APPGATE, INC. The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our results of operations, financial condition, liquidity and cash flows for the periods presented. This discussion should be read in conjunction with our audited consolidated financial statements and related notes contained elsewhere in this Amendment. This discussion contains forward-looking statements that are based upon our expectations, including with respect to our future revenues and operating results. Our actual results may differ materially from those anticipated in such forward-looking statements as a result of various factors, including those set forth under "Item 1A, Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements" contained in our Original 10-K and in this Amendment. These forward-looking statements reflect our views only as of the date they were made, which was the date of the filing of the Original 10-K. We operate on a calendar year basis. Thus, references to 2021, for example, refer toAppgate's year endedDecember 31, 2021 . Capitalized terms used in this section and not defined herein have the respective meanings given to such terms elsewhere in this Amendment or the Original 10-K. Numbers and percentages presented throughout this discussion and analysis may not always add up to equivalent totals and/or to 100% due to rounding.
Restatement of Previously Issued Financial Statements
This "Management's Discussion and Analysis of Financial Condition and Results of Operations" has been amended and restated to give effect to the Restatement, as more fully described in Note 1 - Restatement of Previously Issued Financial Statements to our accompanying audited consolidated financial statements contained elsewhere in this Amendment. For further detail regarding the Restatement, see "Explanatory Note" and Part II, Item 9A, "Controls and Procedures" contained in this Amendment.
Overview of Our Business
We believe we are defining a new category ofZero Trust access for enterprises and governments. OurZero Trust platform is designed to protect against increasingly damaging breaches through innovative, identity-centric, context-aware solutions. Our pure-play focus onZero Trust has enabled us to deliver the highest ranked current Zero Trust Network Access offering as determined by the Forrester New Wave™: Zero Trust Network Access, Q3 2021. This newZero Trust paradigm is needed today because enterprises are undergoing digital transformation as they seek to automate operations, generate new revenue streams, transition business models and deliver a seamless customer experience. Simultaneously, the number and sophistication of cyberattacks have increased dramatically, as has their costs and frequency. This combination of more vulnerable networks and more malicious activity has created a cybersecurity crisis, changing the threat landscape organizations face. As a result, enterprises require security access solutions that proactively ensure the right user has authorized access to the right resources at the right time. We believe that ourZero Trust solutions secure an enterprise's exponentially increased attack surface, which occurs as a result of their digital transformation journey. We also offer digital threat protection and risk-based authentication tools to identify and eliminate attacks before they occur, across social media, phishing attacks, bogus websites, and malicious mobile apps. We sell our solutions primarily through a recurring revenue license model or subscription, and we employ a 'land and expand' strategy to generate incremental revenue through the addition of new users and the sale of additional products. Our annual recurring revenue ("ARR") was$31.1 million and$22.5 million atDecember 31, 2021 and 2020, respectively. We believe the success of our strategy is validated by our strong dollar-based net retention rates, which describe our ability to retain and grow the ARR generated from our existing subscription customers. Our dollar-based net retention rates were 114% and 105% atDecember 31, 2021 and 2020, respectively. Our number of customers generating over$100,000 ARR increased 50% fromDecember 31, 2020 toDecember 31, 2021 , driven by elevated C-suite and board level dialogue and customer prioritization of aZero Trust posture. See "- Key Business Metrics" for additional information regarding ARR and dollar-based net retention rate. We have achieved significant growth in recent periods, with our revenue increasing from$33.2 million for 2020 to$43.0 million for 2021, an increase of 30%. We continue to invest in growing our business and, as a result, we incurred net losses from continuing operations before income taxes of$136.4 million and$52.5 million for 2021 and 2020, respectively. 54 --------------------------------------------------------------------------------
Factors Affecting Our Business
Merger with
OnOctober 12, 2021 , Legacy Appgate successfully completed its merger with a direct, wholly owned subsidiary ofNewtown Lane . Upon closing of the Merger,Newtown Lane changed its name toAppgate, Inc. , and our common stock is now quoted on the OTC Markets under the symbol "APGT." The Merger has been accounted for as a reverse capitalization, and the historical financial statements contained in this Amendment are those of: (1) except for the equity, which was retroactively restated following applicable accounting guidance, Legacy Appgate with respect to all periods prior to consummation of the Merger, and (2) those of us, inclusive ofNewtown Lane for the period subsequent to the Merger. We incurred$3.1 million in transaction costs during 2021 in connection with the Merger.
Risks and Uncertainties due to COVID-19
The COVID-19 pandemic continues to evolve and disrupt normal activities in many segments of theU.S. and global economies even as COVID-19 vaccines have been and continue to be administered. Much uncertainty still surrounds the pandemic, including new variants of COVID-19, its duration and ultimate overall impact on our operations. Our 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 2020, management took measures during such periods to minimize the risks from the pandemic. Those measures were aimed at safeguarding us, and the health, safety and wellbeing of our employees and customers.
Public Company Costs
Following the consummation of the Merger, we became a public company, which will require hiring of additional staff and implementation of processes and procedures to address public company regulatory requirements and customary practices. We expect to incur substantial additional annual expenses for, among other things, directors' and officers' liability insurance, director fees and additional internal and external costs for investor relations, accounting, audit, legal, corporate secretary and other functions.
Formation and Cyxtera Spin-Off
Prior toDecember 31, 2019 , Legacy Appgate was wholly owned by Cyxtera. OnDecember 31, 2019 , Cyxtera consummated several transactions (the "Cyxtera Spin-Off"), following which Legacy Appgate became a stand-alone entity. The transactions separated Cyxtera's data center business from Legacy Appgate's cybersecurity business. Upon consummation of the Cyxtera Spin-Off,Legacy Appgate and Cyxtera Management, Inc. , a wholly-owned subsidiary of Cyxtera (the "Management Company ") entered into a transition services agreement (the "Transition Services Agreement"), pursuant to which theManagement Company provided certain transition services to Legacy Appgate, and Legacy Appgate provided certain transition services to theManagement Company . The term under the Transition Services Agreement commenced onJanuary 1, 2020 and ended onJune 30, 2021 . Substantially all of the obligations under the Transition Services Agreement ceased onDecember 31, 2020 .
During 2021 and 2020, the
During 2021 and 2020, Legacy Appgate charged theManagement Company $0.1 million and$0.3 million , respectively, for services provided to theManagement Company and its affiliates by Legacy Appgate under the Transition Services Agreement. Income for these services is included in other expense, net in our consolidated statements of operations. OnFebruary 8, 2021 , Legacy Appgate made a payment of$1.0 million to Cyxtera as settlement in full of trade balances with Cyxtera and its subsidiaries and other amounts due to / from under the Intercompany Master Services Agreement (as defined below) and the Transition Services Agreement, which trade balances and other amounts totaled$2.6 million . Because theManagement Company was an affiliate under common control with Legacy Appgate at the time of repayment, the settlement of these amounts was recognized as a capital contribution of$1.6 million . 55
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Promissory Notes
OnMarch 31, 2019 , Legacy Appgate issued promissory notes to each of Cyxtera and theManagement Company (together, the "Promissory Notes"), which had a combined initial aggregate principal amount of$95.2 million and provided for additional borrowings during the term of the Promissory Notes for additional amounts not to exceed approximately$52.5 million in the aggregate. Interest accrued on the unpaid principal balance of the Promissory Notes at a rate per annum equal to 3% and was payable upon the maturity of the Promissory Notes. Each Promissory Note had an initial maturity date ofMarch 30, 2020 , which was extended untilMarch 30, 2021 by amendments entered into effective as ofMarch 30, 2020 .
The aggregate outstanding principal and interest under the Promissory Notes was
OnFebruary 8, 2021 , Legacy Appgate repaid Cyxtera$20.6 million , representing the entirety of the then outstanding principal and interest under the Promissory Note issued to Cyxtera, and Legacy Appgate made a partial repayment of$99.0 million to theManagement Company on the then outstanding principal and interest of$133.6 million under the Promissory Note issued to theManagement Company . On that same date, theManagement Company issued Legacy Appgate a payoff letter, extinguishing the balance remaining unpaid following such repayment. Because Cyxtera was Legacy Appgate's direct parent at the time of issuance of the Promissory Notes and an affiliate under common control with Legacy Appgate at the time of repayment, Legacy Appgate accounted for the note extinguishment of$34.6 million as a capital contribution in 2021.
Sale of Brainspace
OnSeptember 30, 2020 , Legacy Appgate adopted a plan for the sale ofBrainspace Corporation ("Brainspace"), a formerly wholly owned subsidiary of LegacyAppgate , which met the criteria for discontinued operations under ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations - see Note 6 to our consolidated financial statements for discontinued operations disclosures included elsewhere in this Amendment. OnDecember 17, 2020 , LegacyAppgate entered into a securities purchase agreement with respect to the sale of 100% of the outstanding equity interests of Brainspace for cash consideration of$125.0 million , and the sale transaction closed onJanuary 20, 2021 . Brainspace offered a comprehensive and advanced data analytics platform for investigations, eDiscovery, intelligence mining, and compliance. Unless otherwise stated, all discussion of Legacy Appgate's results of operations included in this discussion and analysis focus on continuing operations and exclude the discontinued Brainspace operations.
Key Business Metrics
Our management reviews a number of key performance indicators, each as described below, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions.
Annual Recurring Revenue
ARR is a performance indicator that management believes provides more visibility
into the growth of our revenue generated by recurring business. Our management
believes ARR is a key metric to measure our business because it is driven by our
ability to acquire new subscription customers and to maintain and expand our
relationship with existing subscription customers. ARR also mitigates
fluctuations due to seasonality, contract term, sales mix, and revenue
recognition timing resulting from revenue recognition methodologies under GAAP.
We define ARR as the annualized value of SaaS, subscription, and term-based
license and maintenance contracts from our recurring software products in effect
at the end of a given period. ARR should be viewed independently of revenue and
deferred revenue as it is an operating measure and is not intended to be
combined with or to replace GAAP revenue or deferred revenue, as they can be
impacted by contract start and end dates and renewal rates. ARR is not intended
to be a replacement or forecast of revenue or deferred revenue.
The table below sets forth our ARR as of the end of the years indicated below
(in thousands):
2021 2020
ARR $ 31,054 $ 22,488
Change $ $ 8,566
Change % 38 %
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Total Customers and Number of Customers with ARR above
Our management believes that our ability to increase our number of customers is an indicator of our market penetration, the growth of our business, and our potential future business opportunities. Over time, larger customers have constituted a greater share of our total revenue, which has contributed to an increase in ARR. Our management believes there are significant upsell and cross-sell opportunities within our customer base by expanding the number of use cases. Historically, we have consistently increased our number of customers and customers with ARR above$100,000 and expect this trend to continue as a result of the growing demand for our cybersecurity solutions. Our management defines a customer as a distinct organization that has entered into a distinct agreement to access our software products for which the term has not ended or with which we are negotiating a renewal contract or the purchase of our professional services.
The below table sets forth our total customers and customers with ARR above
2021 2020
Total customers 652 615
Customers with ARR above
We stopped offering our Compliance Sheriff product which accounted for less than 5% of our total revenue for 2021. Total Compliance Sheriff-only customers included in our total customer count as ofDecember 31, 2020 was 76. As a result, our increase in customer count fromDecember 31, 2020 toDecember 31, 2021 reflected in this Amendment is not indicative of our customer growth given our one-time voluntary sunsetting of our Compliance Sheriff product and its respective customers.
Dollar-Based Net Retention Rate
Our management believes that our ability to retain and grow the ARR generated from our existing subscription customers is an indicator of the long-term value of our subscription customer relationships and future business opportunities. We track our performance in this area by measuring our dollar-based net retention rate, which reflects customer renewals, expansion, contraction, and customer attrition within our ARR base. We calculate dollar-based net retention rate by dividing the numerator by the denominator as set forth below:
• Denominator: As of the end of a reporting period, ARR as of the last day of the comparable reporting period in the prior year.
• Numerator: ARR for that same cohort of customers as of the end of the reporting period in the current year, including any expansion and net of any contraction and customer attrition over the trailing 12 months, excluding ARR from new subscription customers in the current period.
Our dollar-based net retention rate was 114% and 105% at
Key Components of Results of Operations
Revenue
We recognize revenue under ASC 606, Revenue from Contracts with Customers ("ASC
606"). Under ASC 606, we recognize revenue when our customers obtain control of
goods or services in an amount that reflects the consideration that we expect to
receive in exchange for those goods or services.
We primarily sell our software through on-premise term-based license agreements,
perpetual license agreements and SaaS subscriptions, which allow our customers
to use our SaaS services without taking possession of the software. Our products
offer substantially the same functionality whether our customers receive them
through a perpetual license, a term-based license or a SaaS arrangement. Our
agreements with customers for software licenses may include maintenance
contracts and may also include professional services contracts. Maintenance
revenues consist of fees for providing unspecified software updates and
technical support for our products for a specified term, which is typically one
to three years. We offer a portfolio of professional services and extended
support contract options to assist our customers with integration, optimization,
training and ongoing advanced technical support. We also generate revenue from
threat advisory services,
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--------------------------------------------------------------------------------including penetration testing, application assessments, vulnerability analysis, reverse engineering, architecture review and source code review.
Subscription. Our term-based license arrangements that do not contain variable consideration include both upfront revenue recognition when the distinct license is made available to the customer as well as revenue recognized ratably over the contract period for support and maintenance based on the stand-ready nature of these elements. Revenue on our SaaS arrangements that do not contain variable consideration, is recognized ratably over the contract period as we satisfy the performance obligation, beginning on the date the service is made available to our customers. Subscription revenue represented approximately 80% and 71% of our revenue for 2021 and 2020, respectively. We expect that a majority of our revenue will continue to be from subscriptions for the foreseeable future, and we expect that subscription revenue as a percentage of total revenue will increase over time. Changes in period-over-period subscription revenue growth are primarily impacted by the following factors:
• the type of new and renewed subscriptions (i.e., term-based or SaaS); and
• the duration of new and renewed term-based subscriptions.
While the number of new and increased subscriptions during a period impacts our subscription revenue growth, the type and duration of those subscriptions have a significantly greater impact on the amount and timing of revenue recognized in a period. Subscription revenue from the software license components of term-based licenses is generally recognized at the beginning of the subscription term, while subscription revenue from SaaS and support and maintenance is generally recognized ratably over the subscription term. As a result, our revenue may fluctuate due to the timing and type of the software license components of term-based licensing transactions. In addition, keeping other factors constant, when the percentage of subscription term-based licenses to total subscriptions sold or renewed in a period increases relative to the prior period, revenue growth will generally increase. Conversely, when the percentage of subscription SaaS and support and maintenance to total subscriptions sold or renewed in a period increases, revenue growth will generally decrease, as compared to a prior period. Additionally, a multi-year subscription term-based license will generally result in greater revenue recognition up front relative to a one-year subscription term-based license. Therefore, keeping other factors constant, revenue growth will generally also trend higher in a period where the percentage of multi-year subscription term-based licenses to total subscription term-based licenses increases. Perpetual licenses. Our perpetual license arrangements generally include both upfront revenue recognition when the distinct license is made available to the customer as well as revenue recognized ratably over the contract period for support and maintenance based on the stand-ready nature of these elements. Revenue related to support and maintenance is included as part of subscription revenue.
For 2021 and 2020, approximately 5% and 8%, respectively, of our revenue was from perpetual licenses.
Services and other. Our services-related performance obligations predominantly relate to the provision of consulting and threat advisory services, and to a lesser extent, training and software installation. Software installation services are distinct from subscriptions and do not result in significant customization of the software. Our services are generally priced on a time and materials basis, which is generally invoiced monthly and for which revenue is recognized as the services are performed. Revenue from our training services and sponsorship fees is recognized on the date the services are complete. Over time, we expect services revenue to remain relatively stable as a percentage of total revenue.
For 2021 and 2020, approximately 15% and 21%, respectively, of our revenue was from services and other.
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Concentrations. The following table summarizes revenue by country and main
geography in which we operate, including in the United States and Canada
("US&C"), Latin America ("LATAM"), Europe , the Middle East and Africa ("EMEA"),
and Asia Pacific ("APAC"), based on the billing address of customers (including,
for the avoidance of doubt, resellers and managed service providers) who have
contracted with us (in thousands).
(As Restated) (As Restated)
2021 2020
Revenues by country (a):
United States $ 20,568 $ 15,463
Colombia 6,735 3,521
Ecuador 3,332 3,765
Other 12,398 10,406
Total $ 43,033 $ 33,155
Revenues by main geography:
US&C $ 22,694 $ 16,568
LATAM 15,142 12,064
EMEA 2,906 2,790
APAC 2,291 1,733
Total $ 43,033 $ 33,155 (a) Only
No single customer (including, for the avoidance of doubt, resellers and managed service providers) accounted for 10% or more of our total revenue in either period presented.
Cost of Revenue
Cost of revenue consists primarily of employee compensation costs for employees associated with supporting our licensing arrangements and service arrangements, certain third-party expenses and the amortization of developed technology assets. Employee compensation and related costs include cash compensation and benefits to employees, equity-based compensation, costs of third-party contractors and associated overhead costs. Third-party expenses consist of cloud infrastructure costs, other expenses directly associated with our customer support, including in limited instances equipment purchased for resale. We expect cost of revenue to increase in absolute dollars.
Gross Profit and Gross Margin
Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, have been and will continue to be affected by various factors, including the timing of our acquisition of new customers and renewals of and follow-on sales to existing customers, the average sales price of our services, mix of services offered in our solutions, including new product introductions, the extent to which we expand our customer support and operations and the extent to which we can increase the efficiency of our technology and infrastructure through technological improvements. We currently expect gross profit to increase in absolute dollars and gross margin to increase slightly over the long term, although our gross profit and gross margin could fluctuate from period to period depending on the interplay of all the above factors.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development,
and general and administrative expenses. Personnel costs are the most
significant component of operating expenses and consist of salaries, benefits,
bonuses, equity-based compensation expense and, with respect to sales and
marketing expenses, sales commissions that are recognized as expenses. Operating
expenses also include overhead costs for facilities, IT, depreciation expense
and amortization expense.
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--------------------------------------------------------------------------------Sales and Marketing
Sales and marketing expenses consist primarily of employee compensation and related expenses, including salaries, bonuses and benefits for our sales and marketing employees, sales commissions that are recognized as expenses over the period of benefit, equity-based compensation expense, marketing and channel programs, travel and entertainment expenses, expenses for conferences and events and allocated overhead costs. We capitalize our sales commissions and associated payroll taxes and recognize them as expenses over the estimated period of benefit. The amount recognized in our sales and marketing expenses reflects the amortization of cost previously deferred as attributable to each period presented in our consolidated financial statements, as described in Note 2 - Business and Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Amendment. Advertising expenses are charged to sales and marketing expense in the consolidated statements of operations as incurred. We intend to continue to significantly invest in our sales and marketing organization to drive additional revenue, further penetrate the market and expand our global customer base. As a result, we expect our sales and marketing expenses to continue to increase in absolute dollars and to be our largest operating expense category for the foreseeable future. In particular, we plan to continue to invest in growing and training our sales force, broadening our brand awareness and expanding and deepening our channel partner relationships. However, we currently expect sales and marketing expenses to decrease as a percentage of our revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses.
Research and Development
Research and development costs to develop software to be sold, leased or marketed are expensed as incurred up to the point of technological feasibility for the related software product. We have not capitalized development costs for software to be sold, leased or marketed to date, as the software development process is essentially completed concurrent with the establishment of technological feasibility. As such, these costs are expensed as incurred and recognized in research and development costs in the consolidated statements of operations. Software developed for internal use, with no substantive plans to market such software at the time of development, is capitalized and included in property and equipment, net in the consolidated balance sheets. Costs incurred during the preliminary planning and evaluation and post implementation stages of the project are expensed as incurred. Costs incurred during the application development stage of the project are capitalized. Our research and development expenses support our efforts to add new features to our existing offerings and to ensure the reliability, availability and scalability of our solutions. Our research and development teams employ software engineers in the design and the related development, testing, certification and support of our solutions. Accordingly, the majority of our research and development expenses result from employee-related costs, including salaries, bonuses and benefits and costs associated with technology tools used by our engineers.
We intend to continue to make significant investments in research and development to extend the features of our existing offerings and technology capabilities.
General and Administrative
General and administrative expenses consist primarily of employee-related costs, including salaries and bonuses, equity-based compensation expense and employee benefit costs for our finance, legal, human resources and administrative personnel, as well as professional fees for external legal services, accounting and other related consulting services. Litigation-related expenses, if any, include professional fees and related costs incurred by us in defending or settling significant claims that our management deem not to be in the ordinary course of our business and, if applicable, accruals related to estimated losses in connection with these claims. We expect that our general and administrative expenses will increase in absolute dollars for the foreseeable future, as we incur increased compliance costs and other related costs necessary to operate as a public company. However, we currently expect our general and administrative expenses to decrease as a percentage of revenue over the long term, although our general and administrative expenses may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses.
Transaction Costs
In connection with the Merger, we incurred transaction costs of
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--------------------------------------------------------------------------------Depreciation and Amortization
Acquired intangible assets consist of identifiable intangible assets, including trademarks and tradenames and customer relationships resulting from business combinations. Acquired finite-lived intangible assets are initially recorded at fair value and are amortized on a straight-line basis over their estimated useful lives. Amortization expense for trademarks and tradenames and customer relationships is recorded primarily within depreciation and amortization in the consolidated statements of operations.
Change in Fair Value of Embedded Derivative Liability
We have recognized an embedded derivative liability associated to the Convertible Senior Notes. The embedded derivative is recognized at fair value and is subsequently remeasured at its estimated fair value on a recurring basis at the end of each reporting period, with changes in estimated fair value recognized as change in fair value of embedded derivative liability in our consolidated statements of operations.
Interest Expense
Interest expense consists primarily of interest incurred on our obligations under the Convertible Senior Notes and throughFebruary 8, 2021 , obligations of Legacy Appgate under the Promissory Notes. See "-Promissory Notes" above and "-Liquidity and Capital Resources" below.
Income Tax
ThroughDecember 31, 2019 , the operations of Legacy Appgate were included in the consolidatedU.S. federal, state, local and foreign income tax returns filed by Cyxtera, where applicable. Our income taxes, as presented in the consolidated financial statements, may not be indicative of the income taxes we will generate in the future. In jurisdictions where Legacy Appgate was included in the tax returns filed by Cyxtera, any income taxes payable/receivable resulting from the related income tax provisions have been reflected in the balance sheets of each separate entity's provision. Benefit (provision) for income taxes consists primarily of income taxes related toU.S. federal and state income taxes and income taxes in foreign jurisdictions in which we conduct business. 61
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Results of Operations
The following table sets forth our consolidated results of operations for the
periods presented (in thousands). The period-to-period comparisons of our
historical results are not necessarily indicative of the results that may be
expected in the future. The results of operations data have been derived from
our audited consolidated financial statements included elsewhere in this
Amendment.
(As Restated) (As Restated)
2021 2020 Variance %
Revenue $ 43,033 $ 33,155 30 %
Cost of revenue, exclusive of amortization shown
below 16,069 15,560 3 %
Amortization expense 4,525 6,168 27 %
Total cost of revenue 20,594 21,728 5 %
Gross profit 22,439 11,427 96 %
Operating expenses:
Sales and marketing 39,167 27,251 44 %
Research and development 10,727 9,792 10 %
General and administrative 18,282 15,935 15 %
Transaction costs 3,099 - nm
Depreciation and amortization 5,408 5,211 4 %
Total operating expenses 76,683 58,189 32 %
Loss from continuing operations (54,244) (46,762) 16 %
Change in fair value of embedded derivative liability (78,497)
- nm
Interest expense, net (3,190) (4,088) 22 %
Other expenses, net (515) (1,640) 69 %Loss from continuing operations before income taxes (136,446)
(52,490) 160 %
Income tax expense of continuing operations (2,396) (1,770) 35 %
Net loss from continuing operations (138,842) (54,260) 156 %
Net income from discontinued operations, net of tax 65,714 1,092 nm
Net loss $ (73,128) $ (53,168) 38 %
nm = not meaningful
Revenue
Revenue from continuing operations were as follows for 2021 and 2020:
(As Restated) (As Restated)
2021 2020 Variance %
Subscription revenue $ 34,335 $ 23,571 46 %
Perpetual licenses 2,055 2,770 26 %
Services and other 6,643 6,814 3 %
Total $ 43,033 $ 33,155 30 %
Revenue increased by $9.9 million , or 30%, during 2021 compared to 2020. The
overall increase in revenue was primarily attributable to a net increase in our
customer count from 615 customers at December 31, 2020 to 652 customers at
December 31, 2021 combined with an increase in sales of subscription term-based
licenses as further explained below.
Subscription revenue accounted for 80% and 71% of our total revenue in 2021 and
2020, respectively. Subscription revenue increased $10.8 million , or 46%, in
2021 when compared to 2020. This increase in subscription revenue was driven by
$5.7 million in revenue from sales to existing customers and $5.1 million in
revenue from sales to new customers. Approximately $4.1 million , or 73%, of the
revenue from existing customers was from one-year subscription term-based
licenses, and $1.5 million , or 27%, from multi-year subscription term-based
licenses. Our net-dollar retention
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rate was 114% at
Perpetual licenses revenue accounted for 5% and 8% of our revenue in 2021 and 2020, respectively.
Services and other revenue accounted for 15% and 21% of our revenue in 2021 and 2020, respectively. Services and other revenue decreased$0.2 million , or 3%, in 2021 when compared to 2020. This decrease in services and other revenue was primarily the result of an overall decrease in service hours billed to customers during 2021 when compared to 2020.
Cost of Revenue
Total cost of revenue from continuing operations decreased by$1.1 million , or 5%, during 2021 compared to 2020. The decrease in total cost of revenue was primarily the result of lower amortization expense of$1.6 million due to a portion of Legacy Appgate's developed technology becoming fully amortized during 2021, partially offset by an increase of$0.5 million in other cost of revenue, principally from higher subscription and hosting services in 2021.
Gross Profit
Gross profit totaled$22.4 million for 2021, an increase of$11.0 million , or 96%, as compared to 2020. This increase was the result of the factors described above under "Revenue" and "Cost of Revenue".
Operating Expenses
Total operating expenses from continuing operations increased by
Sales and marketing expenses increased by$11.9 million , or 44%, for 2021 as compared to 2020. This increase was primarily the result of an increase in personnel costs from higher headcount in 2021 on both the sales and marketing teams, higher commission expense, and to a lesser extent, costs incurred in connection with the Merger and related initiatives. Sales and marketing headcount increased by 71 positions from 2020 to 2021.
Research and development increased
General and administrative expenses increased by$2.3 million , or 15%, for 2021 as compared to 2020. The increase in general and administrative expenses was the result of an increase of approximately$1.8 million in personnel costs from higher headcount in 2021, higher professional services fees of approximately$1.6 million primarily incurred in connection with the Merger and related initiatives, and higher insurance costs of approximately$0.9 million related to our new D&O insurance policy. General and administrative headcount increased by 19 positions from 2020 to 2021. These increases were partially offset by lower facilities costs of approximately$1.6 million and lower bad debt of approximately$0.5 million . As described in Note 5 to our consolidated financial statements included elsewhere in this Amendment, during 2020, we incurred$1.6 million in lease costs under the Transition Services Agreement with Cyxtera. The improvement in bad debt during 2021 was the result of improved collection efforts after separation from Cyxtera. Transaction costs recognized in connection with the Merger totaled$3.1 million in 2021. These costs were primarily related to a success fee arrangement withDBO Partners LLC for$2.1 million , which was contingent on the successful completion of the Merger. We settled this fee, together with other transaction and closing costs upon consummation of the Merger.
Depreciation and Amortization
Depreciation and amortization expense increased by
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--------------------------------------------------------------------------------Change in Fair Value of Embedded Derivative Liability
During 2021, we recognized a loss of
Interest Expense, Net Interest expense, net decreased by$0.9 million for 2021 as compared to 2020. The decrease in interest expense, net was primarily attributable to the change in the mix of our debt during 2021. During 2020, interest expense consisted of interest incurred under the Promissory Notes. The average outstanding balance of the Promissory Notes during 2020 was$137.4 million . As described above, the Promissory Notes were repaid in part with the balance extinguished, in each case onFebruary 8, 2021 . OnFebruary 9, 2021 , Legacy Appgate issued the Initial Convertible Senior Notes, which are described below, and in connection with the closing of the Merger onOctober 12, 2021 , issued the Additional Convertible Senior Notes. Other Expenses, Net Other expenses, net decreased by$1.1 million for 2021 when compared to 2020, primarily from a loss recognized in 2020 on disposal of fixed assets of$1.7 million following the separation from Cyxtera, which was partially offset by$0.3 million income received by Legacy Appgate under the Transition Services Agreement in 2020. In addition, we experienced approximately$0.3 million in higher foreign currency losses in 2021 when compared to 2020.
Income Tax Expense
Our effective tax rate for 2021 and 2020 was (1.8)% and (3.4)%, respectively. The effective tax rate for 2021 differs from theU.S. Federal income tax rate of 21% primarily due to changes in the valuation allowance, the change in the fair value of our embedded derivative liability that is not tax deductible, state taxes, and foreign withholding taxes. The effective tax rate for 2020 differs from theU.S. Federal income tax rate of 21% primarily due to changes in the valuation allowance, state taxes, and foreign taxes.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe the following non-GAAP financial measures are useful to investors in evaluating our operating performance. These non-GAAP financial measures are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP and may be different from similarly titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure determined in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.
Non-GAAP Gross Profit and Gross Margin
Non-GAAP gross profit and non-GAAP gross margin are supplemental measures of
operating performance that are not determined in accordance with GAAP and do not
represent, and should not be considered as, an alternative to gross profit and
gross margin, the most directly comparable financial measures determined in
accordance with GAAP. We define non-GAAP gross profit as gross profit, adjusted
to add back non-cash equity-based compensation expense and developed technology
amortization expense and define non-GAAP gross margin as non-GAAP gross profit
as a percentage of revenue.
We use non-GAAP gross profit and non-GAAP gross margin to understand and
evaluate our core operating performance and trends, to prepare and approve our
annual budget, and to develop short-term and long-term operating plans. We
believe that non-GAAP gross profit and non-GAAP gross margin are useful measures
to our management and to our investors because they provide consistency and
comparability with past financial performance and between periods, as the
metrics generally eliminate the effects of the variability of amortization
expense of intangibles and non-cash equity-based compensation expense from
period to period, which may fluctuate for reasons unrelated to overall operating
performance. We believe that the use of these measures enables our management to
more effectively evaluate our performance period-
64
--------------------------------------------------------------------------------
over-period and relative to our competitors, some of which use similar non-GAAP
financial measures to supplement their GAAP results. Non-GAAP gross profit and
non-GAAP gross margin have limitations as analytical tools, and you should not
consider them in isolation, or as a substitute for analysis of our results as
reported under GAAP. Because of these limitations, non-GAAP gross profit and
non-GAAP gross margin should not be considered as a replacement for gross profit
and gross margin, as determined in accordance with GAAP, or as a measure of our
profitability.
A reconciliation of our non-GAAP gross profit and non-GAAP gross margin to gross
profit and gross margin, the most directly comparable financial measures
determined in accordance with GAAP, for 2021 and 2020, is as follows (in
thousands):
(As Restated) (As Restated)
2021 2020
GAAP revenue $ 43,033 $ 33,155
GAAP gross profit 22,439 11,427
Add: amortization expense 4,525 6,168
Add: equity-based compensation 504 503
Non-GAAP gross profit $ 27,468 $ 18,098
GAAP gross margin 52 % 34 %
Non-GAAP gross margin 64 % 55 %
Non-GAAP Loss from Operations and Non-GAAP Operating Margin
We define non-GAAP loss from operations as GAAP loss from continuing operations
excluding amortization expense of acquired intangible assets, non-cash
equity-based compensation expense, and transaction costs. We define non-GAAP
operating margin as non-GAAP loss from continuing operations as a percentage of
revenue.
A reconciliation of our non-GAAP loss from operations and non-GAAP operating
margin to loss from continuing operations and operating margin, the most
directly comparable financial measures determined in accordance with GAAP, for
2021 and 2020, is as follows (in thousands):
(As Restated) (As Restated)
2021 2020
GAAP revenue $ 43,033 $ 33,155 GAAP loss from continuing operations
9,196 10,857
Add: equity-based compensation 3,460 4,235
Add: transaction costs 3,099 -
Non-GAAP loss from operations $ (38,489) $ (31,670)
GAAP operating margin (126) % (141) %
Non-GAAP operating margin (89) % (96) %
65--------------------------------------------------------------------------------
Free Cash Flow and Free Cash Flow Margin
Free cash flow is a non-GAAP financial measure that we define as net cash
provided by (used in) operating activities of continuing operations less cash
used for purchases of property and equipment and repayment of finance leases. We
believe that free cash flow is a useful indicator of liquidity that provides
information to management and investors, even if negative, as it provides useful
information about the amount of cash generated (or consumed) by our operating
activities that is available (or not available) to be used for other strategic
initiatives. For example, if free cash flow is negative, we may need to access
cash reserves or other sources of capital to invest in strategic initiatives.
While we believe that free cash flow is useful in evaluating our business, free
cash flow is a non-GAAP financial measure that has limitations as an analytical
tool, and free cash flow should not be considered as an alternative to, or
substitute for, net cash provided by (used in) operating activities in
accordance with GAAP. The utility of free cash flow as a measure of our
liquidity is limited as it does not represent the total increase or decrease in
our cash balance for any given period and does not reflect our future
contractual commitments. In addition, other companies, including companies in
our industry, may calculate free cash flow differently or not at all, which
reduces the usefulness of free cash flow as a tool for comparing our results to
those of other companies.
(As Restated) (As Restated)
2021 2020
Net cash, cash equivalents and restricted cash used in operating activities of continuing operations
$ (52,915) $ (26,484) Less: Purchases of property and equipment (920) (1,074) Repayment of finance leases (22) (21) Free cash flow$ (53,857) $ (27,579) As a percentage of revenue: GAAP revenue$ 43,033
(123) % (80) %
Less:
Purchases of property and equipment (2) % (3) % Repayment of finance leases - % - % Free cash flow (125) % (83) %
Liquidity and Capital Resources
As ofDecember 31, 2021 , we had cash and cash equivalents of$26.0 million . Historically, Legacy Appgate's principal source of liquidity was borrowing availability under the Promissory Notes and cash generated from Legacy Appgate's operations. As discussed above, onFebruary 8, 2021 , Legacy Appgate repaid Cyxtera the full amount of the Promissory Note issued to Cyxtera and made a partial repayment on the then accumulated principal and interest under the Promissory Note issued to theManagement Company . On that same date, theManagement Company issued a payoff letter to Legacy Appgate extinguishing the balance remaining unpaid of$34.6 million following such repayment. The payoff letter resulted in the full settlement and extinguishment of the Promissory Note held by theManagement Company . We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and consolidated statements of cash flows. We expect to continue to incur operating losses and negative cash flows from operations for the foreseeable future. Currently, our principal sources of liquidity are the proceeds from the issuance of the Convertible Senior Notes and cash generated from our operations, which have enabled us to make continued investments to support the growth of our business. We expect that proceeds from the Convertible Senior Notes and cash generated from our operations, as well as our borrowing capacity under the Revolving Credit Facility, will provide sufficient cash to fund working capital and capital expenditures for at least the next 12 months. We may also issue up to an additional$25.0 million in aggregate principal amount of Convertible Senior Notes at the election of the holders of the Convertible Senior Notes, subject to our consent, in one or more closings, which may occur on or prior to the earlier of (i) seventy-five (75) days after the Company closes a registered offering of equity securities in an aggregate amount of no less 66 -------------------------------------------------------------------------------- than$40.0 million and (ii)October 31, 2022 ; however, we cannot provide any assurance that the holders of the Convertible Senior Notes will elect to effect any such closings, or that we will consent to any such election. We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. In the long-term, we may be required to obtain additional financing to fund our current planned operations, which may consist of, at Magnetar's election and our consent, issuing the additional$25.0 million of Convertible Senior Notes, entering into the Revolving Credit Facility or an alternative financing arrangement, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed may have a negative impact on our financial condition and our ability to pursue our business strategy. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
Debt
As ofDecember 31, 2021 , we had$75.0 million in aggregate principal amount of Convertible Senior Notes outstanding. As ofDecember 31, 2020 , Legacy Appgate had$153.8 million due under the Promissory Notes. As discussed above, the Promissory Notes were fully settled and extinguished onFebruary 8, 2021 .
Convertible Senior Notes
OnFebruary 9, 2021 , Legacy Appgate issued the Initial Convertible Senior Notes to various funds managed by Magnetar. In connection with the closing of the Merger, Legacy Appgate issued the Additional Convertible Senior Notes. The Convertible Senior Notes are subject to the terms and conditions of the Note Issuance Agreement and Note Purchase Agreement. We received net proceeds of$72.8 million from the issuance of the Convertible Senior Notes, after deducting fees and expenses of$2.2 million . We recorded these fees and expenses as debt issuance costs that will be amortized over the term of the Convertible Senior Notes. The Convertible Senior Notes are senior, unsecured obligations of LegacyAppgate , and the payment of the principal and interest is unconditionally guaranteed, jointly and severally by Legacy Appgate'sU.S. subsidiaries and, as of the closing of the Merger, also by the Company. The Convertible Senior Notes mature onFebruary 9, 2024 , unless earlier converted, redeemed, or repurchased. The Note Issuance Agreement under which the Convertible Senior Notes were issued was amended effectiveFebruary 9, 2022 to, among other things, provide that Magnetar may elect, with our consent, to invest up to an additional$25.0 million in aggregate principal amount of such notes, in one or more closings, on or prior to the earlier of (i) seventy-five (75) days after the Company closes a registered offering of equity securities in an aggregate amount of no less than$40.0 million and (ii)October 31, 2022 . Interest on the Convertible Senior Notes is payable either entirely in cash or entirely in kind ("PIK Interest"), or a combination of cash and PIK Interest atAppgate's discretion. The Convertible Senior Notes bear interest at the annual rate of 5% with respect to interest payments made in cash and 5.50% with respect to PIK Interest, with interest payable semi-annually onFebruary 1 andAugust 1 of each year, commencing onAugust 1, 2021 . Additional notes ("PIK Notes") issuable in respect of PIK Interest would have the same terms and conditions as the Convertible Senior Notes. The Note Issuance Agreement includes certain affirmative and financial covenants we are required to satisfy. We were in compliance with all covenants as ofDecember 31, 2021 .
Promissory Notes
OnMarch 31, 2019 , Legacy Appgate issued the Promissory Notes to each of Cyxtera and theManagement Company . The outstanding principal and interest under the Promissory Notes was$153.8 million as ofDecember 31, 2020 . As discussed above and in our consolidated financial statements included elsewhere in this Amendment, onFebruary 8, 2021 , Legacy Appgate repaid Cyxtera the full amount on the then outstanding principal and interest of$20.6 million under the Promissory Note issued to Cyxtera and made a partial repayment of$99.0 million to theManagement Company on the then outstanding principal and interest of$133.6 million under the Promissory Note issued to theManagement Company . On that same date, theManagement Company issued a payoff letter to Legacy Appgate extinguishing the balance remaining unpaid following such repayment. Because Cyxtera was Legacy Appgate's direct parent at the time of issuance of the Promissory Notes and an affiliate under common control with Legacy Appgate at the time of repayment, we recognized the note extinguishment of$34.6 million as a capital contribution in 2021. 67 --------------------------------------------------------------------------------
Revolving Credit Facility
OnMarch 29, 2022 ,Legacy Appgate and SIS Holdings entered into the Revolving Credit Facility Commitment Letter, pursuant to whichSIS Holdings agreed to provide to Legacy Appgate, subject to the satisfaction of the terms and conditions contained therein, the Revolving Credit Facility in an aggregate principal amount of$50.0 million . This indebtedness would be contractually subordinated to the Convertible Senior Notes.SIS Holdings' commitment to provide the Revolving Credit Facility will expire, and, if entered into, the Revolving Credit Facility will mature, on the earlier to occur of (a)June 30, 2023 and (b) the closing a registered offering of equity securities of the Company in an aggregate amount of not less than$50.0 million . Interest will accrue on amounts drawn under the Revolving Credit Facility at rate of 10.0% per annum, payable in cash on the maturity date. Entry into the Revolving Credit Facility will be subject to customary closing conditions, including the execution and delivery of appropriate definitive documentation related to the Revolving Credit Facility, including customary terms, covenants and conditions, and there can be no assurance that such closing conditions will be satisfied or that the Revolving Credit Facility will be entered into prior to the expiration ofSIS Holdings' commitment or at all.
Other Contractual Obligations and Commitments
In addition to our debt obligations under the Convertible Senior Notes and, if entered into and drawn, the Revolving Credit Facility, and lease obligations under several operating lease arrangements,Appgate has other contractual commitments. Refer to Note 11 - Leases and Note 12 - Convertible Senior Notes, to our consolidated financial statements included elsewhere in this Amendment for additional information on maturities. Refer to Note 13 - Commitments and Contingencies to our consolidated financial statements included elsewhere in this Amendment for additional information regarding cash amounts committed under other contractual obligations.
Cash Flow
Cash Flows for 2021 and 2020. The following table sets forth our historical cash flows for the periods indicated (in thousands):
(As Restated) (As Restated)
2021 2020
Net cash, cash equivalents and restricted cash used in operating activities
$
(52,066)
$
124,102
$
(48,408)
Operating Activities
Our largest source of operating cash is cash collections from customers for sales of licenses and services. Our primary uses of cash from operating activities are for employee-related expenditures, marketing expenses and third-party hosting costs.
Net cash used in operating activities during 2021 was$52.1 million , which resulted from a net loss of$73.1 million , adjusted for the net income from discontinued operations of$65.7 million , net cash provided by operating activities of discontinued operations of$0.8 million , non-cash charges of$97.6 million and net cash outflow of$11.6 million from changes in assets and liabilities. Non-cash charges primarily consisted of a$78.5 million change in the fair value of our embedded derivative liability,$9.9 million of depreciation and amortization,$5.3 million of amortization of deferred contract acquisition costs, and$3.5 million in equity-based compensation. The net cash outflow from changes in assets and liabilities was primarily due to more cash used in working capital, primarily driven by higher headcount in 2021 as discussed above under "Results of Operations," and higher costs associated to the Merger and related initiatives, increases in contract assets and deferred contract acquisition costs, and a decrease in deferred revenue, partially offset by increased collections.
Net cash used in operating activities during 2020 was
68
--------------------------------------------------------------------------------
million of depreciation and amortization, $4.2 million in equity-based
compensation, $4.0 million of amortization of deferred contract acquisition
costs, and $1.7 million of loss on disposal of assets. The net cash inflow from
changes in assets and liabilities was primarily due to more cash due to
affiliates and changes in working capital primarily increased accounts payable
and lower collections following the Cyxtera Spin-Off, combined with increases in
deferred contract acquisition costs and deferred revenue.
Investing Activities
During 2021, our investing activities provided cash of$124.1 million as compared to cash used in investing activities of$1.1 million during 2020. The change in cash flows from investing activities during 2021 when compared to 2020 was primarily due to receipt of$125.0 million in net proceeds received from the sale of Brainspace inJanuary 2021 .
Financing Activities
During 2021, we used$48.4 million of cash in financing activities as compared to cash provided by financing activities of$19.4 million during 2020. Cash used in financing activities during 2021 was primarily due to the repayment of$119.6 million to Cyxtera and/or theManagement Company inFebruary 2021 as settlement and extinguishment of the Promissory Notes. Also, during 2021, we received gross proceeds of$75.0 million from the issuance of the Convertible Senior Notes. Cash provided by financing activities during 2020 was from cash advances received under the Promissory Notes.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities at the date of our financial statements. We evaluate our estimates and assumptions on an ongoing basis. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, impacting our reported results of operations and financial condition. Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Based on this definition, we have identified the following critical accounting policies and estimates: revenue from contracts with customers, accounting for income taxes, and accounting for goodwill and intangible assets. These critical accounting policies are addressed below. In addition, we have other key accounting policies and estimates that are described in Note 2 - Business and Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Amendment.
Revenue Recognition
We recognize revenue under ASC 606. Under ASC 606, we recognize revenue when our
customers obtain control of goods or services in an amount that reflects the
consideration that we expect to receive in exchange for those goods or services.
We primarily sell our software through on-premise term-based license agreements,
perpetual license agreements and SaaS subscriptions, which allow our customers
to use our SaaS services without taking possession of the software. Our products
offer substantially the same functionality whether our customers receive them
through a perpetual, or term-based license or a SaaS arrangement. Our agreements
with customers for software licenses may include maintenance contracts and may
also include professional services contracts. Maintenance revenues consist of
fees for providing unspecified software updates and technical support for our
products for a specified term, which is typically one to three years. We offer a
portfolio of professional services and extended support contract options to
assist our customers with integration, optimization, training and ongoing
advanced technical support. We also generate revenue from threat advisory
services, including penetration testing, application assessments, vulnerability
analysis, reverse engineering, architecture review and source code review.
If a contract contains a single performance obligation, the entire transaction
price is allocated to the single performance obligation. For contracts that
contain multiple distinct performance obligations, we allocate the transaction
price to each performance obligation based on a relative standalone selling
price ("SSP"). We determine the transaction price with reference to the SSP of
the various performance obligations inherent within a contract. The SSP is
determined based on the
69
--------------------------------------------------------------------------------prices at which we separately sell these products, assuming the majority of these fall within a pricing range. In instances where SSP is not directly observable, such as when we do not sell the software license separately, we derive the SSP utilizing market conditions and other factors, including customer type, market conditions and pricing objectives, historical sales data, and negotiated discounts from price lists, if any, that can require significant judgement.
Derivatives
We have concluded that the conversion feature under the Convertible Senior Notes requires bifurcation from the debt host agreement in accordance with ASC 815. Accordingly, we recognize a derivative liability at fair value for this instrument in our consolidated balance sheet and adjust the carrying value of the liability to fair value at each reporting period until the conversion feature underlying the instrument is exercised, redeemed, cancelled or expires. The changes in fair value are recorded as other expense in our consolidated statement of operations. The derivative is valued using Level 3 inputs which are highly subjective and require a high degree of judgment. Refer to Note 8 to our consolidated financial statements included elsewhere in this Amendment for disclosures regarding those significant unobservable inputs and how a change in those significant unobservable inputs to a different amount might produce a significantly higher or lower derivative value at the reporting date.
Income Taxes
ThroughDecember 31, 2019 , the operations of Legacy Appgate were included in the consolidatedU.S. federal, state, local and foreign income tax returns, filed by Cyxtera, where applicable. We account for income taxes using the asset and liability method. Deferred income taxes are recognized by applying the enacted statutory tax rates applicable to future years to differences between the carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance to amounts that are more likely than not to be realized. In addition, certain Federal and state NOL carryforward assets are reduced by a valuation allowance and/or may be limited by Internal Revenue Code Section 382.
Goodwill represents the excess of the fair value of purchase consideration in a business combination over the fair value of net tangible and intangible assets acquired.Goodwill amounts are not amortized, but rather tested for impairment at least annually or more often if circumstances indicate that the carrying value may not be recoverable. Upon the Cyxtera Spin-Off, Legacy Appgate's opening carve-out consolidated financial statements included the goodwill balances carried over from Cyxtera in connection with Cyxtera's acquisition of the entities that formed Legacy Appgate, less impairments. We perform annual impairment tests of goodwill onOctober 1st of each year or whenever an indicator of impairment exists. We did not record any impairment of goodwill in 2021 or 2020. Acquired intangible assets consist of identifiable intangible assets, including developed technology, trademarks and tradenames, and customer relationships, resulting from business combinations. Acquired finite-lived intangible assets are initially recorded at fair value and are amortized on a straight-line basis over their estimated useful lives. Amortization expense of trademarks and tradenames, and customer relationships is recorded primarily within depreciation and amortization in our consolidated statements of operations. Amortization expense of developed technology is recorded within cost of revenue in our consolidated statements of operations. Long-lived assets, such as property and equipment and acquired intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We measure the recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows that these assets are expected to generate. If the total of the future undiscounted cash flows are less than the carrying amount of an asset, we record an impairment charge for the amount by which the carrying amount of the asset exceeds the fair value. We did not record any impairment of long-lived assets in 2021 or 2020.
Recent Accounting Pronouncements
Recently issued accounting pronouncements are described in Note 2 of our consolidated financial statements included elsewhere in this Amendment.
70
--------------------------------------------------------------------------------Item 8. Financial Statements and Supplementary Data
Appgate, Inc. Table of Contents Consolidated Financial Statements: Page
Report of Independent Registered Public Accounting Firm (
72
Consolidated Balance Sheets as of December 31, 2021 and 2020 75
Consolidated Statements of Operations for the Years Ended
77
Consolidated Statements of Comprehensive Loss for the Years Ended
78
Consolidated Statement of Changes in Stockholders' Equity for the Years
Ended
79
Consolidated Statements of Cash Flows for the Years Ended
80
Notes to Consolidated Financial Statements 82
71
--------------------------------------------------------------------------------
Report of Independent Registered Public Accounting FirmStockholders and Board of Directors of
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets ofAppgate, Inc. (the "Company") as ofDecember 31, 2021 and 2020 restated, the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity, and cash flows for each of the two years then ended, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company atDecember 31, 2021 and 2020 restated, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted inthe United States of America .
Restatement of Financial Statements
As discussed in Note 1 to the consolidated financial statements, the 2021 and 2020 consolidated financial statements have been restated to correct misstatements.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) ("PCAOB") and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 72 --------------------------------------------------------------------------------
Revenue Recognition - Allocation of Standalone Selling Price
As described in Notes 2 and 7 to the consolidated financial statements, the
Company sells software through term-based license agreements, perpetual licenses
agreements and software as a service ("SaaS") subscriptions. The Company's
agreements for software licenses also include support and maintenance and may
also include professional services.
Management identifies each performance obligation in the contract and allocates
the total contract price to each performance obligation based on a relative
stand-alone selling price. The Company determines the standalone selling price,
when not directly observable, utilizing market conditions and other factors,
including customer type, pricing objectives, historical sales data, and
negotiated discounts from price lists, if any, that can require significant
judgement.
The primary procedures we performed to address this critical audit matter included:
•Performing procedures to test the completeness and accuracy of the data used to determine stand-alone selling price;
•Evaluating the Company's standalone selling prices, including their compliance with the Company's accounting policy, by assessing available, relevant external information and comparing the standalone selling prices to internal historical disaggregated sales data by product or service, including discounts from list price, if any, by customer; and,
•Testing the allocation of the transaction price between performance obligations based on the relative standalone selling prices on a sample basis.
Convertible Senior Notes
As described in Notes 8 and 12 to the consolidated financial statements, onFebruary 9, 2021 , the Company issued$50.0 million in aggregate principal amount of convertible senior notes due 2024 (the "First Tranche"). In connection with the closing of the merger (the "Merger") onOctober 12, 2021 with a public shell company, the Company issued an additional$25.0 million in aggregate principal balance in convertible notes (together with the First Tranche, the "Convertible Senior Notes"). The Company concluded that its Convertible Senior Notes contained an embedded derivative, i.e. a conversion feature, and determined that following the closing of the Merger, this embedded derivative required bifurcation in accordance with Accounting Standards Codification 815, Derivatives and Hedging. The fair value of the embedded derivative is approximately$78.5 million and is recorded as a derivative liability on the Company's consolidated balance sheet as ofDecember 31, 2021 . We identified the valuation of the Convertible Senior Notes and embedded derivative as a critical audit matter because of the complexity of the valuation models and the judgements made by management in estimating the fair value of the Convertible Senior Notes and embedded derivative. Specifically, the valuation models used in determining the fair value of the Convertible Senior Notes and embedded derivative include inputs subject to management's judgment, including an estimate of volatility, market yield and probability of a change of control or fundamental change. This required subjective auditor judgment and an increased level of effort when performing audit procedures, including the involvement of valuation professionals with specialized skills and knowledge.
The primary procedures we performed to address this critical audit matter included:
•Testing the accuracy of the source data used by management in the valuation by comparing it to the debt agreement and share price.
•Testing management's process for developing the fair value estimate and
evaluating the significant assumptions used to calculate the fair value of the
embedded derivative, including the probability of a change of control or
fundamental change, including considering evidence obtained in other areas of
the audit to determine if contradictory evidence existed.
•Utilizing personnel with specialized skills and knowledge in valuation approach
and methodologies to assist in: (i) assessing the appropriateness of the
methodology used in estimating the fair value of the Convertible Senior Notes
and embedded derivative; (ii) evaluating the reasonableness of certain
significant assumptions, such as volatility
73
--------------------------------------------------------------------------------and market yields; and (iii) performing sensitivity tests to determine the impact of changes to primary inputs to the concluded value determined by management.
/s/BDO USA, LLP Certified Public Accountants
We have served as the Company's auditor since 2020.
Miami, Florida March 31, 2022 , except for the impact of the restatement in Note 1, as to which the date isDecember 28, 2022 . 74 --------------------------------------------------------------------------------
Appgate, Inc.
Consolidated Balance Sheets
As of December 31, 2021 and 2020
(in thousands, except share information)
(As Restated) (As Restated)
2021 2020
ASSETS
Current assets:
Cash and cash equivalents $ 25,990 $ 3,505
Restricted cash 1,473 2,116
Accounts receivable, net of allowance of
6,848 12,052
Contract assets 1,458 1,210
Deferred contract acquisition costs, current 1,319 1,587
Prepaid and other current assets 6,196 2,012
Due from former Parent, net (Note 5) - 1,183
Current assets of discontinued operations - 61,568
Total current assets 43,284 85,233
Property and equipment, net 2,115 1,829
Operating lease right-of-use assets 2,497 2,008
Contract assets, noncurrent 8,630 5,565
Deferred contract acquisition costs, noncurrent 2,986 1,474
Goodwill 71,604 71,604
Intangible assets, net 36,459 45,642
Deferred income taxes 863 768
Other assets 147 184
Total assets $ 168,585 $ 214,307
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 4,483 $ 6,558
Accrued expenses 12,193 9,117
Operating lease liabilities, current 798 779
Deferred revenue, current 5,274 6,165
Other current liabilities - 15
Promissory Notes, including accrued interest - 153,811
Current liabilities of discontinued operations - 7,158
Total current liabilities 22,748 183,603
Deferred revenue, noncurrent 717 993
Operating lease liabilities, noncurrent 1,891 1,256
Convertible senior notes, net 72,968 -
Derivative liability 78,497 -
Other liabilities - 263
Total liabilities 176,821 186,115
Commitments and contingencies (Note 13)
Stockholders' (deficit) equity:
Preferred stock, $0.001 par value per share; 1,000,000 shares
authorized; no shares issued and outstanding - -
Common stock,
132 14
Additional paid-in capital 509,586 471,687
Accumulated other comprehensive loss (1,985) (668)
Accumulated deficit (515,969) (442,841)
75-------------------------------------------------------------------------------- Total stockholders' (deficit) equity (8,236)
28,192
Total liabilities and stockholders' (deficit) equity
See accompanying notes to consolidated financial statements.
76
--------------------------------------------------------------------------------
Appgate, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2021 and 2020
(in thousands, except share and per share information)
(As Restated) (As Restated)
2021 2020
Revenue $ 43,033 $ 33,155
Cost of revenue, exclusive of amortization shown below 16,069 15,560
Amortization expense 4,525 6,168
Total cost of revenue 20,594 21,728
Gross profit 22,439 11,427
Operating expenses:
Sales and marketing 39,167 27,251
Research and development 10,727 9,792
General and administrative 18,282 15,935
Transaction costs 3,099 -
Depreciation and amortization 5,408 5,211
Total operating expenses 76,683 58,189
Loss from continuing operations (54,244) (46,762)
Change in fair value of embedded derivative liability (78,497) -
Interest expense, net (3,190) (4,088)
Other expenses, net (515) (1,640)
Loss from continuing operations before income taxes (136,446) (52,490)
Income tax expense of continuing operations (2,396) (1,770)
Net loss from continuing operations (138,842) (54,260)
Net income from discontinued operations, net of tax 65,714 1,092
Net loss $
(73,128)
(Loss) income per share: Net loss from continuing operations per share of common stock - basic and diluted
$
(3.48)
$ 1.64 $ 0.08 Weighted-average shares used in computation - basic and diluted 39,951,865
13,757,550
See accompanying notes to consolidated financial statements.
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Appgate, Inc.
Consolidated Statements of Comprehensive Loss
For the Years Ended December 31, 2021 and 2020
(in thousands)
(As Restated) (As Restated)
2021 2020
Net loss $ (73,128) $ (53,168)
Other comprehensive loss:
Change in foreign currency translation (1,317) (1,117)
Other comprehensive loss (1,317) (1,117)
Comprehensive loss $ (74,445) $ (54,285) See accompanying notes to consolidated financial statements.
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Appgate, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2021 and 2020
(in thousands, except share information)
Accumulated
Preferred stock Common stock Additional other Total
paid-in comprehensive Accumulated stockholders'
Shares Amount Shares Amount capital income (loss) deficit equity (deficit)
Balance as of December 31, 2019 (As
Restated) - $ - 13,757,550 $ 14 $ 466,242 $ 449 $ (389,673) $ 77,032
Equity-based compensation - - - - 3,691 - - 3,691
Transactions with former Parent
(Notes 2 and 5) - - - - 1,754 - - 1,754
Net loss - - - - - - (53,168) (53,168)
Other comprehensive loss - - - - - (1,117) - (1,117)
Balance as of December 31, 2020 (As
Restated) - - 13,757,550 14 471,687 (668) (442,841) 28,192
Recapitalization - - 886,190 1 (109) - - (108)
Stock issued in connection with
Merger - - 117,149,920 117 (1,634) - - (1,517)
Equity-based compensation - - - - 3,401 - - 3,401
Transactions with former Parent
(Notes 2 and 5) - - - - 36,241 - - 36,241
Net loss - - - - - - (73,128) (73,128)
Other comprehensive loss - - - - - (1,317) - (1,317)
Balance as of December 31, 2021 (As
Restated) - $ - 131,793,660 $ 132 $ 509,586 $ (1,985) $ (515,969) $ (8,236)
See accompanying notes to consolidated financial statements.
79
--------------------------------------------------------------------------------Appgate, Inc. Consolidated Statements of Cash Flows For the Years EndedDecember 31, 2021 and 2020 (in thousands) (As Restated) (As Restated) 2021 2020 Cash flows from operating activities: Net loss $
(73,128)
(65,714) (1,092)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 9,933 11,379
Equity-based compensation 3,460 4,235
Amortization of deferred contract acquisition costs 5,333 3,987
Loss on disposal of assets - 1,683
Change in fair value of embedded derivative liability 78,497 -
Amortization of debt issuance costs 212 -
Operating lease amortization 140 57
(Reversal of) Provision for allowance for doubtful accounts (95) 364
Deferred income taxes 95 (632)
Changes in assets and liabilities:
Accounts receivable 5,405 (5,175)
Contract assets (3,419) 801
Prepaid and other current assets (4,141) (776)
Due from affiliates, net 3,252 9,737
Deferred contract acquisition costs (6,467) (5,368)
Other assets - 27
Accounts payable (2,247) 5,329
Accrued expenses (2,795) 40
Deferred revenue (1,236) 1,898
Other current liabilities - (58)
Other liabilities - 248
Net cash, cash equivalents and restricted cash used in operating activities of continuing operations
(52,915) (26,484)
Net cash, cash equivalents and restricted cash provided by operating activities of discontinued operations
849 9,388
Net cash, cash equivalents and restricted cash used in operating activities
(52,066) (17,096)
Cash flows from investing activities:
Purchases of property and equipment (920) (1,074)
Net cash, cash equivalents and restricted cash used in investing activities of continuing operations
(920) (1,074)
Net cash, cash equivalents and restricted cash provided by investing activities of discontinued operations
125,022 -
Net cash, cash equivalents and restricted cash provided by (used in) investing activities
124,102 (1,074)
Cash flows from financing activities:
Recapitalization, net of costs (Note 3) (1,502) -
Proceeds from convertible senior notes 75,000 -
Payment of debt issuance costs (2,244) -
Repayment of Promissory Notes (119,640) -
Proceeds from Promissory Notes - 19,429
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Repayment of finance leases (22) (21)
Net cash, cash equivalents and restricted cash (used in) provided by financing activities of continuing operations
(48,408) 19,408
Effect of foreign currency exchange rates on cash (1,786)
(1,746)
Net increase (decrease) in cash, cash equivalents and restricted cash
21,842 (508)
Cash, cash equivalents and restricted cash at beginning of period
5,621 6,156
Cash, cash equivalents and restricted cash at end of period
27,463 5,648
Less cash of discontinued operations -
(27)
Cash, cash equivalents and restricted cash of continuing operations at end of period$ 27,463 $ 5,621 Cash and cash equivalents$ 25,990 $ 3,505 Restricted cash 1,473 2,116
Cash, cash equivalents and restricted cash of continuing operations at end of period
$ 27,463
Supplemental cash flow information: Cash paid for interest$ 2,272 $ - Cash paid for income taxes, net of refunds$ 2,440
$ 1,383
$ 36,241
$ 132
$ -
See accompanying notes to consolidated financial statements.
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Notes to Consolidated Financial Statements
Note 1. Restatement of Previously Issued Financial Statements
Background to Restatement
The accompanying consolidated financial statements have been restated as a result of the following accounting errors, all of which are further described below: (i) accounting for revenue recognition, specifically the allocation of standalone selling price on sales of software through term-based license agreements; (ii) the amortization pattern in accounting for incremental costs to obtain a contract with a customer; and (iii) disclosures of diluted earnings (loss) per share.Appgate, Inc. ("Appgate", the "Company", "we", "us", or "our") announced its decision to restate these financial statements onNovember 8, 2022 . •Revenue Recognition - Allocation of Standalone Selling Price - We recognize revenue under theFinancial Accounting Standards Board's (the "FASB") Accounting Standards Codification ("ASC") 606, Accounting from Contracts with Customers ("ASC 606"). Under ASC 606, we recognize revenue when our customers obtain control of goods or services in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. We primarily sell our software through on-premise term-based license agreements, perpetual license agreements and software as a service ("SaaS") subscriptions, which allow our customers to use our SaaS services without taking possession of the software. Our agreements with customers for software licenses may include maintenance contracts and may also include professional services contracts. We have determined that our sales contracts for term-based license agreements contain multiple distinct performance obligations (i.e., obligation to deliver the software license and the obligation to provide support and maintenance over the term of the agreement). In accounting for those arrangements, we allocate the transaction price to each performance obligation based on a relative standalone selling price ("SSP"). We determine the transaction price with reference to the SSP of the various performance obligations inherent within a contract. We corrected our accounting estimate for SSP as it relates to term-based license arrangements, specifically the estimate used to allocate the transaction price between the license and the support and maintenance obligations in term-based license agreements (the "Revenue Recognition Error"). The change in the allocation estimate results in more transaction price being allocated to the support and maintenance portion of multi-year term-based license agreements, which changes our periodic recognition of revenue under these agreements. The Revenue Recognition Error had an effect on amounts reported for continuing and discontinued operations for 2021 and 2020 and on the gain on disposal of discontinued operations in 2021. The effect of the Revenue Recognition Error was as follows: -overstatement of revenue of$2.3 million and$0.6 million for 2021 and 2020, respectively; -overstatement of contract assets of$3.4 million and$1.1 million as ofDecember 31, 2021 and 2020, respectively; -understatement of deferred revenue of$0.3 million and$0.2 million as ofDecember 31, 2021 and 2020, respectively; -(understatement) overstatement of net income from discontinued operations, net of tax of$(3.6) million and$0.1 million for 2021 and 2020, respectively; -overstatement of current assets of discontinued operations of$2.7 million as ofDecember 31, 2020 ; -understatement of current liabilities of discontinued operations of$0.6 million as ofDecember 31, 2020 ; and -understatement of accumulated deficit of$3.3 million and$4.5 million as ofDecember 31, 2021 and 2020, respectively. •Incremental Costs to Obtain a Contract with a Customer - Amortization Pattern - We capitalize incremental costs associated with obtaining customer contracts, specifically certain commission payments, and incur commission expense on an ongoing basis. We corrected the pattern of amortization of these deferred costs to allocate the combined commission asset to the individual performance obligations and amortize each respective portion based on the pattern of performance for the underlying performance obligation (the "Amortization Error"). Prior to the change, commission expense was expensed ratably over five years. The change in the pattern of amortization of deferred contract acquisition costs accelerates the recognition of commission expense. 82
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Appgate, Inc.
Notes to Consolidated Financial Statements
The Amortization Error had an effect on amounts reported for continuing and discontinued operations for 2021 and 2020 and on the gain on disposal of discontinued operations in 2021. The effect of the Amortization Error was as follows:
-understatement of sales and marketing expenses of$2.0 million and$2.1 million for 2021 and 2020, respectively; -understatement of research and development expenses of$10 thousand in 2020; -understatement of general and administrative expenses of$0.1 million in each of 2021 and 2020; -overstatement of deferred contract acquisition costs of$7.9 million and$5.8 million as ofDecember 31, 2021 and 2020, respectively; -(understatement) overstatement of net income from discontinued operations, net of tax of$(2.2) million and$59 thousand for 2021 and 2020, respectively; -overstatement of current assets of discontinued operations of$2.3 million as ofDecember 31, 2020 ; -understatement of accumulated deficit of$8.0 million and$8.2 million as ofDecember 31, 2021 and 2020, respectively; and -understatement of accumulated other comprehensive loss of$85 thousand and$1 thousand as ofDecember 31, 2021 and 2020, respectively. •Diluted Earnings (Loss) per Share - In 2021, our diluted loss per share of common stock calculation included the effect of the issuance of 10,982,805 shares of our common stock underlying the Company's outstanding Convertible Senior Notes (as defined in Note 12). The Convertible Senior Notes are convertible at any time prior to their maturity at the option of the holders thereof. These potentially dilutive shares should have instead been excluded from diluted (loss) income per share, as their effect was anti-dilutive and reduced net loss per share. Therefore, the weighted-average number of shares of common stock outstanding used to calculate both basic and diluted net loss per share for the year endedDecember 31, 2021 should have been the same. Although the foregoing error, by itself, affected only diluted (loss) income per share, both basic and diluted earnings (loss) per share are impacted by the errors described above and were restated accordingly.
The errors did not have an impact on the Company's net cash or liquidity.
As discussed in more detail below, we have separately quantified the impact of the various accounting adjustments on our 2021 and 2020 consolidated financial statements. The impact to our accumulated deficit for periods prior to 2020 is reflected in our consolidated financial statements as an adjustment to the beginning balance of our accumulated deficit as ofJanuary 1, 2020 . The$9.9 million cumulative increase in accumulated deficit for periods prior to 2020 resulted primarily from adjustments related to revenue recognition and incremental costs to obtain a contract with a customer, and the related impact to discontinued operations. The cumulative impact to the Company's accumulated deficit throughDecember 31, 2021 is summarized below (in thousands):
Cumulative (Decrease)
Increase
Pre-tax restatement adjustments to continuing operations: Accounting for revenue recognition
$ 3,587
Accounting for incremental costs to obtain a contract with a customer
7,883
Total pre-tax restatement adjustments to continuing operations
11,470
Income tax impact of restatement adjustments to continuing operations
(110)
Total restatement impact from adjustments to continuing operations
11,360
Pre-tax restatement adjustments to discontinued operations: Accounting for revenue recognition
3,414
Accounting for incremental costs to obtain a contract with a customer
2,349
Impact of restatement adjustments to gain on disposal
(5,786)
Total restatement impact from adjustments to discontinued operations
(23)
Total restatement impact to accumulated deficit $ 11,337
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Notes to Consolidated Financial Statements
As a result of the corrections reflected in the restatement, our income tax
expense on continuing operations was reduced by approximately $38 thousand and
$0.1 million for 2021 and 2020, respectively, primarily from changes in deferred
taxes. See Note 18, Income Taxes, for additional details regarding income taxes.
Following are the reconciliations of previously reported to restated figures (in thousands, except share and per share information):
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Notes to Consolidated Financial Statements
(As Reported) (As Restated) (As Reported) (As Restated)
2021 Adjustments 2021 2020 Adjustments 2020
ASSETS
Current assets:
Cash and cash equivalents $ 25,990 $ - $ 25,990 $ 3,505 $ - $ 3,505
Restricted cash 1,473 - 1,473 2,116 - 2,116
Accounts receivable, net of
allowance 6,848 - 6,848 12,052 - 12,052
Contract assets 1,639 (181) (a) 1,458 1,427 (217) (a) 1,210
Deferred contract acquisition
costs, current 3,464 (2,145) (b) 1,319 3,065 (1,478) (b) 1,587
Prepaid and other current
assets 6,196 - 6,196 2,012 - 2,012
Due from former Parent, net
(Note 5) - - - 1,183 - 1,183
Current assets of discontinued
operations - - - 66,604 (5,036) (a), (b) 61,568
Total current assets 45,610 (2,326) 43,284 91,964 (6,731) 85,233
Property and equipment, net 2,115 - 2,115 1,829 - 1,829
Operating lease right-of-use
assets 2,497 - 2,497 2,008 - 2,008
Contract assets, noncurrent 11,800 (3,170) (a) 8,630 6,496 (931) (a) 5,565
Deferred contract acquisition
costs, noncurrent 8,749 (5,763) (b) 2,986 5,791 (4,317) (b) 1,474
Goodwill 71,604 - 71,604 71,604 - 71,604
Intangible assets, net 36,459 - 36,459 45,642 - 45,642
Deferred income taxes 793 70 (c) 863 735 33 (c) 768
Other assets 147 - 147 184 - 184
Total assets $ 179,774 $ (11,189) $ 168,585 $ 226,253 $ (11,946) $ 214,307
LIABILITIES AND STOCKHOLDER'S
(DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 4,483 $ - $ 4,483 $ 6,558 $ - $ 6,558
Accrued expenses 12,232 (39) (c) 12,193 9,156 (39) (c) 9,117
Operating lease liabilities,
current 798 - 798 779 - 779
Deferred revenue, current 4,813 461 (a) 5,274 5,995 170 (a) 6,165
Other current liabilities - - - 15 - 15
Promissory Notes, including
accrued interest - - - 153,811 - 153,811
Current liabilities of
discontinued operations - - - 6,548 610 (a) 7,158
Total current liabilities 22,326 422 22,748 182,862 741 183,603
Deferred revenue, noncurrent 906 (189) (a) 717 995 (2) (a) 993
Operating lease liabilities,
noncurrent 1,891 - 1,891 1,256 - 1,256
Convertible senior notes, net 72,968 - 72,968 - - -
Embedded derivative liability 78,497 - 78,497 - - -
Other liabilities - - - 263 - 263
Total liabilities 176,588 233 176,821 185,376 739 186,115
Stockholders' (deficit)
equity:
Preferred stock - - - - - -
Common stock 132 - 132 14 - 14
Additional paid-in capital 509,586 - 509,586 471,687 - 471,687
Accumulated other
comprehensive loss (1,900) (85) (a) (1,985) (667) (1) (a) (668)
Accumulated deficit (504,632) (11,337) (a), (b), (c) (515,969) (430,157) (12,684) (a), (b), (c) (442,841)
Total stockholders' (deficit)
equity 3,186 (11,422) (8,236) 40,877 (12,685) 28,192
Total liabilities and
stockholders' (deficit) equity $ 179,774 $ (11,189) $ 168,585 $ 226,253 $ (11,946) $ 214,307
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Notes to Consolidated Financial Statements
(As Reported) (As Restated) (As Reported) (As Restated)
2021 Adjustments 2021 2020 Adjustments 2020
Revenue $ 45,311 $ (2,278) (a) $ 43,033 $ 33,729 $ (574) (a) $ 33,155
Cost of revenue, exclusive of
amortization shown below 16,069 - 16,069 15,560 - 15,560
Amortization expense 4,525 - 4,525 6,168 - 6,168
Total cost of revenue 20,594 - 20,594 21,728 - 21,728
Gross profit 24,717 (2,278) 22,439 12,001 (574) 11,427
Operating expenses:
Sales and marketing 37,150 2,017 (b) 39,167 25,175 2,076 (b) 27,251
Research and development 10,727 - (b) 10,727 9,782 10 (b) 9,792
General and administrative 18,209 73 (b) 18,282 15,824 111 (b) 15,935
Transaction costs 3,099 - 3,099 - - -
Depreciation and amortization 5,408 - 5,408 5,211 - 5,211
Total operating expenses 74,593 2,090 76,683 55,992 2,197 58,189
Loss from continuing operations (49,876) (4,368) (54,244) (43,991) (2,771) (46,762)
Change in fair value of embedded
derivative liability (78,497) - (78,497) - - -
Interest expense, net (3,190) - (3,190) (4,088) - (4,088)
Other expenses, net (515) - (515) (1,640) - (1,640)
Loss from continuing operations before
income taxes (132,078) (4,368) (136,446) (49,719) (2,771) (52,490)
Income tax expense of continuing
operations (2,434) 38 (c) (2,396) (1,842) 72 (c) (1,770)
Net loss from continuing operations (134,512) (4,330) (138,842) (51,561) (2,699) (54,260)
Net income from discontinued
operations, net of tax 60,037 5,677 (a), (b) 65,714 1,136 (44) (a), (b) 1,092
Net loss $ (74,475) $ 1,347 $ (73,128) $ (50,425) $ (2,743) $ (53,168)
(Loss) income per share:
Net loss from continuing operations
per share of common stock - basic $ (3.37) $ (0.11) $ (3.48) $ (3.75) $ (0.19) $ (3.94) Net loss from continuing operations
per share of common stock - diluted
$ (3.48) $ (3.75) $ (0.19) $ (3.94) Net income from discontinued operations per share of common stock - basic $ 1.50$ 0.14 $ 1.64 $ 0.08 $ - $ 0.08 Net income from discontinued operations per share of common stock - diluted $ 1.18$ 0.46 $ 1.64 $ 0.08 $ - $ 0.08 Weighted-average shares used in computation Basic 39,951,865 - 39,951,865 13,757,550 - 13,757,550 Diluted 50,934,670 (10,982,805) 39,951,865 13,757,550 - 13,757,550 86
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Notes to Consolidated Financial Statements
(As Reported) (As Restated) (As Reported) (As Restated)
2021 Adjustments 2021 2020 Adjustments 2020
Cash flows from operating
activities:
Net loss $ (74,475) $ 1,347 $ (73,128) $ (50,425) $ (2,743) $ (53,168)
Net income from discontinued
operations, net of tax (60,037) (5,677) (a), (b) (65,714) (1,136) 44 (a), (b) (1,092)
Adjustments to reconcile net loss
to net cash used in operating
activities: - -
Depreciation and amortization 9,933 - 9,933 11,379 - 11,379
Equity-based compensation 3,460 - 3,460 4,235 - 4,235
Amortization of deferred contract
acquisition costs 3,220 2,113 (b) 5,333 1,790 2,197 (b) 3,987
Loss on disposal of assets - - - 1,683 - 1,683
Change in fair value of embedded
derivative liability 78,497 - 78,497 - - -
Amortization of debt issuance
costs 212 - 212 - - -
Operating leases, net 140 - 140 57 - 57
(Reversal of) Provision for
allowance for doubtful accounts (95) - (95) 364 - 364
Deferred income taxes 58 37 (c) 95 (665) 33 (c) (632)
Changes in assets and liabilities: - -
Accounts receivable 5,405 - 5,405 (5,175) - (5,175)
Contract assets (5,631) 2,212 (a) (3,419) 242 559 (a) 801
Prepaid and other current assets (4,141) - (4,141) (776) - (776)
Due from affiliates, net 3,252 - 3,252 9,737 - 9,737
Deferred contract acquisition
costs (6,467) - (6,467) (5,368) - (5,368)
Other assets - - - 27 - 27
Accounts payable (2,247) - (2,247) 5,329 - 5,329
Accrued expenses (2,720) (75) (c) (2,795) 145 (105) (c) 40
Deferred revenue (1,279) 43 (a) (1,236) 1,883 15 (a) 1,898
Other current liabilities - - - (58) - (58)
Other liabilities - - - 248 - 248
Net cash, cash equivalents and
restricted cash used in operating
activities of continuing
operations (52,915) - (52,915) (26,484) - (26,484)
Net cash, cash equivalents and
restricted cash provided by
operating activities of
discontinued operations 849 - 849 9,301 87 (d) 9,388
Net cash, cash equivalents and
restricted cash used in operating
activities (52,066) - (52,066) (17,183) 87 (17,096)
Cash flows from investing
activities:
Purchases of property and
equipment (920) - (920) (1,074) - (1,074)
Net cash, cash equivalents and
restricted cash used in investing
activities of continuing
operations (920) - (920) (1,074) - (1,074)
Net cash, cash equivalents and
restricted cash provided by
investing activities of
discontinued operations 125,022 - 125,022 - - -
Net cash, cash equivalents and
restricted cash provided by (used
in) investing activities 124,102 - 124,102 (1,074) - (1,074)
Cash flows from financing
activities:
Recapitalization, net of costs
(Note 3) (1,502) - (1,502) - - -
Proceeds from convertible senior
notes 75,000 - 75,000 - - -
Payment of debt issuance costs (2,244) - (2,244) - - -
Repayment of Promissory Notes (119,640) - (119,640) - - -
Proceeds from Promissory Notes - - - 19,429 - 19,429
Repayment of finance leases (22) - (22) (21) - (21)
Net cash, cash equivalents and
restricted cash (used in) provided
by financing activities of
continuing operations (48,408) - (48,408) 19,408 - 19,408
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Notes to Consolidated Financial Statements
Effect of foreign currency
exchange rates on cash (1,786) - (1,786) (1,746) - (1,746)
Net increase (decrease) in
cash, cash equivalents and
restricted cash 21,842 - 21,842 (595) 87 (508)
Cash, cash equivalents and
restricted cash at beginning
of period 5,621 - 5,621 6,243 (87) (d) 6,156
Cash, cash equivalents and
restricted cash at end of
period 27,463 - 27,463 5,648 - 5,648
Less cash of discontinued
operations - - - (27) - (27)
Cash, cash equivalents and
restricted cash of
continuing operations at end
of period $ 27,463 $ - $ 27,463 $ 5,621 $ - $ 5,621
Cash and cash equivalents $ 25,990 $ - $ 25,990 $ 3,505 $ - $ 3,505
Restricted cash 1,473 - 1,473 2,116 - 2,116
Total cash, cash equivalents
and restricted cash of
continuing operations at end
of period $ 27,463 $ - $ 27,463 $ 5,621 $ - $ 5,621
Footnotes to tables:
(a) Accounting adjustment related to the Revenue Recognition Error.
(b) Accounting adjustment related to the Amortization Error.
(c) Accounting adjustment resulting from the impact of the corrections of (a) and (b) on our income tax expense.
(d) Immaterial revision to adjust beginning cash, cash equivalents and restricted cash balance to exclude the cash, cash equivalents and restricted cash balance of discontinued operations.
The Company has also restated quarterly information for 2021 - see Note 21.
Note 2. Business and Summary of Significant Accounting Policies
Merger with Newtown
OnOctober 12, 2021 ,Cyxtera Cybersecurity, Inc. , aDelaware corporation doing business asAppGate ("Legacy Appgate"), successfully completed its merger (the "Merger") with a direct, wholly owned subsidiary ofNewtown Lane Marketing, Incorporated , a public company incorporated inDelaware ("Newtown"). In connection with the Merger, Legacy Appgate changed its legal name toAppgate Cybersecurity, Inc. and upon closing of the Merger, Newtown changed its name toAppgate, Inc. Appgate's common stock is now quoted on the OTC Markets under the symbol "APGT".Appgate is seeking to uplist to theNew York Stock Exchange or Nasdaq following satisfaction of applicable listing requirements. As ofDecember 31, 2021 , we had deferred specific incremental transaction costs within prepaid and other current assets of$1.6 million in the consolidated balance sheet. Description of the BusinessAppgate 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 inCoral Gables, Florida .
Formation and Cyxtera Spin-Off
Prior to
OnDecember 31, 2019 , the boards of directors ofSIS Holdings GP LLC ("SIS GP"), the sole general partner ofSIS Holdings LP , Cyxtera's then sole stockholder ("SIS Holdings "), and Cyxtera, approved several transactions to 88
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Appgate, Inc.
Notes to Consolidated Financial Statements
reorganize Cyxtera's cybersecurity business. In connection with the
reorganization, Cyxtera redeemed, cancelled and retired 0.04 of a share of its
common stock, par value $0.01 , held by SIS Holdings , representing the relative
fair value of all of the outstanding equity interests of Cyxtera's cybersecurity
business, in exchange for the transfer by Cyxtera of all issued and outstanding
equity interests of the cybersecurity business (the "Cyxtera Spin-Off") to SIS
Holdings . The Cyxtera Spin-Off was accounted for as a common control
transaction. Accordingly, the Cyxtera Spin-Off was accounted for by Appgate as a
carve out from Cyxtera and has been accounted for based upon the guidance in ASC
Topic 805-50, Business Combinations, which requires receiving entities to
recognize the net assets received at their historical carrying amounts.
Transactions with former Parent recognized in our consolidated statements of
changes in stockholders' equity resulted from the settlement of and carve out
adjustments related to transactions with and allocations from our former
Parent.
Sale of Brainspace
OnSeptember 30, 2020 , Legacy Appgate adopted a plan for the sale ofBrainspace Corporation ("Brainspace"), which met the criteria for discontinued operations under ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations - see Note 6 for discontinued operations disclosures. LegacyAppgate executed a securities purchase agreement with respect to the sale of 100% of the outstanding equity interests of Brainspace for cash consideration of$125.0 million onDecember 17, 2020 , and the sale transaction closed onJanuary 20, 2021 . Brainspace offered a comprehensive and advanced data analytics platform for investigations, eDiscovery, intelligence mining, and compliance.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with
Principles of Consolidation
The consolidated financial statements include the accounts ofAppgate and the accounts of entities in whichAppgate has a controlling financial interest, the usual condition of which is ownership of a majority voting interest. All material intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Such estimates include, but are not limited to, the determination of revenue recognition, deferred revenue, deferred contract acquisition costs, valuation of goodwill and acquired intangible assets, the period of benefit generated from our deferred contract acquisition costs, allowance for doubtful accounts, valuation of equity awards, useful lives of property and equipment, useful lives of acquired intangible assets, valuation of deferred tax assets and liabilities, fair value of our debt and the embedded derivative liability, and the discount rate used for operating leases. Management determines these estimates and assumptions based on historical experience and on various other assumptions that are believed to be reasonable. Actual results could differ significantly from these estimates, and such differences may be material to the consolidated financial statements.
Risks and Uncertainties due to COVID-19 Pandemic
The COVID-19 pandemic continues to evolve and disrupt normal activities in many segments of theU.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 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 2020 or 2021, management took measures 89
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Notes to Consolidated Financial Statements
during such period 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.
Foreign Currency
Our reporting currency is the U.S. dollar. The functional currency of our
foreign subsidiaries is generally the currency of the economic environment in
which a particular subsidiary primarily operates. Accordingly, monetary assets
and liabilities of our foreign subsidiaries are re-measured into U.S. dollars at
the exchange rates in effect at the reporting date, non-monetary assets and
liabilities are re-measured at historical rates, and revenue and expenses are
re-measured at average exchange rates in effect during each reporting period.
The effects of translation adjustments are reported as a component of
accumulated other comprehensive income (loss) in the consolidated statements of
stockholders' equity. Foreign currency transaction gains and losses are recorded
in other expense, net in the consolidated statements of operations. We
recognized re-measurement losses of $0.4 million and $0.1 million in 2021 and
2020, respectively.
Financial Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. Our cash and cash equivalents and restricted bank deposits are invested with major banks inthe United States ,Latin America ,Europe andAsia . Generally, these investments may be redeemed upon demand, and we believe that the financial institutions that hold our cash deposits are financially sound and, accordingly, subject us to minimal credit risk. Our trade receivables are derived from sales to a diverse set of customers located in the following main geographical regions:United States andCanada ("US&C");Latin America ("LATAM");Europe , theMiddle East andAfrica ("EMEA"); andAsia Pacific ("APAC"). Concentration of credit risk with respect to trade receivables is mitigated by credit limits, ongoing credit evaluation and account monitoring procedures. As ofDecember 31, 2021 and 2020, none of our customers (including resellers and managed service providers) comprised more than 10% of our accounts receivable, net. Segment Information We operate as one reportable and operating segment. Our chief operating decision maker is our chief executive officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources.
Revenue Recognition
We primarily sell our software through on-premise term-based license agreements,
perpetual license agreements and SaaS subscriptions, which allow our customers
to use our SaaS services without taking possession of the software. Our products
offer substantially the same functionality whether our customers receive them
through a perpetual or term-based license or a SaaS arrangement. Our agreements
with customers for software licenses may include maintenance contracts and may
also include professional services contracts. Maintenance revenues consist of
fees for providing unspecified software updates and technical support for our
products for a specified term, which is typically one to three years. We offer a
portfolio of professional services and extended support contract options to
assist our customers with integration, optimization, training and ongoing
advanced technical support. We also generate revenue from threat advisory
services, including penetration testing, application assessments, vulnerability
analysis, reverse engineering, architecture review and source code review.
Under ASC Topic 606, Revenue from Contracts with Customers, we recognize revenue
when the customer obtains control of the promised goods or services in an amount
that reflects the consideration that we expect to receive in exchange for those
goods or services. Our contracts include varying terms and conditions and
identifying and evaluating the impact
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of these terms and conditions on revenue recognition requires significant judgment. In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements, we perform the following steps:
(i) identification of the contract with a customer;
We enter into contracts with customers through order forms, which in some cases are governed by master sales agreements. We determine that we have a contract with a customer when the order form has been approved by us, each party's rights regarding the products or services to be transferred can be identified, the payment terms for the services can be identified, we have determined that the customer has the ability and intent to pay and the contract has commercial substance. We apply judgment in determining the customer's ability and intent to pay, which is based on a variety of factors, including the customer's historical payment experience or, in the case of a new customer, credit, reputation and financial or other information pertaining to the customer. At contract inception, we evaluate whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance obligation. We also evaluate termination rights at contract inception to determine the impact, if any, on the contractual term.
(ii) determination of whether the promised goods or services are performance obligations;
Performance obligations promised in a contract are identified based on the products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the products or services either on their own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the products and services is separately identifiable from other promises in the contract. Our term-based license arrangements include both an obligation to provide the right to use our software, as well as an obligation to provide support and maintenance for the duration of the term. Our perpetual software licenses include the perpetual obligation to provide the right to use our software and may include an obligation to provide support and maintenance for a limited period of time. Our SaaS products provide access to SaaS services as well as support, which we consider to be a single performance obligation. Services-related performance obligations relate to software installation and the provision of consulting and training services. Software-installation services are distinct from subscriptions and do not result in significant customization of the software.
We have concluded that our contracts with customers do not contain warranties that give rise to a separate performance obligation.
(iii) measurement of the transaction price;
The transaction price is the amount of consideration we expect to be entitled to receive in exchange for transferring our products and services to a customer, excluding amounts collected on behalf of third parties. The consideration promised in our contracts with customers may include fixed amounts, variable amounts, or both.
(iv) allocation of the transaction price to the performance obligations; and
If the contract contains a single performance obligation, the entire transaction
price is allocated to the single performance obligation. For contracts that
contain multiple distinct performance obligations, we allocate the transaction
price to each performance obligation based on a relative standalone selling
price ("SSP"). We determine the transaction price with reference to the SSP of
the various performance obligations inherent within a contract. The SSP is
determined based on the prices at which we separately sell these products,
assuming the majority of these fall within a pricing range. In instances where
SSP is not directly observable, such as when we do not sell the software license
separately, we derive the SSP utilizing market conditions and other factors,
including customer type, market conditions and pricing objectives, historical
sales data, and negotiated discounts from price lists, if any, that can require
significant judgement.
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(v) recognition of revenue when the Company satisfies each performance obligation;
Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised product or service to the customer. Our term-based and perpetual license arrangements generally include both upfront revenue recognition when the distinct license is made available to the customer, as well as revenue recognized ratably over the contract period for support and maintenance based on the stand-ready nature of these elements. Further, revenue on our SaaS arrangements is generally recognized ratably over the contract period as we satisfy the performance obligation, beginning on the date our service is made available to our customers. However, certain of our on-premise license arrangements and certain of our SaaS arrangements contain usage-based fees. Revenues from usage-based arrangements for distinct on-premise licenses and SaaS subscriptions are recognized as the end user usage occurs under practical expedient ASC 606-10-55-18. For usage-based arrangements with a fixed minimum guarantee amount, the minimum amount is generally recognized upfront when the software is made available to the customer. Professional services and other revenue consist primarily of fees from professional services provided to our customers and partners to configure and optimize the use of our solutions, as well as training services related to the configuration and operation of our solutions. Our professional services are generally priced on a time and materials basis, which is generally invoiced monthly and for which revenue is recognized as the services are performed. Revenue from our training services and sponsorship fees is recognized on the date the services are complete. We generate sales directly through our sales team and through our channel partners. Sales to channel partners are made at a discount, and revenues are recorded at this discounted price once all of the revenue recognition criteria above are met. To the extent that we offer rebates, incentives or joint marketing funds to such channel partners, recorded revenues are reduced by those amounts. Channel partners generally receive an order from an end-customer prior to placing an order with us. Payment from channel partners is generally not contingent on the partner's collection from end-customers. We are generally the party primarily responsible for fulfilling the promise to provide the specified good or service to the end customer. Accordingly, for sales through our channel partners, we generally are considered the principal to the end customer and thus, we report revenue on a gross basis.
Any sales taxes collected from customers and remitted directly to government authorities are excluded from revenue and cost of sales.
Incremental Costs to Obtain a Contract with a Customer
We capitalize incremental costs associated with obtaining customer contracts, specifically certain commission payments. We pay commissions based on contract value upon signing a new arrangement with a customer and upon renewal and upgrades of existing contracts with customers only if the renewal and upgrades result in an incremental increase in contract value. We also incur commission expense on an ongoing basis based upon revenue recognized. In these cases, no incremental costs are deferred, as the commissions are earned and expensed in the same period for which the associated revenue is recognized. Based on the nature of our technology and services, and the rate at which we continually enhance and update our technology, the expected life of the customer arrangement is determined to be approximately five years. Commissions for new arrangements and incremental renewals are both amortized over approximately five years. Amortization is primarily included in sales and marketing expense in the consolidated statements of operations. The current portion of deferred commission and incentive payments is included in deferred contract acquisitions costs, current, and the long-term portion is included in deferred contract acquisition costs, noncurrent on our consolidated balance sheets.
Accounts Receivable and Allowance
Accounts receivable are recorded at the invoiced amount and are non-interest
bearing. Accounts receivable are stated at their realizable value, net of an
allowance for doubtful accounts. We have a well-established collections history
from our customers. Credit is extended to customers based on an evaluation of
their financial condition and other factors. In determining the necessary
allowance for doubtful accounts, management considers the current aging and
financial condition of our customers, the amount of receivables in dispute and
current payment patterns. The allowance for doubtful accounts has historically
not been material. We do not have any off-balance-sheet credit exposure related
to our customers.
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Notes to Consolidated Financial Statements
Cash Equivalents
We classify all highly liquid instruments with an original maturity of three months or less as cash equivalents.
Restricted Cash
Restricted cash consists of amounts invested in guaranteed investment certificates, which are required as collateral for the Company's letters of credit and credit cards issued to several employees.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market, or if none exists, the most advantageous market, for the specific asset or liability at the measurement date (the exit price). The fair value is based on assumptions that market participants would use when pricing the asset or liability. The fair values are assigned a level within the fair value hierarchy, depending on the source of the inputs to the calculation, as follows:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly.
Level 3 - Unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.
Property and Equipment, Net
Property and equipment, net is stated at historical cost net of accumulated depreciation. Property and equipment, excluding leasehold improvements, are depreciated using the straight-line method over the estimated useful lives of the respective assets, generally ranging from three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the respective assets or the lease term.
Expenditures for maintenance and repairs are expensed as incurred and significant improvements and betterments that substantially enhance the life of an asset are capitalized.
Software Development Costs Research and development costs for software to be sold, leased or marketed are expensed as incurred up to the point of technological feasibility for the related software product. We have not capitalized development costs for software to be sold, leased or marketed to date, as the software development process is essentially completed concurrently with the establishment of technological feasibility. As such, these costs are expensed as incurred and recognized in research and development costs in the consolidated statements of operations. Software developed for internal use, with no substantive plans to market such software at the time of development, are capitalized and included in property and equipment, net in the consolidated balance sheets. Costs incurred during the preliminary planning and evaluation and post implementation stages of the project are expensed as incurred. Costs incurred during the application development stage of the project are capitalized.
Business Combinations
We account for our business combinations using the acquisition method of
accounting, which requires, among other things, allocation of the fair value of
purchase consideration to the tangible and intangible assets acquired and
liabilities assumed at their estimated fair values on the acquisition date. The
excess of the fair value of purchase consideration over the values of these
identifiable assets and liabilities is recorded as goodwill. When determining
the fair value of assets acquired and liabilities assumed, we make estimates and
assumptions, especially with respect to intangible
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assets. Our estimates of fair value are based upon assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable and, as a
result, actual results may differ materially from estimates. During the
measurement period, not to exceed one year from the date of acquisition, we may
record adjustments to the assets acquired and liabilities assumed, with a
corresponding offset to goodwill if new information is obtained related to facts
and circumstances that existed on the acquisition date. After the measurement
period, any subsequent adjustments are reflected in the consolidated statements
of operations. Acquisition costs, such as legal and consulting fees, are
expensed as incurred.
Goodwill represents the excess of the fair value of purchase consideration in a business combination over the fair value of net tangible and intangible assets acquired.Goodwill amounts are not amortized, but rather tested for impairment at least annually or more often if circumstances indicate that the carrying value may not be recoverable. Upon the Cyxtera Spin-Off, our opening carve-out consolidated financial statements included the goodwill balances carried over from Cyxtera in connection with Cyxtera's acquisition of the entities that formed Legacy Appgate, less impairments. Acquired intangible assets consist of identifiable intangible assets, including developed technology, trademarks and tradenames, and customer relationships, resulting from business combinations. Acquired finite-lived intangible assets are initially recorded at fair value and are amortized on a straight-line basis over their estimated useful lives. Amortization expense of trademarks and tradenames, and customer relationships is recorded primarily within depreciation and amortization in the consolidated statements of operations. Amortization expense of developed technology is recorded within cost of revenue in the consolidated statements of operations. Long-lived assets, such as property and equipment, right-of-use assets and acquired intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We measure the recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows that these assets are expected to generate. If the total of the future undiscounted cash flows are less than the carrying amount of an asset, we record an impairment charge for the amount by which the carrying amount of the asset exceeds the fair value. No impairment of long-lived assets was recorded during 2021 and 2020.
Assets Held for Sale
We consider assets to be held for sale when management, with appropriate authority, approves and commits to a formal plan to actively market the assets for sale at a price reasonable in relation to their estimated fair value, the assets are available for immediate sale in their present condition, an active program to locate a buyer has been initiated, the sale of the assets is probable and expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, we record the assets at the lower of their carrying value or their estimated fair value, reduced for the cost to dispose the assets, and cease to record depreciation and amortization expenses on the assets. Assets and liabilities of a discontinued operation are reclassified for all comparative periods presented in the consolidated balance sheet. Refer to Note 6 - Discontinued Operations for additional information regarding our assets and liabilities held for sale.
Discontinued Operations
We report financial results for discontinued operations separately from
continuing operations to distinguish the financial impact of disposal
transactions from ongoing operations. Discontinued operations reporting occurs
only when the disposal of a component or a group of components of the Company
(i) meets the held-for-sale classification criteria, is disposed of by sale, or
disposed of other than by sale, and (ii) represents a strategic shift that will
have a major effect on our operations and financial results. The results of
operations and cash flows of a discontinued operation are restated for all
comparative periods presented. Unless otherwise noted, discussion in the notes
to our consolidated financial statements refers to the Company's continuing
operations only. Refer to Note 6 - Discontinued Operations for additional
information regarding our discontinued operations.
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Notes to Consolidated Financial Statements
Operating and Finance Leases
We enter into operating lease arrangements for real estate assets related to office space and colocation assets related to space and racks at data center facilities. Operating leases related balances are included in "operating lease right-of-use assets," "operating lease liabilities, current," and "operating lease liabilities, noncurrent" in our consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make payments arising from the lease. We determine if an arrangement contains a lease at inception based on whether there is an identified asset and whether the Company controls the use of the identified asset throughout the period of use. We classify leases as either financing or operating. Our finance leases were not significant to any of the periods presented. Operating lease right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease payments consist of the fixed payments under the arrangement. Variable costs, such as maintenance and utilities based on actual usage, are not included in the measurement of right-to-use assets and lease liabilities but are expensed and disclosed when the event determining the amount of variable consideration to be paid occurs. As the implicit rate of our leases is not determinable, we use an incremental borrowing rate to determine the value of lease obligations. The incremental borrowing rate represents the rate of interest that would be paid to borrow on a collateralized basis over a similar term. The Company determines its incremental borrowing rate based on information available as of the lease commencement date, including applicable lease terms and the current economic environment. The lease expense is recognized on a straight-line basis over the lease term. We generally use the base, non-cancelable lease term when recognizing the right-of-use assets and lease liabilities, unless it is reasonably certain that a renewal or termination option will be exercised. We account for lease components and non-lease components as a single lease component for all classes of underlying assets. Right-of-use assets are assessed for impairments consistent with our long-lived asset policy. Leases with a term of twelve months or less are deemed short-term leases and are not recognized on the consolidated balance sheets for all classes of underlying assets. We recognize lease expense for these leases on a straight-line basis over the term of the lease and provide appropriate disclosures.
Debt Issuance Costs and Fees
Debt issuance costs and fees are capitalized and amortized over the term of the related loans based on the effective interest method. Such amortization is a component of interest expense, net on the consolidated statements of operations. Debt issuance costs related to outstanding debt are presented as a reduction of the carrying amount of the debt liability on our consolidated balance sheets.
Derivatives
We do not use derivative instruments to hedge exposures to cash flow, market, or
foreign currency risks. We evaluate all of our financial instruments to
determine if such instruments are derivatives or contain features that qualify
as embedded derivatives, pursuant to ASC 480, Distinguishing Liabilities from
Equity, and ASC 815, Derivatives and Hedging ("ASC 815"). The classification of
derivative instruments, including whether such instruments should be recorded as
liabilities or as equity, is re-assessed at the end of each reporting period.
As described in Note 12, we have determined that the conversion feature under
our Convertible Senior Notes (as defined in Note 12) requires bifurcation from
the debt host agreement in accordance with ASC 815. Accordingly, we recognize a
derivative liability at fair value for this instrument in our consolidated
balance sheet and adjust the carrying value of the liability to fair value at
each reporting period until the conversion feature underlying the instrument is
exercised, redeemed, cancelled or expires. The changes in fair value are
recorded as other expense in our consolidated statement of operations.
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Notes to Consolidated Financial Statements
Equity-based Compensation
SIS Holdings issued equity awards in the form of profit interest units ("PIUs") to certain employees ofAppgate and its affiliates. Compensation expense related to PIU awards is based on the fair value of the underlying units on the grant date. Fair value of PIUs is estimated using a Black-Scholes option pricing model ("OPM"), which requires assumptions as to expected volatility, dividends, term, and risk-free rates. These PIUs vest based on a service condition. For additional information regarding equity-based compensation, see Note 15 - Profit Interest Units ofSIS Holdings LP .
Research and Development
Our research and development expenses support our efforts to add new features to our existing offerings and to ensure the reliability, availability and scalability of our solutions. Our research and development teams employ software engineers in the design and the related development, testing, certification and support of our solutions. Accordingly, the majority of our research and development expenses result from employee-related costs, including salaries, bonuses and benefits and costs associated with technology tools used by our engineers.
Advertising Expenses
Advertising expenses are charged to sales and marketing expense in the
consolidated statements of operations as incurred. We recognized advertising
expense of
Income Taxes
ThroughDecember 31, 2019 , the operations of Legacy Appgate were included in the consolidatedU.S. federal, state, local and foreign income tax returns, filed by Cyxtera, where applicable. In jurisdictions in which we were included in Cyxtera's tax returns, any income taxes payable/receivable resulting from the related income tax provisions have been reflected in the balance sheets of each separate entity's provision. See Note 5 - Transactions with Former Parent - Cyxtera. We account for income taxes using the asset and liability method. Deferred income taxes are recognized by applying the enacted statutory tax rates applicable to future years to differences between the carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance to amounts that are more likely than not to be realized. We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. OnDecember 22, 2017 , theU.S. Tax Cuts and Jobs Act of 2017 (the "Tax Act") was signed into law. The Tax Act revisedU.S. corporate income tax law by, among other things, reducing theU.S. federal corporate income tax rate to 21 percent, imposed a minimum tax on foreign earnings related to intangible assets called global intangible low-taxed income ("GILTI"), a one-time transition tax on previously unremitted foreign earnings, and modified the taxation of other income and expense items. With regards to the GILTI minimum tax, foreign earnings are reduced by the profit attributable to tangible assets and a deductible allowance of up to 50 percent, subject to annual limitations. For GILTI, we have elected to account for the impact of the minimum tax as a period cost when incurred. The effects of the Tax Act on the measurement of deferred tax assets and liabilities and other aspects of our income tax provision are described in greater detail in Note 18 - Income Taxes.
Comprehensive Loss
Comprehensive loss consists of two components, net loss and other comprehensive
loss. Other comprehensive loss refers to unrealized foreign currency gains or
losses that are recorded as an element of stockholders' equity and are excluded
from net loss.
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Notes to Consolidated Financial Statements
Income (Loss) Per Common Share
As described earlier, onOctober 12, 2021 , Legacy Appgate completed the Merger. In accordance with applicable guidance, the equity structure of Legacy Appgate has been restated in all comparative periods up to the closing date of the Merger to reflect the number of shares ofAppgate's common stock,$0.001 par value per share, issued to Legacy Appgate's sole shareholder in connection with the Merger. As such, the shares and corresponding capital amounts and earnings per share related to Newtown common stock prior to the Merger have been retroactively restated to reflect the new equity structure ofAppgate post-Merger.
Recently Adopted Accounting Pronouncements
InAugust 2020 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, designed to reduce the complexity and improve comparability of financial reporting associated with accounting for convertible instruments and contracts in an entity's own equity. Key changes in the ASU include:
•Convertible debt will no longer be bifurcated into debt and equity for most convertible securities, thus improving the GAAP interest expense treatment;
•Precludes the use of the treasury stock method for convertible securities with flexible settlement with net share settlement intent;
•Removes the following features required for equity contracts to be exempt from derivative accounting: (a) to consider whether a contract would be settled in registered shares, (b) to consider whether collateral is required to be posted and (c) to assess shareholder rights;
•Enhances information transparency by making targeted improvements to disclosure for convertible instruments and earnings-per share guidance; and
•Clarifies that an average market price for a given reporting period (and not the quarter-end stock price) should be used to calculate any in-the-money share dilution. The ASU allows entities to adopt the guidance through either a modified retrospective method (i.e., applying changes on an ongoing basis) or fully retrospective method (i.e., applying changes retrospectively). The new standard is effective for smaller reporting companies defined for fiscal years beginning afterDecember 15, 2023 , including the interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning afterDecember 15, 2020 , including interim periods. We adopted this standard onJanuary 1, 2021 . The adoption of this standard did not have a material impact to our consolidated financial statements. InDecember 2020 , the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) ("ASU 2019-12"): Simplifying the Accounting for Income Taxes. The new standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. For public business entities, it is effective for fiscal years beginning afterDecember 15, 2020 , including interim periods within those fiscal years. Early adoption is permitted. We adopted this standard onJanuary 1, 2021 . The adoption of this standard did not have a material impact to our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
InJune 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 97
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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 3. Merger Transaction
OnOctober 12, 2021 , Legacy Appgate completed the Merger. Upon consummation of the Merger, Newtown issued 117,149,920 shares of its common stock toSIS Holdings , the sole stockholder of Legacy Appgate as of immediately prior to the closing, in exchange for all outstanding shares of Legacy Appgate common stock. In connection with the Merger, Newtown issued 666,667 shares of Newtown common stock to an advisor of Newtown (the "Advisor") and one or more existing stockholders of Newtown contributed 666,667 shares of Newtown common stock to Newtown. OnOctober 12, 2021 , in connection with closing, Newtown entered into a supplemental agreement (the "Supplemental Agreement") with Legacy Appgate and Magnetar, as representative of the holders of the Convertible Senior Notes (as defined in Note 12), pursuant to which Newtown, among other things, unconditionally guaranteed all of Legacy Appgate's Obligations (as defined in the Note Issuance Agreement described and defined in Note 12), including the Convertible Senior Notes, and assumed all of Legacy Appgate's Conversion Obligations and Change of Control Conversion Obligations (each as defined in the Note Issuance Agreement). Immediately after giving effect to the Merger and assuming no conversion of the Convertible Senior Notes and no issuance of shares under the 2021 Plan (as defined in Note 22), the holders of Newtown's common stock as of immediately prior to the closing of the Merger, together with the Advisor, own an aggregate of approximately 11% of the Company's common stock andSIS Holdings , the sole stockholder of Legacy Appgate as of immediately prior to the closing of the Merger, owns an aggregate of approximately 89% of the Company's common stock. The accumulated deficit of Newtown was eliminated to reflect the legal capitalization of the combined entity upon the completion of the Merger. As a result of the Merger,SIS Holdings became the controlling stockholder of the Company. Accordingly, the Merger of Newtown's wholly owned subsidiary, Merger Sub, with and into Legacy Appgate was a reverse merger that was accounted for as a recapitalization of Legacy Appgate. As described in Note 2, upon completion of the Merger, Newtown changed its name toAppgate, Inc.
A summary of the current assets that were acquired and current liabilities assumed in the reverse merger transaction is as follows (in thousands):
Current assets: Cash$ 9 Total current assets 9 Current liabilities: Accounts payable and accrued expenses 1,093 Convertible notes payable - Related Party 367 Due to unrelated party 167 Total current liabilities 1,627 Net current liabilities$ (1,618)
Upon completion of the Merger, the settlement of all net liabilities of Newtown
was treated as a direct reduction from the recapitalization transaction in
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Notes to Consolidated Financial Statements
Note 4. Income (Loss) per Common Share
Basic loss per common share is computed by dividing net loss (the numerator) by the weighted-average number of shares of common stock outstanding (the denominator) for the period. Diluted 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 2021, the Company's potential dilutive shares consist of 10,982,805 shares ofAppgate's common stock underlying the Convertible Senior Notes that is convertible at any time at the option of the holders of the Convertible Senior Notes prior to their maturity - see Note 12. These potentially dilutive shares have been excluded from diluted (loss) income per share for the 2021 period 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 stock outstanding used to calculate both basic and diluted net loss per share is the same in 2021.
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 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 per share amounts):
(As Restated) (As Restated) (As Restated) (As Restated)
2021 2020 2021 2020
Continuing operations Discontinued operations
Numerator:
Net (loss) income attributable to common
stockholders - basic $ (138,842) $
(54,260)
78,497 - - -
Net (loss) income attributable to common
stockholders - diluted $ (60,345) $
(54,260)
Denominator:
Weighted-average shares of common stock - basic 39,951,865 13,757,550 39,951,865 13,757,550 Effect from conversion of shares of common stock under the Convertible Senior Notes (Note 12) 10,982,805 - 10,982,805 - Weighted-average shares of common stock - diluted 50,934,670 13,757,550 50,934,670 13,757,550 Basic earnings per share$ (3.48) $
(3.94) $ 1.64 $ 0.08 Diluted earnings per share
$ (3.48) $
(3.94) $ 1.64 $ 0.08
Note 5. Transactions with Former Parent - Cyxtera
As discussed in Note 2, onDecember 31, 2019 , Cyxtera consummated the Cyxtera Spin-Off, following which Legacy Appgate became a stand-alone entity. The transaction 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 and certain equity owners ofSIS Holdings . These agreements, relationships and transactions are described below.
Service Provider Fees
In connection with the formation of Cyxtera in 2017, certain equity owners ofSIS 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 99
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"Company Group "). Under the Services Agreement, the Service Providers agreed to
provide certain executive and management, financial, consulting, human resources
and advisory services as requested 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. Legacy Appgate was allocated $0.1
million in 2020 under the Services Agreement through the Intercompany Master
Services Agreement described below. The Service Providers waived all fees under
the Services Agreement for 2021. The Services Agreement was terminated on July
29, 2021 .
Also in connection with the formation of Cyxtera in 2017, theCompany 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 theCompany Group from time to time, including financial, accounting, administrative, facilities and other services. Except as set forth under "Service Provider Fees" above, no amounts were allocated to Legacy Appgate under the Intercompany Master Services Agreement in 2020 or 2021. The Intercompany Master Services Agreement was terminated onJuly 29, 2021 .
Upon consummation of the Cyxtera Spin-Off, Legacy Appgate and theManagement Company entered into a transition services agreement (the "Transition Services Agreement"), pursuant to which theManagement Company provided certain transition services to us, and we provided certain transition services to theManagement Company . The term under the Transition Services Agreement commenced onJanuary 1, 2020 and ended onJune 30, 2021 . Substantially all of the obligations under the Transition Services Agreement ceased onDecember 31, 2020 . During 2021 and 2020, theManagement Company charged Legacy Appgate$0.1 million and$4.2 million , respectively, for services rendered under the Transition Services Agreement, including$1.5 million and$0.1 million of short-term lease cost and variable lease costs in 2020. Costs incurred under the Transition Services Agreement are included in general and administrative expenses in the consolidated statement of operations for 2021 and 2020. During 2021 and 2020, Legacy Appgate charged theManagement Company $0.1 million and$0.3 million , respectively, of fees for services provided to theManagement Company and its affiliates by Legacy Appgate under the Transition Services Agreement. Income for these services is included in other expenses, net in the consolidated statement of operations for 2021 and 2020.
Promissory Notes
OnMarch 31, 2019 , Legacy Appgate issued promissory notes to each of Cyxtera and theManagement Company (together, the "Promissory Notes") evidencing funds borrowed at such time by Legacy Appgate from each of Cyxtera and theManagement 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 throughDecember 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 ofMarch 30, 2020 and was extended throughMarch 30, 2021 by amendments entered into effective as ofMarch 30, 2020 . During 2020, we received advances of$19.4 million under the Promissory Notes (none during 2021). The outstanding principal and interest under the Promissory Notes was$153.8 million as ofDecember 31, 2020 . Management believes that the carrying value of the Promissory Notes approximated fair value.
During 2021 and 2020, we recognized
OnFebruary 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 100
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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 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 2021.
Note 6. Discontinued Operations
As stated in Note 2, onJanuary 20, 2021 , Legacy Appgate completed the sale of 100% of the outstanding equity interests of its formerly wholly owned subsidiary, 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 consolidated statements of operations for all periods presented. Additionally, the related assets and liabilities associated with discontinued operations in the prior year consolidated balance sheet are classified as discontinued operations.
The major classes of assets and liabilities attributable to discontinued
operations as of
ASSETS
Current assets:
Cash $ 27 Accounts receivable, net of allowance of
208
Deferred contract acquisition costs, current 279
Total current assets 5,716
Contract assets, noncurrent 5,732
Deferred contract acquisition costs, noncurrent 666
33,696
Intangible assets, net 15,758
Total assets $ 61,568
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable $ 128
Accrued expenses 4,993
Deferred revenue 1,857
Total current liabilities 6,978
Other liabilities 180
Total liabilities 7,158
Net assets $ 54,410
Total assets and total liabilities as of December 31, 2020 were classified as
current assets and liabilities of discontinued operations in the December 31,
2020 consolidated balance sheet.
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The major items constituting net income attributable to discontinued operations for 2021 and 2020 are presented below (in thousands):
(As Restated) (As Restated)
2021 2020
Revenue $ 2,111 $ 17,829
Cost of revenue, exclusive of amortization shown below 142 2,492
Amortization expense - 2,296
Total cost of revenue 142 4,788
Gross profit 1,969 13,041
Operating expenses:
Sales and marketing 240 3,337
Research and development 290 4,285
General and administrative - 2,811
Depreciation and amortization (1) - 1,094
Total operating expenses 530 11,527
Income from operations 1,439 1,514
Gain on the disposal of the discontinued operation 64,621 -
Other expense, net - (422)
Income from discontinued operations 66,060 1,092
Income tax expense of discontinued operations (346) -
Net income of discontinued operations, net of tax $
65,714
(1)Comprises depreciation and amortization expense of direct Brainspace intangibles.
Note 7. Revenue Disaggregation of Revenue
The following table summarizes our revenue by category (in thousands):
(As Restated) (As Restated)
2021 2020
Subscription revenue:
Multi-year subscription term-based licenses $ 11,101 $ 6,062
1-year subscription term-based licenses 8,568
4,984
Total subscription term-based licenses 19,669 11,046 Subscription SaaS 10,526 9,173 Support and maintenance 4,140 3,352 Total subscription revenue 34,335 23,571 Perpetual licenses 2,055 2,770 Services and other 6,643 6,814 Total$ 43,033 $ 33,155 102
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Notes to Consolidated Financial Statements
The following table summarizes revenue by 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 (in
thousands):
(As Restated) (As Restated)
2021 2020
Revenues by country (a):
United States $ 20,568 $ 15,463
Colombia 6,735 3,521
Ecuador 3,332 3,765
Other 12,398 10,406
Total $ 43,033 $ 33,155
Revenues by main geography:
US&C $ 22,694 $ 16,568
LATAM 15,142 12,064
EMEA 2,906 2,790
APAC 2,291 1,733
Total $ 43,033 $ 33,155 (a) Only
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 each period 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. In 2021 and 2020, we recognized revenue of$6.0 million and$4.3 million , respectively, that was included in the corresponding contract liability balance at the beginning of the related year. 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$10.1 million and$6.8 million as ofDecember 31, 2021 and 2020, 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 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. 103
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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 ofDecember 31, 2021 , the aggregate amount of the transaction price allocated to remaining performance obligations was$37.6 million . We expect to recognize 46% 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):
(As Restated) (As Restated)
2021 2020
Beginning balance $ 3,061 $ 2,007
Capitalization of contract acquisition costs 6,193 4,927
Amortization of deferred contract acquisition costs (5,333)
(3,987)
Impacts of foreign currency translation 384
114
Ending balance$ 4,305 $
3,061
Deferred contract acquisition costs, current
1,587
Deferred contract acquisition costs, noncurrent
1,474
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 2021 and 2020. Sales commissions accrued but not paid as ofDecember 31, 2021 and 2020 totaled$1.4 million and$1.7 million , respectively, and are included within accrued expenses in the consolidated balance sheets.
Our fulfillment costs are generally not significant.
Note 8. Financial Instruments and Fair Value Measurements
Our financial instruments consist of cash equivalents, accounts receivable, accounts payable, accrued expenses, deferred revenue, our debt and an embedded derivative liability. Our debt consisted of our Convertible Senior Notes as ofDecember 31, 2021 and our Promissory Notes as ofDecember 31, 2020 . 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. Refer to Note 5 - Transactions with Former Parent - Cyxtera, for the carrying amount and estimated fair value of our Promissory Notes as ofDecember 31, 2020 and their subsequent repayment and extinguishment. The carrying value of our Convertible Senior Notes, net of issuance costs was$73.0 million as ofDecember 31, 2021 . The fair value of the Convertible Senior Notes was estimated as$69.5 million as ofDecember 31, 2021 . The fair value was estimated using a discounted cash flow analysis with a yield based on our credit rating.
Recurring Fair Value Measurements
The fair value of the embedded derivative liability was estimated using a "with
and without" approach as of
•"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.
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•"Without" scenario: the fair value of the Convertible Senior Notes "without"
the embedded features was estimated using a DCF model whereby the contractual
cash flows absent the embedded derivative (i.e., the coupon and principal
payments) are discounted at a risk-adjusted rate.
The following table summarizes fair value measurements by level at
Level 1 Level 2 Level 3 Total
Financial liability:
Embedded derivative liability $ - $ -
No financial instruments were measured at fair value on a recurring basis at
The following table presents the changes in Level 3 liabilities measured at fair value on a recurring basis in 2021 (in thousands):
Embedded derivative liability Total liabilities
Balance at January 1, 2021 $ - $
-
Loss included in earnings 78,497
-
Balance at December 31, 2021 $ 78,497 $
78,497
The loss included in the previous table is reported in our consolidated statement of operations within change in fair value of embedded derivative liability. There were no transfers between fair value measurement levels during 2020 and there were no Level 3 liabilities outstanding during 2020.
The significant unobservable inputs used in the fair value measurement of our embedded derivative liability are a volatility rate of 64.0% and a bond yield of 8.85%. 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 2.1 years atDecember 31, 2021 . 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 9. Balance Sheet Components
Accounts Receivable and Allowance for Doubtful Accounts
Our accounts receivable represent amounts invoiced and due from our customers
(including, for the avoidance of doubt, resellers and managed service providers)
under our revenue contracts. The activity in the allowance for doubtful accounts
was as follows (in thousands):
2021 2020
Beginning balance$ 437 $
650
(Reversal of) Provision for allowance for doubtful accounts (95) 364 Write offs
(218) (592)
Impacts of foreign currency translation 39 15 Ending balance$ 163 $ 437 105
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Prepaid and Other Current Assets
Our prepaid and other current assets consisted of the following as of
2021 2020
Prepaid expenses $ 4,247 $ 1,640
Withholding taxes 394 336
Deferred costs 1,555 -
Other current assets - 36
Total 6,196 2,012
Property and Equipment, Net
Our property and equipment, net consisted of the following as of
2021 2020
Leasehold improvements $ 4,225 $ 5,241
Equipment and fixtures 4,233 2,856
8,458 8,097
Less: accumulated depreciation and amortization (6,343) (6,268) Property and equipment, net
$ 2,115 $ 1,829
During 2021 and 2020, we recognized depreciation and amortization expense on
property and equipment of
Note 10.
The carrying amount of goodwill was
Intangible Assets, Net Our acquired intangible assets subject to amortization consist of customer relationships, trademarks and tradenames, and developed technology and were originally acquired by Cyxtera when it acquired the entities that formed LegacyAppgate . 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 ofDecember 31, 2021 and 2020 (in thousands): Weighted 2021 2020 average Accumulated Accumulated remaining useful life Gross amortization Net Gross amortization Net (Years) Customer relationships$ 30,157 $ (15,706) $ 14,451 $ 30,157 $ (12,347) $ 17,810 4.6 Trademarks and tradenames 18,732 (8,051) 10,681 18,732 (6,741) 11,991 8.8 Developed technology 38,881 (27,554) 11,327 38,869 (23,028) 15,841 2.7 Total$ 87,770 $ (51,311) $ 36,459 $ 87,758 $ (42,116) $ 45,642 The main changes in the carrying amount of each major class of intangible assets during 2021 and 2020 was amortization, and to a lesser extent, foreign currency translation. 106
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We recorded amortization expense on intangible assets of $9.2 million and $10.9
million in 2021 and 2020, respectively. Amortization expense for all intangible
assets, except our developed technology, was recorded within depreciation and
amortization expense in the consolidated statements of operations. Amortization
expense for our developed technology was recorded within cost of revenue in the
consolidated statements of operations.
Future amortization expense of intangible assets is as follows (in thousands):
For the years ending:
2022 $ 9,148
2023 8,623
2024 7,471
2025 4,303
2026 2,297
Thereafter 4,617
Total $ 36,459
Impairment Tests
We perform annual impairment tests of goodwill on October 1st of each year or
whenever an indicator of impairment exists. No impairment was recorded during
2021 and 2020.
Note 11. Leases
We lease office space and certain colocation space under non-cancelable
operating lease agreements. As described in Note 5, we were also party to
agreements with Cyxtera that have been determined to be short-term leases and
some that consisted solely of variable lease payments. We also leased certain
equipment under finance lease arrangements that expired in November 2021 .
Finance leases were not significant and were included in other noncurrent
liabilities in the consolidated balance sheet as of December 31, 2020 .
Operating Leases
The following is a summary of our operating lease costs for 2021 and 2020 (in
thousands):
2021 2020
Operating lease cost $ 1,120 $ 1,411
Short-term lease cost 68 1,611
Variable lease cost 76 334
Total operating lease costs
Included in 2020 short-term lease cost and variable lease cost above is$1.5 million and$0.1 million , respectively, charged to us by theManagement Company under the Transition Services Agreement described in Note 5. Substantially all of the obligations under the Transition Services Agreement ceased onDecember 31, 2020 . The Intercompany Master Services Agreement was terminated onJuly 29, 2021 . The Transition Services Agreement ended onJune 30, 2021 .
The following table presents information about leases on our consolidated
balance sheets as of
2021 2020
Operating lease right-of-use assets
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At December 31, 2021 , the weighted-average remaining lease term and
weighted-average discount rate for operating leases were 4.0 years and 6.39%,
respectively. At December 31, 2020 , the weighted-average remaining lease term
and weighted-average discount rate for operating leases were 3.4 years and
5.92%, respectively.
Cash paid for amounts included in the measurement of operating lease liabilities
was
Right-of-use assets obtained in exchange for lease obligations was
Maturities of operating lease liabilities consisted of the following as of
For the years ending: 2022$ 875 2023 643 2024 571 2025 539 2026 377 Thereafter 27 Total future minimum lease payments 3,032 Less: Imputed interest (343) Total$ 2,689
Note 12. Convertible Senior Notes
Convertible Senior Notes consist of the following as of
Principal amount of Convertible Senior Notes
(2,032)
Net carrying amount $ 72,968
On February 9, 2021 , Legacy Appgate issued $50.0 million in aggregate principal
amount of convertible senior notes due 2024 (the "First Tranche") to various
funds managed by Magnetar Financial LLC ("Magnetar"). In connection with the
closing of the Merger, Legacy Appgate issued an additional $25.0 million in
aggregate principal balance in convertible notes to various funds managed by
Magnetar (together with the First Tranche, the "Convertible Senior Notes"). The
Convertible Senior Notes are subject to the terms and conditions of the note
issuance agreement among Legacy Appgate, Legacy Appgate's wholly owned domestic
subsidiaries and Magnetar, the representative of the noteholders (the "Note
Issuance Agreement"), and the note purchase agreement among Legacy Appgate and
the lender parties thereto (the "Note Purchase Agreement"). Capitalized terms
not otherwise defined in this Note 12 have the meanings ascribed to them in the
Note Issuance Agreement.
We received net proceeds of $72.8 million from the issuance of the Convertible
Senior Notes, after deducting fees and expenses of $2.2 million . We recorded
these fees and expenses as debt issuance costs that will be amortized over the
term of the Convertible Senior Notes.
The Convertible Senior Notes are senior, unsecured obligations of Legacy
Appgate , and the payment of the principal and interest is unconditionally
guaranteed, jointly and severally by Legacy Appgate's U.S. subsidiaries and, as
of the closing of the Merger, also by Appgate . The Convertible Senior Notes will
mature on February 9, 2024 , unless earlier converted, redeemed, or repurchased.
The Note Issuance Agreement was amended, effective as of February 9, 2022 , to,
among other things, provide that Magnetar may elect, with our consent, to invest
up to an additional $25.0 million in aggregate principal amount of Convertible
Senior Notes, in one or more closings, on or prior to the earlier of (i)
seventy-five (75) days after the Company closes a registered offering of equity
securities in an aggregate amount of no less than $40.0 million and (ii) October
31, 2022 .
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Interest on the Convertible Senior Notes is payable either entirely in cash or
entirely in kind ("PIK Interest"), or a combination of cash and PIK Interest at
our discretion. The Convertible Senior Notes bear interest at the annual rate of
5% with respect to interest payments made in cash and 5.50% with respect to PIK
Interest, with interest payable semi-annually on February 1 and August 1 of each
year, commencing on August 1, 2021 . Additional notes ("PIK Notes") to be issued
for PIK Interest will have the same terms and conditions as the Convertible
Senior Notes. The Note Issuance Agreement includes certain affirmative and
financial covenants we are required to satisfy (as further described below). We
were in compliance with all covenants as of December 31, 2021 .
Supplemental Agreement
OnOctober 12, 2021 , in connection with the closing of the Merger, Newtown entered into a supplemental agreement (the "Supplemental Agreement") with LegacyAppgate and Magnetar, as representative of the holders of the Convertible Senior Notes, pursuant to which Newtown, among other things, unconditionally guaranteed all of Legacy Appgate's Obligations under the Note Issuance Agreement, including the Convertible Senior Notes, and assumed all of Legacy Appgate's Conversion Obligations and Change of Control Conversion Obligations under the Note Issuance Agreement.
During 2021, we recognized
Other key terms of the Convertible Senior Notes, as of
Conversion upon Change of Control. If Legacy Appgate undergoes a Change of Control other than the Merger prior to maturity, each holder of Convertible Senior Notes shall have the option to convert all or any portion of such Convertible Senior Notes into Legacy Appgate common stock or, following entry into the Supplemental Agreement (as defined above), our common stock, subject to and in accordance with the terms of the Note Issuance Agreement, including the applicable conversion rate thereunder. Conversion. Other than upon a Change of Control, prior to maturity, each holder of the Convertible Senior Notes shall have the option to convert all or any portion of such Convertible Senior Notes into Legacy Appgate common stock or, following entry into the Supplemental Agreement, our common stock, subject to and in accordance with the terms of the Note Issuance Agreement, including the applicable conversion rate thereunder. Guarantees; Conversion Obligations. The Convertible Senior Notes are guaranteed by each of Legacy Appgate's wholly owned domestic subsidiaries and, as of the closing of the Merger, also byAppgate . Upon the consummation of certain events resulting in Legacy Appgate becoming a direct or indirect subsidiary of any person (including the Merger), such acquiring person, any direct or indirect parent company thereof and each subsidiary thereof (immediately prior to such event) shall unconditionally guarantee Legacy Appgate's Obligations and assume all of Legacy Appgate's Conversion Obligations and Change of Control Conversion Obligations and, upon such assumption, Legacy Appgate shall be released from its Conversion Obligations and Change of Control Conversion Obligations. Repurchase Upon a Fundamental Change. Upon the occurrence of a Fundamental Change at any time after a Public Company Event, each holder of Convertible Senior Notes shall have the option to require Legacy Appgate to repurchase for cash all or any portion of such Convertible Senior Notes, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon, subject to and in accordance with the terms of the Note Issuance Agreement. Repurchase Upon a Change of Control. Upon the occurrence of a Change of Control other than the Merger at any time before a Public Company Event, each holder of Convertible Senior Notes shall have the option to require Legacy Appgate to repurchase for cash all or any portion of such Convertible Senior Notes, at a repurchase price equal to 102% of the principal amount thereof, plus accrued and unpaid interest thereon, subject to and in accordance with the terms of the Note Issuance Agreement. Covenants. The Note Issuance Agreement contains restrictive covenants that, among other things, generally limit the ability of our and certain of our subsidiaries (subject to certain exceptions) to: (i) incur additional debt and issue Disqualified Stock; (ii) create liens; (iii) pay dividends, acquire shares of capital stock, or make investments; (iv) issue guarantees; (v) sell assets and (vi) enter into transactions with affiliates. The Note Issuance Agreement also contains a financial covenant that requires that we maintain liquidity of not less than$10.0 million as of the last day of any calendar 109
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month. The foregoing restrictive covenants are subject to a number of important exceptions and qualifications, as set forth in the Note Issuance Agreement.
Events of Default. The Note Issuance Agreement provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others: (i) nonpayment of principal or interest; (ii) breach of covenants or other agreements in the Note Issuance Agreement; (iii) defaults in failure to pay certain other indebtedness; and (iv) certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing under the Note Issuance Agreement, Magnetar or the holders of at least 25% in aggregate principal amount of the Convertible Senior Notes then outstanding may declare the principal of, premium, if any, and accrued interest on all the Convertible Senior Notes immediately due and payable. No Registration. The Convertible Senior Notes and anyAppgate 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 inthe United States absent registration under the Securities Act or an applicable exemption from registration requirements. This description of the Note Issuance Agreement and the Convertible Senior Notes does not constitute an offer to sell, or the solicitation of an offer to buy, any securities and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful.
If the holders have not converted the Convertible Senior Notes and the Convertible Senior Notes have not been redeemed by the maturity date, Legacy Appgate must repay the outstanding principal amount and accrued interest.
Embedded Derivative Liability
The Convertible Senior Notes contain (i) call options to be settled in cash upon the occurrence of a Change of Control (other than the Merger), (ii) put options to be settled in cash contingent upon the occurrence of a Fundamental Change after a Public Company Event or a Change of Control (other than the Merger) and (iii) a default interest rate increase of 3% applicable upon the occurrence of an event of default.Appgate evaluated these embedded redemption features under the guidance of ASC 815, and determined that a redemption feature contained a substantial premium requiring bifurcation at fair value. However, management determined the probability of a Change of Control to be remote and as such the fair value of the embedded redemption feature has been estimated to be zero. Management also evaluated the contingent interest feature and determined the likelihood of payment to be remote. Accordingly, the fair value of the contingent interest feature was also estimated to be zero. Lastly, management evaluated the embedded conversion feature, and determined that following the closing of the Merger, this embedded feature meets the net settlement criterion under ASC 815-15-25. Consequently, the automatic conversion meets the criteria under ASC 815-15-25-1(c). For an embedded feature to be bifurcated, it must meet all three criteria in ASC 815-15-25-1. Therefore, this embedded feature requires bifurcation. Accordingly, we have recorded an embedded derivative liability representing the combined fair value of the right of the noteholders to receive 10,982,805 shares of our common stock upon conversion of the Convertible Senior Notes at any time (the "conversion feature"). The embedded derivative liability is presented as a non-current liability in our consolidated balance sheet and is adjusted to reflect fair value at each period end with changes in fair value recorded in the "Change in fair value of embedded derivative liability" financial statement line item of our consolidated statements of operations. We will continue to adjust the embedded derivative liability for changes in fair value until the underlying conversion feature is exercised, redeemed, cancelled or expires. As ofDecember 31, 2021 , the carrying amount of this embedded derivative included in our consolidated balance sheet was$78.5 million . The fair value of this derivative is estimated using Level 3 inputs in the fair value hierarchy on a recurring basis. Refer to Note 8 - Financial Instruments and Fair Value Measurements. Based on the estimated value of the derivative atDecember 31, 2021 , if the noteholders were to exercise the conversion feature, they would receive approximately$3.5 million in excess over the aggregate principal amount on the Convertible Senior Notes.
Note 13. Commitments and Contingencies
Letters of Credit
As ofDecember 31, 2021 , we had$1.5 million in irrevocable stand-by letters of credit outstanding, which were issued primarily to guarantee a subsidiary's performance under contracts with customers and as a guarantee under the Company's corporate credit card line. As ofDecember 31, 2021 , no amounts had been drawn on any of these irrevocable stand-by letters of credit. 110
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Notes to Consolidated Financial Statements
Non-cancelable Purchase Obligations
In the normal course of business, we enter into non-cancelable purchase
commitments with various parties to purchase products and services, such as
technology equipment, subscription-based cloud service arrangements, corporate
events and consulting services. As of
Legal Contingencies
We may be subject to legal proceedings and litigation arising from time to time. We record a liability when we believe that it is both probable that a loss has been incurred and the amount can be reasonably estimated. We periodically evaluate developments in our legal matters that could affect the amount of liability that we accrue, if any, and adjust, as appropriate. Until the final resolution of any such matter for which we may be required to record a liability, there may be a loss exposure in excess of the liability recorded and such amount could be significant. We expense legal fees as incurred. As ofDecember 31, 2021 and 2020, the Company was not a party to, and the Company is not currently party to, any litigation that would have a material adverse effect on the Company's consolidated financial statements.
Note 14. Stockholders' Equity
As ofDecember 31, 2021 , our authorized share capital consists of 1,000,000 shares of preferred stock and 270,000,000 shares of capital stock designated as common stock. As ofDecember 31, 2021 , we had 131,793,660 shares of common stock issued and outstanding. We do not have any shares of preferred stock issued and outstanding. As described in Note 2, onOctober 12, 2021 , the Merger was consummated. In accordance with applicable guidance, the equity structure ofAppgate has been restated in all comparative periods up to the closing date of the Merger to reflect the number of shares ofAppgate's common stock,$0.001 par value per share, issued to Legacy Appgate's sole shareholder in connection with the Merger. As such, the shares and corresponding capital amounts and earnings per share related to Legacy Appgate common stock prior to the Merger have been retroactively restated to reflect the new equity structure ofAppgate post-merger.
Note 15. Profit Interest Units of
SIS Holdings adopted the SIS Holdings LP Class B Unit Plan (the "SIS Holdings Plan") inMay 2017 . The purpose of the SIS Holdings Plan is to promote the interests ofSIS Holdings and its controlled affiliates, includingAppgate and Cyxtera by (a) attracting and retaining officers, directors, managers, employees and consultants ofSIS Holdings and its controlled affiliates, and (b) enabling such persons to acquire an equity interest in and participate in the long-term growth and financial success ofSIS Holdings and its controlled affiliates. 1,000,000 Class B profit interest units were originally available for issuance pursuant to awards under the SIS Holdings Plan. Class B units issued under the SIS Holdings Plan are limited partnership units inSIS Holdings and are subject to the terms and conditions of theAmended and Restated Limited Partnership Agreement ofSIS Holdings datedMay 1, 2017 . All outstanding awards, including, but not limited to, awards to employees ofAppgate (or a subsidiary thereof), under the SIS Holdings Plan were issued in 2017, 2018 and 2019. Awards under the SIS Holdings Plan are subject to a vesting schedule measured by a service condition such that awards vest 25% after the first anniversary of issue date (or, with respect to certain employees, the earlier of their hire date andMay 1, 2017 ), and the remainder vest in equal monthly installments over the 42 months following the initial vesting date. In addition, vesting of all unvested units will be accelerated upon the satisfaction of a performance condition, namely an "exit event". An exit event is defined as a change of control through sale of all or substantially all of the assets ofSIS Holdings and its subsidiaries (whether by merger, recapitalization, stock sale or other sale or business combination, including the sale of any subsidiary accounting for all or substantially all of the revenues ofSIS Holdings and its subsidiaries on a consolidated basis) or any transaction resulting in a change of in excess of 50% of the beneficial ownership of the voting units ofSIS Holdings . The holders of the Class B units were not required to make any capital contributions toSIS Holdings ,Appgate or Cyxtera in exchange for their Class B units and are entitled to receive distributions (when and if declared bySIS Holdings ) on their vested units (including those accelerated upon an exit event). Compensation expense related to the Class B units is recognized based on the estimated fair values of the Class B units and recognized on straight line basis over the service period. The fair value of the Class B units was estimated using a 111
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Appgate, Inc.
Notes to Consolidated Financial Statements
Black-Scholes OPM, which estimates the fair value of each class of security
using call options. Similar to call options for publicly-traded stock, call
options used in an OPM assign value to each class of security based on the
potential to profit from the upside of the business while taking into account
the unique characteristics of each class of security. Each call option gives its
holder the right, but not the obligation, to buy the underlying asset at a
predetermined price, or exercise price. The starting equity value is based on
the total equity value of Appgate and Cyxtera rather than, in the case of a
regular call option, the per share stock price.
The strike prices on the options in an OPM model are represented by
"breakpoints", which are the points at which there is a change in the proportion
of the claims of the various securities on the total equity value. Each junior
security is considered a call option with a claim on the equity value at an
exercise price which settles all of the more senior claims and takes into
account the unique characteristics of each class of security. A discount for
lack of marketability was then calculated based on the Finnerty model, using
series-specific volatility, and applied to the per share value of Class B units
produced by the OPM, to arrive at a non-marketable value.
The following summary shows the activity in PIU awards granted by
Weighted-
average
grant
Number of date fair
units value
Outstanding at
(8,375) (87.32)
Outstanding at December 31, 2020 253,384 87.12
Forfeited (3,348) (85.94)
Outstanding at
Equity-based compensation costs totaled$3.5 million and$4.2 million for 2021 and 2020, respectively. These amounts are included in the following captions in the consolidated statements of operations (in thousands): 2021 2020 Cost of revenue$ 504 $ 503 Sales and marketing 1,844 2,211 Research and development 359 360 General and administrative 753 1,161 Total$ 3,460 $ 4,235
No related income tax benefit was recognized as of 2021 or 2020.
As of
EffectiveJuly 29, 2021 , the SIS Holdings Plan was amended to the extent required such that any distribution bySIS Holdings to its equity holders that is attributable to amounts received bySIS Holdings in respect of its equity interests in Cyxtera or Legacy Appgate, in each case upon the consummation of the transactions contemplated by Cyxtera's merger withStarboard Value Acquisition Corp. inJuly 2021 (the "Cyxtera Transaction" and, together with the Merger, the "Transactions") or the Merger Agreement, respectively, shall be deemed to have been made at an amount equal to the value of the Cyxtera common stock or Legacy Appgate common stock, as applicable, in each such Transaction.
Note 16.
OnFebruary 13, 2018 , theManagement Company adopted theCyxtera Management, Inc. Long-Term Incentive Plan (the "LTI Plan"). The purpose of the LTI Plan is to retain key talent, attract new employees, align particular behavior 112
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Notes to Consolidated Financial Statements
with the common goals of profitability and revenue growth, provide incentive
awards the value of which are tied to the equity value of SIS Holdings and to
create an opportunity for certain key employees to participate in value
creation. Certain employees of Appgate (or a subsidiary thereof) are
participants under the LTI Plan.
Award units entitle the holder to share in the equity appreciation of SIS
Holdings upon an exit event or an initial public offering (an "IPO") of Cyxtera
or its successor. Except in the case of an IPO, any payments in respect of the
awards are expected to be made in cash. In an IPO, payment may be made in the
stock of the IPO vehicle. Payout is estimated to range between $0 and $70.0
million, depending on a multiple based on the results of the exit event or IPO.
While awards under the LTI Plan vest, to the extent there is no exit event or an
IPO, the awards expire after seven years from the grant date. We have determined
that no expense or liability should be recognized under this LTI Plan until an
exit event or IPO occurs.
On July 29, 2021, Cyxtera consummated the Cyxtera Transaction and caused its
subsidiaries to terminate or declare an "Early Settlement Event" under
(resulting in the final settlement of) the LTI Plan and any award agreements
thereunder, in each case, without liability to Appgate , Cyxtera, or any of their
respective subsidiaries.
Note 17. 401(k) Savings Plan
Effective January 1, 2021, Legacy Appgate's employees became eligible to
participate in the Appgate Cybersecurity Inc. 401(k) Savings Plan (the "401(k)
Plan"), a defined contribution benefit plan sponsored by Legacy Appgate. Under
the 401(k) Plan, the Company (or a subsidiary thereof) makes matching
contributions equal to 100% of an employee's salary deferral that does not
exceed 1% of the employee's compensation plus 50% of the salary deferral between
1% and 6% of the employee's compensation.
Prior to January 1, 2021, Legacy Appgate's employees were eligible to
participate in the Cyxtera 401(k) Savings Plan (the "Cyxtera 401(k) Plan"), a
defined contribution benefit plan sponsored by the Management Company. Under the
Cyxtera 401(k) Plan, matching contributions were made equal to 100% of an
employee's salary deferral that does not exceed 1% of the employee's
compensation plus 50% of the salary deferral between 1% and 6% the employee's
compensation. Employees of Legacy Appgate were eligible to participate in the
Cyxtera 401(k) Plan after the Cyxtera Spin-Off through December 31, 2020. Costs
related to the participation of Legacy Appgate's employees in the Cyxtera 401(k)
Plan were charged back to Legacy Appgate by Cyxtera under the Transition
Services Agreement described in Note 5 - Transactions with Former Parent -
Cyxtera.
During 2021, we made matching contributions to the 401(k) Plan of $1.7 million.
During 2020, we made matching contributions to the Cyxtera 401(k) Plan of $1.4
million. These amounts are included in the following captions in the
consolidated statements of operations (in thousands):
2021 2020
Cost of revenue $ 344 $ 313
Sales and marketing 626 438
Research and development 518 463
General and administrative 218 183
Total $ 1,706 $ 1,397
Note 18. Income Taxes
The amounts of (loss) income from continuing operations before income taxes was as follows (in thousands):
(As Restated) (As Restated)
2021 2020
United States $ (137,102) $ (54,856)
Foreign 656 2,366
Total $ (136,446) $ (52,490)
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Notes to Consolidated Financial Statements
The income tax expense from continuing operations for 2021 and 2020 consisted of
the following (in thousands):
(As Restated) (As Restated)
2021 2020
Current:
Federal $ - $ -
State 24 87
Foreign 2,467 1,051
Total current income tax expense 2,491 1,138
Deferred:
Federal - -
State - 62
Foreign (95) 570
Total deferred income tax (benefit) expense (95) 632
Income tax expense $ 2,396 $ 1,770
The effective tax rates for 2021 and 2020 were (1.8)% and (3.4)%, respectively.
An income tax reconciliation between the U.S. Federal statutory tax rate of 21%
for each of 2021 and 2020 and the effective tax rate is as follows (in
thousands):
(As Restated) (As Restated)
2021 2020
Income tax at U.S. Federal statutory
income tax rate $ (28,654) 21.0 % $ (11,023) 21.0 %
State and local taxes, net of Federal
income tax benefit (1,469) 1.1 % (1,399) 2.6 %
Valuation allowance 14,072 (10.3) % 11,614 (22.1) %
Change in fair value of embedded
derivative liability 16,484 (12.1) % - 0.0 %
Nondeductible expenses 730 (0.5) % 940 (1.8) %
Taxes of foreign operations at rates
different than U.S. Federal statutory
income tax rate 1,936 (1.5) % 1,386 (2.6) %
Other (703) 0.5 % 252 (0.5) %
Total $ 2,396 (1.8) % $ 1,770 (3.4) %
The effective tax rate for 2021 differs from the U.S. Federal income tax rate of
21% primarily due to changes in the valuation allowance, the change in the fair
value of our embedded derivative liability that is not tax deductible, state
taxes, and foreign withholding taxes. The effective tax rate for 2020 differs
from the U.S. Federal income tax rate of 21% primarily due to changes in the
valuation allowance, state taxes, and foreign taxes.
The Tax Act, which was signed into law on December 22, 2017, contained many
significant changes to the U.S. federal income tax laws. Among other things, the
Tax Act reduced the U.S. corporate income tax rate from 35% to 21% effective
January 1, 2018, limited the tax deductibility of interest expense, accelerated
expensing of certain business assets and transitioned the U.S. international
taxation from a worldwide tax system to a territorial tax system by imposing a
one-time mandatory repatriation of undistributed foreign earnings. Also included
in the Tax Act was the implementation of a minimum tax on foreign earnings.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security ("CARES")
Act was enacted and signed into law. Intended to provide economic relief to
those impacted by the COVID-19 pandemic, the CARES Act includes provisions,
among other things, addressing the carryback of NOLs for specific periods and
temporary modifications to the limitation placed on the tax deductibility of
interest expense.
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Appgate, Inc.
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities consists of the
following (in thousands):
(As Restated) (As Restated)
2021 2020
Deferred tax assets:
Net operating loss carryforward $ 44,158 $ 61,151
Accrued expenses 1,270
2,449
Allowance for doubtful accounts 34
127
163(j) Interest expense limitation and carryforward - 996 Total deferred tax assets 45,462 64,723 Deferred tax liabilities: Property and equipment (289) (427) Deferred revenue (955) (3,280) Intangible assets (6,907) (14,099) Deferred contract acquisition costs (922)
(902)
Other -
(79)
Total deferred tax liabilities (9,073)
(18,787)
Valuation allowance (35,526)
(45,168)
Deferred income tax asset, net $ 863 $
768
The Company anticipates most of its deferred tax assets will be realized within the period during which its deferred tax liabilities are expected to reverse. However, there are certainU.S. federal and foreign deferred tax assets as well as state NOLs that are not expected to be realized before expiration and as such are not more-likely-than-not realizable and we have recorded a valuation allowance against such deferred tax assets. As of December 31, 2021, we hadU.S. Federal NOL carryforwards of $181.4 million generated in tax years 2002 through 2021, of which $21.9 million will expire in 2035, $22.8 million will expire in 2036, $27.2 million will expire in 2037, and $109.5 million will carry forward indefinitely. We have state NOL carryforwards of $90.0 million generated in tax years 2007 through 2021. The state NOL carryforwards of $68.0 million will expire from 2022 to 2041 and $22.0 million will carry forward indefinitely. Additionally, we have foreign NOL carry forwards of $5.6 million generated from tax years 2006 through 2016, of which $5.6 million will carry forward indefinitely. In addition to the NOL carryforwards discussed above, as a result of past acquisitions and the Merger, we have an additional $12.9 million of federal NOL carryforwards. Management has not concluded on the realizability of these NOLs or whether they may be limited by Internal Revenue Code Section 382. Accordingly, to reflect that a more likely than not determination has not been made, a deferred tax asset has not been recorded as of December 31, 2021. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. In making such a determination, we considered all available positive and negative evidence, including our past operating results, forecasted earnings, frequency and severity of current and cumulative losses, duration of statutory carryforward periods, future taxable income and prudent and feasible tax planning strategies. On the basis of this evaluation, we continue to maintain a valuation allowance against a portion of the Company's deferred tax assets. As of December 31, 2021, we have recorded a valuation allowance of $35.5 million for the portion of the deferred tax asset that did not meet the more-likely-than-not realization criteria. We decreased the valuation allowance on our net deferred taxes by $9.6 million during 2021. The reduction in the valuation allowance during 2021 was primarily due to the realization of certain deferred tax assets against the taxable gain resulting from the sale of Brainspace - see Note 6. We are subject to taxation inthe United States and various foreign jurisdictions. As of December 31, 2021, we were no longer subject to examination by the Internal Revenue Service for tax years prior to 2018 and generally not subject to examination by state tax authorities for tax years prior to 2016. With few exceptions, we are no longer subject to foreign 115
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Appgate, Inc.
Notes to Consolidated Financial Statements
examinations by tax authorities for tax years prior to 2018. All material withholding tax returns and income tax returns have been timely filed.
We do not have any unrecorded unrecognized tax positions ("UTPs") as of
December 31, 2021. While we currently do not have any UTPs, it is foreseeable
that the calculation of our tax liabilities may involve dealing with
uncertainties in the application of complex tax laws and regulations in a
multitude of jurisdictions across our global operations. ASC 740 states that a
tax benefit from an uncertain tax position may be recognized when it is more
likely than not that the position will be sustained upon examination, including
resolutions of any related appeals or litigation processes, on the basis of the
technical merits. Upon identification of a UTP, we would (1) record the UTP as a
liability in accordance with ASC 740 and (2) adjust these liabilities if/when
management's judgment changes as a result of the evaluation of new information
not previously available. Ultimate resolution of UTPs may produce a result that
is materially different from an entity's estimate of the potential liability. In
accordance with ASC 740, we would reflect these differences as increases or
decreases to income tax expense in the period in which new information is
available. If any, we recognize and include interest and penalties accrued on
uncertain tax positions as a component of income tax expense.
Note 19. Segment and Geographic Information
Our chief operating decision maker is our chief executive officer, who reviews financial information presented on a consolidated basis for the purposes of allocating resources and evaluating financial performance. Accordingly, management has determined that we operate as one operating and reportable segment.
Our long-lived assets consist of property and equipment and operating lease
right-of-use assets, which are summarized by geographic area as follows (in
thousands):
2021 2020
United United
States Colombia Sweden Other Total States Colombia Sweden Other TotalProperty and equipment, net $ 1,690 $ 266 $ 152 $ 7 $ 2,115 $ 1,239 $ 428 $ 162
$ - $ 1,829
Operating lease right-
of-use assets 1,528 166 632 171 2,497 705 456 820 27 2,008
Total $ 3,218 $ 432 $ 784 $ 178 $ 4,612 $ 1,944 $ 884 $ 982 $ 27 $ 3,837
Only
Refer to Note 7 - Revenue, for information on revenue by geography.
Note 20. Related Party Transactions
Commercial Related Person Transactions with Cyxtera
Three members of our Board of Directors also serve on the board of directors of
Cyxtera and, as of February 2, 2022, SIS Holdings owned approximately 61.5% of
Cyxtera's outstanding common stock. Our most significant related party
relationships and transactions are with Cyxtera, the Management Company, SIS
Holdings and certain of the equity owners of SIS Holdings. Those relationships
and transactions are described in Notes 2 and 5. In addition, Legacy Appgate
maintains a number of ordinary course commercial relationships, both as a
customer and service provider, with Cyxtera.
For instance, in 2021 and 2020, Cyxtera purchased certain cybersecurity products
and services from Legacy Appgate, including licenses for Legacy Appgate
cybersecurity software and training. During 2021 and 2020, Legacy Appgate
charged Cyxtera $0.2 million and $0.1 million, respectively, for those products
and services and recognized revenue from these licenses in the same amounts. As
of December 31, 2020, Legacy Appgate had receivables from Cyxtera (and/or its
subsidiaries) for $0.1 million under these agreements. There were no open
receivables from Cyxtera (and/or its subsidiaries) as of December 31, 2021.
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Appgate, Inc.
Notes to Consolidated Financial Statements
During 2021 and 2020, Cyxtera provided Legacy Appgate certain data center
co-location and CXD services. During 2021 and 2020, Cyxtera charged Legacy
Appgate $0.3 million and $0.2 million, respectively, for those services. As of
December 31, 2020, Legacy Appgate had payables to Cyxtera (and/or its
subsidiaries) for $0.2 million under these agreements. Open payables to Cyxtera
(and/or its subsidiaries) as of December 31, 2021 were insignificant.
Transactions with Director Affiliated Companies
Two members of our Board of Directors are also members of the board of directors
of Chewy, Inc. ("Chewy"), an American online retailer of pet food and other
pet-related products. During 2021 and 2020, Legacy Appgate charged Chewy (or the
channel partner reselling certain cybersecurity products provided to Chewy) $0.4
million and $0.1 million, respectively, under contracts by Legacy Appgate or a
channel partner for certain cybersecurity products provided to Chewy. During
2021 and 2020, Legacy Appgate recognized $0.4 million and $0.2 million,
respectively, as revenue from these contracts. There were no open receivables
from Chewy (or the channel partner reselling certain cybersecurity products
provided to Chewy) as of December 31, 2021 and 2020.
Other Related Party Transactions
CenturyLink Communications, LLC ("CenturyLink"), an approximate 10.4% owner of SIS Holdings and, as a result, an indirect beneficial owner of the Company, is a reseller of certain of our products and services. During 2021 and 2020, LegacyAppgate charged CenturyLink $0.8 million and $0.2 million, respectively, under contracts for certain cybersecurity products provided by Legacy Appgate to CenturyLink for resale by CenturyLink to end users. During 2021 and 2020, LegacyAppgate recognized $0.6 million and $0.2 million, respectively, as revenue from these contracts. As of December 31, 2021 and 2020, we had receivables from CenturyLink for $0.6 million and $0.2 million, respectively, under these agreements.
Note 21. Quarterly Financial Data (Unaudited and Restated)
The following tables present reconciliations of select previously reported to
restated unaudited consolidated quarterly financial information. See Note 1 -
Restatement of Previously Issued Financial Statements for additional
information. This quarterly information has been prepared on the same basis as
the consolidated financial statements and includes all adjustments necessary to
state fairly the information for the periods presented, which management
considers necessary for a fair presentation when read in conjunction with the
consolidated financial statements and notes. We believe these comparisons of
consolidated quarterly selected financial data are not necessarily indicative of
future performance.
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Notes to Consolidated Financial Statements
•Select 2021 Unaudited Interim Balance Sheet Data (in thousands):
2021 - End of periods (As Reported) Adjustments (As Restated)
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
ASSETS
Current assets:
Cash and cash equivalents $ 47,706 $ 33,109 $ 19,483 $ 25,990 $ - $ - $ - $ - $ 47,706 $ 33,109 $ 19,483 $ 25,990
Contract assets 3,240 2,782 1,836 1,639 (528) (8) (54) (181) 2,712 2,774 1,782 1,458
Deferred contract acquisition
costs, current 2,545 3,059 3,241 3,464 (1,621) (1,831) (2,002) (2,145) 924 1,228 1,239 1,319
Total current assets 69,129 54,232 42,811 45,610 (2,149) (1,839) (2,056) (2,326) 66,980 52,393 40,755 43,284
Contract assets, noncurrent 6,488 8,048 7,728 11,800 (654) (1,630) (1,871) (3,170) 5,834 6,418 5,857 8,630
Deferred contract acquisition
costs, noncurrent 7,063 7,660 8,173 8,749 (4,631) (5,092) (5,353) (5,763) 2,432 2,568 2,820 2,986
Deferred income taxes 212 554 - 793 33 33 - 70 245 587 - 863
Total assets $ 201,754 $ 186,808 $172,400 $ 179,774 $ (7,401) $ (8,528) $ (9,280) $ (11,189) $ 194,353 $ 178,280 $ 163,120 $ 168,585 LIABILITIES AND STOCKHOLDER'S
EQUITY (DEFICIT)
Current liabilities:
Accrued expenses $ 10,257 $ 10,912 $ 10,873 $ 12,232 $ (39) $ (39) $ (39) $ (39) $ 10,218 $ 10,873 $ 10,834 $ 12,193
Deferred revenue, current 5,881 5,534 4,913 4,813 150 289 408 461 6,031 5,823 5,321 5,274
Total current liabilities 20,388 20,082 19,148 22,326 111 250 369 422 20,499 20,332 19,517 22,748
Deferred revenue, noncurrent 1,435 1,400 1,897 906 10 (43) (145) (189) 1,445 1,357 1,752 717
Deferred income tax liability - 372 463 - - - (33) - - 372 430 -
Total liabilities 73,176 72,926 72,459 176,588 121 207 191 233 73,297 73,133 72,650 176,821
Stockholders' equity
(deficit):
Accumulated other
comprehensive income (loss) 166 (862) (1,985) (1,900) (52) (103) (52) (85) 114 (965) (2,037) (1,985)
Accumulated deficit (380,480) (395,105) (408,859) (504,632) (7,470) (8,632) (9,419) (11,337) (387,950) (403,737) (418,278) (515,969)
Total stockholders' equity
(deficit) 128,578 113,882 99,941 3,186 (7,522) (8,735) (9,471) (11,422) 121,056 105,147 90,470 (8,236)Total liabilities and stockholders' equity (deficit) $ 201,754 $ 186,808 $ 172,400 $ 179,774 $ (7,401) $ (8,528) $ (9,280) $ (11,189) $ 194,353 $ 178,280 $ 163,120 $ 168,585
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Appgate, Inc.
Notes to Consolidated Financial Statements
•Select 2021 and 2020 Unaudited Interim Statements of Operations Data (in thousands except per share information):
2021 - Quarters (As Reported) Adjustments (As Restated)
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Revenue $ 10,070 $ 9,886 $ 11,473 $ 13,882 $ (33) $ (489) $ (310) $ (1,446) $ 10,037 $ 9,397 $ 11,163 $ 12,436
Cost of revenue, exclusive of
amortization shown below 3,578 4,169 4,065 4,257 - - - - 3,578 4,169 4,065 4,257
Amortization expense 1,131 1,131 1,131 1,132 - - - - 1,131 1,131 1,131 1,132
Total cost of revenue 4,709 5,300 5,196 5,389 - - - - 4,709 5,300 5,196 5,389
Gross profit 5,361 4,586 6,277 8,493 (33) (489) (310) (1,446) 5,328 4,097 5,967 7,047
Operating expenses:
Sales and marketing 7,114 9,166 9,579 11,291 423 648 458 488 7,537 9,814 10,037 11,779
Research and development 2,197 2,723 2,718 3,089 - - - - 2,197 2,723 2,718 3,089
General and administrative 3,342 4,599 4,245 6,023 8 25 19 21 3,350 4,624 4,264 6,044
Transaction costs 330 43 226 2,500 - - - - 330 43 226 2,500
Depreciation and amortization 1,341 1,352 1,347 1,368 - - - - 1,341 1,352 1,347 1,368
Total operating expenses 14,324 17,883 18,115 24,271 431 673 477 509 14,755 18,556 18,592 24,780
Loss from continuing
operations (8,963) (13,297) (11,838) (15,778) (464) (1,162) (787) (1,955) (9,427) (14,459) (12,625) (17,733)
Change in fair value of
embedded derivative liability - - - (78,497) - - - - - - - (78,497)
Interest expense, net (833) (643) (641) (1,073) - - - - (833) (643) (641) (1,073)
Other expenses, net (126) (93) (64) (232) - - - - (126) (93) (64) (232)
Loss from continuing
operations before income
taxes (9,922) (14,033) (12,543) (95,580) (464) (1,162) (787) (1,955) (10,386) (15,195) (13,330) (97,535)
Income tax expense of
continuing operations (412) (592) (999) (431) - - - 38 (412) (592) (999) (393)
Net loss from continuing
operations (10,334) (14,625) (13,542) (96,011) (464) (1,162) (787) (1,917) (10,798) (15,787) (14,329) (97,928)
Net income from discontinued
operations, net of tax 60,012 - (212) 237 5,677 - - - 65,689 - (212) 237
Net income (loss) $ 49,678 $ (14,625) $(13,754) $ (95,774) $ 5,213 $ (1,162) $ (787) $ (1,917) $ 54,891 $ (15,787) $ (14,541) $ (97,691)
(Loss) income per share:
Net loss from continuing
operations per share of
common stock - basic and
diluted $ (0.75) $ (1.00) $ (0.92) $ (0.03) $ (0.08) $ (0.05) $ (0.78) $ (1.08) $ (0.98)
Net loss from continuing
operations per share of
common stock - basic $ (2.40) $ (0.05) $ (2.45)
Net loss from continuing
operations per share of
common stock - diluted $ (0.34) $ (2.11) $ (2.45)
Net income (loss) from
discontinued operations per
share of common stock - basic
and diluted $ 4.35 $ - $ (0.01) $ 0.42 $ - $ - $ 4.77 $ - $ (0.01)
Net income (loss) from
discontinued operations per
share of common stock - basic $ 0.01 $ - $ 0.01
Net income (loss) from
discontinued operations per
share of common stock -
diluted $ - $ - $ 0.01
The weighted-average shares used in the computation of basic and diluted loss
per share for the 2021 quarterly periods prior to closing of the Merger (i.e.,
Q1, Q2 and Q3) have been retroactively restated for the equivalent number of
shares received by the accounting acquirer as a result of the Merger (as
described and defined in Notes 2 and 4).
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Appgate, Inc.
Notes to Consolidated Financial Statements
2020 - Quarters (As Reported) Adjustments (As Restated)
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Revenue $ 9,625 $ 7,119 $ 6,773 $ 10,212 $ (26) $ (306) $ (95) $ (147) $ 9,599 $ 6,813 $ 6,678 $ 10,065
Cost of revenue, exclusive of
amortization shown below 3,946 3,598 3,288 4,728 - - - - 3,946 3,598 3,288 4,728
Amortization expense 1,624 1,624 1,624 1,296 - - - - 1,624 1,624 1,624 1,296
Total cost of revenue 5,570 5,222 4,912 6,024 - - - - 5,570 5,222 4,912 6,024
Gross profit 4,055 1,897 1,861 4,188 (26) (306) (95) (147) 4,029 1,591 1,766 4,041
Operating expenses:
Sales and marketing 6,536 6,793 5,138 6,708 262 406 504 904 6,798 7,199 5,642 7,612
Research and development 2,343 2,137 2,337 2,965 - - - 10 2,343 2,137 2,337 2,975
General and administrative 5,327 4,901 4,378 1,218 - 23 34 54 5,327 4,924 4,412 1,272
Transaction costs - - - - - - - - - - - -
Depreciation and amortization 1,342 1,282 1,274 1,313 - - - - 1,342 1,282 1,274 1,313
Total operating expenses 15,548 15,113 13,127 12,204 262 429 538 968 15,810 15,542 13,665 13,172
Loss from continuing
operations (11,493) (13,216) (11,266) (8,016) (288) (735) (633) (1,115) (11,781) (13,951) (11,899) (9,131)
Change in fair value of
embedded derivative liability - - - - - - - - - - - -
Interest expense, net (995) (976) (1,020) (1,097) - - - - (995) (976) (1,020) (1,097)
Other expenses, net (1,546) 9 (86) (17) - - - - (1,546) 9 (86) (17)
Loss from continuing
operations before income
taxes (14,034) (14,183) (12,372) (9,130) (288) (735) (633) (1,115) (14,322) (14,918) (13,005) (10,245)
Income tax expense of
continuing operations (208) (628) (112) (894) - - - 72 (208) (628) (112) (822)
Net loss from continuing
operations (14,242) (14,811) (12,484) (10,024) (288) (735) (633) (1,043) (14,530) (15,546) (13,117) (11,067)
Net income from discontinued
operations, net of tax 3,292 586 (875) (1,867) (411) (97) 317 147 2,881 489 (558) (1,720)
Net income (loss) $ (10,950) $ (14,225) $(13,359) $ (11,891) $ (699) $ (832) $ (316) $ (896) $ (11,649) $ (15,057) $ (13,675) $ (12,787)
(Loss) income per share:
Net loss from continuing
operations per share of
common stock - basic and
diluted $ (1.04) $ (1.08) $ (0.91) $ (0.73) $ (0.02) $ (0.05) $ (0.05) $ (0.08) $ (1.06) $ (1.13) $ (0.95) $ (0.80)
Net income (loss) from
discontinued operations per
share of common stock - basic
and diluted $ 0.24 $ 0.04 $ (0.06) $ (0.14) $ (0.03) $ (0.01) $ 0.02 $ 0.01 $ 0.21 $ 0.04 $ (0.04) $ (0.13)
The weighted-average shares used in the computation of basic and diluted loss
per share for all 2020 quarterly periods has been retroactively restated for the
equivalent number of shares received by the accounting acquirer as a result of
the Merger (as described and defined in Notes 2 and 4).
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Appgate, Inc.
Notes to Consolidated Financial Statements
2021 - Year-to-date periods
ended (As Reported) Adjustments (As Restated)
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Revenue $ 10,070 $ 19,956 $ 31,429 $ 45,311 $ (33) $ (522) $ (832) $ (2,278) $ 10,037 $ 19,434 $ 30,597 $ 43,033
Cost of revenue, exclusive
of amortization shown below 3,578 7,747 11,812 16,069 - - - - 3,578 7,747 11,812 16,069
Amortization expense 1,131 2,262 3,393 4,525 - - - - 1,131 2,262 3,393
4,525
Total cost of revenue 4,709 10,009 15,205 20,594 - - - - 4,709 10,009 15,205 20,594 Gross profit 5,361 9,947 16,224 24,717 (33) (522) (832) (2,278) 5,328 9,425 15,392 22,439 Operating expenses: - - - - - - Sales and marketing 7,114 16,280 25,859 37,150 423 1,071 1,529 2,017 7,537 17,351 27,388 39,167 Research and development 2,197 4,920 7,638 10,727 - - - - 2,197 4,920 7,638
10,727
General and administrative 3,342 7,941 12,186 18,209 8 33 52 73 3,350 7,974 12,238 18,282 Transaction costs 330 373 599 3,099 - - - - 330 373 599 3,099 Depreciation and amortization 1,341 2,693 4,040 5,408 - - - - 1,341 2,693 4,040 5,408 Total operating expenses 14,324 32,207 50,322 74,593 431 1,104 1,581 2,090 14,755 33,311 51,903
76,683
Loss from continuing operations (8,963) (22,260) (34,098) (49,876) (464) (1,626) (2,413) (4,368) (9,427) (23,886) (36,511) (54,244) Change in fair value of embedded derivative liability - - - (78,497) - - - - - - - (78,497) Interest expense, net (833) (1,476) (2,117) (3,190) - - - - (833) (1,476) (2,117) (3,190) Other expenses, net (126) (219) (283) (515) - - - - (126) (219) (283) (515) Loss from continuing operations before income taxes (9,922) (23,955) (36,498) (132,078) (464) (1,626) (2,413) (4,368) (10,386) (25,581) (38,911) (136,446) Income tax expense of continuing operations (412) (1,004) (2,003) (2,434) - - - 38 (412) (1,004) (2,003) (2,396) Net loss from continuing operations (10,334) (24,959) (38,501) (134,512) (464) (1,626) (2,413) (4,330) (10,798) (26,585) (40,914) (138,842) Net income from discontinued operations, net of tax 60,012 60,012 59,800 60,037 5,677 5,677 5,677 5,677 65,689 65,689 65,477
65,714
Net income (loss) $ 49,678 $ 35,053 $ 21,299
$ (74,475) $ 5,213 $ 4,051 $ 3,264
$ 1,347 $ 54,891 $ 39,104 $ 24,563 $ (73,128)
(Loss) income per share:
Net loss from continuing
operations per share of
common stock - basic and
diluted $ (0.75) $ (1.76) $ (2.68) $ (0.03) $ (0.11) $ (0.17) $ (0.78) $ (1.87) $ (2.85)
Net loss from continuing
operations per share of
common stock - basic $ (3.37) $ (0.11) $ (3.48)
Net loss from continuing
operations per share of
common stock - diluted $ (1.10) $ (2.38) $ (3.48)
Net income (loss) from
discontinued operations per
share of common stock -
basic and diluted $ 4.35 $ 4.22 $ 4.17 $ 0.42 $ 0.40 $ 0.40 $ 4.77 $ 4.62 $ 4.56
Net income (loss) from
discontinued operations per
share of common stock -
basic $ 1.50 $ 0.14 $ 1.64
Net income (loss) from
discontinued operations per
share of common stock -
diluted $ 1.18 $ 0.47 $ 1.64
The weighted-average shares used in the computation of basic and diluted loss
per share for the 2021 year-to-date periods prior to closing of the Merger
(i.e., Q1, Q2 and Q3) have been retroactively restated for the equivalent number
of shares received by the accounting acquirer as a result of the Merger (as
described and defined in Notes 2 and 4).
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Appgate, Inc.
Notes to Consolidated Financial Statements
2020 - Year-to-date periods
ended (As Reported) Adjustments (As Restated)
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Revenue $ 9,625 $ 16,744 $ 23,517 $ 33,729 $ (26) $ (332) $ (427) $ (574) $ 9,599 $ 16,412 $ 23,090 $ 33,155
Cost of revenue, exclusive of
amortization shown below 3,946 7,544 10,832 15,560 - - - - 3,946 7,544 10,832 15,560
Amortization expense 1,624 3,248 4,872 6,168 - - - - 1,624 3,248 4,872 6,168
Total cost of revenue 5,570 10,792 15,704 21,728 - - - - 5,570 10,792 15,704 21,728
Gross profit 4,055 5,952 7,813 12,001 (26) (332) (427) (574) 4,029 5,620 7,386 11,427
Operating expenses: - - - - - -
Sales and marketing 6,536 13,329 18,467 25,175 262 668 1,172 2,076 6,798 13,997 19,639 27,251
Research and development 2,343 4,480 6,817 9,782 - - - 10 2,343 4,480 6,817 9,792
General and administrative 5,327 10,228 14,606 15,824 - 23 57 111 5,327 10,251 14,663 15,935
Transaction costs - - - - - - - - - - - -
Depreciation and amortization 1,342 2,624 3,898 5,211 - - - - 1,342 2,624 3,898 5,211
Total operating expenses 15,548 30,661 43,788 55,992 262 691 1,229 2,197 15,810 31,352 45,017 58,189
Loss from continuing operations (11,493) (24,709) (35,975) (43,991) (288) (1,023) (1,656) (2,771) (11,781) (25,732) (37,631) (46,762)
Change in fair value of
embedded derivative liability - - - - - - - - - - - -
Interest expense, net (995) (1,971) (2,991) (4,088) - - - - (995) (1,971) (2,991) (4,088)
Other expenses, net (1,546) (1,537) (1,623) (1,640) - - - - (1,546) (1,537) (1,623) (1,640)
Loss from continuing operations
before income taxes (14,034) (28,217) (40,589) (49,719) (288) (1,023) (1,656) (2,771) (14,322) (29,240) (42,245) (52,490)
Income tax expense of
continuing operations (208) (836) (948) (1,842) - - - 72 (208) (836) (948) (1,770)
Net loss from continuing
operations (14,242) (29,053) (41,537) (51,561) (288) (1,023) (1,656) (2,699) (14,530) (30,076) (43,193) (54,260)
Net income from discontinued
operations, net of tax 3,292 3,878 3,003 1,136 (411) (508) (191) (44) 2,881 3,370 2,812 1,092
Net income (loss) $ (10,950) $ (25,175) $ (38,534) $ (50,425) $ (699) $ (1,531) $ (1,847) $ (2,743) $ (11,649) $ (26,706) $ (40,381) $ (53,168)
(Loss) income per share:
Net loss from continuing
operations per share of common
stock - basic and diluted $ (1.04) $ (2.11) $ (3.02) $ (3.75) $ (0.02) $ (0.07) $ (0.12) $ (0.19) $ (1.06) $ (2.19) $ (3.14) $ (3.94)
Net income (loss) from
discontinued operations per
share of common stock - basic
and diluted $ 0.24 $ 0.28 $ 0.22 $ 0.08 $ (0.03) $ (0.04) $ (0.01) $ - $ 0.21 $ 0.24 $ 0.20 $ 0.08
The weighted-average shares used in the computation of basic and diluted loss
per share for all 2020 periods has been retroactively restated for the
equivalent number of shares received by the accounting acquirer as a result of
the Merger (as described and defined in Notes 2 and 4).
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Appgate, Inc.
Notes to Consolidated Financial Statements
•Select 2021 and 2020 Unaudited Interim Statements of Cash Flows Data:
2021 - Year-to-date periods
ended (As Reported) Adjustments (As Restated)
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Cash flows from operating
activities:
Net loss $ 49,678 $ 35,053 $ 21,299 $ (74,475) $ 5,213 $ 4,051 $ 3,264 $ 1,347 $ 54,891 $ 39,104 $ 24,563 $ (73,128) Net income from discontinued operations, net of tax (60,012) (60,012) (59,800)
(60,037) (5,677) (5,677) (5,677)
(5,677) (65,689) (65,689) (65,477) (65,714) Adjustments to reconcile net loss to net cash used in operating activities: - Amortization of deferred contract acquisition costs 706 1,406 2,136 3,220 431 1,104 1,580 2,113 1,137 2,510 3,716 5,333 Deferred income taxes - (553) 615 58 - - - 37 - (553) 615 95 Changes in assets and liabilities: - Accounts receivable (223) (3,388) 888 5,405 - - - - (223) (3,388) 888 5,405 Contract assets (1,790) (4,194) (1,638) (5,631) 43 499 785 2,212 (1,747) (3,695) (853) (3,419) Accrued expenses (4,319) (3,640) (3,816) (2,720) - - - (75) (4,319) (3,640) (3,816) (2,795) Deferred revenue 332 1,144 (166) (1,279) (10) 23 47 43 322 1,167 (119) (1,236) Net cash, cash equivalents and restricted cash used in operating activities of continuing operations (15,497) (31,052) (38,579) (52,915) - - - - (15,497) (31,052) (38,579) (52,915) Net cash, cash equivalents and restricted cash provided by operating activities of discontinued operations 972 1,166 849 849 - - - - 972 1,166 849 849 Net cash, cash equivalents and restricted cash used in operating activities (14,525) (29,886) (37,730) (52,066) - - - - (14,525) (29,886) (37,730) (52,066) Cash flows from investing activities: Net cash, cash equivalents and restricted cash used in investing activities of continuing operations (111) (467) (543) (920) - - - - (111) (467) (543) (920) Net cash, cash equivalents and restricted cash provided by investing activities of discontinued operations 125,022 125,022 125,022 125,022 - - - - 125,022 125,022 125,022 125,022 Net cash, cash equivalents and restricted cash provided by (used in) investing activities 124,911 124,555 124,479 124,102 - - - - 124,911 124,555 124,479 124,102 Cash flows from financing activities: Net cash, cash equivalents and restricted cash (used in) provided by financing activities of continuing operations (69,826) (69,832) (69,974) (48,408) - - - - (69,826) (69,832) (69,974)
(48,408)
Effect of foreign currency exchange rates on cash 2,991 4,088 (1,476) (1,786) - - - - 2,991 4,088 (1,476)
(1,786)
Net increase in cash, cash equivalents and restricted cash 43,551 28,925 15,299 21,842 - - - - 43,551 28,925 15,299
21,842
Cash, cash equivalents and restricted cash at beginning of period 5,621 5,621 5,621 5,621 - - - - 5,621 5,621 5,621
5,621
Cash, cash equivalents and restricted cash at end of period 49,172 34,546 20,920 27,463 - - - - 49,172 34,546 20,920
27,463
Less cash of discontinued operations - - - - - - - - - - -
-
Cash, cash equivalents and restricted cash of continuing operations at end of period $ 49,172 $ 34,546 $ 20,920 $ 27,463 $ - $ - $ - $ - $ 49,172 $ 34,546 $ 20,920 $ 27,463
Cash and cash equivalents $ 47,706 $ 33,109 $ 19,483
$ 25,990 $ - $ - $ - $ - $ 47,706 $ 33,109 $ 19,483 $ 25,990 Restricted cash
1,466 1,437 1,437 1,473 - - - - 1,466 1,437 1,437 1,473
Total cash, cash
equivalents and restricted
cash of continuing
operations at end of period $ 49,172 $ 34,546 $ 20,920 $ 27,463 $ - $ - $ - $ - $ 49,172 $ 34,546 $ 20,920 $ 27,463
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Appgate, Inc.
Notes to Consolidated Financial Statements
2020 - Year-to-date
periods ended (As Reported) Adjustments (As Restated)
Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4
Cash flows from operating
activities:
Net loss $ (25,175) $ (38,534) $ (50,425) $ (1,531) $ (1,847) $ (2,743) $ (26,706) $ (40,381) $ (53,168)
Net income from
discontinued operations,
net of tax (3,878) (3,003) (1,136) 508 191 44 (3,370) (2,812) (1,092)
Adjustments to reconcile
net loss to net cash used
in operating activities: -
Amortization of deferred
contract acquisition
costs 844 1,251 1,790 698 1,236 2,197 1,542 2,487 3,987
Deferred income taxes 66 - (665) - - 33 66 - (632)
Changes in assets and
liabilities: - - -
Contract assets 320 (191) 242 359 460 559 679 269 801
Accrued expenses 578 (1,286) 145 - - (105) 578 (1,286) 40
Deferred revenue 1,464 1,764 1,883 (34) (40) 15 1,430 1,724 1,898
Net cash, cash
equivalents and
restricted cash used in
operating activities of
continuing operations (12,772) (23,795) (26,484) - - - (12,772) (23,795) (26,484)
Net cash, cash
equivalents and
restricted cash provided
by operating activities
of discontinued
operations 6,289 7,760 9,301 87 87 87 6,376 7,847 9,388
Net cash, cash
equivalents and
restricted cash used in
operating activities (6,483) (16,035) (17,183) 87 87 87 (6,396) (15,948) (17,096)
Cash flows from investing
activities:
Net cash, cash
equivalents and
restricted cash used in
investing activities of
continuing operations (362) (941) (1,074) - - - (362) (941) (1,074)
Net cash, cash
equivalents and
restricted cash provided
by investing activities
of discontinued
operations - - - - - - - - -
Net cash, cash
equivalents and
restricted cash provided
by (used in) investing
activities (362) (941) (1,074) - - - (362) (941) (1,074)
Cash flows from financing
activities:
Net cash, cash
equivalents and
restricted cash (used in)
provided by financing
activities of continuing
operations 5,669 14,914 19,408 - - - 5,669 14,914 19,408
Effect of foreign
currency exchange rates
on cash 2,519 2,840 (1,746) - - - 2,519 2,840 (1,746)
Net increase in cash,
cash equivalents and
restricted cash 1,343 778 (595) 87 87 87 1,430 865 (508)
Cash, cash equivalents
and restricted cash at
beginning of period 6,243 6,243 6,243 (87) (87) (87) 6,156 6,156 6,156
Cash, cash equivalents
and restricted cash at
end of period 7,586 7,021 5,648 - - - 7,586 7,021 5,648
Less cash of discontinued
operations (4) (56) (27) - - - (4) (56) (27)
Cash, cash equivalents
and restricted cash of
continuing operations at
end of period $ 7,582 $ 6,965 $ 5,621 $ - $ - $ - $ 7,582 $ 6,965 $ 5,621
Cash and cash equivalents $ 5,690 $ 5,165 $ 3,505
$ - $ - $ - $ 5,690 $ 5,165 $ 3,505
Restricted cash 1,892 1,800 2,116 - - - 1,892 1,800 2,116
Total cash, cash
equivalents and
restricted cash of
continuing operations at
end of period $ 7,582 $ 6,965 $ 5,621 $ - $ - $ - $ 7,582 $ 6,965 $ 5,621
Note 22. Subsequent Events
On October 12, 2021, our Board of Directors adopted theAppgate, Inc. 2021 Incentive Compensation Plan (the "2021 Plan"). The purpose of the 2021 Plan is to assistAppgate, Inc. and its related entities in attracting, motivating, retaining and rewarding high-quality executives and other employees, officers, directors, consultants and other persons who provide services toAppgate, Inc. or its related entities by enabling such persons to acquire or increase a proprietary interest in the Company in order to strengthen the mutuality of interests between such persons and the Company's shareholders, and providing such persons with performance incentives to expend their maximum efforts in the creation of shareholder value. During 2021, no grants or awards were made under the 2021 Plan. In 2022, our Board of Directors (or a designee thereof) approved certain grants of long-term incentive awards to executives, employees, officers and consultants of the Company (or a subsidiary thereof). Such grants were given as restricted stock units ("RSUs") and phantom stock units 124
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Appgate, Inc.
Notes to Consolidated Financial Statements
("PSUs"). Awards of RSUs were given as time-based awards and/or
performance-based awards under the 2021 Plan. All PSUs were given as
performance-based awards. The vesting of the performance-based awards is
dependent upon certain conditions, including service and/or performance
conditions as defined in the grants. On December 23, 2022, the Company and our
Executive Chairman and Chairman of our Board agreed to cancel his January 1,
2022 award of 1,102,217 time-based RSUs. As of December 27, 2022, there were no
time-based RSUs, 9,282,292 performance-based RSUs, and 52,678 performance-based
PSUs issued and outstanding to participants under the 2021 Plan, which
performance-based RSUs and performance-based PSUs were subject to certain
vesting criteria. As of December 27, 2022, none of the awards had vested.
Amendment to Note Purchase Agreement and Note Issuance Agreement and Waiver to Note Purchase Agreement and Registration Rights Agreement
As of February 9, 2022, the Company, Legacy Appgate, the holders of the Convertible Senior Notes (the "Noteholders") and Magnetar, as representative of the Noteholders (the "Representative"), entered into an Amendment to Note Purchase Agreement and Note Issuance Agreement and Waiver to Note Purchase Agreement and Registration Rights Agreement (the "Amendment and Waiver").
The Amendment and Waiver modifies: (i) the Note Purchase Agreement by (a) (1) extending the date by which the Representative or its affiliates may elect to consummate an Optional Closing (as defined in the Note Purchase Agreement) until the earlier of (x) 75 days after the Company closes a registered offering of equity securities in an aggregate amount of no less than $40.0 million and (y) October 31, 2022 and (2) requiring the Company's consent to effect any Optional Closing, and (b) waiving, for the period of time set forth in the Amendment and Waiver, certain registration rights of the Noteholders; (ii) the Note Issuance Agreement to provide for the incurrence of certain subordinated indebtedness; and (iii) that certain Registration Rights Agreement, dated as of February 8, 2021 entered into by and among Legacy Appgate and the Noteholders, by waiving, for the period of time set forth in the Amendment and Waiver, certain registration rights of the Noteholders. As of December 28, 2022, we were in non-compliance with one of the debt covenants under the Note Issuance Agreement due to our failure to deliver our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 to the Representative within 15 days after the date such Form 10-Q was required to be filed with theSEC .
Revolving Credit Facility
On April 26, 2022, Legacy Appgate,Appgate , the other guarantors party thereto and SIS Holdings entered into a revolving credit agreement (the "Revolving Credit Agreement") which provides for a $50.0 million unsecured, revolving credit facility (the "Revolving Credit Facility"). This indebtedness is contractually subordinated to the Convertible Senior Notes and matures on the earlier to occur of (a) June 30, 2023, (b) the closing of a registered offering of Capital Stock (as defined in the Revolving Credit Agreement) of the Company in an aggregate amount equal to $50.0 million or more and (c) the date of which the Loans (as defined in the Revolving Credit Agreement) are accelerated upon an Event of Default (as defined in the Revolving Credit Agreement). Interest accrues on amounts drawn under the Revolving Credit Facility at a rate of 10.0% per annum, payable in cash on the Final Maturity Date (as defined in the Revolving Credit Agreement). The Revolving Credit Agreement is subject to customary terms, covenants and conditions. All obligations under the Revolving Credit Agreement are guaranteed byAppgate and Legacy Appgate's domestic subsidiaries. As of December 28, 2022, we had an aggregate of $43.0 million in borrowings outstanding under the Revolving Credit Facility and were in non-compliance with one of the debt covenants under the Revolving Credit Facility due to our failure to deliver our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 to SIS Holdings within 15 days after the date such Form 10-Q was required to be filed with theSEC .
Liquidity and Going Concern
Subsequent to the issuance of the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with theSEC on March 31, 2022, events or conditions occurred that have led to the conclusion that substantial doubt exists about the Company's ability to continue as a going concern. Among other things, the conditions that raised substantial doubt include continued losses at the Company. 125
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Appgate, Inc.
Notes to Consolidated Financial Statements
Reduction in Force
On July 25, 2022, we substantially completed a reduction in force (the "Reduction") of approximately 22% of our workforce. In connection with the Reduction, we incurred approximately $1.8 million of costs and expenses, primarily comprising severance and termination-related costs, which we recognized in the third quarter of 2022.
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