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 (a) our unaudited condensed consolidated financial statements and related notes contained elsewhere in Part I, Item 1, "Financial Statements" of this Quarterly Report, (b) Part II, Item 1A "Risk Factors" of this Quarterly Report, (c) Part I, Item 1A "Risk Factors," Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes in the Amended 10-K, (d) Part II, Item 1A "Risk Factors" in the Amended Q1 10-Q, and (e) Part II, Item 1A "Risk Factors" in the Amended Q2 10-Q. As discussed in the section above titled "Cautionary Statement Regarding Forward-Looking Statements," the following discussion contains forward-looking statements that are based upon our current expectations, including with respect to our future revenues and operating results. Our actual results may differ materially from those anticipated in such forward-looking statements as a result of various factors. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included under Part II, Item 1A below and included under Part I, Item 1A in our Amended 10-K, Part II, Item 1A in our Amended Q1 10-Q and Part II, Item 1A in our Amended Q2 10-Q. We operate on a calendar year basis. Capitalized terms used in this section and not defined herein have the respective meanings given to such terms elsewhere in this Quarterly Report. Numbers and percentages presented throughout this discussion and analysis may not always add up to equivalent totals and/or to 100% due to rounding. Overview of Our Business We believe we are defining a new category 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$34.1 million and$30.9 million atSeptember 30, 2022 and 2021, respectively. Our dollar-based net retention rate was 94% atSeptember 30, 2022 , down from 130% atSeptember 30, 2021 . Our number of customers generating over$100,000 ARR increased 19% fromSeptember 30, 2021 toSeptember 30, 2022 , 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. Our revenue decreased from$11.2 million for the three months endedSeptember 30, 2021 to$10.6 million for the three months endedSeptember 30, 2022 , a decrease of 5%. In turn, our revenue increased from$30.6 million for the nine months endedSeptember 30, 2021 to$32.8 million for the nine months endedSeptember 30, 2022 , an increase of 7%. 31 --------------------------------------------------------------------------------
Factors Affecting Our Business
Reduction in Force
On
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 Quarterly Report are those of: (1) except for the equity, which was retroactively restated following applicable accounting guidance, Legacy Appgate with respect to all periods prior to consummation of the Merger, and (2) those of us, inclusive ofNewtown Lane for the period subsequent to the Merger. We expensed$226 thousand and$0.6 million , respectively, in transaction costs during the three and nine months endedSeptember 30, 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 in 2022. Much uncertainty still surrounds the pandemic, including new variants of COVID-19, its duration and ultimate overall impact on our operations. Management continues to carefully evaluate potential outcomes and has plans to mitigate related risks. While the COVID-19 pandemic did not have a material impact on our business, financial condition or results of operations for 2021 or the nine months endedSeptember 30, 2022 , management took measures during such periods to minimize the risks from the pandemic. Those measures were aimed at safeguarding the Company, and the health, safety and well-being of our employees and customers.
Public Company Costs
Following the consummation of the Merger, we became a public company, which resulted in, and will continue to require, hiring of additional staff and implementation of processes and procedures to address public company regulatory requirements and customary practices. We have incurred, and expect to continue to incur, substantial additional annual expenses for, among other things, directors' and officers' liability insurance, director fees and additional internal and external costs for investor relations, accounting, audit, legal, corporate secretary and other functions.
Formation and Cyxtera Spin-Off
Prior 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 each of the three and nine months endedSeptember 30, 2021 , theManagement Company charged Legacy Appgate$0.1 million for services rendered under the Transition Services Agreement. Such costs are included in general and administrative expenses in the condensed consolidated statement of operations.
During the three and nine months ended
32
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On February 8, 2021 , Legacy Appgate made a payment of $1.0 million to Cyxtera
(and/or its subsidiaries) as settlement in full of trade balances with Cyxtera
and its subsidiaries and other amounts due to / from under the Intercompany
Master Services Agreement and the Transition Services Agreement, which trade
balances and other amounts totaled $2.6 million . Because the Management Company
was an affiliate under common control with Legacy Appgate at the time of
repayment, the settlement of these amounts was recognized as a capital
contribution of $1.6 million in the nine months ended September 30, 2021 .
Promissory Notes
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 .
During the nine months ended
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 the nine months endedSeptember 30, 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 4 to our condensed consolidated financial statements for discontinued operations disclosures included in Part I, Item 1 of this Quarterly Report - "Financial Statements". OnJanuary 20, 2021 , Legacy Appgate completed the sale of 100% of the outstanding equity interests of Brainspace for$125.0 million . We recorded a gain on the sale of Brainspace of$64.6 million . We have classified the results of Brainspace as discontinued operations in our condensed consolidated statements of operations for all periods presented. Unless otherwise stated, all discussion of Legacy Appgate's results of operations included in this discussion and analysis focus on continuing operations and exclude the discontinued Brainspace operations.
Key Business Metrics
Our management reviews a number of key performance indicators, each as described below, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions.
Annual Recurring Revenue
ARR is a performance indicator that management believes provides more visibility
into the growth of our revenue generated by recurring business. Our management
believes ARR is a key metric to measure our business because it is driven by our
ability to acquire new subscription customers and to maintain and expand our
relationship with existing subscription customers. ARR also mitigates
fluctuations due to seasonality, contract term, sales mix, and revenue
recognition timing resulting from revenue recognition methodologies under GAAP.
We define ARR as the annualized value of SaaS, subscription, and term-based
license and maintenance contracts from our recurring software products in effect
at the end of a given period. ARR should be viewed independently of revenue and
deferred revenue as it is an operating measure and is not intended to be
combined with or to replace GAAP revenue or deferred revenue, as they can be
impacted by contract start and end dates and renewal rates. ARR is not intended
to be a replacement or forecast of revenue or deferred revenue.
33
--------------------------------------------------------------------------------The table below sets forth our ARR as of the end of the periods indicated below (in thousands):
September 30,
2022 2021
ARR $ 34,057 $ 30,873
Change $ $ 3,184
Change % 10 %
Total Customers and Number of Customers with ARR above
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
September 30,
2022 2021
Total customers 624 610
Customers with ARR above $100,000 64 54
We stopped offering our Compliance Sheriff product which accounted for less than
5% of our total revenue for 2021. Total Compliance Sheriff-only customers
included in our total customer count as of September 30, 2021 above was 59. As a
result, our increase in customer count from September 30, 2021 to September 30,
2022 reflected in this Quarterly Report is not indicative of our customer growth
given our one-time voluntary sunsetting of our Compliance Sheriff product and
its respective customers.
Dollar-Based Net Retention Rate
Our management believes that our ability to retain and grow the ARR generated from our existing subscription customers is an indicator of the long-term value of our subscription customer relationships and future business opportunities. We track our performance in this area by measuring our dollar-based net retention rate, which reflects customer renewals, expansion, contraction, and customer attrition within our ARR base. We calculate dollar-based net retention rate by dividing the numerator by the denominator as set forth below:
• Denominator: As of the end of a reporting period, ARR as of the last day of the comparable reporting period in the prior year.
• Numerator: ARR for that same cohort of customers as of the end of the reporting period in the current year, including any expansion and net of any contraction and customer attrition over the trailing 12 months, excluding ARR from new subscription customers in the current period.
Our dollar-based net retention rates were 94% and 130% as of
34
--------------------------------------------------------------------------------Key Components of Results of Operations
Revenue
We recognize revenue under ASC 606, Revenue from Contracts with Customers ("ASC
606"). Under ASC 606, we recognize revenue when our customers obtain control of
goods or services in an amount that reflects the consideration that we expect to
receive in exchange for those goods or services.
We primarily sell our software through on-premise term-based license agreements,
perpetual license agreements and SaaS subscriptions, which allow our customers
to use our SaaS services without taking possession of the software. Our products
offer substantially the same functionality whether our customers receive them
through a perpetual license, a term-based license or a SaaS arrangement. Our
agreements with customers for software licenses may include maintenance
contracts and may also include professional services contracts. Maintenance
revenues consist of fees for providing unspecified software updates and
technical support for our products for a specified term, which is typically one
to three years. We offer a portfolio of professional services and extended
support contract options to assist our customers with integration, optimization,
training and ongoing advanced technical support. We also generate revenue from
threat advisory services, including penetration testing, application
assessments, vulnerability analysis, reverse engineering, architecture review
and source code review.
Subscription. Our term-based license arrangements that do not contain variable
consideration include both upfront revenue recognition when the distinct license
is made available to the customer as well as revenue recognized ratably over the
contract period for support and maintenance based on the stand-ready nature of
these elements. Revenue on our SaaS arrangements that do not contain variable
consideration, is recognized ratably over the contract period as we satisfy the
performance obligation, beginning on the date the service is made available to
our customers.
Subscription revenue represented approximately 78% and 81% of our revenue for
the three and nine months ended September 30, 2022 , respectively, and
approximately 82% and 79% of our revenue for the three and nine months ended
September 30, 2021 , respectively. We expect that a majority of our revenue will
continue to be from subscriptions for the foreseeable future, and we expect that
subscription revenue as a percentage of total revenue will increase over time.
Changes in period-over-period subscription revenue growth are primarily impacted
by the following factors:
• the type of new and renewed subscriptions (i.e., term-based or SaaS); and
• the duration of new and renewed term-based subscriptions.
While the number of new and increased subscriptions during a period impacts our subscription revenue growth, the type and duration of those subscriptions have a significantly greater impact on the amount and timing of revenue recognized in a period. Subscription revenue from the software license components of term-based licenses is generally recognized at the beginning of the subscription term, while subscription revenue from SaaS and support and maintenance is generally recognized ratably over the subscription term. As a result, our revenue may fluctuate due to the timing and type of the software license components of term-based licensing transactions. In addition, keeping other factors constant, when the percentage of subscription term-based licenses to total subscriptions sold or renewed in a period increases relative to the prior period, revenue growth will generally increase. Conversely, when the percentage of subscription SaaS and support and maintenance to total subscriptions sold or renewed in a period increases, revenue growth will generally decrease, as compared to a prior period. Additionally, a multi-year subscription term-based license will generally result in greater revenue recognition up front relative to a one-year subscription term-based license. Therefore, keeping other factors constant, revenue growth will generally also trend higher in a period where the percentage of multi-year subscription term-based licenses to total subscription term-based licenses increases. Perpetual licenses. Our perpetual license arrangements generally include both upfront revenue recognition when the distinct license is made available to the customer as well as revenue recognized ratably over the contract period for support and maintenance based on the stand-ready nature of these elements. Revenue related to support and maintenance is included as part of subscription revenue. For the three and nine months endedSeptember 30, 2022 , approximately 7% and 4%, respectively, of our revenue was from perpetual licenses. For the three and nine months endedSeptember 30, 2021 , approximately 3% and 6%, respectively, of our revenue was from perpetual licenses. 35 -------------------------------------------------------------------------------- Services and other. Our services-related performance obligations predominantly relate to the provision of consulting and threat advisory services, and to a lesser extent, training and software installation. Software installation services are distinct from subscriptions and do not result in significant customization of the software. Our services are generally priced on a time and materials basis, which is generally invoiced monthly and for which revenue is recognized as the services are performed. Revenue from our training services and sponsorship fees is recognized on the date the services are complete. Over time, we expect services revenue to remain relatively stable as a percentage of total revenue. For the three and nine months endedSeptember 30, 2022 , approximately 15% and 16%, respectively, of our revenue was from services and other. For the three and nine months endedSeptember 30, 2021 , approximately 15% and 16%, respectively, of our revenue was from services and other. Concentrations. The following table summarizes revenue (in thousands) by country and main geography in which we operate, which arethe United States andCanada ("US&C"),Latin America ("LATAM"),Europe , theMiddle East andAfrica ("EMEA"), andAsia Pacific ("APAC"), based on the billing address of customers (including, for the avoidance of doubt, resellers and managed service providers) who have contracted with us. As with our aggregate revenues, as described above, within each geography described below we expect that subscription revenue as a percentage of total revenue in each such geography will increase over time. While there may be shifts in individual countries representing 10% or more of our total revenue from time to time, we expect that we will continue to derive the vast majority of our revenue fromthe United States , which is our country of domicile. We do not currently anticipate significant shifts in revenues by main geography. Three Months Ended September Nine Months Ended September 30, 30, 2022 2021 2022 2021 Revenues by country (a): United States$ 5,337 $ 4,811 $ 16,898 $ 13,271 Ecuador 1,354 733 2,719 2,798 Colombia 1,217 2,523 4,126 5,204 Other 2,694 3,096 9,066 9,324 Total$ 10,602 $ 11,163 $ 32,809 $ 30,597 Revenues by main geography: US&C$ 5,528 $ 4,979 $ 18,515 $ 15,066 LATAM 3,852 4,481 10,393 11,788 EMEA 713 685 2,238 1,927 APAC 509 1,018 1,663 1,816 Total$ 10,602 $ 11,163 $ 32,809 $ 30,597
(a) Only
No single customer (including, for the avoidance of doubt, resellers and managed service providers) accounted for 10% or more of our total revenue in the periods presented. Cost of Revenue Cost of revenue consists primarily of employee compensation costs for employees associated with supporting our licensing arrangements and service arrangements, certain third-party expenses and the amortization of developed technology assets. Employee compensation and related costs include cash compensation and benefits to employees, equity-based compensation, costs of third-party contractors and associated overhead costs. Third-party expenses consist of cloud infrastructure costs, other expenses directly associated with our customer support, including, in limited instances, equipment purchased for resale. We expect cost of revenue to increase in absolute dollars.
Gross Profit and Gross Margin
Gross profit, or revenue less cost of revenue, and gross margin, or gross profit
as a percentage of revenue, have been and will continue to be affected by
various factors, including the timing of our acquisition of new customers and
renewals of
36
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and follow-on sales to existing customers, the average sales price of our
services, mix of services offered in our solutions, including new product
introductions, the extent to which we expand our customer support and operations
and the extent to which we can increase the efficiency of our technology and
infrastructure through technological improvements. We currently expect gross
profit to increase in absolute dollars and gross margin to increase slightly
over the long term, although our gross profit and gross margin could fluctuate
from period to period depending on the interplay of all the above factors.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, equity-based compensation expense and, with respect to sales and marketing expenses, sales commissions that are recognized as expenses. Operating expenses also include overhead costs for facilities, IT, depreciation expense and amortization expense. Sales and Marketing Sales and marketing expenses consist primarily of employee compensation and related expenses, including salaries, bonuses and benefits for our sales and marketing employees, sales commissions that are recognized as expenses over the period of benefit, equity-based compensation expense, marketing and channel programs, travel and entertainment expenses, expenses for conferences and events and allocated overhead costs. We capitalize our sales commissions and associated payroll taxes and recognize them as expenses over the estimated period of benefit. The amount recognized in our sales and marketing expenses reflects the amortization of cost previously deferred as attributable to each period presented in our consolidated financial statements, as described in Note 1 - Business and Summary of Significant Accounting Policies to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report - "Financial Statements". Advertising expenses are charged to sales and marketing expense in the condensed consolidated statements of operations as incurred. We intend to continue to invest in our sales and marketing organization to drive additional revenue, further penetrate the market and expand our global customer base. As a result, we expect our sales and marketing expenses to be our largest operating expense category for the foreseeable future. In particular, we plan to continue to invest in our sales force, broadening our brand awareness and expanding and deepening our channel partner relationships. However, we currently expect sales and marketing expenses to decrease as a percentage of our revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses.
Research and Development
Research and development costs to develop software to be sold, leased or marketed are expensed as incurred up to the point of technological feasibility for the related software product. We have not capitalized development costs for software to be sold, leased or marketed to date, as the software development process is essentially completed concurrent with the establishment of technological feasibility. As such, these costs are expensed as incurred and recognized in research and development costs in the condensed consolidated statements of operations. Software developed for internal use, with no substantive plans to market such software at the time of development, is capitalized and included in property and equipment, net in the condensed consolidated balance sheets. Costs incurred during the preliminary planning and evaluation and post implementation stages of the project are expensed as incurred. Costs incurred during the application development stage of the project are capitalized. Our research and development expenses support our efforts to add new features to our existing offerings and to ensure the reliability, availability and scalability of our solutions. Our research and development teams employ software engineers in the design and the related development, testing, certification and support of our solutions. Accordingly, the majority of our research and development expenses result from employee-related costs, including salaries, bonuses and benefits and costs associated with technology tools used by our engineers.
We intend to continue to make investments in research and development to extend the features of our existing offerings and technology capabilities.
37
--------------------------------------------------------------------------------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
InJune 2022 , we expensed$2.1 million of transaction costs in connection with the contemplated registered offering of equity securities. Transaction costs expensed in connection with the Merger totaled$226 thousand and$0.6 million , respectively in the three and nine months endedSeptember 30, 2021 .
Depreciation and Amortization
Acquired intangible assets consist of identifiable intangible assets, including trademarks and tradenames and customer relationships resulting from business combinations. Acquired finite-lived intangible assets are initially recorded at fair value and are amortized on a straight-line basis over their estimated useful lives. Amortization expense for trademarks and tradenames and customer relationships is recorded primarily within depreciation and amortization in the condensed consolidated statements of operations.
Loss on Abandonment of Assets
We stopped offering our Compliance Sheriff product and, as a result, recorded a loss on abandonment of the related intangible assets of$1.7 million in the nine months endedSeptember 30, 2022 (all during the first quarter of 2022).
Change in Fair Value of Embedded Derivative Liability
We have recognized an embedded derivative liability associated to the Convertible Senior Notes (as defined below). The embedded derivative is recognized at fair value and is subsequently remeasured at its estimated fair value on a recurring basis at the end of each reporting period, with changes in estimated fair value recognized as change in fair value of embedded derivative liability in our condensed consolidated statements of operations.
Interest Expense
Interest expense consists primarily of interest incurred on our obligations under the Convertible Senior Notes and, 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 condensed consolidated financial statements, may not be indicative of the income taxes we will generate in the future. In jurisdictions where Legacy Appgate was included in the tax returns filed by Cyxtera, any income taxes payable/receivable resulting from the related income tax provisions have been reflected in the balance sheets of each separate entity's provision. Benefit (provision) for income taxes consists primarily of income taxes related toU.S. federal and state income taxes and income taxes in foreign jurisdictions in which we conduct business. 38 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth our consolidated results of operations for the
periods presented (in thousands). The period-to-period comparisons of our
historical results are not necessarily indicative of the results that may be
expected in the future. The results of operations data have been derived from
our unaudited condensed consolidated financial statements included in Part I,
Item 1 of this Quarterly Report, "Financial Statements".
Three Months Ended September Nine Months Ended September
30, 30,
2022 2021 Variance % 2022 2021 Variance %
Revenue $ 10,602 $ 11,163 5 % $ 32,809 $ 30,597 7 %
Cost of revenue, exclusive of
amortization shown below 4,292 4,065 6 % 14,084 11,812 19 %
Amortization expense 954 1,131 16 % 2,862 3,393 16 %
Total cost of revenue 5,246 5,196 1 % 16,946 15,205 11 %
Gross profit 5,356 5,967 10 % 15,863 15,392 3 %
Operating expenses:
Sales and marketing 9,504 10,037 5 % 37,645 27,388 37 %
Research and development 2,953 2,718 9 % 10,387 7,638 36 %
General and administrative 8,103 4,264 90 % 26,160 12,238 114 %
Transaction costs - 226 nm 2,059 599 nm
Depreciation and amortization 1,370 1,347 2 % 4,116 4,040 2 %
Loss on abandonment of assets - - nm 1,658 - nm
Total operating expenses 21,930 18,592 18 % 82,025 51,903 58 %
Loss from continuing operations (16,574) (12,625) 31 % (66,162) (36,511) 81 %
Change in fair value of embedded
derivative liability 23,040 - nm 68,917 - nm
Interest expense, net (1,829) (641) 185 % (4,303) (2,117) 103 %
Other expenses, net (961) (64) 1402 % (1,341) (283) 374 %
Income (loss) from continuing
operations before income taxes 3,676 (13,330) nm (2,889) (38,911) 93 %
Income tax expense of continuing
operations (818) (999) 18 % (1,954) (2,003) 2 %
Net income (loss) from continuing
operations 2,858 (14,329) nm (4,843) (40,914) 88 %
Net income from discontinued
operations, net of tax - (212) nm - 65,477 nm
Net income (loss) $ 2,858 $ (14,541) nm $ (4,843) $ 24,563 120 %
nm = not meaningful
Revenue
Revenue from continuing operations were as follows for the three and nine months
ended
Three Months Ended September Nine Months Ended September
30, 30,
2022 2021 Variance % 2022 2021 Variance %
Subscription revenue $ 8,304 $ 9,113 9 % 26,467 24,064 10 %
Perpetual licenses 710 347 105 % 1,217 1,719 29 %
Services and other 1,588 1,703 7 % 5,125 4,814 6 %
Total $ 10,602 $ 11,163 5 % $ 32,809 $ 30,597 7 %
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Three Months Ended
Revenue decreased by$0.6 million , or 5%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . The decrease in revenue was primarily attributable to an overall decrease in subscription SaaS, one-year subscription term-based licenses and services and other revenue as further explained below. These decreases were partially offset by increases in multi-year subscription term-based licenses and perpetual licenses revenue. Subscription revenue accounted for 78% and 82% of our total revenue for the three months endedSeptember 30, 2022 and 2021, respectively. Subscription revenue decreased$0.8 million , or 9%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . This decrease in subscription revenue was driven by a$0.8 million decrease in revenue from sales to new customers. Subscription revenue from sales to existing customers was relatively flat. Approximately$0.7 million of the decrease in revenue from new customers was in multi-year subscription term-based licenses and$0.2 million in one-year subscription term-based licenses. Our dollar-based net retention rate was 94% atSeptember 30, 2022 , down from 130% atSeptember 30, 2021 . Perpetual licenses revenue accounted for 7% and 3% of our total revenue for the three months endedSeptember 30, 2022 and 2021, respectively. Perpetual licenses revenue increased$0.4 million for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . This increase in perpetual license revenue was driven by sale and deployment of new perpetual licenses in the three months endedSeptember 30, 2022 . Services and other revenue accounted for 15% of our total revenue for each of the three months endedSeptember 30, 2022 and 2021. Services and other revenue decreased$0.1 million , or 7%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . This decrease in services and other revenue was primarily the result of an overall decrease in service hours billed to customers during the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 .
Nine Months Ended
Revenue increased by$2.2 million , or 7%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The overall increase in revenue was primarily attributable to an overall increase in subscription term-based licenses as further explained below, and an increase in services and other revenue, partially offset by a decrease in perpetual licenses. Subscription revenue accounted for 81% and 79% of our total revenue for the nine months endedSeptember 30, 2022 and 2021, respectively. Subscription revenue increased$2.4 million , or 10%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . This increase in subscription revenue was driven by$1.3 million in revenue from sales to existing customers and$1.0 million in revenue from sales to new customers. Approximately$0.7 million of the revenue from existing customers was from one-year subscription term-based licenses, and$0.6 million from multi-year subscription term-based licenses. In turn, approximately$1.0 million of the revenue from new customers was from multi-year subscription term-based licenses. Perpetual licenses revenue accounted for 4% and 6% of our total revenue for the nine months endedSeptember 30, 2022 and 2021, respectively. Perpetual licenses revenue decreased$0.5 million , or 29%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . This decrease in perpetual license revenue was driven by sale and deployment of perpetual licenses in the nine months endedSeptember 30, 2021 , for which only maintenance and support is recognized in the nine months endedSeptember 30, 2022 , partially offset by sale and deployment of new perpetual licenses in the nine months endedSeptember 30, 2022 . Services and other revenue accounted for 16% of our total revenue for each of the nine months endedSeptember 30, 2022 and 2021. Services and other revenue increased$0.3 million , or 6%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . This increase in services and other revenue was primarily the result of an overall increase in service hours billed to customers during the nine months endedSeptember 30, 2022 when compared to the nine months endedSeptember 30, 2021 . 40 --------------------------------------------------------------------------------
Cost of Revenue
Total cost of revenue from continuing operations increased by$0.1 million , or 1%, during the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . The increase in total cost of revenue was primarily due to an increase of$0.2 million in other cost of revenue, partially offset by a decrease in amortization of developed technology. The increase in other cost of revenue was primarily as a result of an increase in personnel costs from higher headcount, and to a lesser extent from an increase in subscription and hosting costs and contracted services. Operations headcount increased by 10 positions from 143 atSeptember 30, 2021 to 153 atSeptember 30, 2022 . The decrease in amortization of developed technology is related to the abandonment of the Compliance Sheriff related developed technology in 2022. Total cost of revenue from continuing operations increased by$1.7 million , or 11%, during the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The increase in total cost of revenue was primarily due to an increase of$2.3 million in other cost of revenue, partially offset by a decrease of$0.5 million in amortization of developed technology. These increases were the result of the same factors described above for the three months periods.
Gross Profit
Gross profit totaled$5.4 million for the three months endedSeptember 30, 2022 , a decrease of$0.6 million , or 10%, as compared to the three months endedSeptember 30, 2021 . Gross profit totaled$15.9 million for the nine months endedSeptember 30, 2022 , an increase of$0.5 million , or 3%, as compared to the nine months endedSeptember 30, 2021 . The decrease for the three months endedSeptember 30, 2022 and the increase for the nine months endedSeptember 30, 2022 were the result of the factors described above under "Revenue" and "Cost of Revenue".
Operating Expenses
Total operating expenses from continuing operations increased by$3.3 million , or 18%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . Total operating expenses from continuing operations increased by$30.1 million , or 58%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The factors that contributed to these increases in operating expenses are detailed below. Sales and marketing expenses decreased by$0.5 million , or 5%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . This decrease was primarily the result of a decrease in personnel costs from lower headcount on both the sales and marketing teams following the Reduction, and to a lesser extent, lower investment in marketing and advertising costs due to other cost reduction initiatives. Sales and marketing headcount decreased by 47 positions from 150 atSeptember 30, 2021 to 103 atSeptember 30, 2022 . Sales and marketing expenses increased by$10.3 million , or 37%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . This increase was primarily the result of an increase in personnel costs from higher headcount on both the sales and marketing teams, and to a lesser extent, higher investment in marketing and advertising costs since completion of the Merger. While sales and marketing headcount has recently decreased as described above, prior to the Reduction, there was overall higher headcount in both the sales and marketing teams in 2022 as compared to 2021. Research and development expenses increased by$0.2 million , or 9%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . Research and development expenses increased by$2.7 million , or 36%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . These increases were primarily the result of an increase in personnel costs from higher headcount. Research and development headcount increased by 14 positions from 107 atSeptember 30, 2021 to 121 atSeptember 30, 2022 . General and administrative expenses increased by$3.8 million , or 90%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . General and administrative expenses increased by$13.9 million , or 114%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . These increases were primarily the result of equity-based compensation expense recognized during the three and nine months endedSeptember 30, 2022 in connection with the 2021 Plan, and an increase in personnel costs from higher headcount throughout 2021 and 2022 prior to the Reduction. General and administrative headcount decreased by 8 positions from 74 atSeptember 30, 2021 to 66 atSeptember 30, 2022 . 41 -------------------------------------------------------------------------------- Transaction costs. InJune 2022 , we expensed$2.1 million of transaction costs related to a contemplated registered equity offering. Transaction costs expensed in connection with the Merger totaled$226 thousand and$0.6 million , respectively, for the three and nine months endedSeptember 30, 2021 . Depreciation and amortization expense remained relatively flat for the three and nine months endedSeptember 30, 2022 as compared to the three and nine months endedSeptember 30, 2021 . While there was an increase in depreciation and amortization primarily due to depreciation and amortization on purchases of property and equipment during 2021, we had lower amortization expense related to intangibles following the abandonment of the Compliance Sheriff related intangibles in 2022.
Loss on Abandonment of Assets. We stopped offering our Compliance Sheriff
product and, as a result, recorded a loss on abandonment of the related
intangible assets of
Change in Fair Value of Embedded Derivative Liability
For the three and nine months endedSeptember 30, 2022 , we recognized a gain of$23.0 million and$68.9 million , respectively, in connection with the embedded derivative associated with the conversion feature under the Convertible Senior Notes. Refer to Note 6 to the unaudited condensed consolidated financial statements in this Quarterly Report for a discussion of the key inputs affecting the value of the derivative. Interest Expense, Net Interest expense, net increased by$1.2 million for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . Interest expense, net increased by$2.2 million for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The increase in interest expense, net was primarily attributable to the change in the mix of our debt during 2021 and 2022. As described above, the Promissory Notes were repaid in part with the balance extinguished, in each case onFebruary 8, 2021 . OnFebruary 9, 2021 , Legacy Appgate issued$50.0 million aggregate principal amount of 5.00% convertible senior notes due 2024 (the "Initial Convertible Senior Notes"), which are described below, and in connection with the closing of the Merger onOctober 12, 2021 , issued an additional$25.0 million aggregate principal amount of convertible senior notes due 2024 (the "Additional Convertible Senior Notes" and, together with the Initial Convertible Senior Notes, the "Convertible Senior Notes"). Additionally, onApril 26, 2022 , Legacy Appgate,Appgate , the other guarantors party thereto andSIS Holdings entered into a revolving credit agreement (the "Revolving Credit Agreement") which provides for a$50.0 million unsecured, revolving credit facility (the "Revolving Credit Facility"). Interest accrues on amounts drawn under the Revolving Credit Facility at a rate of 10.0% per annum, payable in cash on the Final Maturity Date. During the three and nine months endedSeptember 30, 2022 , we borrowed$16.5 million and$37.5 million , respectively, under the Revolving Credit Facility, all of which remained outstanding as ofSeptember 30, 2022 . Other Expenses, Net Other expenses, net were$0.9 million and$1.1 million higher for the three and nine months endedSeptember 30, 2022 when compared to the three and nine months endedSeptember 30, 2021 . These increases were primarily the result of costs expensed following the abandonment of certain projects during 2022.
Income Tax Expense
Our effective tax rate for the three months endedSeptember 30, 2022 and 2021 was (22.3)% and 7.5%, respectively. Our effective tax rate for the nine months endedSeptember 30, 2022 and 2021 was 67.6% and 5.1%, respectively. The effective tax rate for the three and nine months endedSeptember 30, 2022 differs from theU.S. Federal income tax rate of 21% primarily due to foreign withholding taxes, changes in the valuation allowance, the change in the fair value of our embedded derivative liability that is not tax deductible, and state taxes. The effective tax rate for the three and nine months endedSeptember 30, 2021 differs from theU.S. Federal income tax rate of 21% primarily due to foreign withholding taxes. 42 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe the following non-GAAP financial measures are useful to investors in evaluating our operating performance. These non-GAAP financial measures are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP and may be different from similarly titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure determined in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.
Non-GAAP Gross Profit and Gross Margin
Non-GAAP gross profit and non-GAAP gross margin are supplemental measures of
operating performance that are not determined in accordance with GAAP and do not
represent, and should not be considered as, an alternative to gross profit and
gross margin, the most directly comparable financial measures determined in
accordance with GAAP. We define non-GAAP gross profit as gross profit, adjusted
to add back non-cash equity-based compensation expense and developed technology
amortization expense and define non-GAAP gross margin as non-GAAP gross profit
as a percentage of revenue.
We use non-GAAP gross profit and non-GAAP gross margin to understand and
evaluate our core operating performance and trends, to prepare and approve our
annual budget, and to develop short-term and long-term operating plans. We
believe that non-GAAP gross profit and non-GAAP gross margin are useful measures
to our management and to our investors because they provide consistency and
comparability with past financial performance and between periods, as the
metrics generally eliminate the effects of the variability of amortization
expense of intangibles and non-cash equity-based compensation expense from
period to period, which may fluctuate for reasons unrelated to overall operating
performance. We believe that the use of these measures enables our management to
more effectively evaluate our performance period-over-period and relative to our
competitors, some of which use similar non-GAAP financial measures to supplement
their GAAP results. Non-GAAP gross profit and non-GAAP gross margin have
limitations as analytical tools, and you should not consider them in isolation,
or as a substitute for analysis of our results as reported under GAAP. Because
of these limitations, non-GAAP gross profit and non-GAAP gross margin should not
be considered as a replacement for gross profit and gross margin, as determined
in accordance with GAAP, or as a measure of our profitability.
A reconciliation of our non-GAAP gross profit and non-GAAP gross margin to gross
profit and gross margin, the most directly comparable financial measures
determined in accordance with GAAP, for the periods presented, is as follows (in
thousands):
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 2022 2021
GAAP revenue $ 10,602 $ 11,163 $ 32,809 $ 30,597
GAAP gross profit 5,356 5,967 15,863 15,392
Add: amortization expense 954 1,131 2,862 3,393
Add: equity-based compensation - 131 62 393
Non-GAAP gross profit $ 6,310 $ 7,229 $ 18,787 $ 19,178
GAAP gross margin 51 % 53 % 48 % 50 %
Non-GAAP gross margin 60 % 65 % 57 % 63 %
43--------------------------------------------------------------------------------
Non-GAAP Loss from Operations and Non-GAAP Operating Margin
We define non-GAAP loss from operations as GAAP loss from continuing operations
excluding amortization expense of acquired intangible assets, loss on
abandonment of assets, non-cash equity-based compensation expense, and
transaction costs. We define non-GAAP operating margin as non-GAAP loss from
continuing operations as a percentage of revenue.
A reconciliation of our non-GAAP loss from operations and non-GAAP operating
margin to loss from continuing operations and operating margin, the most
directly comparable financial measures determined in accordance with GAAP, for
the periods presented, is as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
GAAP revenue $ 10,602 $ 11,163 $ 32,809 $ 30,597
GAAP loss from continuing operations (16,574) (12,625) (66,162) (36,511)
Add: amortization expense 2,099 2,299 6,295 6,898
Add: loss on abandonment of assets - - 1,658 -
Add: equity-based compensation 3,641 936 11,029 2,903
Add: transaction costs - 226 2,059 599
Non-GAAP loss from operations $ (10,834) $ (9,164) $ (45,121) $ (26,111)
GAAP operating margin (156) % (113) % (202) % (119) %
Non-GAAP operating margin (102) % (82) % (138) % (85) %
44--------------------------------------------------------------------------------
Free Cash Flow and Free Cash Flow Margin
Free cash flow is a non-GAAP financial measure that we define as net cash
provided by (used in) operating activities of continuing operations less cash
used for purchases of property and equipment and repayment of finance leases. We
believe that free cash flow is a useful indicator of liquidity that provides
information to management and investors, even if negative, as it provides useful
information about the amount of cash generated (or consumed) by our operating
activities that is available (or not available) to be used for other strategic
initiatives. For example, if free cash flow is negative, we may need to access
cash reserves or other sources of capital to invest in strategic initiatives.
While we believe that free cash flow is useful in evaluating our business, free
cash flow is a non-GAAP financial measure that has limitations as an analytical
tool, and free cash flow should not be considered as an alternative to, or
substitute for, net cash provided by (used in) operating activities in
accordance with GAAP. The utility of free cash flow as a measure of our
liquidity is limited as it does not represent the total increase or decrease in
our cash balance for any given period and does not reflect our future
contractual commitments. In addition, other companies, including companies in
our industry, may calculate free cash flow differently or not at all, which
reduces the usefulness of free cash flow as a tool for comparing our results to
those of other companies.
Nine Months Ended
2022 2021
Net cash, cash equivalents and restricted cash used in operating activities of continuing operations
$ (51,523) $ (38,579) Less: Purchases of property and equipment (514) (543) Repayment of finance leases - (154) Free cash flow$ (52,037) $ (39,276) As a percentage of revenue: GAAP revenue$ 32,809 $ 30,597
Net cash, cash equivalents and restricted cash used in operating activities of continuing operations
(157) % (126) %
Less:
Purchases of property and equipment (2) % (2) % Repayment of finance leases - % (1) % Free cash flow (159) % (128) %
Liquidity and Capital Resources
As ofSeptember 30, 2022 , we had cash and cash equivalents and borrowing capacity under the Revolving Credit Facility of$10.7 million and of$12.5 million , respectively. Historically, Legacy Appgate's principal source of liquidity was borrowing availability under the Promissory Notes and cash generated from Legacy Appgate's operations. As discussed above, 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 condensed consolidated statements of cash flows. We expect to continue to incur operating losses and negative cash flows from operations for the foreseeable future. Currently, our principal sources of liquidity are the proceeds from the issuance of the Convertible Senior Notes, our borrowing capacity under the Revolving Credit Facility and cash generated from our operations, which have enabled us to make continued investments to support the growth of our business. As a result of our recurring losses from operations and current liquidity, management is of the opinion that there is a substantial doubt as to the Company's ability to continue as a going concern. The unaudited condensed consolidated financial statements included herein have been prepared assuming that we will continue as a going concern and do not include adjustments that might result from the outcome of this uncertainty. If we are unable to raise the requisite funds, we will need to curtail or cease operations. See Note 1 to the unaudited condensed consolidated financial statements and Part II, Item 1A, "Risk Factors-Management has performed an analysis of our ability to continue as a going concern, and has 45 --------------------------------------------------------------------------------
determined that, based on our current financial position, there is a substantial doubt about our ability to continue as a going concern" in the Amended Q2 10-Q.
We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong. In the long-term, we will be required to obtain additional financing to fund our current planned operations, which may consist of borrowings under the Revolving Credit Facility or an alternative financing arrangement, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed may have a negative impact on our financial condition and our ability to pursue our business strategy. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
Debt
As ofSeptember 30, 2022 , we had$112.5 million in aggregate principal amount of debt outstanding:$75.0 million under the Convertible Senior Notes and$37.5 million under the Revolving Credit Facility. As ofDecember 31, 2021 , we had$75.0 million in aggregate principal amount of debt outstanding, all of which was under the Convertible Senior Notes.
Convertible Senior Notes
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. During 2021, we received net proceeds of$72.8 million from the issuance of the Convertible Senior Notes, after deducting fees and expenses of$2.2 million . We recorded these fees and expenses as debt issuance costs that will be amortized over the term of the Convertible Senior Notes. The Convertible Senior Notes are senior, unsecured obligations of 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. 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.
Revolving Credit Agreement
OnApril 26, 2022 , Legacy Appgate,Appgate , the other guarantors party thereto andSIS 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 ofSeptember 30, 2022 , we had$37.5 million in aggregate principal amount of debt outstanding under the Revolving Credit Facility.
Promissory Notes
OnMarch 31, 2019 , Legacy Appgate issued the Promissory Notes to each of Cyxtera and theManagement Company . As discussed above and in our condensed consolidated financial statements included elsewhere in Part I, Item 1 of this 46 -------------------------------------------------------------------------------- Quarterly Report, "Financial Statements", 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 the nine months endedSeptember 30, 2021 .
Other Contractual Obligations and Commitments
In addition to our debt obligations under the Convertible Senior Notes, the Revolving Credit Facility, and lease obligations under several operating lease arrangements,Appgate has other contractual commitments. Refer to Note 9 - Leases and Note 10 - Debt, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, "Financial Statements" for additional information on maturities. Refer to Note 11 - Commitments and Contingencies to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, "Financial Statements" for additional information regarding cash amounts committed under other contractual obligations.
Cash Flow
Cash Flows for the Nine Months EndedSeptember 30, 2022 and 2021. The following table sets forth our historical cash flows for the periods indicated (in thousands): Nine Months EndedSeptember 30, 2022 2021
Net cash, cash equivalents and restricted cash used in operating activities
$
(51,523)
$
(514)
$ 37,500 $ (69,974) Operating Activities
Our largest source of operating cash is cash collections from customers for sales of licenses and services. Our primary uses of cash from operating activities are for employee-related expenditures, marketing expenses and third-party hosting costs.
Net cash used in operating activities during the nine months endedSeptember 30, 2022 was$51.5 million , which resulted from net income of$4.8 million , adjusted for net non-cash inflows of$42.7 million and net cash outflow of$4.0 million from changes in assets and liabilities. Non-cash inflows primarily consisted of a$68.9 million gain in the fair value of our embedded derivative liability,$11.0 million in equity-based compensation,$7.0 million of depreciation and amortization,$4.7 million of amortization of deferred contract acquisition costs, and$1.7 million of loss on abandonment of assets. The net cash outflow from changes in assets and liabilities was primarily due to decreases in deferred contract acquisition costs and cash used in working capital. The main changes in working capital were prepaid and other current assets and accrued expenses. 47
-------------------------------------------------------------------------------- Net cash used in operating activities during the nine months endedSeptember 30, 2021 was$37.7 million , which resulted from a net loss of$24.6 million , adjusted for the net income from discontinued operations, net of tax of$65.5 million , non-cash charges of$14.8 million , net cash outflow of$12.4 million from changes in assets and liabilities and$0.8 million net cash provided by operating activities of discontinued operations. Non-cash charges primarily consisted of$7.4 million of depreciation and amortization,$3.7 million of amortization of deferred contract acquisition costs and$2.9 million in equity-based compensation. The net cash outflow from changes in assets and liabilities was primarily due to settlement of cash due to affiliates and changes in working capital combined with an increase in deferred contract acquisition costs. The main changes in working capital were accounts payable and accrued expenses and prepaid and other current assets.
Investing Activities
During the nine months endedSeptember 30, 2022 , we used cash in our investing activities of$0.5 million as compared to cash provided by investing activities of$124.5 million during the nine months endedSeptember 30, 2021 . The change in cash flows from investing activities during the nine months endedSeptember 30, 2022 when compared to the nine months endedSeptember 30, 2021 was primarily due to receipt of$125.0 million from the sale of Brainspace inJanuary 2021 .
Financing Activities
During the nine months endedSeptember 30, 2022 , we borrowed$37.5 million under the Revolving Credit Facility. We did not have any other cash movement in financing activities during the period. During the nine months endedSeptember 30, 2021 , we used$70.0 million of cash in financing activities, primarily for the repayment of$119.6 million to Cyxtera and/or theManagement Company inFebruary 2021 as settlement and extinguishment of the Promissory Notes, net of gross proceeds of$50.0 million received from the issuance of the Convertible Senior Notes.
Critical Accounting Policies and Estimates
For information regarding our critical accounting policies and estimates, see "Critical Accounting Estimates" included in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Amended 10-K.
Recent Accounting Pronouncements
Recently issued accounting pronouncements are described in Note 1 of our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, "Financial Statements".
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