Backblaze, Inc. 10-K

Item 8. Financial Statements and Supplementary Data BACKBLAZE, INC. INDEX TO THE FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (BDO USA, LLP, San Jose, California, PCAOB ID# 243 ) 52 Balance Sheets 53 Statements of Operations 54 Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit ) 55 Statements of Cash Flows 56 Notes to Financial Statements 58 51 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Backblaze, Inc. San Mateo, California Opinion on the Financial Statements We have audited the accompanying balance sheets of Backblaze, Inc. (the “Company”) as of December 31, 2022 and 2021, the related statements of operations, changes in convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended , in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 2 to the financial statements, the Company has changed its method for accounting for leases in the fiscal year 2022 due to the adoption of Topic 842: Leases, using a modified retrospective approach. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BDO USA, LLP We have served as the Company’s auditor since 2020. San Jose, California March 31, 2023 52 Table of Contents BACKBLAZE, INC. BALANCE SHEETS (in thousands, except share and per share data) December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 6,690 $ 104,843 Accounts receivable, net 856 309 Short-term investments 58,733 — Prepaid expenses and other current assets 8,120 5,930 Total current assets 74,399 111,082 Restricted cash, non-current 4,306 — Property and equipment, net 49,375 43,068 Operating lease right-of-use assets 6,881 — Capitalized internal-use software, net 16,704 7,637 Other assets 793 1,794 Total assets $ 152,458 $ 163,581 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 3,283 $ 2,075 Accrued expenses and other current liabilities 9,418 7,620 Finance lease liabilities and lease financing obligations, current 18,531 13,645 Operating lease liabilities, current 2,130 — Deferred revenue, current 22,912 21,722 Total current liabilities 56,274 45,062 Finance lease liabilities and lease financing obligations, non-current 15,487 19,603 Operating lease liabilities, non-current 5,032 — Deferred revenue, non-current 2,611 3,132 Other long-term liabilities — 298 Debt facility, non-current 4,306 — Total liabilities $ 83,710 $ 68,095 Commitments and contingencies (Note 10) Stockholders’ Equity Class A common stock, $ 0.0001 par value; 113,000,000 shares authorized as of December 31, 2022 and 2021; 16,198,333 and 8,227,992 shares issued and outstanding as of December 31, 2022 and 2021, respectively. 2 1 Class B common stock, $ 0.0001 par value; 37,000,000 shares authorized as of December 31, 2022 and 2021; 17,195,404 and 22,156,842 shares issued and outstanding as of December 31, 2022 and 2021, respectively. 2 2 Additional paid-in capital 156,485 131,826 Accumulated deficit ( 87,741 ) ( 36,343 ) Total stockholders’ equity 68,748 95,486 Total liabilities and stockholders’ equity $ 152,458 $ 163,581 See accompanying notes, which are an integral part of these financial statements. 53 Table of Contents BACKBLAZE, INC. STATEMENTS OF OPERATIONS (in thousands, except share and per share data) For the Years Ended December 31, 2022 2021 Revenue $ 85,155 $ 67,479 Cost of revenue 41,292 33,138 Gross profit 43,863 34,341 Operating expenses: Research and development 33,107 20,536 Sales and marketing 35,399 19,698 General and administrative 23,470 12,901 Total operating expenses 91,976 53,135 Loss from operations ( 48,113 ) ( 18,794 ) Investment income 965 — Interest expense, net ( 4,289 ) ( 3,677 ) Gain on extinguishment of debt — 2,299 Realized loss on SAFE — ( 1,436 ) Loss before provision for income taxes ( 51,437 ) ( 21,608 ) Income tax (benefit) provision ( 39 ) 96 Net loss $ ( 51,398 ) $ ( 21,704 ) Net loss per share attributable to Class A and Class B common stockholders, basic and diluted $ ( 1.62 ) $ ( 1.07 ) Weighted average shares used in computing net loss per share attributable to Class A and Class B common stockholders, basic and diluted 31,662,301 20,345,655 See accompanying notes, which are an integral part of these financial statements. 54 Table of Contents BACKBLAZE, INC. STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands, except share data) Convertible Preferred Stock Class A and Class B Common Stock Additional Paid-in Capital Accumulated Deficit Total Shares Amount Shares Amount Balance as of December 31, 2020 3,359,195 $ 2,784 18,614,905 $ 5 $ 7,794 $ ( 14,639 ) $ ( 6,840 ) Net loss — — — — — ( 21,704 ) ( 21,704 ) Conversion of convertible preferred stock to common stock upon initial public offering ( 3,359,195 ) ( 2,784 ) 3,359,195 ( 3 ) 2,784 — 2,781 Issuance of Class A common stock upon initial public offering, net of underwriting discounts and commissions and other offering costs — — 7,187,500 1 103,142 — 103,143 Issuance of Class A common stock upon settlement of SAFE notes — — 722,860 — 11,566 — 11,566 Issuance of Class A and Class B common stock upon exercise of stock options — — 500,374 — 478 — 478 Stock-based compensation — — — — 6,062 — 6,062 Balance as of December 31, 2021 — $ — 30,384,834 $ 3 $ 131,826 $ ( 36,343 ) $ 95,486 Net loss — — — — — ( 51,398 ) ( 51,398 ) Issuance of Class A and Class B common stock upon exercise of stock options — — 2,112,819 1 4,407 — 4,408 Issuance of Class A common stock under equity incentive plans, net of taxes withheld — — 321,720 — ( 130 ) — ( 130 ) Issuance of Class A common stock related to Employee Stock Purchase Plan ("ESPP") — — 574,364 — 2,511 — 2,511 Stock-based compensation — — — — 17,871 — 17,871 Balance as of December 31, 2022 — $ — 33,393,737 $ 4 $ 156,485 $ ( 87,741 ) $ 68,748 See accompanying notes, which are an integral part of these financial statements. 55 Table of Contents BACKBLAZE INC. STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ ( 51,398 ) $ ( 21,704 ) Adjustments to reconcile net loss to net cash provided by operating activities: Gain on extinguishment of Paycheck Protection Program (“PPP”) loan — ( 2,299 ) Net accretion of discount on investment securities ( 863 ) — Realized loss and interest expense on SAFE — 1,566 Noncash lease expense on operating leases 2,457 — Depreciation and amortization 20,151 16,322 Stock-based compensation 17,049 5,629 Loss (gain) on disposal of assets and other adjustments 37 ( 4 ) Changes in operating assets and liabilities: Accounts receivable ( 547 ) ( 100 ) Prepaid expenses and other current assets ( 379 ) ( 3,131 ) Other assets 1,001 ( 541 ) Accounts payable 1,627 502 Accrued expenses and other current liabilities ( 970 ) 2,311 Deferred revenue 670 5,464 Operating lease liabilities ( 2,547 ) — Other long-term liabilities ( 69 ) ( 495 ) Net cash (used in) provided by operating activities ( 13,781 ) 3,520 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of marketable securities ( 145,871 ) — Maturities of marketable securities 88,000 — Purchases of property and equipment, net ( 7,349 ) ( 7,562 ) Capitalized internal-use software costs ( 8,634 ) ( 3,628 ) Net cash used in investing activities ( 73,854 ) ( 11,190 ) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on finance lease and lease financing obligations ( 16,492 ) ( 12,153 ) Proceeds from initial public offering, net of underwriting discounts and commissions and other offering costs — 106,950 Payments of deferred offering costs ( 658 ) ( 2,977 ) Proceeds from debt facility 4,305 3,500 Repayment of debt facility — ( 3,500 ) Proceeds from SAFE — 10,000 Proceeds from lease financing obligations — 4,308 Employee payroll taxes paid related to net settlement of equity awards ( 130 ) — Proceeds from exercises of stock options 4,252 478 Proceeds from employee stock purchase plan 2,511 — Net cash (used in) provided by financing activities ( 6,212 ) 106,606 Net increase (decrease) in cash, restricted cash and restricted cash, non-current ( 93,847 ) 98,936 Cash and restricted cash at beginning of period 105,012 6,076 Cash, restricted cash and restricted cash, non-current at end of period $ 11,165 $ 105,012 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 3,776 $ 3,526 Cash paid for income taxes $ 31 $ 14 Cash paid for operating lease liabilities $ 2,838 $ — SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Stock-based compensation included in capitalized internal-use software $ 2,674 $ 433 Accrued bonus settled in restricted stock units $ 1,852 $ — Financed insurance premiums included in accrued expenses and other current liabilities $ 1,545 $ — Equipment acquired through finance lease and lease financing obligations $ 17,037 $ 16,499 Accruals related to purchases of property and equipment $ 158 $ 164 Lease liabilities arising from right-of-use assets upon adoption of ASC 842 $ 5,220 $ — 56 Table of Contents Assets obtained in exchange for operating lease obligations $ 4,118 $ — Proceeds from stock option exercises pending settlement $ 156 $ — Settlement of SAFE notes $ — $ 11,566 Extinguishment of PPP loan $ — $ 2,299 RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH Cash $ 6,690 $ 104,843 Restricted cash – included in prepaid expenses and other current assets $ 169 $ 169 Restricted cash, non-current $ 4,306 $ — Total cash, cash equivalents and restricted cash $ 11,165 $ 105,012 See accompanying notes, which are an integral part of these financial statements. 57 Table of Contents BACKBLAZE INC. NOTES TO FINANCIAL STATEMENTS Note 1. Organization and Description of Business Description of Business Backblaze, Inc. (“Backblaze” or the “Company”) is a storage cloud platform, providing businesses and consumers with solutions to store and use their data. Backblaze provides these cloud services through purpose-built, web-scale software built on commodity hardware. Backblaze was incorporated in the state of Delaware on April 20, 2007 and is headquartered in San Mateo, California. Initial Public Offering (“IPO”) On November 15, 2021, the Company’s IPO had its first closing, in which it issued and sold 6,250,000 shares of our Class A common stock at a public offering price of $ 16.00 per share. On November 17, 2021, the IPO had its second closing, in which the Company issued and sold 937,500 additional shares at the same per-share price pursuant to the exercise by the underwriters of their option to purchase such shares from us for the purpose of covering over-allotments. 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 the Company’s Amended and Restated Certificate of Incorporation in Delaware and the adoption of its Amended and Restated Bylaws, the following occurred, (i) the reclassification of all outstanding shares of the Company’s common stock into an equivalent number of shares of its 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 and (iii) the SAFE notes automatically converted into 722,860 shares of Class A common stock. Note 2. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Stock Split During October 2021, the Company effected a 3.6 -for-1 stock split of its outstanding common stock and convertible preferred stock. Upon the effectiveness of the stock split, all issued and outstanding shares of common stock and convertible preferred stock and related per share amounts contained in the accompanying financial statements were retroactively revised to reflect this stock split for all periods presented. The par value of the authorized stock was not adjusted as a result of the stock split. Emerging Growth Company The Company is an emerging growth company (“EGC”), as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, EGCs can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an EGC or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The Company expects to use the extended transition period for any other new or revised accounting standards during the period in which it remains an EGC. Segment Information The Company has a single operating and reportable segment. In reaching this conclusion, management considers the definition of the chief operating decision maker (“CODM”), how the business is defined by the CODM, the nature of the 58 Table of Contents information provided to the CODM and how that information is used to make operating decisions, allocate resources and assess performance. The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on an aggregated basis for purposes of making operating decisions, assessing financial performance and allocating resources. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Such estimates and assumptions include the costs to be capitalized as internal-use software, which include (i) determining whether projects will result in new or additional functionality, (ii) the start and end date of the application development phase of projects, and (iii) their useful life, the useful lives of other long-lived assets, impairment considerations for long-lived assets, the incremental borrowing rate for lease agreements, expected lease term, lease and non-lease component allocation, estim ates related to variable consideration, valuation of the Company’s (i) common stock prior to its IPO in November 2021, (ii) stock options, and (iii) Employee Stock Purchase Plan (“ESPP”) expense, and accounting for taxes, including estimates for sales tax and VAT liability, deferred tax assets, valuation allowance and uncertain tax positions. The Company bases its estimates on historical experience and on assumptions that management considers reasonable. Future actual results could differ materially from these estimates. Risks and Uncertainties COVID-19 The worldwide spread of COVID-19 has 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. In addition to the impact on customers, the pandemic has had some impact to our supply chain. 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. Concentrations Credit risk. Financial instruments that potentially subject the Company to credit risk primarily consist of cash, cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with high-quality financial institutions with investment-grade ratings. Although the Company uses City National Bank, a subsidiary of Royal Bank of Canada (“RBC”), for its banking needs, and does 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 the Company maintains deposits, it may lose timely access to its funds at such institutions and incur significant losses to the extent its funds exceed the $250,000 limit insured by the Federal Deposit Insurance Corporation. Deposits with these financial institutions may exceed the amount of insurance provided on such deposits. For accounts receivable, the Company is exposed to credit risk in the event of nonpayment by customers to the extent of the amount recorded on the balance sheets. Vendors. The Company acquires infrastructure equipment from third party vendors. Vendors may have limited sources of equipment and supplies which may expose the Company to potential supply and service disruptions that could harm the Company’s business. Two vendors represented in aggregate 25 % of total cash disbursements during the year ended December 31, 2022, and two vendors represented 26 % of the accounts p ayable balance as of December 31, 2022. Two vendors represented in aggregate 24 % of total cash disbursements during the year ended December 31, 2021, and three vendors represented 40 % of the accounts payable balance as of December 31, 2021. Revenue. The Company derives substantially all of its revenue from the services operating on its Backblaze Storage Cloud platform: its Backblaze B2 Cloud Storage (“B2 Cloud Storage”) and Backblaze Computer Backup (“Computer Backup”) offerings. The potential for severe impact to the Company’s business could result if the Company was unable to operate its platform or serve customers through its platform, for an extended period of time. 59 Table of Contents Revenue Recognition The Backblaze Storage Cloud provides the core platform for the Company’s B2 Cloud Storage consumption-based offering and its Computer Backup subscription-based offering. The Company derives its revenue primarily from fees earned from customers accessing these offerings through its platform, paid monthly in arrears for consumption-based arrangements for B2 Cloud Storage, or charged upfront for subscription-based arrangements for Computer Backup. The Company provides services to its customers under subscription-based arrangements of one month, one-year and two-years, which automatically renew at the end of the respective term. The Company also recognizes revenue from products offered to its customers for the ability to securely restore data using a USB drive (“USB Restore”) and for migrating large data sets to its platform using its proprietary Fireball device. The Company refers to these products as its “Physical Media revenue”. Physical Media revenue was approximately 1 % of the Company’s revenue for the years ended December 31, 2022 and 2021. The Company’s monthly subscription arrangements do not provide customers with refund rights. One and two-year subscription arrangements are eligible for a full refund up to 30 days after subscribing. For its Physical Media revenue, the Company offers a full refund to its customers restoring data using a USB drive, if the drives are returned to the Company within 30 days of receipt. The Company recognizes revenue net of its estimate of expected customer cancellations and returns. These estimates involve inherent uncertainties and use of management’s judgment. While the majority of the Company’s customers pay via credit card, amounts that have been invoiced are recorded in accounts receivable and in revenue, or deferred revenue, depending on whether appropriate revenue recognition criteria have been met. As the Company provides its offerings as a hosted service, it does not provide customers the contractual right to take possession of the software at any time, does not incur set up costs, nor does it charge an installation fee for its new customers. The Company determines revenue recognition through the following five steps: 1. Identify the contract with a customer. The Company considers the terms and conditions of the contracts and its customary business practices in identifying its contracts under ASC 606. The Company determines it has a contract with a customer when: • the contract has been approved by both parties, • it can identify each party’s rights regarding the services to be transferred and the payment terms for the services, • it has determined the customer to have the ability and intent to pay, and • the contract has commercial substance. The Company applies judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors; however, as approximately 96 % and 98 % of the Company ’s 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 low and historical write-offs having been immaterial. 2. Identify the performance obligations in the contract. Performance obligations promised in a contract are identified based on the services and products that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract. The Company’s contracts typically contain a single distinct performance obligation representing one of its Backblaze Storage Cloud platform offerings, which includes either B2 Cloud Storage or Computer Backup services and related customer support. Customers also have the option to purchase a USB device for USB Restore and rental of its Fireball device at the standalone selling price (“SSP”). 3. Determine the transaction price. The transaction price is determined based on the consideration the Company expects to receive in exchange for transferring services to the customer. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue recognized under the contract will not occur. The Company’s variable consideration includes consumption-based revenue and revenue arrangements that offer the right of return. The Company offers a 30 day right of ret urn for its 1 and 2-year subscription-based arrangements and records a refund liability based on historical return data. Certain fees that are considered consideration payable to a customer are accounted for as a reduction of the transaction price. None of the Company’s 60 Table of Contents contracts contain a significant financing component. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental entities (e.g., sales and other indirect taxes). 4. Allocate the transaction price to performance obligations in the contract. Contracts that contain multiple distinct performance obligations require an allocation of the transaction price to each performance obligation based on a relative SSP. The Company determines SSP for performance obligations based on the price it sells a good or service separately. 5. Recognize revenue when or as the Company satisfies a performance obligation. Revenue is recognized when control of the services is transferred to the customer and in an amount that reflects the consideration the Company expects to receive in exchange for those services. Performance obligations are satisfied over time when the customer simultaneously receives and consumes the benefits as the entity performs. Revenue is generally recognized over the common measure of progress (i.e., time-based or consumption-based) for the entire performance obligation. Revenue from subscription-based arrangements is recognized on a straight-line basis over the contractual term beginning on the date that the service commences, as customers are entitled to the same benefits throughout the contractual term. Fees from consumption-based arrangements are recognized as services are delivered based on the amount of daily storage consumed. Revenue for USB Restore is recognized as USB devices are delivered to customers, and recognition of the Company’s Fireball device rental is time-based. The Company also offers a 15-day free trial pe riod for its subscription-based arrangements and it does not enter into a contract with the customer during this trial period. Separately, under its consumption-based arrangements, the Company does not charge customers until at least 10 gigabytes of data have been stored. The Company applied the optional exemption of not disclosing the transaction price allocated to the remaining performance obligations for its consumption-based contracts and contracts with original duration of one year or less. The non-current deferred revenue balance o f $ 2.6 million on the Company’s balance sheet as of December 31, 2022 will be recognized in 2024. As of December 31, 2021, the Company’s non-current deferred revenue balance was $ 3.1 million , which will be recognized in 2023. For revenue generated from arrangements that involve third-parties, the Company evaluates whether it is the principal or the agent based on maintaining control over the services being provided and maintaining the relationship with the end-customer. Substantially all of the Company’s revenue is reported on a gross basis, as the Company is the principal. Cost of Revenue Cost of revenue includes costs directly associated with the delivery of services and products, which consists of expenses for providing Backblaze’s platform to its customers. These expenses include rent and utilities for operating in co-location facilities, network and bandwidth costs, shipping and handling for Physical Media revenue, depreciation of the Company’s equipment and capital lease assets in co-location facilities and other infrastructure expenses incurred in connection with its customers’ use of its services. Personnel-related costs associated with customer support and maintaining service availability include salaries, benefits, bonuses and stock-based compensation. Cost of revenue also includes credit card processing fees, amortization of capitalized internal-use software development costs and allocated overhead costs. Research and Development Costs Research and development costs consist primarily of personnel-related expenses associated with the Company’s research and development staff, including salaries, benefits, bonuses and stock-based compensation. Research and development costs also include consultants or professional services fees, costs related to the support and maintenance of systems used in product development, subscription services for use by its research and development organization and an allocation of its overhead costs. Research and development costs are generally expensed as incurred, unless they qualify as capitalized internal-use software. Advertising Costs Advertising costs are expensed as incurred and are included in sales and marketing expenses in the statements of operations. These costs were approximate ly $ 5.7 million and $ 3.3 million for the years ended December 31, 2022 and 2021, respectively. 61 Table of Contents Income Taxes The Company accounts for income taxes using the asset and liability method. Deferred income taxes are recognized by applying the enacted statutory tax rates applicable to future years to differences between the carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance to amounts that are more likely than not to be realized. Where interpretation of the tax law may be uncertain, the Company recognizes, measures and discloses income tax uncertainties. The Company accounts for interest expense and penalties related to unrecognized tax benefits as income tax expense in its statements of operations. The Company is subject to periodic audits by the Internal Revenue Service and other taxing authorities, which may challenge tax positions taken by the Company. Stock-based Compensation All stock-based compensation to employees is measured on the grant date, based on the fair value of the awards on the date of grant. The Company recognizes compensation cost for its awards on a straight-line basis over the requisite service period, which is generally a vesting period of three to four years , except for the awards granted under the Company’s 2022 Bonus Plan (see Note 14). Share-based compensation includes restricted stock units (“RSUs”), stock option grants and stock purchase rights under the ESPP. The Company uses the Black-Scholes option pricing model to measure the fair value of its stock options and the stock purchase rights under the ESPP. The Black-Scholes option pricing model requires the use of complex assumptions, which determine the fair value of stock-based awards. If an award contains a provision whereby vesting is accelerated upon a change in control, the Company recognizes stock-based compensation expense on a straight-line basis, as a change in control is considered to be outside of its control and is not considered probable until it occurs. Forfeitures are accounted for in the period in which they occur. Cash and Cash Equivalents Cash and cash equivalents include cash and certain highly liquid investments with maturities of 90 days or less at the date of purchase. Cash equivalents are primarily recorded at cost, which approximates fair value due to their short maturities. Investments The Company holds all investments on a held-to-maturity basis and evaluates each position quarterly for impairment. The Company recognizes an impairment on a security through the statement of operations if (i) the Company intends to sell the impaired security; or (ii) it is more likely than not the Company will be required to sell the impaired security prior to recovery of its amortized cost basis. If a sale is intended or likely to be required, the amortized cost basis of the security will be written down to fair value and the full amount of the impairment will be recognized through the statement of operations as a net realized investment loss. In evaluating whether a decline in fair value is other-than-temporary, the Company considers several factors including, but not limited to: • the intent to sell the security or whether it is more likely than not the Company will be required to sell the security before recovery; • the severity and duration of the decline in fair value; • the financial condition of the issuer; • the failure of the issuer to make scheduled interest or principal payments; • recent credit downgrades of the applicable security or the issuer below investment grade; and • adverse conditions specifically related to the security, an industry or a geographical area. The Company’s short-term investments include investment grade commercial paper with original maturities of 365 days or less at the date of purchase. Short-term investments are recorded at amortized cost on the balance sheet. 62 Table of Contents Fair Value of Financial Instruments The Company measures financial assets and liabilities at fair value at each reporting date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are reported under a three-level valuation hierarchy. The classification of the Company’s financial assets within the hierarchy is as follows: Level 1 — Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 — Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Level 3 — Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. The carrying amounts reflected in the balance sheets for accounts receivable, prepaid expenses and other current assets, accounts payable, accrued liabilities and other liabilities and deferred revenue, current approximate their respective fair values due to the short maturities of those instruments. Accounts Receivable, Net Accounts receivable are recorded net of an allowance for doubtful accounts, when the Company has an unconditional right to payment. The allowance for doubtful accounts is estimated based on the Company’s assessment of its ability to collect on customer accounts receivable and wa s not material as of December 31, 2022 and 2021. The Company regularly reviews the allowance by considering certain factors such as historical experience, credit quality, age of accounts receivable balances and other known conditions that may affect a customer’s ability to pay. In cases where the Company is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, a specific allowance is recorded against amounts due from the customer which reduces the net recognized receivable to the amount the Company reasonably believes will be collected. The Company writes-off accounts receivable against the allowance when a determination is made that the balance is uncollectible and collection of the receivable is no longer being actively pursued. Unbilled Accounts Receivable Unbilled accounts receivable represents revenue recognized on contracts for which billings have not yet been presented to customers due to consumption-based usage that is billed monthly in arrears. Substantially all of the Company’s unbilled accounts receivable is charged via a credit card upon billing. Unbilled accounts receivable is included in prepaid expenses and other current assets on the balance sheets. The balance of unbilled accounts receivable as of December 31, 2022 and 2021 is presented in Note 6. Deferred Offering Costs Deferred offering costs, which consist of direct incremental legal, accounting and consulting fees relating to the Company’s IPO, are capitalized in other assets on the balance sheet. The deferred offering costs were offset against IPO proceeds upon the consummation of the IPO. Deferred Contract Costs Commissions paid to affiliates for new customers or customer renewals are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are recorded when earned and are amortized over the expected benefit period using the straight-line method. As renewal commission is commensurate with a commission in an initial sale, such amounts are capitalized and amortized over the stated contract term. Capitalized commission amounts expected to be recognized within one year of the balance sheet date are recorded as prepaid expenses and other current assets, and the remaining portion is recorded as other assets, on the Company’s balance sheets. Expenses for commissions are included in sales and marketing expenses in the statements of operations. 63 Table of Contents Property and Equipment, Net Property and equipment, both owned and under capital leases, are stated at cost, less accumulated depreciation, which is computed on a straight-line basis over the asset’s estimated useful life. Leasehold improvements are depreciated over the shorter of the useful life of the asset or expected lease term. Improvements that increase functionality of the asset are capitalized and depreciated over the asset’s remaining useful life. Construction-in-progress is not depreciated. Fully depreciated assets are retained in property and equipment until removed from service. The following table presents the estimated useful lives of property and equipment: Property and Equipment Useful life Data center equipment 3 - 5 years Machinery and equipment 3 - 5 years Computer equipment 3 - 5 years Leasehold improvements Shorter of useful life or expected lease term Capitalized Internal-Use Software, Net The Company capitalizes qualifying software development costs related to new features and enhancements to the functionality of its platform and related products. The costs consist of personnel costs (including related benefits and stock-based compensation) that are incurred during the application development stage. Capitalization of costs begins when two criteria are met: (i) the preliminary project stage is completed, and (ii) it is probable that the software will be completed and used for its intended function. Capitalization ceases when the software is substantially complete and ready for its intended use, including the completion of all significant testing. Costs related to preliminary project activities and post-implementation operating activities are expensed as incurred. The Company reviews its capitalization criteria for each project individually. Capitalized costs are amortized over the estimated useful life of the software, which is generally five years , on a straight-line basis, and represents the manner in which the expected benefit will be derived. The Company determines the useful lives of identifiable project assets after considering the specific facts and circumstances related to each project. The amortization of costs related to the platform applications is included in cost of revenue in the statements of operations. Significant judgments related to the capitalization of software costs include determining whether it is probable that projects will result in new or additional functionality, concluding on when the application development phase starts and ends and estimating which costs, especially employee compensation costs, should be capitalized. Impairment of Long-lived Assets Long-lived assets with finite lives include property and equipment, capitalized internal-use software, and certain implementation costs incurred for cloud computing arrangements. The Company evaluates these long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds these estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the assets exceeds the fair value of the asset or asset group during the quarter in which the determination is made. Deferred Revenue The Company records deferred revenue when customer payments are received in advance of satisfying the performance obligations on the Company’s contracts. Subscription-based arrangements are generally billed and paid in advance of satisfaction of these performance obligations. Deferred revenue relating to the Company’s subscription-based arrangements that have a contractual expiration date of less than 12 months are classified as current. The Company classifies deferred revenue from services that will be provided in more than 12 months as non-current on its balance sheets. 64 Table of Contents Leases The Company enters into finance lease arrangements for hard drives and related equipment, and operating leases for rental of co-location space in data centers and offices. The Company determines if an arrangement is or contains a lease at inception by evaluating various factors, including if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration and other facts and circumstances. For finance leases, the lease term generally begins on the date of initial possession of the leased asset, and for operating leases the term begins when the Company has the right to use the leased space and obtain the economic benefits. The Company does not assume renewals in its determination of the lease term unless the renewals are deemed to be reasonably assured at lease inception. Lease classification is determined at the lease commencement date. The underlying assets of finance leases are included in property and equipment, net, on the Company’s balance sheets. Accounting Pronouncements Recently Adopted In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), or (“ASC 842”), and since that date, has issued several ASUs to further clarify certain aspects of ASU 2016-02 and provide entities with practical expedients that may be elected upon adoption. The Company adopted the new standard beginning January 1, 2022 using the modified retrospective approach and electing the optional transition approach of not adjusting the comparative period financial statements for the impact of adoption. The Company elected the package of practical expedients permitted under the transition guidance, which allows the Company to carry forward its historical lease classification, its assessment on whether a contract is or contains a lease, and its initial direct costs for any leases that existed prior to adoption of the new standard. In accordance with ASC 842, the Company determines if an arrangement is a lease at its inception. For arrangements classified as an operating lease, Right-of-use (“ROU”) assets and corresponding lease liabilities, are recognized at the commencement date based on the present value of remaining lease payments over the lease term, which, for the Company, includes primarily fixed payments. As a majority of the Company’s operating leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available as of the commencement date for each lease component. For leases existing at adoption, the Company elected to use the remaining lease term and remaining minimum lease payments in calculating the incremental borrowing rate for all existing leases. The discount rate used is the rate of interest that a lessee would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. The Company has elected the short-term lease practical expedient for all asset classes, which allows the lessee to not apply the recognition requirements of ASC 842 to short-term leases (leases with original terms of 12 months or less and that do not include a purchase option that the lessee is reasonably certain to exercise). The Company has elected the practical expedient to combine lease and non-lease components for all of its leases, with the exception of its leases belonging to the colocation lease agreement asset class. For its colocation lease agreements, the Company only recognizes fixed minimum payments for tangible components as ROU assets and operating lease liabilities, as this class of agreements may include significant intangible components. The adoption of the new standard on January 1, 2022 resulted in the recognition of approximately $ 5.2 million and $ 5.6 million of operating lease ROU assets and operating lease liabilities on the Company's balance sheet, respectively, with the ROU asset on an existing lease being offset by an existing ASC 420, Exit or Disposal Cost Obligations, obligation of approximately $ 0.4 million . The Company noted no material impact on its financial statements with respect to its finance leases as a result of its ASC 842 adoption. See Note 10 to these financial state ments. Accounting Pronouncements Not Yet Adopted In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected, with further clarifications made more recently. For trade receivables, loans and other financial instruments, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities are required to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. This guidance is effective for the Company for its fiscal year beginning January 1, 2023 and 65 Table of Contents interim periods within that fisc al year. The adoption of, and future elections under, this ASU are not expected to have a material impact on the Company’s financial statements. Note 3. Revenues Deferred Contract Costs The Company’s amortization of deferred contract costs was $ 0.9 million and $ 0.8 million during the years ended December 31, 2022 and 2021, respectively. The amount of capitalized contract costs was $ 0.4 million as of December 31, 2022 and 2021, respectively. Deferred Revenue Deferred revenue was $ 25.5 million and $ 24.9 million as of December 31, 2022 and 2021, respectively. Total revenue recognized during the year ended December 31, 2022 and 2021 was approximately $ 21.7 million and $ 17.6 million, respectively, which was included in each deferred revenue balance at the beginning of each respective period. The Company’s deferred revenue as stated on the balance sheets presented approximates its contract liability balance as of December 31, 2022 and 2021. The Company’s deferred revenue balance as of December 31, 2022 , approximates the aggregate amount of the transaction price allocated to remaining performance obligations (“RPOs”) as of that date. Further, as of December 31, 2022 , the Company’s deferred revenue, current, balance on its balance sheet of $ 22.9 million approximates the expected amount to be recognized from its RPOs as revenue over the next 12 months. Disaggregation of Total Revenue The following table presents the Company’s total revenue disaggregated by timing of revenue recognition (in thousands): For the Years Ended December 31, 2022 2021 Consumption-based arrangements (B2 Cloud Storage) $ 33,041 $ 22,632 Subscription-based arrangements (Computer Backup) 51,431 44,117 Physical Media 683 730 Total revenue $ 85,155 $ 67,479 Total revenue by geographic area, based on the location of the Company’s customers, was as follows (in thousands): For the Years Ended December 31, 2022 2021 United States $ 60,950 $ 48,346 United Kingdom 4,652 3,686 Canada 4,324 3,439 Other 15,229 12,008 Total $ 85,155 $ 67,479 Note 4. Investments Fair Values and Gross Unrealized Gains and Losses on Investments The following table summarizes adjusted cost, gross unrealized losses, and fair value by significant investment category. The Company’s commercial paper investments are classified as held-to-maturity on its balance sheets as of December 31, 2022 . The Company did not have an investments balance as of December 31, 2021 . 66 Table of Contents Amortized Cost Gross Unrealized Fair Value Net Carrying Value Gains Losses As of December 31, 2022 (In Thousands) Investments Commercial paper $ 58,733 $ — $ ( 144 ) $ 58,589 $ 58,733 Total investments $ 58,733 $ — $ ( 144 ) $ 58,589 $ 58,733 Scheduled Maturities The amortized cost and fair value of held-to-maturity securities as of December 31, 2022 by contractual maturity are shown below. As of December 31, 2022 Amortized Cost Fair Value (In Thousands) Within one year $ 58,733 $ 58,589 After one year through five years — — After 5 years through 10 years — — After 10 years — — Total investments $ 58,733 $ 58,589 Aging of Unrealized Losses As of December 31, 2022, the Company’s investments had an aggregate gross unrealized loss of $ 0.1 million, all of which had been in an unrealized loss position of less than twelve months and are recorded at amortized cost on the Company’s balance sheet. As of December 31, 2022 , the investment portfolio did not have any securities that had been in an unrealized loss position for a period of twelve months or longer. The Company did not have held-to-maturity investments as of December 31, 2021 . For those securities in an unrealized loss position, the length of time the securities were in such a position is as follows: Less than 12 Months Total # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses As of December 31, 2022 (Dollars In Thousands) Investments Commercial paper 11 $ 58,589 $ ( 144 ) 11 $ 58,589 $ ( 144 ) Total 11 $ 58,589 $ ( 144 ) 11 $ 58,589 $ ( 144 ) Note 5. Fair Value Measurements The Company classifies its fair value disclosure for its held-to-maturity investments, which are comprised of investment grade commercial paper, within Level 2 of the fair value hierarchy because the fair value of these securities are priced by 67 Table of Contents using inputs based on non-binding market consensus that are primarily corroborated by observable market data or quoted market prices for similar instruments. There were no transfers between levels of the fair value hierarchy for the year ended December 31, 2022 and 2021, respectively. The Company held no assets or liabilities that were measured at fair value on a recurring basis as of December 31, 2022 and 2021, respectively. The following table summarizes the total carrying value of the Company’s Level 3 instruments held as of December 31, 2021 including cumulative realized losses recognized during the year ended December 31, 2021 (in thousands): Year Ended December 31, 2021 Beginning balance as of December 31, 2020 $ — Sale of SAFE notes 10,000 Total realized loss 1,436 Conversion of SAFE notes ( 11,436 ) Ending balance as of December 31, 2021 $ — Level 3 instruments are characterized by unobservable inputs that are supported by little or no market activity, which require management judgment or estimation. The fair value of the SAFE notes was determined in interim periods during 2021 using unobservable inputs. In valuing the SAFE notes, the Company used a Monte Carlo simulation to forecast a range of probability-weighted settlement paths in combination with income, market, and cost-based valuation approaches. The settlement paths used probabilities ranging from 5 % to 65 %. The Company used a discount rate of approximately 30 % to adjust the probability-weighted settlement paths to their present value. An increase in the discount rate would decrease the fair value of the instrument, and an increase in probabilities of certain settlement paths would increase the fair value of the instrument. The fair value of the SAFE notes, upon conversion, was determined using the Company’s Class A common stock valuation of $ 16.00 as of the settlement date of November 10, 2021, which is also the Company’s IPO date. See Note 11 for further details on the SAFE Notes. A s of December 31, 2022 and December 31, 2021, the Compa ny had $ 169 thousand in restricted cash related to the letter of credit established according to requirements under a lease agreement, reported as a component of other current assets on the balance sheets. Additionally, as of December 31, 2022 , the Company had $ 4.3 million in restricted cash related to the line of credit agreement with City National Bank. See Note 11 for further details. Note 6. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following (in thousands): December 31, 2022 2021 Unbilled accounts receivable $ 1,637 $ 1,220 Prepaid expenses 1,288 2,403 Prepaid subscriptions 1,312 730 Prepaid Physical Media Hardware 246 378 Capitalized commissions 365 345 Receivable from payment processor 644 289 Financed prepaid insurance 1,545 — Other 1,083 565 Total prepaid expenses and other current assets $ 8,120 $ 5,930 68 Table of Contents Note 7. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): December 31, 2022 2021 Data center equipment $ 28,531 $ 25,338 Leased and financed data center equipment 62,300 50,419 Machinery and equipment 11,613 7,803 Computer equipment 2,503 1,631 Leasehold improvements 1,268 956 Construction-in-process 3,636 — Total property and equipment 109,851 86,147 Less: accumulated depreciation ( 60,476 ) ( 43,079 ) Total property and equipment, net $ 49,375 $ 43,068 Depreciation expense was $ 18.0 million and $ 14.6 million for the years ended December 31, 2022 and 2021, respectively. For the Company’s equipment under capital leases and collateralized financing obligations, accumulated depreciation was $ 24.5 million and $ 13.5 million as of December 31, 2022 and 2021, respectively. The carrying value of the Company’s equipment under capital lease agreements and collateralized financing obligations was $ 37.8 million and $ 36.9 million as of December 31, 2022 and 2021, respectively. During the years ended December 31, 2022 and 2021, the Company recorded a loss and a gain of less than $ 0.1 million , respectively, as a result of disposing of certain hard drives. These disposals occurred in the ordinary course of business, as the Company continuously evaluates its requirements for operating its data centers. The loss and gains are recorded as general and administrative expenses in the Company’s statements of operations. As of December 31, 2022 , the Company had long-lived assets of $ 56.3 million, comprising of property and equipment, net and operating lease right-of-use assets, with $ 50.2 million located in the United States and $ 6.1 million located in The Netherlands. As of December 31, 2021, substantially all of the Company’s assets were held in the United States. Note 8. Capitalized Internal-Use Software, Net Capitalized internal-use software, net consisted of the following (in thousands): December 31, 2022 2021 Developed software $ 23,777 $ 12,535 General and administrative software 144 144 Total capitalized internal-use software 23,921 12,679 Less: accumulated amortization ( 7,217 ) ( 5,042 ) Total capitalized internal-use software, net $ 16,704 $ 7,637 In accordance with the adoption of ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software , during 2021 the Company aligned its capitalization of implementation costs for cloud computing arrangements with its accounting for the underlying software license included in such arrangements. Accordingly, the Company reclassified these implementation costs on its balance sheet to prepaid expenses and other current assets and other assets as of December 31, 2021, on a prospective basis. Amortization expense of capitalized internal-use software was $ 2.2 million and $ 1.7 million for the years ended December 31, 2022 and 2021, respectively. Amortization of developed and general and administrative internal-use 69 Table of Contents software are included in cost of revenue and general and administrative expense, respectively, in the Company’s statements of operations for the years ended December 31, 2022 and 2021. As of December 31, 2022, future amortization expense is expected to be as follows (in thousands): Year Ending December 31, 2023 $ 3,985 2024 3,884 2025 3,429 2026 2,976 2027 2,250 Thereafter 180 Total $ 16,704 Note 9. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): December 31, 2022 2021 Accrued compensation $ 2,728 $ 1,159 ESPP withholding 415 489 Accrued expenses 2,881 1,646 Accrued sales taxes 208 1,209 Accrued value-added tax ("VAT") 1,220 2,511 Financed insurance premiums (see Note 11) 1,545 — Other 421 606 Accrued expenses and other current liabilities $ 9,418 $ 7,620 Note 10. Commitments and Contingencies Finance Leases and Lease Financing Obligations The Company enters into finance lease arrangements to obtain hard drives and related equipment for its data center operations. The terms of these agreements primarily range from three -to- four years and certain of these arrangements have optional renewals to extend the term of the lease generally at a fixed price. Contingent rental payments are generally not included in the Company’s finance lease agreements. Finance leases are generally secured by the underlying leased equipment. The Company’s finance leases have original lease periods expiring between 2023 and 2025. The underlying assets of finance leases are included in the property and equipment, net on the Company’s balance sheet. A s of December 31, 2022 , the weighted average remaining lease term for finance lease and lease financing obligation agreements was approximately two years and the weighted average discount rate for finance leases was 10.2 %. For th e Company’s assets acquired through finance lease and lease financing obligation agreements, which are related to sale-leaseback agreements, depreciation expense was $ 13.2 million and $ 11.5 million for the years ended December 31, 2022 and 2021, respectively. Depreciation expense on assets acquired through the Company’s finance leases and lease financing obligations is included in cost of revenue in its statements of operations. During the year ended December 31, 2022 , total finance lease costs were $ 16.1 million, of which interest expense was approximately $ 3.9 million, and total lease financing obligation costs were $ 1.4 million, of which interest expense was approximately $ 0.3 million. The cash paid on interest on finance lease and lease financing obligations was $ 3.8 million for the year ended December 31, 2022 . 70 Table of Contents During the year ended December 31, 2021, the Company entered into four sale-leaseback arrangements with vendors to provide $ 4.3 million in cash proceeds for previously purchased hard drives and related equipment. The Company concluded the related lease arrangements would be classified as lease financing obligations as it has the option to repurchase the assets at their fair value at a future date. Therefore, the transactions were each deemed a failed sale-leaseback and was accounted for as a financing arrangement. The assets continue to be depreciated over their useful lives, and payments are allocated between interest expense and repayment of the financing liability. The failed sale-leaseback transactions continued to be accounted for as a failed sale-leaseback upon adoption of ASC 842 because the leaseback is classified as financing. The Company did not enter into any new sale-leaseback arrangements during the year ended December 31, 2022. The future minimum commitments for these finance leases and lease financing obligations as of December 31, 2022 were as follows (in thousands): Year Ending December 31, Finance leases Lease financing obligations Total 2023 $ 19,458 $ 1,385 $ 20,843 2024 11,557 1,240 12,797 2025 3,287 521 3,808 Thereafter — — — Total future minimum lease and financing commitments 34,302 3,146 37,448 Less imputed interest ( 3,078 ) ( 352 ) ( 3,430 ) Total liability $ 31,224 $ 2,794 $ 34,018 Prior to the ASC 842 adoption, the future minimum commitment for these finance leases and lease financing obligations as of December 31, 2021 were as follows (in thousands): Year Ending December 31, 2022 $ 16,765 2023 14,123 2024 6,707 2025 617 2026 — Thereafter — Total future minimum lease and financing commitments 38,212 Less imputed interest ( 4,964 ) Total liability $ 33,248 Prior to the ASC 842 adoption, as of December 31, 2021, the future minimum payments related to the lease financing obligations consisted of the following (in thousands): Year Ending December 31, 2022 $ 1,385 2023 1,385 2024 1,240 2025 387 2026 — Thereafter — Total future minimum financing payments $ 4,397 Operating Leases The Company leases its facilities for data centers and office space under non-cancelable operating leases with various expiration dates. Certain lease agreements include renewal options to extend the lease term at a price to be determined upon exercise. These options are not reasonably certain to be exercised and therefore are not factored into the determination of 71 Table of Contents lease payments. Contingent rental payments are generally not included in the Company’s lease agreements. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Th e Company's leases have original lease periods expiring between 2023 and 2031. The Company does not have a material amount of short-term leases as of December 31, 2022 . As of December 31, 2022, the weighted average remaining lease term for operating leases was approximately 5.6 years and the weighted average discount rate for operating leases was approximately 5.4 %. The future minimum commitments for these operating leases as of December 31, 2022 were as follows (in thousands), which excludes amounts allocated to services under operating lease agreements that are considered non-lease components: Year Ending December 31, 2023 $ 2,400 2024 1,311 2025 871 2026 890 2027 914 Thereafter 2,038 Total future minimum operating lease commitments 8,424 Less imputed interest ( 1,262 ) Total $ 7,162 72 Table of Contents Non-lease components included in the Company’s colocation lease agreements are related to non-tangible utilities and services used in its data center operations. The Company used judgment and third-party data in determining the stand-alone price for allocating consideration to lease and non-lease components under these colocation lease agreements, such as, the price of utilities as compared to its tangible data center footprint within each colocation facility. The future minimum commitments for the Company’s non-cancellable contractual obligations as of December 31, 2022 for non-lease components were as follows (in thousands): Year Ending December 31, 2023 $ 5,116 2024 4,187 2025 2,592 2026 2,560 2027 2,636 Thereafter 6,106 Total future minimum commitments $ 23,197 Prior to the ASC 842 adoption, the future minimum commitments for these operating leases as of December 31, 2021 were as follows (in thousands), which also include minimum payments for services under operating lease agreements: Year Ending December 31, 2022 $ 4,896 2023 4,351 2024 3,098 2025 1,327 2026 1,363 Thereafter 5,977 Total $ 21,012 Rental expense related to the Company’s operating leases was $ 6.5 million for the year ended December 31, 2022, of which $ 4.9 million is included in cost of revenue in its statement of operations. During the year ended December 31, 2022, total operating lease cost was $ 7.7 million, which does not include costs related to services. Rental expense related to the Company’s operating leases was $ 7.1 million for the year ended December 31, 2021. Other Contractual Commitments Other non-cancellable commitments relate mainly to infrastructure agreements used to facilitate the Company’s operations. This amount does not include amounts related to finance lease, lease financing obligations and operating leases as disclosed above. As of December 31, 2022, the Company had future minimum payments under the Company’s non-cancelable purchase commitments of $ 10.8 million and $ 0.2 million payable during the years ending December 31, 2023 and 2024, respectively. 401(k) Plan The Company sponsors a 401(k) defined contribution plan covering all eligible U.S. employees. Contributions to the 401(k) plan are discretionary. The Company contributed $ 1.6 million and $ 1.1 million to the 401(k) plan for the years ended December 31, 2022 and 2021, respectively. Legal Matters The Company is involved from time to time in various claims and legal actions arising in the ordinary course of business. While it is not feasible to predict or determine the ultimate outcome of these matters, the Company believes that none of its current legal proceedings are likely to have a material adverse effect on its financial position, results of operations or cash 73 Table of Contents flows. However, the results of legal proceedings are inherently unpredictable and litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors. On July 15, 2022, the Company received a demand letter from the investors that participated in the Simple Agreement for Future Equity agreement in August 2021 related to a contractual dispute in connection with the SAFE transaction. The investors sought a refund of their original investment of $ 10.0 million . In February 2023, the Company settled with the SAFE holders for a full release of all claims related to the SAFE transaction for a one-time payment in the amount of $ 1.5 million in aggregate. The $ 1.5 million settlement is included as a general and administrative expense in the Company’s statement of operations during the year ended December 31, 2022. One of the SAFE holders, TMT Investments PLC (“TMT”), a beneficial holder of more than 5% of the Company’s capital stock, was a party to the settlement and received a pro-rata payment of $ 0.3 million as part of the SAFE settlement. Sales Tax The Company undertook an analysis of its sales tax exposure based on the South Dakota vs. Wayfair case whereby the U.S. Supreme Court determined that physical presence was not required to determine the potential exposure a company has for sales tax purposes. Based on the Company’s analysis, its total accrual for sales tax payable was $ 0.2 million and $ 1.2 million as of December 2022 and 2021, respectively, which includes estimated amounts for penalties and interest. Accrued VAT Liability The Company has calculated a liability for uncollected and unpaid VAT, which is generally assessed by various taxing authorities on services the Company provides to its customers. The Company accrues an amount that it considers probable to be collected and can be reasonably estimated. Based on the Company’s analysis, its total accrual for VAT tax payable was $ 1.2 million and $ 2.5 million as of December 31, 2022 and 2021, respectively, which includes estimated amounts for penalties and interest. Indemnification The Company enters into indemnification provisions under agreements with other parties from time to time in the ordinary course of business. The Company has agreed in certain circumstances to indemnify and defend the indemnified party for claims and related losses suffered or incurred by the indemnified party from third-party claims due to the Company’s activities or non-compliance with certain representations and warranties made by the Company. It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. No losses have been recorded in the statements of operations in connection with the indemnification provisions. Note 11. Debt Credit Facility During October 2021, the Company entered into a revolving credit agreement (“RCA”) with City National Bank (“Lender”). Under this agreement, among other things, (i) amounts available to be borrowed are $ 9.5 million and (ii) advances on the line of credit will bear monthly interest at a variable rate equal to, at the Company’s discretion, (a) the average Secured Overnight Financing Rate (“SOFR”) plus 2.75 %, or (b) the base rate. The base rate under the RCA is a rate equal to the greater of (i) 3.00 % or (ii) the prime rate most recently announced by the Lender. The revolving credit agreement matures in September 2024. In connection with this agreement, the Company fully repaid and subsequently terminated its 2017 revolving credit agreement with HomeStreet Bank. During December 2021, the Company entered into its first amendment to the revolving credit agreement with City National Bank. The amendment removed the financial covenants under the agreement and added a requirement for cash collateral to be posted prior to any advance. During April 2022, the Company entered into a second amendment to its revolving credit agreement with City National Bank. Under this amendment, the amount available to be borrowed was increased to $ 30.0 million from $ 9.5 million. There were no other material changes to the agreement as a result of the amendment. 74 Table of Contents The Company began borrowing under the RCA during the year ended December 31, 2022. As of December 31, 2022, the Company had an outstanding balance of $ 4.3 million and the total amount available to the Company to be borrowed was $ 25.7 million . Under the RCA, the outstanding balance of $ 4.3 million as of December 31, 2022 was collateralized by an equal amount of cash held by the Company. As such, the Company held $ 4.3 million in cash that it deemed to be restricted and is included in restricted cash, non-current on the Company’s balance sheet as of December 31, 2022 . With prior written notice to the Lender, the Company has the right, at any time prior to the maturity date, to terminate the RCA. In the event of such termination, the aggregate principal of the then outstanding amounts, including any accrued interest to date, shall be repaid and the restrictions on the associated collateralized cash would be released. As of December 31, 2022, the interest rate associated with the outstanding balance under the RCA was 6.7 %, which is a per annum rate. Interest payments on outstanding borrowing are due on the last day of each monthly interest period and payments for the commitment fee are due at the end of each calendar quarter. Advances under the RCA are due in full in September 2024. As the RCA is a multi-year revolving credit agreement, the Company classifies the facility as long-term debt on its balance sheets as it has the intent and ability to maintain the facility outstanding for longer than 12 months. Insurance Premium Financing Agreement Effective November 2022, the Company entered into an insurance policy with annual premiums totaling $ 2.1 million. The Company has executed a Finance Agreement with AFCO Premium Credit LLC over a term of twelve months , with an annual interest rate of 4.5 %, that finances the payment of the total premiums owed. The agreement requires a $ 0.5 million down payment, with the remaining $ 1.5 million plus interest paid over three quarterly installments. These quarterly payments start February 10, 2023. As of December 31, 2022, the unpaid balance is approximately $ 1.5 million, reported as a component of accrued expenses and other current liabilities on the balance sheets. Paycheck Protection Program On April 22, 2020, the Company received $ 2.3 million in funding through the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) that was part of the CARES Act that was signed into law in March 2020. The interest rate on the loan is 1.00 % per year and matured in April 2022. The note was payable in monthly installments of principal and interest, beginning in August 2021. The Company recognized the entire loan amount as a financial liability, with interest accrued and expensed over the term of the loan. An application to forgive the entire amount was submitted with the lender in July 2020. In June 2021, the Company received notification from the SBA that the Company’s forgiveness application of the PPP loan and accrued interest, totaling $ 2.3 million, was approved in full, and the Company has no further obligations related to the PPP loan. Accordingly, the Company recorded the forgiveness of the PPP loan as gain on extinguishment of debt on its statement of operations for the year ended December 31, 2021. Convertible notes and related party transactions During August 2021, the Company issued investors convertible notes (the “Security”) in the amount of $ 10.0 million. The Security was classified as a Simple Agreement for Future Equity agreement. The convertible notes were automatically convertible into shares of the Company’s Class A common stock upon the completion of an initial public offering (or other liquidity event if sooner) at a discounted price to the value of its common stock at the time of such event. The Company determined that the SAFE notes should be classified as a liability based on evaluating the characteristics of the instrument, which contained both debt and equity-like features. As such, the Company recorded the carrying value of the SAFE notes and the associated accrued interest as a current liability on its balance sheet upon its issuance. The fair value of the SAFE notes was determined in interim periods during 2021 using unobservable inputs. In valuing the SAFE notes, the Company used a Monte Carlo simulation to forecast a range of probability-weighted settlement paths in combination with income, market, and cost-based valuation approaches. The settlement paths used probabilities ranging from 5 % to 65 %. The Company used a discount rate of approximately 30 % to adjust the probability-weighted settlement paths to their present value. An increase in the discount rate would decrease the fair value of the instrument, and an 75 Table of Contents increase in probabilities of certain settlement paths would increase the fair value of the instrument. On November 10, 2021, in connection with the IPO, the SAFE notes automatically converted into 722,860 shares of Class A common stock. The Company valued the notes on the settlement date of November 10, 2021 based on the Class A common stock price of $ 16.00 , which was the price of the Class A common stock sold in the IPO. The weighted average discount on the SAFE notes was approximately 13 % and interest accrued was $ 0.1 million. This valuation resulted in a realized loss of $ 1.4 million that the Company recorded in its statement of operations. Furthermore, $ 2.0 million of the SAFE notes were purchased by TMT, and was deemed to be a related party transaction. In addition, as described more fully in Note 10, TMT also received a pro-rata payment of $ 0.3 million as part of the settlement relating to a contractual dispute in connection with the SAFE transaction, in exchange for a full release of claims related to the SAFE transaction. Note 12. Stockholders’ Equity Common Stock. In connection with the IPO, the Amended and Restated Certificate of Incorporation provided for a dual class common stock structure, all outstanding shares of the Company’s common stock converted into an equivalent number of shares of its Class B common stock, and all shares of the convertible preferred stock then outstanding automatically converted into 3,359,195 shares of Class B common stock. The Class B common stock on the Company’s balance sheets presented is representative of its common stock prior to the inception of the dual class structure. Subsequent to the IPO, the Company has had two classes of common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except for voting, transfer, and conversion rights. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to ten votes and is convertible at any time into one share of Class A common stock. The Company had reserved shares of common stock for future issuance as follows: December 31, 2022 2011 Equity Incentive Plan Options outstanding 10,862,094 Shares available for future grants — 2021 Equity Incentive Plan Options outstanding 1,509,187 Restricted stock units outstanding 3,716,061 Shares available for future grants 1,836,566 2021 Employee Stock Purchase Plan Shares available for future purchases 990,132 Total 18,914,040 Promissory notes In June 2021, the Company issued full-recourse promissory notes to four employees of the Company for an aggregate principal amount of $ 48.0 thousand with an interest rate of 0.13 % per annum. All of the principal was used to exercise options for 234,526 shares of the Company’s common stock. As of December 31, 2021 , the promissory notes had been settled. Note 13. Convertible Preferred Stock In connection with the IPO on November 10, 2021, as further discussed in Note 11, and with the filing of the Company’s Amended and Restated Certificate of Incorporation in Delaware and the adoption of its Amended and Restated Bylaws, all shares of the Company’s convertible preferred stock outstanding, totaling 3,359,195 , were automatically converted into an equivalent number of Class B common stock on a one -to-one basis and their carrying value of $ 2.7 million was reclassified into stockholder’s equity. As of December 31, 2022 and December 31, 2021, there were no shares of convertible preferred stock issued and outstanding. 76 Table of Contents Note 14. Stock-Based Compensation Equity Incentive Plans 2011 Equity Incentive Plan. In 2011, the Company’s Board of Directors approved the adoption of the 2011 Stock Plan (the “2011 Plan”). The 2011 Plan provides for the grant of stock-based awards to employees, non-employee directors and other service providers of the Company. During April 2020, the Company’s Board approved an increase to the number of authorized shares under the Plan by 2,700,000 . Following the increase, the Plan had 12,420,000 shares authorized as of December 31, 2020. In March and August 2021, the Company’s Board approved increases to the number of authorized shares under the Plan by 1,980,000 . Following the increases, the Plan had 14,400,000 shares authorized. The Plan expired in September 2021. 2021 Equity Incentive Plan. In October 2021, the Company’s Board of Directors and stockholders adopted the 2021 Equity Incentive Plan (the “2021 Plan”) and it was approved by stockholders in October 2021. The 2021 Plan replaced the 2011 Plan. However, awards outstanding under the 2011 Plan will continue to be governed by their existing terms. The 2021 Plan has the features described below. Share Reserve . The number of shares of our common stock available for issuance under our 2021 Plan equals the sum of 5,262,500 shares plus up to approximately 13,719,000 shares subject to awards granted under our 2011 Plan that expire, forfeit or are repurchased following the effective date of the 2021 Plan. The number of shares reserved for issuance under our 2021 Plan will be increased automatically on the first business day of each of our fiscal years, commencing in 2022 and ending in 2031, by a number equal to the least of (i) 4,784,100 shares, (ii) 5 % of the shares of common stock outstanding on the last business day of the prior fiscal year; or (iii) the number of shares determined by the Board of Directors. During the year ended December 31, 2022, the Company increased the number of shares reserved under the 2021 Plan by 1,519,241 pursuant to this evergreen provision. In general, to the extent that any awards under the 2021 Plan are forfeited, terminate, expire or lapse without the issuance of shares, or if the Company reacquires the shares subject to awards granted under our 2021 Plan, those shares will again become available for issuance under our 2021 Plan, as will shares applied to pay the exercise or purchase price of an award or to satisfy tax withholding obligations related to any award. Restricted Stock Units During November 2021, in connection with the IPO, the Company granted its first RSUs under the 2021 Plan to certain of its non-employee directors. During the year ended December 31, 2022, the Company began granting more RSUs than options to its employees and non-employee directors. All RSUs granted have service-based vesting conditions. RSUs granted under the 2021 Equity Incentive Plan generally vest based on continued service over a three - to- four year period for employees, and over a one year period for non-employee directors . RSU activity for the year ended December 31, 2022 was as follows: Shares Weighted-average grant date fair value per share Unvested balance as of December 31, 2021 18,750 $ 22.04 Granted 4,163,608 $ 6.87 Vested ( 344,017 ) $ 9.37 Forfeited ( 122,280 ) $ 10.31 Unvested balance as of December 31, 2022 3,716,061 $ 6.60 77 Table of Contents Stock Options Stock Options. Stock options granted under the equity plans generally vest based on continued service over four years and expire ten years from the date of grant. The following table summarizes the Black-Scholes option pricing model weighted-average assumptions used in estimating the fair value of stock options granted to employees during the years ended December 31, 2022 and 2021, inclusive of grants issued under from the 2021 and 2011 Equity Incentive Plans: For the Years Ended December 31, 2022 2021 Expected term (in years) 6 6 Expected volatility 49.0 % 49.1 % Risk-free interest rate 1.20 % 1.10 % Expected dividend yield — % — % Expected term. For stock options considered to be “plain vanilla” options, the Company estimates the expected term based on the simplified method, which is essentially the weighted average of the vesting period and contractual term, as the Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate the expected term. Expected volatility. The Company performed an analysis using the average volatility of a peer group of representative public companies with sufficient trading history over the expected term to develop an expected volatility assumption. Risk-free interest rate. Based upon quoted market yields for the United States Treasury debt securities for a term consistent with the expected life of the awards in effect at the time of grant. Expected dividend yield. Because the Company has never paid and has no intention to pay cash dividends on common stock, the expected dividend yield is zero . Fair value of underlying common stock. Prior to the IPO, because the Company’s common stock was not yet publicly traded, the Company estimated the fair value of common stock. The Board of Directors (the “Board”) considered numerous objective and subjective factors to determine the fair value of the Company’s common stock at each meeting in which awards were approved. The factors considered included, but are not limited to: (i) the results of contemporaneous independent third-party valuations of the Company’s common stock; (ii) the prices, rights, preferences, and privileges of the Company’s convertible preferred stock relative to those of its common stock; (iii) the lack of marketability of the Company’s common stock; (iv) actual operating and financial results; (v) then current business conditions and projections; (vi) the likelihood of achieving a liquidity event, such as an initial public offering or sale of the Company, given prevailing market conditions; and (vii) precedent transactions involving the Company’s shares. A summary of equity award activity under the Company’s equity plans and related information is as follows (in thousands, except share, price and year data): 78 Table of Contents Shares available for grant Outstanding Equity Awards Weighted- average exercise Price Weighted- average remaining contractual life (years) Aggregate intrinsic value Balance as of December 31, 2020 865,339 11,409,736 $ 2.27 6.52 $ 36,889 Shares authorized 7,242,500 Options granted ( 4,437,720 ) 4,437,720 12.15 Options exercised — ( 500,374 ) 0.96 Options cancelled 406,900 ( 406,900 ) 4.52 2011 Stock Plan expiration ( 177,995 ) — RSUs granted ( 18,750 ) — Balance as of December 31, 2021 3,880,274 14,940,182 $ 5.19 6.69 $ 182,843 Shares authorized 1,519,241 Options granted ( 109,800 ) 109,800 13.29 Options exercised — ( 2,112,819 ) 2.09 Options cancelled 565,882 ( 565,882 ) 6.37 RSU award activity, net of shares withheld for taxes ( 4,019,031 ) — Balance as of December 31, 2022 1,836,566 12,371,281 $ 5.74 6.07 $ 32,385 Vested and exercisable as of December 31, 2022 8,787,912 $ 3.80 5.16 $ 28,866 The weighted-average grant-date fair value of options granted was $ 6.26 and $ 7.10 during the years ended December 31, 2022 and 2021, respectively. The intrinsic value of options exercised was $ 10.5 million and $ 5.6 million for the years ended December 31, 2022 and 2021, respectively. Aggregate intrinsic value represents the difference between the exercise price of the options and the estimated fair value of the Company’s underlying common stock at the time of exercise. The aggregate grant-date fair value of options vested was $ 13.0 million and $ 3.7 million for the years ended December 31, 2022 and 2021, respectively. ESPP In October 2021, the Company’s Board of Directors adopted the 2021 Employee Stock Purchase Plan (“ESPP”), which became effective on the date of the IPO. The ESPP initially reserved and authorized the issuance of up to a total of 956,800 shares of Class A common stock to participating employees. During the year ended December 31, 2022, the Company increased the number of shares reserved under the ESPP by 607,696 pursuant to its evergreen provision. The initial offering period commenced in November 2021 and the first purchase date occurred in May 2022. Under the Company’s ESPP, eligible employees may authorize payroll deductions of up to 50 % of their eligible compensation, subject to IRS limitations, during prescribed offering periods to purchase shares of the Company’s Class A common stock at a price per share equal to 85 % of the lesser of (1) the stock price at the employee’s first participation in the offering period or (2) the fair market value of the Company’s common stock on the purchase date. A participant may participate in only one offering period at a time, and a new offering period generally begins each May 20th and November 20th. Each offering period is generally 24 months and consists of four exercise dates (each, generally six months following the start of the offering period or the preceding exercise date, as the case may be). If the fair market value of the Company’s Class A common stock is less on a given exercise date than on the date of grant, employee participation in that offering period ends and participants are automatically re-enrolled in the next new offering period. The ESPP shall terminate automatically 20 years after its effective date, unless the ESPP is extended by the Board of Directors and the extension is approved within 12 months by a vote of the stockholders of the Company. As of December 31, 2022, 574,364 shares of Class A common stock have been purchased under the ESPP. The fair value of the purchase rights under the ESPP was estima ted using the Black-Scholes option pricing model with a similar methodology for determining inputs as the Company’s stock options, as described above. The Company recorded stock-based compensation expense under this plan of $ 2.9 million f or the year ended December 31, 2022, of which $ 0.6 million was capitalized for the development of capitalized internal-use software. As of December 31, 2022 , the total unrecognized stock-based compensation expense related to the ESPP was $ 4.5 million and is expected to be recognized over a weighted 79 Table of Contents average period of 2 years. As of December 31, 2022 , $ 0.4 million had been withheld on behalf of employees for future purchases. The following table summarizes the Black-Scholes option pricing model weighted-average assumptions used in estimating the fair value of the stock purchase rights granted to employees under the ESPP for the years ended December 31, 2022 and 2021: For the Years Ended December 31, 2022 2021 Expected term (in years) 0.5 - 2.0 0.5 - 2.0 Expected volatility 45 % - 68 % 45 % - 57 % Risk-free interest rate 0.10 % - 4.75 % 0.10 % - 0.51 % Expected dividend yield — % — % Stock-Based Compensation Expense Stock-based compensation expense included in the statements of operations was as follows (in thousands): For the Years Ended December 31, 2022 2021 Cost of revenue $ 1,267 $ 509 Research and development 6,698 2,129 Sales and marketing 5,360 1,652 General and administrative 3,724 1,339 Total stock-based compensation expense $ 17,049 $ 5,629 During the years ended December 31, 2022 and 2021, the Company capitalized $ 2.7 million and $ 0.4 million, respectively, of stock-based compensation for the development of capitalized internal-use software. As of December 31, 2022, total compensation cost related to stock options and RSUs not yet vested was $ 21.2 million and $ 22.7 million, respectively which will be recognized over a weighted-average period of 2.1 years and 3.0 years, respectively. During March 2022, the Company’s Compensation Committee approved a new bonus plan (“2022 Bonus Plan”) for its employees. The 2022 Bonus Plan is contingent upon the achievement of annual corporate performance targets. If these performance targets are met during 2022, employees will be paid out under the plan in RSUs in 2023. As a result, the Company recognized $ 1.9 million in stock-based compensation during the year ended December 31, 2022 based on progress made towards these performance targets. Pursuant to the 2022 Bonus Plan, during February 2023 the Company’s Compensation Committee approved the issuance of approximately 288,000 RSUs that immediately vested. During the year ended December 31, 2021, the Company’s Board approved modifications to extend the exercise period of vested options for certain terminated employees by the earlier of five years from the employee’s termination date or the option expiration date. The modification was effective upon the Board’s approvals. As a result, the Company recognized an incremental $ 0.1 million in stock-based compensation during the year ended December 31, 2021. There were no such modifications during the year ended December 31, 2022. Note 15. Net Loss per Share Attributable to Common Stockholders The Company computes net loss per share using the two-class method required for multiple classes of common stock and participating securities. The rights of the holders of the Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Accordingly, the Class A common stock and Class B common stock share equally in the Company’s net losses. Prior to the IPO, the Company’s participating securities also included convertible preferred stock. The holders of convertible preferred stock did not have a contractual obligation to share in the Company’s losses, and as a result, net losses were not allocated to these participating securities. Subsequent to the IPO, the Company considers its convertible preferred stock to be participating securities. 80 Table of Contents Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potentially dilutive common stock equivalents during the period. For purposes of this calculation, the Company’s stock options, share purchase rights pursuant to the Company’s ESPP, and unvested restricted stock are considered to be potential common stock equivalents, but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is antidilutive. The shares issued in the IPO, the shares issued pursuant to the exercise by the underwriters of an option to purchase additional shares, and the shares of Class A and Class B common stock issued upon conversion of the SAFE notes, respectively, are included in the table below. For illustration purposes, Class B common stock in the table below for the 2021 periods presented represents the Company’s common stock prior the adoption of the dual class structure in connection with the IPO. The following table presents the calculation of basic and diluted net loss per share (in thousands, except share and per share data): For the Years Ended December 31, 2022 2021 (in thousands, except share and per share amounts) Class A Class B Class A Class B Numerator: Net loss attributable to common stockholders $ ( 20,980 ) $ ( 30,418 ) $ ( 1,137 ) $ ( 20,567 ) Denominator for basic and diluted net loss per share: Weighted-average shares used in computing net loss per share attributable to common stockholders – basic and diluted 12,924,084 18,738,217 1,065,955 19,279,700 Net loss per share attributable to common stockholders – basic and diluted $ ( 1.62 ) $ ( 1.62 ) $ ( 1.07 ) $ ( 1.07 ) Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common shares outstanding would have been antidilutive. The potential shares of common stock that were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented are as follows: December 31, 2022 2021 RSUs 3,716,061 18,750 Stock options 12,371,281 14,940,182 Shares issuable pursuant to the ESPP 120,191 35,961 Total 16,207,533 14,994,893 Note 16. Income Taxes The following table presents the components of net loss before income taxes (in thousands): For the Years Ended December 31, 2022 2021 United States $ ( 51,437 ) $ ( 21,608 ) Loss before provision for income taxes $ ( 51,437 ) $ ( 21,608 ) 81 Table of Contents The provision for income taxes for the years ended were as follows (in thousands): For the Years Ended December 31, 2022 2021 Current Federal $ — $ — State ( 1 ) 58 Total current ( 1 ) 58 Deferred: — — Federal ( 38 ) 38 State — — Total deferred $ ( 38 ) $ 38 Total provision $ ( 39 ) $ 96 Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of net deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. The following table presents a reconciliation of the statutory federal rate and the Company’s effective tax rate: For the Years Ended December 31, 2022 2021 Statutory federal income (benefit) rate ( 21 ) % ( 21 ) % Increase (decrease) resulting from: State income tax rate ( 4 ) % ( 6 ) % Change in valuation allowance 28 % 33 % Permanent items — % — % Tax credits ( 4 ) % ( 4 ) % Stock-based compensation — % 2 % Other — % ( 1 ) % Debt instruments — % 2 % PPP loan adjustment — % ( 2 ) % Fixed assets 1 % ( 3 ) % Effective tax rate — % — % 82 Table of Contents The components of the Company’s deferred tax assets and liabilities consisted of (in thousands): December 31, 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 15,154 $ 12,149 R&D credit carryforwards 6,751 4,323 Stock-based compensation 2,211 317 Research and experimental expenditures under IRC Section 174 5,062 — Accruals and other 3,353 2,012 32,531 18,801 Valuation allowance ( 27,049 ) ( 12,747 ) Total deferred tax asset 5,482 6,054 Deferred tax liability: Fixed assets ( 3,652 ) ( 4,258 ) Capitalized internal-use software ( 1,830 ) ( 1,834 ) Total deferred tax liability $ ( 5,482 ) $ ( 6,092 ) Net deferred tax liability $ — $ ( 38 ) Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of net deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. ASC 740 requires that the tax benefit of net operating losses (“NOLs”), temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is more likely than not. Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Management believes that realization of the deferred tax assets arising from the above-mentioned future tax benefits from operating loss carryforwards is currently not more likely than not and, accordingly, has provided a valuation allowance. The valuation allowance increased by $ 14.3 million and $ 7.2 million during the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, the Company had federal and state NOL carryforwards of $ 63.4 million and $ 33.5 million , respectively. The federal NOL carryforwards consisted of $ 16.0 million generated before January 1, 2018, which will begin to expire in 2027 but are able to offset 100% of taxable income and $ 47.4 million generated after December 31, 2017 that will carryforward indefinitely but will be subject to 80% taxable income limitation beginning in tax years after December 31, 2021 as provided by the CARES Act. The Company has federal research and development (“R&D”) credit carryforwards of $ 5.5 million which will begin to expire in 2032 and California R&D credit carryforwards of $ 2.9 million which do not expire. The Company also has $ 0.1 million of California enterprise zone credits which will begin to expire in 2028. The utilization of NOLs and tax credit carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that have occurred previously or may occur in the future. Under Sections 382 and 383 of the Internal Revenue Code (“IRC”), a corporation that undergoes an ownership change may be subject to limitations on its ability to utilize its pre-change NOLs and other tax attributes otherwise available to offset future taxable income and/or tax liability. An ownership change is defined as a cumulative change of 50% or more in the ownership positions of certain stockholders during a rolling three-year period. The Company has not completed a formal study to determine if any ownership changes within the meaning of IRC Sections 382 and 383 have occurred. If an ownership change has occurred, the Company’s ability to use its NOLs or tax credit carryforwards may be restricted, which could require the Company to pay federal or state income taxes earlier than would be required if such limitations were not in effect. Effective for tax years beginning after December 31, 2021, taxpayers are required to capitalize any expenses they incurred that are considered incidental to research and experimentation (“R&E”) activities under IRC Section 174. While taxpayers historically had the option of deducting these expenses under IRC Section 174, the Tax Act mandates capitalization and amortization beginning with tax years after December 31, 2021. Expenses incurred in connection with R&E activities must 83 Table of Contents be amortized over a 5-year period if incurred in the US or over a 15-year period if incurred outside of the United States. R&E activities are broader in scope than the calculation of qualified research activities under IRC Section 41 (for research and development tax credit purposes). For the year ended December 31, 2022, the Company performed an analysis based on all the guidance available and has determined that it will continue to be in a loss position after considering the R&E capitalization. The Company will continue to monitor the effects of this legislation, however, the Company does not expect to pay cash taxes as a result of this change as the remaining operating expenses excluding R&E expense are significant and expect to continue to generate losses for tax purposes in the near future. Uncertain Income Tax Positions The total amount of unrecognized tax benefits as of December 31, 2022 was $ 1.2 million which related to federal and state R&D credits. If recognized, none of the unrecognized tax benefits would affect the effective tax rate. The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands): For the Years Ended December 31, 2022 2021 Balance at beginning of year $ 817 $ 584 Tax positions related to the current year: Additions 442 233 Reductions — — Tax positions related to the prior year: Additions — — Reductions ( 20 ) — Settlements — — Lapses in statute — — Balance at end of year $ 1,239 $ 817 The Company’s policy is to account for interest and penalties as income tax expense. As of December 31, 2022, the Company had no interest related to unrecognized tax benefits. No amounts of penalties related to unrecognized tax benefits were recognized in the provision for income taxes. The Company does not anticipate any significant change within twelve months of this reporting date. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal and state income tax examination for calendar tax years beginning in 2007 due to NOLs that are being carried forward for tax purposes. Note 17. Subsequent Events Starting in January 2023, the Company initiated a reduction in headcount incurring employee termination expenses and other associated costs, in aggregate, estimated to be between $ 3.5 million to $ 4.0 million. The Company expects to recognize the majority of these expenses in the first quarter of fiscal year 2023. In February 2023, in addition to approving equity awards related to the 2022 Bonus Plan (see Note 14), the Company’s Compensation Committee approved the issuance of approximately 701,000 RSUs with service-based vesting periods that are satisfied over three or four years . The Company expects to recognize approximately $ 4.1 million in stock-based compensation on a straight-line basis over the vesting period of these awards. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None . 84 Table of Contents