What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-03-28 · 139 added, 143 removed, 414 unchanged (41% of the section changed)

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Through our blog and culture of transparency, we have built a community of millions of readers and brand advocates.

Referrals from our community of brand advocates, combined with our highly efficient and primarily self-serve customer acquisition model and an ecosystem of thousands of partners, have allowed us to attract approximately 500,000 customers as of December 31, 2021.

These customers use our Storage Cloud platform across more than 175 countries to grow and protect their business data on our approximately 2 exabytes, or 2 trillion megabytes, of data storage under management.

Referrals from our community of brand advocates, combined with our highly efficient and primarily self-serve customer acquisition model and an ecosystem of thousands of partners, have allowed us to attract more than 500,000 customers as of December 31, 2022.

These customers use our Storage Cloud platform across more than 175 countries to grow and protect their business data on our over 2.5 exabytes, or 2.5 trillion megabytes, of data storage under management.

Our Backblaze Storage Cloud provides a platform that is the foundation for our B2 Cloud Storage Infrastructure-as-a-Service (IaaS) consumption-based offering and our Backblaze Computer Backup Software-as-a-Service (SaaS) subscription-based offering.

B2 Cloud Storage enables customers to store data, developers to build applications, and partners to expand their use cases.

The amount of data stored in this cloud service can scale up and down as needed on a pay-as-you-go basis.

The amount of data stored in this cloud service can scale up and down as needed primarily on a pay-as-you-go basis or can be paid for on a capacity basis for greater predictability, which we refer to as our B2 Reserve offering.

Backblaze Computer Backup automatically backs up data from laptops and desktops for businesses and individuals.

This cloud backup service offers easily understood flat-rate pricing to continuously back up a virtually unlimited amount of data.

This cloud backup service offers easily understood primarily flat-rate pricing to continuously back up a virtually unlimited amount of data.

Our operations have historically been efficient with limited outside investment.

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Together, these two closings resulted in net proceeds of approximately $103.0 million after deducting the underwriting discounts and commissions and offering expenses.

In connection with the IPO and with the filing of our Amended and Restated Certificate of Incorporation in Delaware and the adoption of our Amended and Restated Bylaws, the following occurred, (i) the reclassification of all outstanding shares of our common stock into an equivalent number of shares of our Class B common stock, (ii) all shares of the convertible preferred stock then outstanding automatically converted into 3,359,195 shares of Class B common stock (iii) the SAFE notes automatically converted into 722,860 shares of Class A common stock.

Our Business Model

Our solutions are designed for individuals and businesses of all sizes and across all industries but have a particularly strong appeal to mid-market organizations (which we define as organizations with 10 to 999 employees) due to their desire for easy-to-use solutions.

We generate revenue primarily from our two cloud services:

• B2 Cloud Storage, which enables customers to store data for any use case, and for developers to embed our platform into their applications.

In both cases, our customers use this offering in a consumption-based model, and

• Backblaze B2 Cloud Storage, which enables customers to store data for any use case, and for developers to embed our platform into their applications.

In both cases, our customers use this offering in a consumption-based or capacity based model, and

• Backblaze Computer Backup, which provides virtually unlimited backup to businesses and consumers in a SaaS subscription model.

Our pricing is simple and straightforward, with fees and terms that are shared transparently on our website.

We have maintained our per-gigabyte B2 Cloud Storage pricing for five years, and we announced price increases to our unlimited subscription Computer Backup pricing in February 2019 and July 2021 with no material impact on customer retention as of December 31, 2021.

We provide simple pricing for usage of our cloud services and increase revenue per customer through our customers’ natural data growth or employee growth.

Additionally, we provide customers with additional value through cross-sell, upsell, and use case expansion that result in additional revenue per customer.

We believe our pricing is simple and straightforward, with fees and terms that are generally shared transparently on our website.

We have maintained our B2 Cloud Storage pricing for six years, and we announced price increases to our unlimited subscription Backblaze Computer Backup pricing in February 2019 and July 2021 with no material impact on customer retention as of December 31, 2022.

We believe we provide simple pricing for usage of our cloud services and increase revenue per customer through our customers’ natural data growth.

Additionally, we provide customers with additional value through cross-sell, upsell, and use case expansion that can result in additional revenue per customer.

These options for cross-selling and upselling include the following:

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Adopting additional products expands usage of our platform.

Customers can choose to use various features and services for additional fees, such as Extended Version History, Snapshots, cloud replication (anticipated to be available in the first half of 2022), and enhanced support tiers.

Customers can choose to use various features and services for additional fees, such as Extended Version History, Snapshots, cloud replication, and enhanced support tiers.

For example, our Computer Backup cloud service includes 30-day file version history with all subscriptions;

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This is delivered via a consumption-based model, and we charge a fixed price per month per gigabyte of data stored on our platform.

For prospective customers interested in Computer Backup, we offer a free 15-day trial and automatically start to back up all their files securely to our Storage Cloud.

Customers may purchase our B2 Cloud Storage on a capacity basis for greater predictability, which we refer to as our B2 Reserve offering.

For prospective customers interested in Computer Backup, we offer a free 15-day trial and automatically start to back up all their files securely to our Backblaze Storage Cloud.

Prospective customers can then choose to sign up on a per computer basis.

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which enables them to extend retention of old file versions and deleted files, which are typically saved for 30 days, to a year or perpetually.

We have a highly efficient go-to-market model that is built on a self-serve selling motion.

We believe that we have an efficient go-to-market model that is built on a self-serve selling motion.

Prospective customers find us through a variety of channels including our website, partners, and brand advocates.

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Our content is intended to encourage organic, inbound traffic that we believe serves as our greatest source of advocates and referrals.

Our free trial and self-serve sign-up processes help convert our blog readers and referrals from our brand advocates into customers, with over 80% of our revenue in 2021 coming from self-serve customers.

Our free trial and self-serve sign-up processes help convert our blog readers and referrals from our brand advocates into customers, with approximately 80% of our total revenue in 2022 coming from self-serve customers.

In addition to generating customers, a community of thousands of partners has arisen as a result of our efforts.

Our developer, alliance, and managed service provider (MSP) partners expand use cases and attract customers, thereby increasing usage of our Storage Cloud and helping to drive revenue growth.

Our technology and developer partners, channel partners and MSP partnerships expand use cases and attract customers, thereby increasing usage of our Storage Cloud and helping to drive revenue growth.

In addition to our self-serve selling motion, we have a sales-assisted selling motion to identify opportunities to increase business with existing customers and to assist larger customers in adopting our services.

Our sales-assisted selling motion helps customers that, in 2021, generally were more than 20 times larger in terms of average revenue per customer than our self-serve customers.

Our sales-assisted selling motion helps customers that, in 2022, generally were much larger in terms of average revenue per customer than our self-serve customers.

Substantially all of our revenue is recurring in nature.

We employ a land-and-expand model that drives additional revenue from existing customers.

We employ a land-and-expand model that seeks to drive additional revenue from existing customers.

As customers generate, store, and back up more data, their use of our platform increases, creating natural opportunities for revenue expansion.

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We believe there is a significant opportunity to further grow our customer base by continuing to make investments in sales and marketing.

We plan to continue investing in our customer acquisition and inbound demand generation activities, which is driven predominantly by our blog content, our case studies, social sharing, earned media, and our self-serve sign up model.

We will continue investing in our customer acquisition and inbound demand generation activities, which is driven predominantly by our blog content, our case studies, social sharing, earned media, and our self-serve sign up model.

We intend to leverage this model as an efficient approach to attract new customers, turning them into brand advocates, partners, and more referrals.

Furthermore, we plan to continue to build and scale our paid lead generation and to increasingly grow in the mid-market.

Furthermore, we plan to continue to build and scale our paid lead generation and outbound sales motion to increasingly grow in the mid-market.

We also plan to continue to build our ecosystem of partners.

We believe that delivering our Storage Cloud solutions through our alliance, developer, and MSP partnerships is an area of opportunity for us.

By adding more partners and deepening our relationships with them, we can expand our use cases and help drive new customer acquisition.

By adding more partners and deepening our relationships with them, we expand our use cases and drive new customer acquisition.

Scale Sales-Assisted Efforts

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We also plan to grow our Customer Success initiatives to ensure customers avail themselves of the full benefits of our platform, thus resulting in increased adoption.

customers continue to generate, store, and back up data, their use of our platform increases, creating natural opportunities for revenue expansion.

As these customers continue to generate, store, and back up data, their use of our platform increases, creating natural opportunities for revenue expansion.

Continued Platform Investment and New Product Launches

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International Expansion

While our sales and marketing efforts have primarily focused on the United States, our existing customer base spans more than 175 countries, with 28% of our revenue originating outside of the United States for the year ended December 31, 2021.

While our sales and marketing efforts have primarily focused on the United States, our existing customer base spans more than 175 countries, with 28% of our total revenue originating outside of the United States for the year ended December 31, 2022.

We believe international expansion represents a meaningful opportunity to generate further demand for our solutions in international geographies.

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The calculation of the key metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts, or investors.

As of December 31,

B2 Cloud Storage

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Annual recurring revenue (in millions) $ 38.6 $ 26.8

$26.80 $17.10

Number of customers (in thousands) (2)

Number of customers (1)

86,874 74,349

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Annual recurring revenue (in millions) $ 53.4 $ 48.6

$48.60 $42.10

Number of customers (in thousands) (2)

Number of customers (1)

436,080 433,079

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Annual recurring revenue (in millions) $ 92.0 $ 75.4

$75.40 $59.20

Number of customers (in thousands) (2)

Number of customers (1)(2)

506,456 493,023

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_____________

(1) The calculation methodology for NRR and gross customer retention rate metrics has been adjusted to improve accuracy with respect to customers that use both our B2 Cloud Storage and Computer Backup solutions.

The calculation methodology for these metrics on a total company basis remains unchanged.

Corresponding NRR and gross customer retention rate metrics for all quarters between Q1’20 and Q4’21 under this adjusted methodology have been provided in the table below:

December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020

(1) The calculation methodology for the NRR and number of customers metrics presented has been refined to include customers that we invoice and with whom we have active paying licenses.

The annual average revenue per user metric was also revised as a result.

As such, the table above has disclosed these refined metrics as of the fourth quarter of 2022 and 2021, respectively.

As the NRR and number of customer metrics are disclosed quarterly, these metrics for all quarters between the first quarter and third quarter of 2022 under this adjusted methodology have been provided in the table below:

September 30, 2022 June 30, 2022 March 31, 2022

B2 Cloud Storage

Net revenue retention rate (NRR) 125 % 127 % 131 %

130 % 131 % 132 % 133 % 136 % 141 % 146 % 150 %

Gross customer retention rate

89 % 89 % 89 % 89 % 89 % 89 % 89 % 89 %

Number of customers 84,118 80,823 77,263

Computer Backup

Net revenue retention rate (NRR) 109 % 107 % 105 %

102 % 101 % 102 % 104 % 107 % 108 % 109 % 109 %

Gross customer retention rate

91 % 91 % 91 % 90 % 90 % 90 % 90 % 90 %

Number of customers 435,312 435,266 434,767

Total Company

Net revenue retention rate (NRR) 115 % 114 % 113 %

110 % 110 % 110 % 111 % 114 % 116 % 116 % 116 %

Gross customer retention rate

91 % 91 % 91 % 91 % 90 % 90 % 90 % 90 %

Number of customers 503,478 500,722 497,125

(2) The number of customers for each of B2 Cloud Storage and Computer Backup solutions include customers that use both our B2 Cloud Storage and Computer Backup solutions.

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We believe that we can drive this metric by continuing to focus on our customers and by adding additional products and functionality to our platform.

Our overall NRR is a trailing four-quarter average of the recurring revenue from a cohort of customers in a quarter as compared to the same quarter in the prior year.

Our overall net revenue retention rate is a trailing four-quarter average of the recurring revenue from a cohort of customers in a quarter as compared to the same quarter in the prior year.

We calculate our overall net revenue retention rate for a quarter by dividing (i) recurring revenue in the current quarter from any accounts that were active at the end of the same quarter of the prior year by (ii) recurring revenue in the current corresponding quarter from those same accounts.

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Given the renewable nature of our business, we view ARR as an important indicator of our financial performance and operating results, and we believe it is a useful metric for internal planning and analysis.

ARR is calculated based on multiplying the monthly revenue from all B2 Cloud Storage and Computer Backup arrangements, which represent greater than 98% of our revenue for the periods presented (and excludes Physical Media revenue), for the last month of a period by 12.

ARR is calculated based on multiplying the monthly revenue from all B2 Cloud Storage and Computer Backup arrangements, which represent greater than 98% of our total revenue for the periods presented (and excludes Physical Media revenue), for the last month of a period by 12.

Our annual recurring revenue for B2 Cloud Storage and Computer Backup is calculated in the same manner as our overall annual recurring revenue based on the revenue from our Computer Backup and B2 Cloud Storage solutions, respectively.

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ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.

While ARR is not a guarantee of future revenue, we consider over 98% of our revenue recurring for the periods presented.

While ARR is not a guarantee of future revenue, we consider over 98% of our total revenue recurring for the periods presented.

As noted above, our gross customer retention rate has been consistent over the periods presented at approximately 90%.

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Fees from B2 Cloud Storage (consumption-based arrangements) are recognized as services are delivered.

Computer Backup (subscription-based arrangements) revenue is recognized on a straight-line basis over the contractual term of the arrangement beginning on the date that the service commences, provided that all other revenue recognition criteria have

See Notes to the financial statements for details on our revenue recognition policy.

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Impact of COVID-19

The worldwide spread of COVID-19 has created significant uncertainty in the global economy.

There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of COVID-19 and the extent to which COVID-19 continues to impact our business will depend on future developments, which are highly uncertain and difficult to predict.

While the full impact of the pandemic to our business remains unknown and we believe that our results of operations and financial condition have not been materially adversely impacted to date, we also believe that the pandemic has had some impact on our business.

Our potential customers, customers, or partners may have experienced, or in the future could experience, downturns or uncertainty in their own business operations due to COVID-19, which may have affected or could affect purchasing and operating decisions.

For example, although we believe our ability to retain customers has not been materially impacted by the pandemic, we also believe that the pandemic may have caused some customers to reduce their use of cloud storage with us or to delay increasing their use of our cloud storage offerings.

The worldwide spread of COVID-19 had a significant impact on the global economy.

Although it is difficult to identify the exact overall impact of the pandemic, we believe that the pandemic may have caused some customers to reduce their use of cloud storage with us or to delay increasing their use of our cloud storage offerings.

In addition, the pandemic may have caused potential customers to delay their purchasing decisions or to store less data with us.

We may also experience customer losses due to customer bankruptcy or cessation of operations, or otherwise.

In addition to the impact on customers, the pandemic has had some impact to our supply chain.

For example, starting in April 2020, we began to acquire additional hard drives and related infrastructure through capital lease agreements in order to minimize the impact of potential supply chain disruptions due to the pandemic.

The additional leased hard drives resulted in a higher balance of capital equipment and related lease liability, an increase in cash used in financing activities from principal payments, as well as a higher ongoing interest and depreciation expense related to these lease agreements.

Accordingly, our supply chain in the future may be disrupted, or we may be unable to obtain infrastructure and related equipment essential to our business on favorable terms or at all.

However, based on the impact from the pandemic to date, we believe we have sufficient reserves to minimize any material impact to our business operations should such a disruption occur.

In response to the COVID-19 pandemic, in the first quarter of 2020, we temporarily and periodically closed our office, enabled our non-essential workforce to work remotely, and implemented travel restrictions for non-essential business.

These changes remain in effect in 2021 and could extend into future quarters.

The changes we have implemented to date have not affected and are not expected to materially affect our ability to maintain operations, including financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures.

after the outbreak of COVID-19, we have seen slower growth in certain operating expenses due to reduced business travel and the virtualization or cancellation of customer and employee events.

In April 2020, we applied for and received a $2.3 million loan from the Small Business Administration’s Paycheck Protection Program (PPP).

We submitted our PPP forgiveness application in July 2020, and in June 2021 we received notification from the SBA that our forgiveness application of the PPP loan and accrued interest, totaling $2.3 million, was approved in full, and we had no further obligations related to the PPP loan.

Accordingly, we recorded a gain on the forgiveness of the PPP loan as gain on extinguishment of debt on our statement of operations as of December 31, 2021.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, cash flows, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted.

The global impact of COVID-19 continues to rapidly evolve, and we will continue to monitor the situation and the effects on our business and operations.

Although the pandemic appears to have substantially lessened, it is possible that the pandemic could re-emerge and adversely impact our business and operations, as well as the business and operations of our customers and partners.

For additional details, see the section titled “Risk Factors - The COVID-19 pandemic has impacted how we, our customers, and our partners are operating, and any re-emergence of the pandemic could result in a material adverse effect on our business.”

Key Components of Results of Operations

We generate revenue primarily from our B2 Cloud Storage and Backblaze Computer Backup cloud services offered on our platform.

Our platform is offered to our customers through either a consumption or a subscription-based arrangement through B2 Cloud Storage and Backblaze Computer Backup, respectively.

We generate revenue primarily from our Backblaze B2 Cloud Storage and Backblaze Computer Backup cloud services offered on our platform.

Our platform is offered to our customers primarily through either a consumption or a subscription-based arrangement through B2 Cloud Storage and Backblaze Computer Backup, respectively.

Our subscription arrangements range in duration from one month to 24 months, for which we bill our customers up front for the entire period.

Our consumption-based arrangements do not have a contractual term and are billed monthly in arrears.

For our subscription arrangements, we provide our cloud services evenly over the contractual period, for which revenue is recognized on a straight-line basis over the contract term beginning on the date that the service is made available to the customer.

Consumption-based revenue is variable and is related to fees charged for our customers’ use of our platform and is recognized as revenue in the period in which the consumption occurs.

In support of our platform, we also derive revenue from products offered to our customers for the ability to securely restore data using a USB drive (USB Restore) and for migrating large data sets to our platform using our proprietary Fireball device.

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We expect our research and development expenses to increase in absolute dollars for the foreseeable future as we continue to focus our research and development efforts on adding new features to our platform, improving our cloud service offerings, and increasing the functionality of our existing features.

Our research and development expenses may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses.

Our research and development expenses may fluctuate as a percentage of total revenue from period to period due to the timing and extent of these expenses.

Sales and Marketing

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Sales and marketing expenses also include expenditures related to advertising, marketing, our brand awareness activities, commissions paid to marketing partners, and an allocation of our general overhead expenses.

We plan to continue investing in sales and marketing by increasing our sales and marketing headcount, supplementing our self-serve model with a direct sales approach, expanding our partner ecosystem, driving our go-to-market strategies, building our lead generation and brand awareness, and sponsoring additional marketing events.

As a result, we expect our sales and marketing expenses to increase in absolute dollars for the foreseeable future.

Sales and marketing expenses may fluctuate as a percentage of revenue from period to period because of the timing and extent of these expenses.

We plan to continue investing in sales and marketing by, among other things, selectively increasing our sales and marketing headcount, optimizing our self-serve model, strengthening our partner ecosystem, driving our go-to-market strategies, and building our lead generation and brand awareness.

As a result, we expect our investment in sales and marketing to increase in absolute dollars for the foreseeable future.

Sales a nd marketing expenses may fluctuate as a percentage of total revenue from period to period because of the timing and extent of these expenses.

General and Administrative

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We expect our general and administrative expenses to increase in absolute dollars as our business grows.

Following the completion of this offering, we will incur additional general and administrative expenses as a result of operating as a public company, including increased expenses for insurance, costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, investor relations, and professional services expenses.

We expect to continue incurring general and administrative expenses as a result of operating as a public company, including expenses for insurance, costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, investor relations, and professional services expenses.

Interest Expense

Interest expense consists primarily of interest related to our capital lease agreements.

Income Tax Provision

Interest expense consists primarily of interest related to our finance lease agreements and interest on the outstanding balance of our existing credit facility.

Investment Income

Investment income consists primarily of interest earned on our cash and investments.

Income Tax (Benefit) Provision

Provision for income taxes consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business.

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General and administrative (1)

23,470 12,901

Total operating expenses

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(48,113) (18,794)

Investment income 965

Interest expense

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(51,437) (21,608)

Income tax provision

Income tax (benefit) provision (39) 96

$ (51,398) $ (21,704)

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Cost of revenue

$ 1,267 $ 509

Research and development

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$ 17,049 $ 5,629

The following table sets forth our statements of operations data expressed as a percentage of revenue for the periods indicated:

The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated:

For the Years Ended

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Loss from operations

Investment income 1 —

Interest expense

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Loss before provision for income taxes

Income tax provision

Income tax (benefit) provision

(60) % (32) %

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2022 2021 Change % Change

(in thousands)

(in thousands, except percentages)

B2 Cloud Storage revenue

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683 730 (47) (6) %

Total revenue

$ 85,155 $ 67,479 $ 17,676 26 %

Total revenue increased by $17.7 million, or 26%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Consumption-based revenue (B2 Cloud Storage) increased by $8.4 million, which primarily increased due to expansion of existing customers.

The remaining increase of $5.2 million was due to subscription-based revenue (Computer Backup), which increased primarily due to the addition of new customers and a price increase for Computer Backup that went into effect in September 2021.

B2 Cloud Storage increased by $10.4 million, which primarily increased due to increased storage for existing customers and the addition of new customers.

The remaining increase of $7.3 million was from Co mputer Backup, which increased primarily due to a price increase that went into effect in September 2021, an increase in the number of licenses per existing customer and the addition of new customers.

Cost of Revenue and Gross Margin

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2022 2021 Change % Change

(in thousands, except

(in thousands, except percentages)

Cost of revenue

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Total cost of revenue increased by $8.2 million, or 25%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily attributable to an increase of $3.3 million for depreciation of our infrastructure equipment, which was mainly a result of purchasing additional hard drives and related infrastructure to

support our growing business and in order to minimize the impact of potential supply chain disruptions caused by COVID-19, and an increase of $4.0 million related to managing and operating our co-location facilities.

Gross margin decreased to 51% for the year ended December 31, 2021 compared to 52% for the year ended December 31, 2020.

The decrease in gross margin was primarily due to cost of revenue increasing at a higher rate as compared to our revenue due primarily to investment in our infrastructure, as described above.

The increase was primarily attributable to an increase of $4.4 million related to managing and

op erating our co-location facilities, and an incr ease of $3.8 million for depreciation of our infrastructure equipment, which resulted from purchasing additional hard drives and related infrastructure in order to support the growth of our business.

Gross margin increased to 52% for the year ended December 31, 2022 compared to 51% for the year ended December 31, 2021.

The increase in gross margin was primarily due to cost of revenue, primarily depreciation expense of our infrastructure equipment, increasing at a slower rate as compared to our total revenue growth.

Operating Expenses

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2022 2021 Change % Change

(in thousands)

(in thousands, except percentages)

Research and development

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Research and Development

Research and development expense increased by $7.5 million, or 57%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The increase was primarily attributable to an increase of $4.9 million in personnel-related expenses as a result of increased headcount, an increase of $0.5 million related to facilities and IT overhead allocation, and an increase of $1.4 million related to stock-based compensation expense.

We expect these expenses to increase in the future as we continue to add new features and functionality to our offerings.

The extent to which these expenses are able to be capitalized related to the development of internal-use software may impact the amount of research and development expenses in future periods.

Research and development expense increased by $12.6 million, or 61%, f or the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily attributable to an increas e of $6.0 million in personnel-related expenses as a result of increased headcount, $4.5 million related to stock-based compensation expense, and $1.7 million in overhead and general office expenses.

Sales and Marketing

Sales and marketing expense increased by $15.7 million, or 80%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase in sales and marketing expense was primarily attributable to an increase of $4.0 million in personnel-related expenses as a result of increased headcount, an increase of $1.0 million related to stock-based compensation and an increase of $2.0 million due to increased advertising expenses.

We expect these expenses to increase in the future as we expand sales and marketing efforts to support our growing business.

The increase in sales and marketing expense was primarily attributable to an increase of $7.7 million in personnel-related expenses as a result of increased headcount, $3.7 million related to stock-based compensation, $2.4 million due to increased advertising expenses related primarily to our B2 Cloud Storage offering, and $1.5 million in overhead and general expenses.

General and Administrative

General and administrative expense increased by $10.6 million, or 82%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily attributable to an increase of $3.1 million in personnel-related expenses as a result of increased headcount, an increase of $0.5 million in professional fees for accounting and tax services, and an increase of $1.0 million related to stock-based compensation expense.

We expect these expenses to increase in the future as we expand efforts to support our growing business.

The increase was primarily attributable to $2.5 million in personnel-related expenses as a result of increased headcount, $2.4 million related to stock-based compensation expense, $1.8 million related to insurance, $1.8 million in overhead and general expenses, $1.5 million for settlement with our SAFE holders in exchange for a full release of all claims related to the SAFE transaction, which was entered into in February 2023, (the SAFE holder settlement), $0.9 million in professional fees for accounting and tax services, $0.4 million of other legal fees, partially offset by a $1.0 million decrease in indirect tax expenses.

Investment Income

For the Years Ended December 31,

2022 2021 Change % Change

(in thousands, except percentages)

Investment income

$ 965 $ — $ 965 — %

Investment income increased by $1.0 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 .

The increase was primarily due to increased interest income from our marketable securities purchased with proceeds from our public offering.

Interest Expense

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2022 2021 Change % Change

(in thousands)

(in thousands, except percentages)

Interest expense

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Interest expense increased by $0.6 million , or 17%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 .

The increase was primarily due to interest expense from capital lease agreements and lease financing obligations we entered into during the second half of 2020 and during 2021, which increased our capital lease liability significantly to $33.2 million as of December 31, 2021.

The capital lease agreements and lease financing obligations were for additional hard drives and related infrastructure that we purchased in response to the COVID-19 pandemic, in order to minimize the impact of potential supply chain disruptions, and in support of our growing business.

The increase was primarily due to interest expense from finance lease agreements we entered into during 2021 and 2022 to support our growing infrastructure, which increased our finance lease liabilities and lease financing obligations to $34.0 million as of December 31, 2022.

Income Tax Provision

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2022 2021 Change % Change

(in thousands)

Income tax provision $ 96 $ 5 $ 91 1820 %

Our provision for income taxes increased by $0.1 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 due to a charge related to the limitation on post-2017 federal net operating losses which are limited to 80% beginning in years after December 31, 2020.

(in thousands, except percentages)

Income tax (benefit) provision $ (39) $ 96 $ (135) (141) %

Our provision for income taxes decreased by $0.1 million , or 141% for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase in income tax benefit was due to sufficient deferred tax asset generated that allowed the increase of valuation allowance utilization to reverse deferred tax liability from December 31, 2021.

Non-GAAP Financial Measures

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We believe adjusted gross margin, when taken together with our GAAP financial results, provides a meaningful assessment of our performance, and is useful to us for evaluating our ongoing operations and for internal planning and forecasting purposes.

We define adjusted gross margin as gross profit, exclusive of stock-based compensation expense, depreciation expense of our property and equipment, and amortization expense of capitalized internal-use software included within cost of revenue, as a percentage of adjusted gross profit to revenue.

We define adjusted gross margin as gross profit, excluding stock-based compensation expense, depreciation and amortization within cost of revenue, as a percentage of adjusted gross profit to total revenue.

We exclude stock-based compensation, which is a non-cash item, because we do not consider it indicative of our core operating performance.

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For the Years Ended

(in thousands)

(in thousands, except percentages)

$ 43,863 $ 34,341

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Our management uses adjusted EBITDA to assess our operating performance.

We define adjusted EBITDA as net loss adjusted to exclude depreciation and amortization, stock-based compensation, interest expense, income tax provision, and gain on extinguishment of debt.

We define adjusted EBITDA as net loss adjusted to exclude depreciation and amortization, stock-based compensation, interest expense, investment income, income tax provision, realized loss on SAFE, SAFE holder settlement, and gain on extinguishment of debt.

We use adjusted EBITDA to evaluate our ongoing operations and for internal planning and forecasting purposes.

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We consider adjusted EBITDA to be an important measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis.

We define adjusted EBITDA margin as adjusted EBITDA as a percentage of total revenue.

Our calculation of adjusted EBITDA may differ from the calculations of adjusted EBITDA by other companies and therefore comparability may be limited.

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The following table presents a reconciliation of net loss, the most directly comparable financial measure stated in accordance with GAAP, to adjusted EBITDA for each of the periods presented.

The following table presents a reconciliation of net loss, the most directly comparable financial measure stated in accordance with GAAP, to adjusted EBITDA for each of the periods presented:

For the Years Ended

(in thousands)

(in thousands, except percentages)

$ (51,398) $ (21,704)

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Stock-based compensation

Interest expense

Income tax provision

Interest expense, net and investment income

Income tax (benefit) provision

Realized loss on SAFE

Gain on extinguishment of debt

SAFE holder settlement 1,500 —

Adjusted EBITDA

$ (9,413) $ 3,157

Adjusted EBITDA Margin (11) % 5 %

Liquidity and Capital Resources

Since inception, we have financed operations primarily through payments received from our customers.

As of December 31, 2021 and December 31, 2020, our principal sources of liquidity were cash and cash equivalents of $104.8 million and $6.1 million, respectively.

In November 2021, we completed our IPO which resulted in net proceeds of approximately $103.0 million, after underwriting discounts and commissions and other offering costs of approximately $12.0 million.

We believe that our existing cash and cash equivalents, together with cash provided by operations and our revolving credit facility, will be sufficient to support our working capital and capital expenditure requirements for at least the next 12 months.

Our future capital requirements will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the price at which we are able to purchase or lease infrastructure equipment, the introduction of platform enhancements, and the continuing market adoption of our platform.

As of December 31, 2022 and December 31, 2021, our principal sources of liquidity were cash, short-term investments and restricted cash, non-current of $69.7 million and $104.8 million, respectively.

In November 2021, we completed our initial public offering (IPO) which resulted in net proceeds of approximately $103.0 million, after underwriting discounts and commissions and other offering costs of approximately $12.0 million.

We believe that our existing cash, cash equivalents, and short-term investments, together with cash provided by operations and our revolving credit facility, will be sufficient to support our working capital and capital expenditure requirements for at least the next 12 months.

Our future capital requirements will depend on many factors, including our total revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the price at which we are able to purchase or lease infrastructure equipment, the introduction of platform enhancements, and the continuing market adoption of our platform.

In the future, we may enter into arrangements to acquire or invest in complementary businesses, products, and technologies.

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The revolving credit agreement matures in September 2024.

In connection with this agreement, we fully repaid and subsequently terminated our 2017 revolving credit agreement

with HomeStreet Bank.

In connection with this agreement, we fully repaid and subsequently terminated our 2017 revolving credit agreement with HomeStreet Bank.

During December 2021, we entered into the first amendment to the revolving credit agreement with City National Bank.

The amendment removed the financial covenants under the agreement and added a requirement to hold collateral in the form of a lien prior to any advance.

During April 2022, we entered into a second amendment to our revolving credit agreement with City National Bank.

Under this amendment, amounts available to be borrowed were increased to $30.0 million from $9.5 million.

As of December 31, 2022, the outstanding balance of our line of credit was $4.3 million, and the amount available to us was $25.7 million.

In August 2021, we issued $10.0 million of convertible notes in a private financing round to continue investing in our growth initiatives and for general corporate purposes.

We also refer to these convertible notes security as a Simple Agreement for Future Equity agreement (SAFE).

As of November 2021, the convertible note and the accrued interest have been fully converted to Class A common stock upon the completion of the initial public offering.

As of November 2021, the convertible note and the accrued interest have been fully converted to Class A common stock upon the completion of our IPO.

On November 10, 2021, in connection with the IPO, the SAFE notes automatically converted into 722,860 shares of Class A common stock.

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For further information , see Note 10 to our financial statements included elsewhere in this Annual Report on Form 10-K.

Although we use City National Bank, a subsidiary of Royal Bank of Canada (RBC), for our banking needs, and do not use Silicon Valley Bank in any capacity, the banking industry has experienced disruption and uncertainty in connection with the recent sudden closure of Silicon Valley Bank in March 2023.

In the event of a failure of any financial institutions where we maintain deposits, we may lose timely access to our funds at such institutions and incur significant losses to the extent our funds exceed the $250,000 limit insured by the Federal Deposit Insurance Corporation.

In addition, the disruption and

uncertainty impacting the banking industry may result in reduced access to capital, increased costs of capital, and reduced opportunities to invest with investment grade securities, which could also lower investment yields and investment income.

Any such impact could have a material adverse effect upon our liquidity and business.

The following table shows a summary of our cash flows for the periods presented:

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(in thousands)

Net cash provided by operating activities

$ 3,520 $ 12,819

Net cash (used in) provided by operating activities $ (13,781) $ 3,520

Net cash used in investing activities (73,854) (11,190)

(11,190) (4,973)

Net cash provided by (used in) financing activities

106,606 (8,748)

Net cash (used in) provided by financing activities (6,212) 106,606

Operating Activities

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Our primary uses of cash from operating activities are for personnel-related expenses, sales and marketing expenses, infrastructure expenses, and overhead expenses.

Cash provided by operating activities mainly consists of our net loss adjusted for certain non-cash items, including stock-based compensation, depreciation, and amortization of property and equipment, amortization of capitalized internal-use software, net, and changes in operating assets and liabilities during each period.

Cash flows from operating activities primarily consist of our net loss adjusted for certain non-cash items, including stock-based compensation, depreciation, and amortization of property and equipment, amortization of capitalized internal-use software, net, and changes in operating assets and liabilities during each period.

For the year ended December 31, 2022, cash used in operating activities was $13.8 million, which resulted from a net loss of $51.4 million, adjusted for non-cash charges of $38.8 million and a net cash outflow of $1.2 million from changes in operating assets and liabilities.

Non-cash charges primarily consisted of $20.2 million for depreciation and amortization expense and $17.0 million for stock-based compensation expense.

The net cash outflow from changes in operating assets and liabilities was primarily the result of a $2.5 million decrease in operating lease liabilities and $1.0 million decrease in accrued expenses and other current liab ilities, which decreased primarily due to timing of payment of our expenses, offset in part by a $1.6 million increase in accounts payable and a $1.0 million decrease in other assets.

Cash used in operations increased during the year ended December 31, 2022, as compared to the same period in 2021 primarily due to increased spending in support of our expanded research and development and sales and marketing spending to support business growth.

For the year ended December 31, 2021, cash provided by operating activities was $3.5 million, which resulted from a net loss of $21.7 million, adjusted for non-cash charges of $22.0 million and a net cash inflow of $3.2 million from changes in operating assets and liabilities.

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The net cash inflow from changes in operating assets and liabilities was primarily the result of a $5.5 million increase in deferred revenue, which increased due to our growing customer base and timing of collections from our customers, in addition to a $1.3 million increase in accrued expenses and other current liabilities, which increased due to timing of payment of our expenses, offset by $3.9 million decrease in prepaid and other current assets.

Cash provided by operations decreased during the year ended December 31, 2021, as compared to the same period

in 2020 primarily due to increased spending in support of our expanded research and development and sales and marketing spending to support business growth.

For the year ended December 31, 2020, cash provided by operating activities was $12.8 million, which resulted from a net loss of $6.6 million, adjusted for non-cash charges of $15.5 million and a net cash inflow of $3.9 million from changes in operating assets and liabilities.

Non-cash charges primarily consisted of $13.0 million for depreciation and amortization expense and $1.9 million for stock-based compensation expense.

The net cash inflow from changes in operating assets and liabilities was primarily the result of a $2.0 million increase in deferred revenue, which increased due to our growing customer base and timing of collections from our customers, in addition to a $2.3 million increase in accrued expenses and other current liabilities, which increased due to timing of payment of our expenses.

Investing Activities

Cash used in investing activities during the year ended December 31, 2021 was $11.2 million, resulting primarily from capital expenditures of $7.6 million in support of infrastructure deployments to support our growing business, and $3.6 million related to the development of software mainly for adding new features and enhanced functionality to our platform.

We expect cash used in our investing activities to continue to increase in the future as we increase our infrastructure footprint and enhance our platform, in support of our growing business.

Cash used in investing activities during the year ended December 31, 2022 was $73.9 million , resulting primarily from the purchase of short-term maturity investments of $145.9 million , capital expenditures of $7.3 million in support of infrastructure deployments to support our growing business, and $8.6 million related to the development of software for adding new features and enhanced functionality to our platform, offset in part by $88.0 million from the maturity of our short-term investments.

Financing Activities

Cash provided by financing activities for the year ended December 31, 2021 was $106.6 million, resulting from $107.0 million in proceeds from the initial public offering in November 2021, $10.0 million in proceeds from the SAFE transaction entered in September 2021, $4.3 million in proceeds from the four lease financing transactions, and $0.5 million in proceeds from the exercise of employee stock options, offset by $12.2 million principal payments on our capital lease agreements and lease financing obligations of related to hard drives and other infrastructure equipment used in our co-location facilities and $3.0 million in payments of deferred offering expense related to our initial public offering.

Cash used in financing activities for the year ended December 31, 2022 was $6.2 million.

Cash used in financing activities was from principal payments on our capital lease agreements of $10.9 million related to hard drives and other infrastructure equipment used in our co-location facilities, offset by $2.3 million in proceeds received from the PPP loan.

Cash used in financing activities was primarily due to principal payments on our finance lease agreements and lease financing obligations of $16.5 million related to hard drives and other infrastructure equipment used in our co-location facilities and $0.7 million related to payments made for offering costs that are deferred, offset in part by $4.3 million in proceeds from the exercise of employee stock options, $4.3 million in proceeds from our credit facility, and $2.5 million in proceeds from our employee stock purchase plan.

Cash provided by financing activities for the year ended December 31, 2021 was $106.6 million, resulting from $107.0 million in proceeds from our IPO in November 2021, $10.0 million in proceeds from the SAFE transaction entered in September 2021, $4.3 million in proceeds from the four lease financing transactions, and $0.5 million in proceeds from the exercise of employee stock options, offset by $12.2 million principal payments on our capital lease agreements and lease financing obligations of related to hard drives and other infrastructure equipment used in our co-location facilities and $3.0 million in payments of deferred offering expense related to our IPO.

Contractual Obligations and Commitments

Our commitments are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts.

Operating lease commitments relate primarily to our rental of office space and co-location facilities.

Our finance lease commitments relate primarily to our infrastructure equipment.

Purchase commitments relate mainly to infrastructure agreements and subscription arrangements used to facilitate our operations.

Critical Accounting Policies and Estimates

Our financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance with U.S.

Our financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP.

The preparation of financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures.

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The Backblaze Storage Cloud provides the core platform for our B2 Cloud Storage consumption-based offering and our Backblaze Computer Backup subscription-based offering.

We derive our revenue primarily from fees

earned from customers accessing these offerings through our platform, paid monthly in arrears for consumption-based arrangements for B2 Cloud Storage, or charged upfront for subscription-based arrangements for Backblaze Computer Backup.

We derive our revenue primarily from fees earned from customers accessing these offerings through our platform, paid monthly in arrears for consumption-based arrangements for B2 Cloud Storage, or charged upfront for subscription-based arrangements for Backblaze Computer Backup.

We provide services to our customers under subscription-based arrangements of one month, one year and two years, which automatically renew at the end of the respective term.

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We refer to these products as our Physical Media revenue.

Physical Media revenue was approximately 1% of our revenue for the years ended December 31, 2021 and 2020.

Physical Media revenue was approximately 1% of our total revenue for the years ended December 31, 2022 and 2021.

Our monthly subscription arrangements do not provide customers with refund rights.

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As we provide our offerings as a hosted service, we do not provide customers the contractual right to take possession of the software at any time, do not incur set up costs, nor charge an installation fee to new customers.

We determine revenue recognition in accordance with ASC 606 through the following five steps, which include inherent estimates:

We determine revenue recognition through the following five steps, which include inherent estimates:

Identify the contract with a customer.

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 payment history;

however, as approximately 98% of our revenue was generated from customers paying via credit card during the years ended December 31, 2021 and 2020, the risk of non-payment is reduced.

however, as approximately 96% and 98% of our revenue was generated from customers paying via credit card during the years ended December 31, 2022 and 2021, respectively, the risk of non-payment is reduced.

Identify the performance obligations in the contract .

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We recognize compensation cost for awards on a straight-line basis over the requisite service period, which is generally the four-year vesting period.

For grants made after our IPO, we use our publicly traded Class A

common stock price to determine the fair value of our Class A common stock.

Share-based compensation includes restricted stock units, stock option grants and stock purchase rights under the Employee Stock Purchase Plan (ESPP).

For grants made after our IPO, we use our publicly traded Class A common stock price to determine the fair value of our Class A common stock.

Fluctuations in our Class A common stock price may have a significant impact on the amount of stock-based compensation recognized.

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Forfeitures are accounted for in the period in which they occur.

We use the Black-Scholes option pricing model to estimate the fair value of our stock options.

We use the Black-Scholes option pricing model to estimate the fair value of our stock options and stock purchase rights under our ESPP.

The Black-Scholes option pricing model requires the use of complex assumptions, which determine the fair value of stock-based awards.

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As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense.

Capitalized Internally-Developed Software, Net

Capitalized Internal-Use Software, Net

We capitalize qualifying software development costs related to new features and enhancements to the functionality of our platform and related products, as well as implementation.

The costs consist of personnel costs (including related benefits and stock-based compensation) that are incurred during the application development stage.

We review capitalization criteria for each project individually, which requires us to exercise judgement as to what costs are capitalizable.

We review capitalization criteria for each project individually, which requires us to exercise judgment as to what costs are capitalizable.

Capitalized costs are amortized over the estimated useful life of the software, which is five years, on a straight-line basis, which represents the manner in which the expected benefit will be derived.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis