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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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| 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
OR
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| 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)
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| Delaware | 20-3547231 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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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
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
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Unaudited Condensed Consolidated Financial Statements: | | Page |
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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.
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
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.
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
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
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 | |
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
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 |