or substitute for, net cash provided by (used in) operating activities in accordance with GAAP. The utility of free cash flow as a measure of our liquidity is limited as it does not represent the total increase or decrease in our cash balance for any given period and does not reflect our future contractual commitments. In addition, other companies, including companies in our industry, may calculate free cash flow differently or not at all, which reduces the usefulness of free cash flow as a tool for comparing our results to those of other companies.


	Nine Months Ended September 30,
	2022			2021
Net cash, cash equivalents and restricted cash used in operating activities of continuing operations	$	(51,523)		$	(38,579)
Less:
Purchases of property and equipment	(514)			(543)
Repayment of finance leases	—			(154)
Free cash flow	$	(52,037)		$	(39,276)
As a percentage of revenue:
GAAP revenue	$	32,809		$	30,597
Net cash, cash equivalents and restricted cash used in operating activities of continuing operations	(157)		%	(126)		%
Less:
Purchases of property and equipment	(2)		%	(2)		%
Repayment of finance leases	—		%	(1)		%
Free cash flow	(159)		%	(128)		%

Liquidity and Capital Resources

As of September 30, 2022, we had cash and cash equivalents and borrowing capacity under the Revolving Credit Facility of $10.7 million and of $12.5 million, respectively. Historically, Legacy Appgate’s principal source of liquidity was borrowing availability under the Promissory Notes and cash generated from Legacy Appgate’s operations. As discussed above, on February 8, 2021, Legacy Appgate repaid Cyxtera the full amount of the Promissory Note issued to Cyxtera and made a partial repayment on the then accumulated principal and interest under the Promissory Note issued to the Management Company. On that same date, the Management Company issued a payoff letter to Legacy Appgate extinguishing the balance remaining unpaid of $34.6 million following such repayment. The payoff letter resulted in the full settlement and extinguishment of the Promissory Note held by the Management Company.

We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and condensed consolidated statements of cash flows. We expect to continue to incur operating losses and negative cash flows from operations for the foreseeable future. Currently, our principal sources of liquidity are the proceeds from the issuance of the Convertible Senior Notes, our borrowing capacity under the Revolving Credit Facility and cash generated from our operations, which have enabled us to make continued investments to support the growth of our business. As a result of our recurring losses from operations and current liquidity, management is of the opinion that there is a substantial doubt as to the Company’s ability to continue as a going concern. The unaudited condensed consolidated financial statements included herein have been prepared assuming that we will continue as a going concern and do not include adjustments that might result from the outcome of this uncertainty. If we are unable to raise the requisite funds, we will need to curtail or cease operations. See Note 1 to the unaudited condensed consolidated financial statements and Part II, Item 1A, “Risk Factors—Management has performed an analysis of our ability to continue as a going concern, and has

determined that, based on our current financial position, there is a substantial doubt about our ability to continue as a going concern” in the Amended Q2 10-Q.

We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong. In the long-term, we will be required to obtain additional financing to fund our current planned operations, which may consist of borrowings under the Revolving Credit Facility or an alternative financing arrangement, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed may have a negative impact on our financial condition and our ability to pursue our business strategy. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

Debt

As of September 30, 2022, we had $112.5 million in aggregate principal amount of debt outstanding: $75.0 million under the Convertible Senior Notes and $37.5 million under the Revolving Credit Facility. As of December 31, 2021, we had $75.0 million in aggregate principal amount of debt outstanding, all of which was under the Convertible Senior Notes.

Convertible Senior Notes

On February 9, 2021, Legacy Appgate issued the Initial Convertible Senior Notes to various funds managed by Magnetar. In connection with the closing of the Merger, Legacy Appgate issued the Additional Convertible Senior Notes. The Convertible Senior Notes are subject to the terms and conditions of the Note Issuance Agreement and Note Purchase Agreement.

The Convertible Senior Notes are senior, unsecured obligations of Legacy Appgate, and the payment of the principal and interest is unconditionally guaranteed, jointly and severally by Legacy Appgate’s U.S. subsidiaries and, as of the closing of the Merger, also by the Company. The Convertible Senior Notes mature on February 9, 2024, unless earlier converted, redeemed, or repurchased.

Interest on the Convertible Senior Notes is payable either entirely in cash or entirely in kind (“PIK Interest”), or a combination of cash and PIK Interest at Appgate’s discretion. The Convertible Senior Notes bear interest at the annual rate of 5% with respect to interest payments made in cash and 5.50% with respect to PIK Interest, with interest payable semi-annually on February 1 and August 1 of each year, commencing on August 1, 2021. Additional notes (“PIK Notes”) issuable in respect of PIK Interest would have the same terms and conditions as the Convertible Senior Notes. The Note Issuance Agreement includes certain affirmative and financial covenants we are required to satisfy.

Revolving Credit Agreement

On April 26, 2022, Legacy Appgate, Appgate, the other guarantors party thereto and SIS Holdings entered into a revolving credit agreement (the “Revolving Credit Agreement”) which provides for a $50.0 million unsecured, revolving credit facility (the “Revolving Credit Facility”). This indebtedness is contractually subordinated to the Convertible Senior Notes and matures, on the earlier to occur of (a) June 30, 2023, (b) the closing of a registered offering of Capital Stock (as defined in the Revolving Credit Agreement) of the Company in an aggregate amount equal to $50.0 million or more and (c) the date of which the Loans (as defined in the Revolving Credit Agreement) are accelerated upon an Event of Default (as defined in the Revolving Credit Agreement). Interest accrues on amounts drawn under the Revolving Credit Facility at a rate of 10.0% per annum, payable in cash on the Final Maturity Date (as defined in the Revolving Credit Agreement). The Revolving Credit Agreement is subject to customary terms, covenants and conditions. All obligations under the Revolving Credit Agreement are guaranteed by Appgate and Legacy Appgate’s domestic subsidiaries. As of September 30, 2022, we had $37.5 million in aggregate principal amount of debt outstanding under the Revolving Credit Facility.

Promissory Notes

On March 31, 2019, Legacy Appgate issued the Promissory Notes to each of Cyxtera and the Management Company. As discussed above and in our condensed consolidated financial statements included elsewhere in Part I, Item 1 of this

Quarterly Report, “Financial Statements”, on February 8, 2021, Legacy Appgate repaid Cyxtera the full amount on the then outstanding principal and interest of $20.6 million under the Promissory Note issued to Cyxtera and made a partial repayment of $99.0 million to the Management Company on the then outstanding principal and interest of $133.6 million under the Promissory Note issued to the Management Company. On that same date, the Management Company issued a payoff letter to Legacy Appgate extinguishing the balance remaining unpaid following such repayment. Because Cyxtera was Legacy Appgate’s direct parent at the time of issuance of the Promissory Notes and an affiliate under common control with Legacy Appgate at the time of repayment, we recognized the note extinguishment of $34.6 million as a capital contribution in the nine months ended September 30, 2021.

Other Contractual Obligations and Commitments

In addition to our debt obligations under the Convertible Senior Notes, the Revolving Credit Facility, and lease obligations under several operating lease arrangements, Appgate has other contractual commitments. Refer to Note 9 — Leases and Note 10 — Debt, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, “Financial Statements” for additional information on maturities. Refer to Note 11 — Commitments and Contingencies to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, “Financial Statements” for additional information regarding cash amounts committed under other contractual obligations.

Cash Flow

Cash Flows for the Nine Months Ended September 30, 2022 and 2021. The following table sets forth our historical cash flows for the periods indicated (in thousands):


	Nine Months Ended September 30,
	2022		2021
Net cash, cash equivalents and restricted cash used in operating activities	$	(51,523)	$	(37,730)
Net cash, cash equivalents and restricted cash (used in) provided by investing activities	$	(514)	$	124,479
Net cash, cash equivalents and restricted cash provided by (used in) financing activities of continuing operations	$	37,500	$	(69,974)

Operating Activities

Our largest source of operating cash is cash collections from customers for sales of licenses and services. Our primary uses of cash from operating activities are for employee-related expenditures, marketing expenses and third-party hosting costs.

Net cash used in operating activities during the nine months ended September 30, 2022 was $51.5 million, which resulted from net income of $4.8 million, adjusted for net non-cash inflows of $42.7 million and net cash outflow of $4.0 million from changes in assets and liabilities. Non-cash inflows primarily consisted of a $68.9 million gain in the fair value of our embedded derivative liability, $11.0 million in equity-based compensation, $7.0 million of depreciation and amortization, $4.7 million of amortization of deferred contract acquisition costs, and $1.7 million of loss on abandonment of assets. The net cash outflow from changes in assets and liabilities was primarily due to decreases in deferred contract acquisition costs and cash used in working capital. The main changes in working capital were prepaid and other current assets and accrued expenses.

Net cash used in operating activities during the nine months ended September 30, 2021 was $37.7 million, which resulted from a net loss of $24.6 million, adjusted for the net income from discontinued operations, net of tax of $65.5 million, non-cash charges of $14.8 million, net cash outflow of $12.4 million from changes in assets and liabilities and $0.8 million net cash provided by operating activities of discontinued operations. Non-cash charges primarily consisted of $7.4 million of depreciation and amortization, $3.7 million of amortization of deferred contract acquisition costs and $2.9 million in equity-based compensation. The net cash outflow from changes in assets and liabilities was primarily due to settlement of cash due to affiliates and changes in working capital combined with an increase in deferred contract acquisition costs. The main changes in working capital were accounts payable and accrued expenses and prepaid and other current assets.

Investing Activities

During the nine months ended September 30, 2022, we used cash in our investing activities of $0.5 million as compared to cash provided by investing activities of $124.5 million during the nine months ended September 30, 2021. The change in cash flows from investing activities during the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2021 was primarily due to receipt of $125.0 million from the sale of Brainspace in January 2021.

Financing Activities

During the nine months ended September 30, 2022, we borrowed $37.5 million under the Revolving Credit Facility. We did not have any other cash movement in financing activities during the period. During the nine months ended September 30, 2021, we used $70.0 million of cash in financing activities, primarily for the repayment of $119.6 million to Cyxtera and/or the Management Company in February 2021 as settlement and extinguishment of the Promissory Notes, net of gross proceeds of $50.0 million received from the issuance of the Convertible Senior Notes.

Critical Accounting Policies and Estimates

For information regarding our critical accounting policies and estimates, see “Critical Accounting Estimates” included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Amended 10-K.

Recent Accounting Pronouncements

Recently issued accounting pronouncements are described in Note 1 of our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, “Financial Statements”.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act and regulations promulgated thereunder) as of September 30, 2022, which we refer to as the Evaluation Date. Based on such evaluation, management concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective at the reasonable assurance level as a result of the material weaknesses discussed in Part II, Item 9A, “Controls and Procedures” in the Amended 10-K as well as the additional material weakness discussed in Part I, Item 4, “Controls and Procedures” in the Amended Q1 10-Q.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

Information in response to this Item is included in Note 11 - Commitments and Contingencies to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, “Financial Statements” and is incorporated by reference into this Part II, Item 1 of this Quarterly Report.

Item 1A. Risk Factors

There have been no material changes to the risk factors described in our Amended 10-K, Amended Q1 10-Q and Amended Q2 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Incorporated by Reference

Exhibit
Number

Description

Form

Exhibit

Filing Date

31.1

Certification of Principal Executive Officer of Appgate, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer of Appgate, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32*

Certification of Principal Executive Officer and Principal Financial Officer of Appgate, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

Inline Interactive Data File

104

Cover Page Interactive Data File

* Furnished herewith.

SIGNATURES

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 hereunto duly authorized.


Dated: January 9, 2023		Appgate, Inc.

	By:	/s/ Leo Taddeo
		Leo Taddeo
		Chief Executive Officer