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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, 2023
OR
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)
Delaware20-3547231
(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 classTrading Symbol(s)Name of each exchange on which registered
N/AN/AN/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 November 10, 2023, the registrant had 131,793,660 shares of its common stock outstanding.




Table of Contents
1



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, 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, 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, the A&R Revolving Credit Agreement, and the AF Convertible Notes (each 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;
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 LP’s (“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 Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“2022 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2023 as well as described from time to time in our other filings with the SEC.

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
2


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.
3


PART I
Item 1. Financial Statements
Appgate, Inc.

Table of Contents
4


Appgate, Inc.
Unaudited Condensed Consolidated Balance Sheets
As of September 30, 2023 and December 31, 2022
(in thousands, except share information)
September 30,
2023
December 31,
2022
ASSETS
Current assets:
Cash and cash equivalents$3,584 $11,531 
Restricted cash613 1,473 
Accounts receivable, net of allowance of $107 and $52, respectively
8,048 4,231 
Contract assets3,040 1,462 
Deferred contract acquisition costs, current1,554 1,508 
Prepaid and other current assets1,648 3,517 
Total current assets18,487 23,722 
Property and equipment, net1,164 1,617 
Operating lease right-of-use assets1,297 1,679 
Contract assets, noncurrent6,265 9,134 
Deferred contract acquisition costs, noncurrent2,749 3,103 
Goodwill71,604 71,604 
Intangible assets, net20,493 26,449 
Deferred income taxes1,288 1,334 
Other assets172 182 
Total assets$123,519 $138,824 
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable$4,181 $4,334 
Accrued expenses7,377 10,240 
Operating lease liabilities, current586 619 
Deferred revenue, current5,971 5,578 
Revolving credit facility 46,500 
Total current liabilities18,115 67,271 
Deferred revenue, noncurrent1,081 909 
Operating lease liabilities, noncurrent886 1,261 
Debt purchase options3,582  
Embedded derivative liability10,810 19,700 
Accrued interest on long-term debt6,809  
Convertible senior notes, net67,333 73,769 
Convertible notes to related party, net3,038  
Revolving credit facility to related party, net49,954  
Total liabilities161,608 162,910 
Commitments and contingencies (Note 9)
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
132 132 
Additional paid-in capital524,281 524,239 
Accumulated other comprehensive loss(3,416)(2,403)
Accumulated deficit(559,086)(546,054)
Total stockholders' deficit(38,089)(24,086)
Total liabilities and stockholders' deficit$123,519 $138,824 
5


See accompanying notes to unaudited condensed consolidated financial statements.
6


Appgate, Inc.
Unaudited Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2023 and 2022
(in thousands, except share and per share information)
Three Months Ended
Nine Months Ended
September 30,September 30,
2023202220232022
Revenue$12,584 $10,602 $34,082 $32,809 
Cost of revenue, exclusive of amortization shown below3,566 4,292 11,054 14,084 
Amortization expense843 954 2,530 2,862 
Total cost of revenue4,409 5,246 13,584 16,946 
Gross profit8,175 5,356 20,498 15,863 
Operating expenses:
Sales and marketing5,212 9,504 16,421 37,645 
Research and development2,881 2,953 8,582 10,387 
General and administrative4,266 8,103 13,280 26,160 
Transaction costs   2,059 
Depreciation and amortization1,346 1,370 4,054 4,116 
Loss on abandonment of assets   1,658 
Total operating expenses13,705 21,930 42,337 82,025 
Loss from operations(5,530)(16,574)(21,839)(66,162)
Change in fair value of debt purchase options17,424  17,856  
Change in fair value of embedded derivative liability64,648 23,040 87,731 68,917 
Interest expense, net(5,606)(1,829)(11,368)(4,303)
Loss on extinguishment of debt  (77,553) 
Loss on issuance of debt(6,431) (6,431) 
Other expenses, net(199)(961)(369)(1,341)
Income (loss) from operations before income taxes64,306 3,676 (11,973)(2,889)
Income tax benefit (expense)65 (818)(1,059)(1,954)
Net income (loss)$64,371 $2,858 $(13,032)$(4,843)
Income (loss) per share:
Net income (loss) per share of common stock - basic$0.49 $0.02 $(0.10)$(0.04)
Net income (loss) per share of common stock - diluted$ $(0.14)$(0.65)$(0.52)
Weighted-average shares used in computation:
Basic131,793,660 131,793,660 131,793,660 131,793,660 
Diluted173,276,528 142,776,465 156,180,669 142,776,465 
See accompanying notes to unaudited condensed consolidated financial statements.
7


Appgate, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
For the Three and Nine Months Ended September 30, 2023 and 2022
(in thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Net income (loss)$64,371 $2,858 $(13,032)$(4,843)
Other comprehensive loss:
Change in foreign currency translation(417)(312)(1,013)(473)
Other comprehensive loss(417)(312)(1,013)(473)
Comprehensive income (loss)$63,954 $2,546 $(14,045)$(5,316)
See accompanying notes to unaudited condensed consolidated financial statements.
8


Appgate, Inc.
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Deficit
For the Three and Nine Months Ended September 30, 2023 and 2022
(in thousands, except share information)
Preferred stockCommon stockAdditional
paid-in capital
Accumulated
other
comprehensive
loss
Accumulated deficitTotal
stockholders’ deficit
SharesAmountSharesAmount
Balance as of December 31, 2022
 $ 131,793,660 $132 $524,239 $(2,403)$(546,054)$(24,086)
Equity-based compensation— — — — 42 — — 42 
Net loss— — — — — — 7,695 7,695 
Other comprehensive income— — — — — (82)— (82)
Balance as of March 31, 2023  131,793,660 132 524,281 (2,485)(538,359)(16,431)
Net loss— — — — — — (85,098)(85,098)
Other comprehensive loss— — — — — (514)— (514)
Balance as of June 30, 2023  131,793,660 132 524,281 (2,999)(623,457)(102,043)
Net loss— — — — — — 64,371 64,371 
Other comprehensive loss— — — — — (417)— (417)
Balance as of September 30, 2023 $ 131,793,660 $132 $524,281 $(3,416)$(559,086)$(38,089)
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 loss— — — — — 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)
See accompanying notes to unaudited condensed consolidated financial statements.
9


Appgate, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2023 and 2022
(in thousands)
Nine Months Ended
September 30,
20232022
Cash flows from operating activities:
Net loss$(13,032)$(4,843)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization6,584 6,978 
Loss on abandonment of assets 1,658 
Equity-based compensation42 11,029 
Amortization of deferred contract acquisition costs3,167 4,661 
Change in fair value of debt purchase options(17,856) 
Change in fair value of embedded derivative liability(87,731)(68,917)
Non-cash interest expense7,819  
Loss on extinguishment of debt77,553  
Loss on issuance of debt6,431  
Amortization of debt issuance costs3,632 595 
Operating lease amortization(15)246 
Provision for allowance for current expected credit losses652 521 
Deferred income taxes25 531 
Changes in assets and liabilities:
Accounts receivable(5,211)(1,257)
Contract assets1,296 (191)
Prepaid and other current assets1,750 3,916 
Deferred contract acquisition costs(2,932)(4,632)
Accounts payable(357)(805)
Accrued expenses36 (1,938)
Deferred revenue564 925 
Net cash, cash equivalents and restricted cash used in operating activities
(17,583)(51,523)
Cash flows from investing activities:
Purchases of property and equipment(50)(514)
Net cash, cash equivalents and restricted cash used in investing activities(50)(514)
Cash flows from financing activities:
Proceeds from AF Convertible Notes5,500  
Proceeds from Revolving Credit Facility (Note 8)3,500 37,500 
Net cash, cash equivalents and restricted cash provided by financing activities
9,000 37,500 
Effect of foreign currency exchange rates on cash(174)(733)
Net decrease in cash, cash equivalents and restricted cash(8,807)(15,270)
Cash, cash equivalents and restricted cash at beginning of period13,004 27,463 
Cash, cash equivalents and restricted cash at end of period$4,197 $12,193 
Cash and cash equivalents$3,584 $10,720 
Restricted cash613 1,473 
Cash, cash equivalents and restricted cash at end of period$4,197 $12,193 
10


Nine Months Ended
September 30,
20232022
Supplemental cash flow information:
Cash paid for interest$ $3,503 
Interest exchanged for PIK Convertible Senior Notes (Note 8)$4,516 $ 
Cash paid for income taxes, net of refunds$922 $1,682 
See accompanying notes to unaudited condensed consolidated financial statements.
11

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, 2022 has been derived from our audited consolidated financial statements as of that date. 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, 2022 included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 31, 2023 (the “2022 Annual Report”). Results for the interim periods are not necessarily indicative of results to be expected for the entirety of 2023.

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 2022, for example, refer to our year ended December 31, 2022. 
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 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 of $3.6 million at September 30, 2023, a loss from operations of $21.8 million for the nine months ended September 30, 2023, and an accumulated deficit of $559.1 million at September 30, 2023. 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 are not sufficient to continue investing in growth, while at the same time meeting
12

Appgate, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

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 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 two reductions in force in July 2022 and February 2023 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 A&R Note Issuance Agreement (as defined in Note 8), the A&R Revolving Credit Agreement (as defined in Note 8) and the AF Note Issuance Agreement (as defined in Note 8). 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 Adopted Accounting Pronouncements
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 adopted this standard effective January 1, 2023 using the modified retrospective transition method. The adoption of this standard did not have a material impact to our unaudited condensed consolidated financial statements. 
Note 2. Income (Loss) per Common Share
Basic income (loss) per common share is computed by dividing net income (loss) (the numerator) by the weighted-average number of shares of common stock outstanding (the denominator) for the period. Diluted income (loss) 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.
For the three and nine months ended September 30, 2023, the Company’s potential dilutive shares consist of shares of Appgate’s common stock underlying the Convertible Senior Notes and the AF Convertible Notes that are convertible at any time at the option of the holders of the Convertible Senior Notes or AF Convertible Notes, respectively, prior to their maturity - see Note 8. For the three and nine months ended September 30, 2022, the Company’s potential dilutive shares consist of 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 8.

13

Appgate, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes the basic and diluted earnings per share calculations (in thousands, except share and per share amounts).

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Numerator:
Net income (loss) attributable to common stockholders - basic$64,371 $2,858 $(13,032)$(4,843)
Add: Effect of mark-to-market adjustment recognized during the period(64,648)(23,040)(87,731)(68,917)
Net income (loss) attributable to common stockholders - diluted$(277)$(20,182)$(100,763)$(73,760)
Denominator:
Weighted-average shares of common stock - basic131,793,660 131,793,660 131,793,660 131,793,660 
Effect from conversion of shares of common stock (Note 8)41,482,868 10,982,805 24,387,009 10,982,805 
Weighted-average shares of common stock - diluted173,276,528 142,776,465 156,180,669 142,776,465 
Basic income (loss) per share$0.49 $0.02 $(0.10)$(0.04)
Diluted income (loss) per share$ $(0.14)$(0.65)$(0.52)
Note 3. Revenue
Disaggregation of Revenue
The following table summarizes our revenue by category (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Subscription revenue:
Multi-year subscription term-based licenses$3,427 $2,825 $10,052 $9,836 
1-year subscription term-based licenses4,798 2,377 10,161 7,193 
Total subscription term-based licenses8,225 5,202 20,213 17,029 
Subscription SaaS2,033 2,139 6,158 6,577 
Support and maintenance800 963 2,624 2,861 
Total subscription revenue11,058 8,304 28,995 26,467 
Perpetual licenses69 710 559 1,217 
Services and other1,457 1,588 4,528 5,125 
Total$12,584 $10,602 $34,082 $32,809 
14

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,
2023202220232022
Revenues by country (a):
United States$7,523 $5,337 $18,503 $16,898 
Ecuador571 1,354 2,082 2,719 
Colombia675 1,217 2,514 4,126 
Other3,815 2,694 10,983 9,066 
Total$12,584 $10,602 $34,082 $32,809 
Revenues by main geography:
US&C$7,737 $5,528 $20,274 $18,515 
LATAM3,063 3,852 8,973 10,393 
EMEA1,095 713 3,056 2,238 
APAC689 509 1,779 1,663 
Total$12,584 $10,602 $34,082 $32,809 
(a) Only the United States, Ecuador and Colombia represented 10% or more of our total revenue in any of 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 any of 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, 2023 and 2022, we recognized revenue of $2.2 million and $3.1 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, 2023 and 2022, we recognized revenue of $5.1 million and $5.4 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 $9.3 million and $10.6 million as of September 30, 2023 and December 31, 2022, 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
15

Appgate, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

with financing. Examples include invoicing at the beginning of a subscription term for SaaS services that do not contain 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 revenue recognized ratably over the contract period.

Opening and closing contract balances were as follows (in thousands):

September 30, 2023December 31, 2022January 1, 2022
Accounts receivable, net$8,048 $4,231 $6,848 
Contract assets, current3,040 1,462 1,458 
Contract assets, noncurrent6,265 9,134 8,630 
Deferred revenue, current5,971 5,578 5,274 
Deferred revenue, noncurrent1,081 909 717 
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, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $30.3 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 EndedYear Ended
September 30,December 31,
20232022
Beginning balance$4,611 $4,305 
Capitalization of contract acquisition costs2,622 6,146 
Amortization of deferred contract acquisition costs(3,167)(5,951)
Impacts of foreign currency translation237 111 
Ending balance$4,303 $4,611 
Deferred contract acquisition costs, current$1,554 $1,508 
Deferred contract acquisition costs, noncurrent$2,749 $3,103 
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, 2023 or 2022.
Sales commissions accrued but not paid as of September 30, 2023 and December 31, 2022 totaled $1.0 million and $0.9 million, respectively, and are included within accrued expenses in the condensed consolidated balance sheets.
Our fulfillment costs are generally not significant.
16

Appgate, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Financial Instruments and Fair Value Measurements
Our financial instruments consist of cash equivalents, accounts receivable, accounts payable, accrued expenses, deferred revenue, our debt and related accrued interest, embedded derivative liability and call option liability. The fair value of cash equivalents, accounts receivable, accounts payable, accrued expenses, and deferred revenue approximate their carrying value because of the short-term nature of these instruments. The fair value of the Revolving Credit Facility approximates fair value as the Company has the ability to repay the outstanding principal at par value at any time.

The carrying value of our Convertible Senior Notes, net of issuance costs and discount, was $67.3 million and $73.8 million as of September 30, 2023 and December 31, 2022, respectively. The fair value of the Convertible Senior Notes was estimated as $61.8 million and $64.6 million as of September 30, 2023 and December 31, 2022, respectively. The fair value was estimated using a discounted cash flow analysis with a yield based on our credit rating. These inputs are considered Level 3 inputs within the fair value hierarchy.

The carrying value of our AF Convertible Notes, net of discount, was $3.0 million as of September 30, 2023. The fair value of the AF Convertible Notes was estimated as $4.8 million as of September 30, 2023. The fair value was estimated using a discounted cash flow analysis with a yield based on our credit rating. These inputs are considered Level 3 inputs within the fair value hierarchy.

Recurring Fair Value Measurements

Debt Purchase Options

The fair values of the call option liabilities were estimated using TF binomial lattice models as of September 30, 2023. The models leverage the notes value nodes from the TF lattice models to determine the value of the Convertible Senior Notes and AF Convertible Notes over the term to expiry of the debt purchase options. Therefore, we have classified the call option liabilities as Level 3 liabilities within the fair value hierarchy.

Embedded Derivative Liability

The fair value of the embedded derivative liability was estimated using a “with and without” approach as of September 30, 2023 and December 31, 2022:

“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.

Therefore, we have classified the embedded derivative liability as a Level 3 liability within the fair value hierarchy.


17

Appgate, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes fair value measurements by level at September 30, 2023 and December 31, 2022 for instruments measured at fair value on a recurring basis (in thousands):

Level 1Level 2Level 3Total
September 30, 2023
Financial liabilities:
Debt purchase options$ $ $3,582 $3,582 
Embedded derivative liability  10,810 10,810 
December 31, 2022
Financial liability:
Embedded derivative liability$ $ $19,700 $19,700 

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, 2023 and 2022 (in thousands):

Debt purchase optionsEmbedded derivative liabilityTotal liabilities
Balance at January 1, 2023$ $19,700 $19,700 
Gain included in earnings (19,634)(19,634)
Balance as of March 31, 2023 66 66 
Loss included in earnings12,075 75,392 87,467 
Balance as of June 30, 202312,075 75,458 87,533 
Gain included in earnings(8,493)(64,648)(73,141)
Balance as of September 30, 2023$3,582 $10,810 $14,392 
Balance at January 1, 2022$ $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 

Except as otherwise stated below, the losses/gains related to the debt purchase options and the embedded derivative liability included in the previous table are reported in our condensed consolidated statements of operations within change in fair value of debt purchase options and change in fair value of embedded derivative liability, respectively. The loss amounts for the three months ended June 30, 2023 include $12.5 million and $78.8 million related to the debt purchase option and embedded derivative liability, respectively, reported in our condensed consolidated statement of operations within loss on extinguishment of debt.

There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2023 or 2022. There were no other Level 3 liabilities outstanding during the three and nine months ended September 30, 2023 or 2022.
The significant unobservable inputs used in the fair value measurement of our debt purchase option and embedded derivative liability underlying the Convertible Senior Notes at September 30, 2023 and December 31, 2022 are a volatility rate of 94.5% and 72.5%, respectively, and a bond yield of 20.56% and 21.78%, 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 4.4 years and 1.1 years at September 30, 2023 and December 31, 2022, 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
18

Appgate, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

value of the instrument, while a change in the bond yield will generate a directionally opposite change in the overall value of the instrument.
The significant unobservable inputs used in the fair value measurement of our debt purchase option underlying the AF Convertible Notes at September 30, 2023 are a volatility rate of 94.5% and a bond yield of 24.37%. The expected volatility of our equity is estimated based on the historical volatility of our common stock and the remaining term of the AF Convertible Notes of 4.6 years at September 30, 2023. 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.
Note 5. Balance Sheet Components
Accounts Receivable and Allowance for Current Expected Credit Losses
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 and are financial assets analyzed by the Company under the expected credit loss model. To measure expected credit losses, accounts receivables are grouped based on days past due (i.e., delinquency status), while considering that the expected credit loss rate is likely to increase as receivables move to older aging buckets. The Company uses the following aging categories to estimate the risk of delinquency status: (i) 0 days past due; (ii) 1-30 days past due; (iii) 31-60 days past due; (iv) 61-90 days past due; (v) 91-180 days past due; (vi) 181-360 days past due; and (vii) over 360 days past due.

The credit losses of the Company’s accounts receivable have been low historically and most balances are collected within one year. Therefore, the Company determined that the expected loss rates should be calculated using the historical loss rates adjusted by macroeconomic factors. The historical rates are calculated for each of the aging categories used for pooling trade receivables. To determine the collected portion of each bucket, the collection time of each trade receivable is identified, to estimate the proportion of outstanding balances per aging bucket that ultimately will not be collected. This is used to determine the expectation of losses based on the history of uncollected trade receivables once the specific past due period is surpassed.

The historical rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of customers to settle the receivables by applying a forward-looking macroeconomic factor. Specific reserves are established for certain customers for which collection is doubtful.

The activity in the allowance for current expected credit losses was as follows (in thousands):
Nine Months EndedYear Ended
September 30,December 31,
20232022
Beginning balance$52 $163 
Provision for allowance for current expected credit losses652 857 
Write offs(601)(952)
Impacts of foreign currency translation4 (16)
Ending balance$107 $52 

The Company does not have a delinquency threshold for writing-off accounts receivable. The Company has a formal process for the review and approval of write offs. Impairment losses on trade receivables, if any, would be presented as net impairment losses within cost of revenue, exclusive of amortization in the unaudited condensed consolidated statements of operations. Subsequent recoveries of amounts previously written off, when applicable, are credited against the allowance for expected current credit losses within accounts receivable, net on the unaudited condensed consolidated balance sheets.

19

Appgate, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Prepaid and Other Current Assets
Our prepaid and other current assets consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):
September 30,
2023
December 31,
2022
Prepaid expenses$1,263 $2,879 
Withholding taxes385 638 
Total1,648 3,517 
Property and Equipment, Net
Our property and equipment, net consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):
September 30,
2023
December 31,
2022
Leasehold improvements$3,862 $3,912 
Equipment and fixtures4,184 4,078 
8,046 7,990 
Less: accumulated depreciation and amortization(6,882)(6,373)
Property and equipment, net$1,164 $1,617 
During the three and nine months ended September 30, 2023, we recognized depreciation and amortization expense on property and equipment of $0.2 million and $0.6 million, respectively. 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.
Accrued Expenses
Our accrued expenses consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):

September 30,
2023
December 31,
2022
Accrued compensation and benefits$5,188 $4,483 
Accrued interest 3,506 
Accrued services1,031 1,092 
Accrued income taxes116 350 
Accrued other taxes903 767 
Other139 42 
Total$7,377 $10,240 
Note 6. Goodwill and Intangible Assets
Goodwill
The carrying amount of goodwill was $71.6 million as of September 30, 2023 and December 31, 2022.

20

Appgate, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

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 Technologies, Inc. (“Cyxtera”) when it acquired the entities that formed our wholly-owned subsidiary, Appgate Cybersecurity, Inc. (f/k/a Cyxtera Cybersecurity, Inc. d/b/a AppGate, “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, 2023 and December 31, 2022 (in thousands):
September 30, 2023December 31, 2022Weighted
average
remaining useful life
(Years)
GrossAccumulated
amortization
NetGrossAccumulated
amortization
Net
Customer relationships$30,157 $(21,583)$8,574 $30,157 $(19,064)$11,093 3
Trademarks and tradenames
17,932 (9,733)8,199 17,932 (8,826)9,106 7.3
Developed technology34,279 (30,559)3,720 34,279 (28,029)6,250 1.1
Total$82,368 $(61,875)$20,493 $82,368 $(55,919)$26,449 
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 change in the carrying amount of each major class of intangible assets during each of the three and nine months ended September 30, 2023 and 2022 was amortization, and to a lesser extent, foreign currency translation.
During the three and nine months ended September 30, 2023, we recorded amortization expense on intangible assets of $2.0 million and $6.0 million, respectively. 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. 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 2023$1,985 
20247,377 
20254,224 
20262,297 
20271,140 
Thereafter3,470 
Total$20,493 
Impairment Tests
We perform annual impairment tests of goodwill on October 1st of each year or whenever an indicator of impairment exists. We have determined that the Company has one reporting unit, which is at the operating segment level and the entire goodwill is allocated to it. The carrying value of the reporting unit was negative at period end. No impairment was recorded during the nine months ended September 30, 2023 or 2022.
21

Appgate, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 7. 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.
Operating Leases
The following is a summary of our operating lease costs for the three and nine months ended September 30, 2023 and 2022 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Operating lease cost$136 $218 $471 $492 
Short-term lease cost44 94 141 123 
Variable lease cost21 19 58 23 
Total operating lease costs$201 $331 $670 $638 
The following table presents information about leases on our condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022 (in thousands):
September 30,
2023
December 31,
2022
Operating lease right-of-use assets$1,297 $1,679 
Operating lease liabilities, current$586 $619 
Operating lease liabilities, noncurrent$886 $1,261 
At September 30, 2023, the weighted-average remaining lease term and weighted-average discount rate for operating leases were 2.9 years and 6.68%, respectively. At December 31, 2022, the weighted-average remaining lease term and weighted-average discount rate for operating leases were 3.5 years and 6.52%, respectively.
Cash paid for amounts included in the measurement of operating lease liabilities was $0.1 million and $0.7 million for the nine months ended September 30, 2023 and 2022, respectively.
There were no right-of-use assets obtained in exchange for lease obligations during the nine months ended September 30, 2023 or 2022.
Maturities of operating lease liabilities consisted of the following as of September 30, 2023 (in thousands):
For the years ending:
Remaining 2023$138 
2024546 
2025519 
2026354 
202727 
Thereafter 
Total future minimum lease payments1,584 
Less: Imputed interest(112)
Total
$1,472 
22

Appgate, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 8. Debt
Our debt consists of the following as of September 30, 2023 and December 31, 2022 (in thousands):
September 30,
2023
December 31, 2022
Convertible Senior Notes
Principal amount$79,516 $75,000 
Unamortized debt issuance costs and discount(12,183)(1,231)
Net carrying amount67,333 73,769 
AF Convertible Notes
Principal amount5,500  
Unamortized discount(2,462) 
Net carrying amount3,038  
Revolving Credit Facility
Principal amount50,000 46,500 
Unamortized debt issuance costs(46) 
Net carrying amount49,954 46,500 
Total debt$120,325 $120,269 
Interest expense, net was as follows (in thousands):

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Interest expense on Convertible Senior Notes$1,672 $938 $4,080 $2,813 
Interest expense on AF Convertible Notes73  73  
Interest expense on Revolving Credit Facility1,251 715 3,666 924 
Amortization of debt issuance costs and discount2,650 163 3,632 595 
Other, net(40)13 (83)(29)
Total interest expense, net$5,606 $1,829 $11,368 $4,303 
Interest accrued but not paid as of September 30, 2023 totaled $6.8 million and is reported as accrued interest on long-term debt in the condensed consolidated balance sheet. Interest accrued but not paid as of December 31, 2022 totaled $3.5 million and is included within accrued expenses in the condensed consolidated balance sheet.

Convertible Senior Notes

On February 9, 2021, Legacy Appgate issued $50.0 million in aggregate principal amount of convertible senior notes due 2024 (the “Initial Convertible Senior Notes”) to various funds managed by Magnetar Financial LLC (“Magnetar”). In connection with the closing of the merger of Newtown Merger Sub, Corp. (“Merger Sub”) with and into Legacy Appgate, with Legacy Appgate surviving and becoming a wholly owned subsidiary of Appgate (the “Merger”), Legacy Appgate issued an additional $25.0 million in aggregate principal amount of convertible senior notes due 2024 to various funds managed by Magnetar (the “Additional Convertible Senior Notes” and together with the Initial Convertible Senior Notes and any PIK Convertible Senior Notes (as defined below), the “Convertible Senior Notes”). The Convertible Senior Notes were originally subject to the terms and conditions of a note issuance agreement (the “Original Note Issuance Agreement”) among Legacy Appgate, Legacy Appgate’s wholly owned domestic subsidiaries, and Magnetar, in its capacity as the representative (the “Representative”) of the holders of the Convertible Senior Notes (the “Noteholders”), and a note purchase agreement among Legacy Appgate and the Noteholders (the “Original Note Purchase Agreement”). Capitalized terms not otherwise defined in this Note 8 have the meanings ascribed to them in the A&R Note Issuance Agreement (as defined below).
23

Appgate, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

We received net proceeds of $72.8 million from the issuance of the Initial Convertible Senior Notes and Additional 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.
On February 1, 2023 and August 1, 2023, Legacy Appgate issued approximately $2.1 million and $2.5 million, respectively, in PIK Convertible Senior Notes each with respect to a single interest payment date.

Supplemental Agreement
On October 12, 2021, in connection with the closing of the Merger, Appgate (which at the time was Newtown Lane Marketing, Incorporated (“Newtown Lane”)) entered into a supplemental agreement (the “Supplemental Agreement”) with Legacy Appgate and Magnetar, as Representative of the Noteholders, pursuant to which Appgate, among other things, unconditionally guaranteed all of Legacy Appgate’s Obligations under the Original 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 Original Note Issuance Agreement.
Amended and Restated Note Issuance Agreement; Amended and Restated Note Purchase Agreement; Amendment to Registration Rights Agreement; Subsequent Amendment to Registration Rights Agreement

On June 9, 2023, Appgate, Legacy Appgate, Legacy Appgate’s domestic subsidiaries, Easy Solutions Japan, GK (“ES Japan”), Easy Solutions S.A.S. (“ES Colombia” and, collectively with the domestic subsidiaries, Appgate and ES Japan, the “Note Guarantors”), Magnetar, and U.S. Bank Trust Company, National Association, as collateral agent (in such capacity, the “Collateral Agent”), entered into an amended and restated note issuance agreement (the “A&R Note Issuance Agreement”), pursuant to which the Original Note Issuance Agreement was amended and restated to (i) secure the obligations under the Convertible Senior Notes and the other related agreements with a first priority security interest in substantially all assets of Legacy Appgate and the Note Guarantors, (ii) extend the maturity date of the Convertible Senior Notes from February 9, 2024 to February 9, 2026, or, at Magnetar’s election, February 9, 2028 (in each case, unless earlier converted, redeemed, or repurchased), (iii) modify the financial covenant contained in the Original Note Issuance Agreement to provide that Appgate maintain liquidity of not less than $5.0 million as of the last day of each fiscal quarter (as further described below), (iv) increase the interest payable semi-annually under the Convertible Senior Notes from an annual rate of 5.00% if paid in cash or 5.50% if paid in kind to an annual rate of 8.00% if paid in cash or 8.50% if paid in kind, with such increase effective as of June 9, 2023, and (v) increase the conversion rate for each $1,000 principal amount of Convertible Senior Notes from 146.4374 shares of common stock of Appgate to a conversion rate of 527.17464 shares of common stock of Appgate; provided, that, in the event that Legacy Appgate fails to achieve Bookings (as defined in the A&R Note Issuance Agreement) of at least $15.0 million during the fiscal year ending December 31, 2023, the conversion rate will increase to 585.74960 shares of common stock of Appgate for each $1,000 principal amount of Notes (such increased number of shares of common stock into which the Notes may be converted, the “Additional Conversion Shares”). The Convertible Senior Notes are senior obligations of Legacy Appgate and unconditionally guaranteed, jointly and severally, by each of the Note Guarantors. The A&R Note Issuance Agreement includes certain affirmative and financial covenants we are required to satisfy (as further described below).

Additionally on June 9, 2023, Appgate, Legacy Appgate, and the lenders thereunder (the “Lenders”) entered into an amended and restated note purchase agreement (the “A&R Note Purchase Agreement”), pursuant to which the Original Note Purchase Agreement was amended and restated to (i) provide for the purchase by the Lenders of up to $15.0 million aggregate principal amount of additional Convertible Senior Notes in one or more subsequent closings on or prior to June 9, 2025 and (ii) amend all previously issued Convertible Senior Notes to reflect terms consistent with the A&R Note Issuance Agreement. Except for the foregoing, the terms of the A&R Note Purchase Agreement are substantially the same as the terms of the Original Note Purchase Agreement.

Pursuant to ASC 470-50-40-2, the restructuring of the Note Purchase Agreement into the A&R Note Purchase Agreement resulted in a debt extinguishment, following which we recognized a loss of $77.6 million.

Concurrently with the execution of the A&R Note Issuance Agreement, Appgate, Legacy Appgate, the Representative and the Noteholders entered into an amendment to registration rights agreement (the “Amendment to Registration Rights Agreement”), pursuant to which, Appgate would be obligated to file a registration statement by no later than October 31, 2023 to register the resale of certain securities of Appgate (including Appgate’s common stock issuable
24

Appgate, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

upon conversion of the Convertible Senior Notes) held by such Noteholders. On September 30, 2023, Legacy Appgate, the Company, the Representative and the Noteholders entered into an amendment to registration rights agreement (the “Subsequent Amendment to Registration Rights Agreement”), pursuant to which, the date by which Appgate was obligated to file a registration statement to register the resale of certain securities of Appgate (including Appgate’s common stock issuable upon conversion of the Convertible Senior Notes) held by such Noteholders, was extended until December 31, 2023.

Other key terms of the Convertible Senior Notes, as of September 30, 2023, were as follows:

Interest. Interest on the Convertible Senior Notes is payable at Legacy Appgate’s election in cash, in kind (“PIK Interest”), or in a combination of cash and PIK Interest. The Convertible Senior Notes bear interest at the annual rate of 8.00% with respect to interest payments made in cash and 8.50% with respect to PIK Interest, with interest payable semi-annually on February 1 and August 1 of each year. Additional notes (“PIK Convertible Senior Notes”) to be issued for PIK Interest will have the same terms and conditions as the Convertible Senior Notes.

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 our common stock, subject to and in accordance with the terms of the A&R Note Issuance Agreement, including the applicable conversion rate thereunder.
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 our common stock, subject to and in accordance with the terms of the A&R Note Issuance Agreement, including the applicable conversion rate thereunder.

Ranking; Guarantees; Conversion Obligations. The Convertible Senior Notes are senior obligations of Legacy Appgate and unconditionally guaranteed, jointly and severally, by each of the Note Guarantors. 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, 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 A&R Note Issuance Agreement.

Repurchase Upon a Change of Control. Upon the occurrence of a Change of Control, 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 110% of the principal amount thereof, plus accrued and unpaid interest thereon, subject to and in accordance with the terms of the A&R Note Issuance Agreement.

Covenants. The A&R 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 A&R Note Issuance Agreement also contains a financial covenant that requires that we maintain liquidity of not less than $5.0 million as of the last day of each fiscal quarter. As of September 30, 2023, we had $3.6 million in cash and cash equivalents, and on September 30, 2023, the Representative and the Noteholders waived our noncompliance with the above-mentioned liquidity financial covenant with respect to the last day of September 2023. The foregoing restrictive covenants are subject to a number of important exceptions and qualifications, as set forth in the A&R Note Issuance Agreement.
Events of Default. The A&R 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 A&R Note Issuance Agreement; (iii) defaults under certain other indebtedness; and (iv) certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing
25

Appgate, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

under the A&R 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 A&R 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.
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 or a Change of Control (other than the Merger) and (iii) a default interest rate increase of 1.5% applicable upon the occurrence of an event of default. Appgate evaluated these embedded redemption features under the guidance of ASC 815, Derivatives and Hedging, 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 41,918,634 shares of our common stock upon conversion of the Convertible Senior Notes at any time (the “conversion feature”). The embedded derivative li