S-1/A 1 d62601ds1a.htm AMENDMENT NO. 1 TO FORM S-1 Amendment No. 1 to Form S-1
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As filed with the Securities and Exchange Commission on November 2, 2021.

Registration No. 333-260333

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1 TO

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

BACKBLAZE, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7372   20-8893125

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

500 Ben Franklin Ct

San Mateo, CA 94401

(650) 352-3738

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Gleb Budman

Chief Executive Officer

Backblaze, Inc.

500 Ben Franklin Ct

San Mateo, CA 94401

(650) 352-3738

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Bennett L. Yee

Jeffrey R. Vetter

Gunderson Dettmer Stough Villeneuve

Franklin & Hachigian, LLP

550 Allerton St

Redwood City, CA 94063

 

Tom MacMitchell

General Counsel

Backblaze, Inc.

500 Ben Franklin Ct

San Mateo, CA 94401

(650) 352-3738

 

Stuart Bressman

White & Case LLP

1221 Avenue of the Americas

New York, NY 10020

Tel: (212) 819-8200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount
to be

registered(1)

 

Proposed
Maximum

Offering Price

per Share(2)

 

Proposed
Maximum
Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee(3)

Class A Common Stock, $0.0001 par value per share

  7,187,500   $17.00  

$122,187,500.00

 

$11,326.78

 

 

(1)

Includes 937,500 additional shares that the underwriters have the option to purchase from the Registrant.

(2)

Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

(3)

The registrant previously paid $9,270 in connection with the initial filing of this Registration Statement on October 18, 2021.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated November 2, 2021

PROSPECTUS

6,250,000 Shares

 

 

LOGO

Class A Common Stock

 

 

This is Backblaze, Inc.’s initial public offering. We are selling 6,250,000 shares of our Class A common stock.

We expect the public offering price to be between $15.00 and $17.00 per share. Currently, no public market exists for our Class A common stock. After pricing of the offering, we expect that the shares will trade on the NASDAQ Global Market under the symbol “BLZE.”

We have 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. See the section titled “Description of Capital Stock” herein for additional information on our capital stock. The holders of our outstanding shares of Class B common stock will hold approximately 97% of the voting power of our outstanding capital stock immediately following this offering, and our founders, directors, executive officers and greater than 5% stockholders and their respective affiliates as a group will hold, or have the ability to control, approximately 80% of the voting power of our outstanding capital stock immediately following this offering.

We are an “emerging growth company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company.” Investing in the common stock involves risks that are described in the ‘‘Risk Factors’’ section beginning on page 20 of this prospectus.

 

 

 

    

Per Share

      

Total

 

Public offering price

   $          $    

Underwriting discount

   $          $    

Proceeds, before expenses, to us

   $          $    

The underwriters may also exercise their option to purchase up to an additional 937,500 shares from us, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

At our request, the underwriters have reserved up to 312,500 shares of our Class A common stock, or up to 5% of the shares offered by this prospectus, for sale at the initial public offering price through a directed share program to certain of our business partners and qualifying customers who are located in the United States. See the section titled “Underwriting.”

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities, or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                     , 2021.

 

 

 

Oppenheimer & Co.

 

William Blair

  Raymond James

 

 

JMP Securities

 

B. Riley Securities

Lake Street

 

 

The date of this prospectus is                     , 2021


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LOGO


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LOGO


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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1  

SUMMARY FINANCIAL DATA

     18  

RISK FACTORS

     20  

A LETTER FROM THE FOUNDERS

     46  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     49  

MARKET, INDUSTRY, AND OTHER DATA

     51  

USE OF PROCEEDS

     52  

DIVIDEND POLICY

     53  

CAPITALIZATION

     54  

DILUTION

     57  

SELECTED FINANCIAL DATA

     60  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     62  

BUSINESS

     92  

MANAGEMENT

     112  

EXECUTIVE COMPENSATION

     120  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     128  

PRINCIPAL STOCKHOLDERS

     130  

DESCRIPTION OF CAPITAL STOCK

     132  

SHARES ELIGIBLE FOR FUTURE SALE

     138  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF OUR COMMON STOCK

     141  

UNDERWRITING

     146  

LEGAL MATTERS

     156  

EXPERTS

     156  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     156  

INDEX TO FINANCIAL STATEMENTS

     F-1  

Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations, and prospects may have changed since that date.

Through and including                     , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to an unsold allotment or subscription.

Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.

 


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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. It does not contain all of the information that may be important to you and your investment decision. You should carefully read this entire prospectus, including the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and the related notes included elsewhere in this prospectus before making an investment decision. In this prospectus, unless context requires otherwise, references to “we,” “us,” “our,” “Backblaze,” or the “Company” refer to Backblaze, Inc.

Our Mission

Data is the digital world’s most precious resource.

Our mission is to make storing, using, and protecting that data astonishingly easy.

Company Overview

We are a leading storage cloud platform, providing businesses and consumers cloud services to store, use, and protect their data in an easy and affordable manner. We provide these cloud services through a purpose-built, web-scale software infrastructure built on commodity hardware. From genome sequencing to mapping the world, from saving lives to playing online games, from interacting with a business to running one, data is central to modern existence. By substantially reducing the complexity and frustration of storing, using, and protecting data, we empower customers to focus on their core business operations. Through our blog and culture of transparency, we have built a devoted community of millions of readers and brand advocates. Referrals from our community of brand advocates, combined with our highly efficient and primarily self-serve customer acquisition model and an ecosystem of thousands of partners, have allowed us to attract over 480,000 customers. These customers use the Backblaze Storage Cloud platform across more than 175 countries to grow and protect their business data on our approximately 2 exabytes, or 2 trillion megabytes, of data storage under management. As businesses and consumers shift to the cloud, we believe our cloud services will increasingly become a foundational element of their overall technology stack.

At its founding, Backblaze set out to simplify the process of storing, using, and protecting data. Over the following years we focused relentlessly on cutting away the complexity common among diversified cloud vendors’ services and legacy on-premises system vendors. Today, our solutions are differentiated by their ease of use and affordability. Focusing on storage use cases and promoting an open ecosystem allows us to integrate well with a broad range of partners. From our straightforward pricing model, to our transparent communication with customers, to the popular and insightful content on our blog—we have established ourselves as an open and trusted provider and partner.

The Backblaze Storage Cloud provides the core platform for our cloud services. This storage cloud organizes, safeguards, and keeps over 500 billion files available on demand and is designed to store trillions more in the future. Through our purpose-built software, we provide a platform that is durable, scalable, performant, and secure. This software manages our global physical infrastructure of nearly 200,000 hard drives and one terabit per second (one million megabits) of network capacity across 5 data centers that are interconnected by private network infrastructure. Our scale, along with our efficiency and expertise developed over years of growing the Backblaze Storage Cloud, provide a robust platform and significant barriers to entry. Our two cloud services that we offer on our Storage Cloud are:

 

   

Backblaze B2 Cloud Storage: Enables customers to store data, developers to build applications, and partners to expand their use cases. The amount of data stored in this cloud service can scale up and

 

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down as needed on a pay-as-you-go basis. This service is offered as a consumption-based Infrastructure-as-a-Service (IaaS) and serves use cases including backups, multi-cloud, application development, and ransomware protection.

 

   

Backblaze Computer Backup: Automatically backs up data from laptops and desktops for businesses and individuals. This cloud backup service offers easily understood flat-rate pricing to continuously back up a virtually unlimited amount of data. This service is offered as a subscription-based Software-as-a-Service (SaaS) and serves use cases including computer backup, ransomware protection, theft and loss protection, and remote access.

Public cloud adoption has been rapid and transformational for a wide range of companies. However, the market is demanding alternatives to the traditional, diversified public cloud vendors for multiple reasons. These public cloud vendors have increasingly focused on the largest enterprises, resulting in significant complexity in their products and pricing that leaves behind mid-market businesses. Due to their walled-garden approach, these public cloud vendors have made it expensive for customers to use their data in multi-cloud and hybrid cloud deployments and with other independent cloud platforms. Additionally, these diversified public cloud vendors increasingly compete with their customers and partners in an ever-widening range of industries.

Backblaze, on the other hand, is designed to fulfill major unmet market needs, particularly among mid-market businesses, by providing straightforward cloud storage offerings with easy-to-understand and affordable pricing from a trusted and independent provider.

Our solutions are designed for individuals and businesses of all sizes and across all industries but have a particularly strong appeal to mid-market organizations (which we define as organizations with 10 to 999 employees) due to their desire for easy-to-use and cost-effective solutions. We serve both the Public Cloud IaaS Storage market and Data-Protection-as-a-Service (DPaaS) market. According to forecasts from International Data Corporation (IDC), the worldwide market for Public Cloud IaaS Storage is $27.6 billion in 2020 and is expected to grow to $91.0 billion by 2025. Additionally, according to IDC, the worldwide market for DPaaS is $7.7 billion in 2020 and expected to grow to $18.4 billion by 2025. Based on our analysis of IDC data, we believe the Backblaze opportunity in the mid-market alone for Public Cloud IaaS is expected to grow to $54.6 billion by 2025, representing a CAGR of 27%, and for DPaaS to $11.0 billion by 2025, representing a CAGR of 19%.

We have a highly efficient go-to-market model that is built on a self-serve selling motion. Prospective customers find us through a variety of channels including our website, partners, and brand advocates. We have fostered deep community engagement with valuable content we share on our blog—in 2020 alone, more than 3 million readers consumed content that we shared there. Our content encourages organic, inbound traffic that we believe serves as our greatest source of advocates and referrals. Our frictionless free trial and self-serve sign-up processes help convert our blog readers and referrals from our brand advocates into customers, with over 80% of our revenue in 2020 coming from self-serve customers. In addition to generating customers, a community of thousands of partners has arisen as a result of our efforts. Our developer, alliance, and managed service provider (MSP) partners expand use cases and attract customers, thereby increasing usage of our Storage Cloud and helping to drive revenue growth. New customers and partners ultimately lead to more insight, content, and community engagement, which creates a positive feedback loop that drives additional customers and partners. In addition to our self-serve selling motion, in recent years we have begun to invest in a sales-assisted selling motion to identify opportunities to increase business with existing customers and to assist larger customers in adopting our services. Our sales-assisted selling motion has experienced substantial growth and helps customers that, in 2020, were approximately 20 times larger in terms of average revenue per customer than our self-serve customers. These efficient and effective go-to-market motions have helped us grow rapidly.

Substantially all of our revenue is recurring in nature. We employ a land-and-expand model that drives additional revenue from existing customers. As customers generate, store, and back up more data, their use of our

 

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platform increases, creating natural opportunities for revenue expansion. We are able to further expand our relationships with our customers when they adopt new features and use cases that lead to increased usage of our platform. Our land-and-expand strategy is evidenced by our overall net revenue retention rate of 113% and 114% as of December 31, 2019 and 2020, respectively.

Our B2 Cloud Storage revenue grew by 66% during the year ended December 31, 2020 and our Computer Backup revenue grew by 23% during the year ended December 31, 2020. We also have recently launched offerings such as Extended Version History, multi-region selection and our new ransomware protection functionality, Object Lock. By expanding our offerings, we are able to further expand our revenue and market opportunity.

Our operations have historically been efficient with limited outside investment. Prior to issuing $10.0 million of convertible notes (which we also refer to as a Simple Agreement for Future Equity agreement (SAFE)) in a private financing round in August 2021, we had raised less than $3.0 million in outside equity since our founding in 2007. This has helped create a culture based on operational efficiency, creativity, and collaborative problem solving. This culture, combined with the software and infrastructure we have scaled, refined, and enhanced over a decade, our innovation roadmap, our efficient go-to-market, large community of brand advocates, and position as an independent cloud platform, is what enables us—now and in the future—to succeed. This is evident in the significant growth we have achieved in recent periods. In the years ended December 31, 2019 and 2020, our revenue was $40.7 million and $53.8 million, respectively, representing growth of 32%. We incurred net losses of $1.0 million and $6.6 million for the years ended December 31, 2019 and 2020, respectively. As of June 30, 2021, our annual recurring revenue was $64.8 million and we incurred net losses of $6.1 million for the six months ended June 30, 2021. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Annual Recurring Revenue” for more information on annual recurring revenue.

Industry Background

We believe data is an increasingly critical part of the global economy. The fundamental shift in how data is created and consumed is fueling the growth and evolution of storage:

 

   

Data storage growth is rapidly expanding to enable our digital universe. Organizations ranging from large companies to small enterprises, startups, municipalities, and educational institutions are digitally transforming and must evolve to effectively compete, or risk becoming irrelevant to customers and being left behind by the market. From gaming to social media to streaming video, entire industries are being built around data. Modern advancements across a range of industries drive data creation and consumption from applications such as artificial intelligence and machine learning. Additionally, increasing regulatory and compliance requirements are also driving retention requirements. As a result, it is a business imperative for companies to retain significantly more data and keep it much longer.

 

   

Data is migrating to the cloud. Historically, data was managed on-premises using legacy storage systems. Organizations are increasingly migrating to the cloud to capitalize on improved flexibility, agility, and scalability, and much of their stored data is moving along with them. IDC estimates that approximately only 4% of global data was stored in public cloud environments in 2010 compared to a projected 53% in 2024.

 

   

Companies are choosing multi-cloud solutions and demanding alternatives to the diversified cloud vendors. Multi-cloud deployments are becoming more commonplace as companies seek to avoid vendor lock-in, minimize latency, and provide redundancy for their mission critical data.

 

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According to Frost & Sullivan’s 2020 Global Cloud User Survey, 43% of respondents indicated current adoption of multi-cloud in 2020 and 84% of respondents indicated planned adoption of multi-cloud in 2022.

 

   

Non-specialists are making purchasing decisions and driving demand for easy, self-serve solutions. Today, IT generalists who are responsible for broad areas of technology, along with other professionals—including cinematographers, DNA scientists, and software developers—and a multitude of roles within an organization that have traditionally not had deep storage expertise can be the purchasing decision makers. These decision makers desire self-serve solutions that work easily and address their needs.

 

   

Developers are a driving force for digital transformation and technology selection. Developers and the applications they create are at the forefront of digital transformation, often guiding business strategy for organizations. As a result, developers are able to influence what technologies, platforms, and solutions are adopted by the broader organization, often seeking platform features such as self-serve, immediacy, and efficiency. Developer-focused, independent cloud platforms that provide services like payment processing, communications, compute, edge distribution, and more have generated billions in revenue by serving these customers. Vendors looking to capture a critical mass of developer mindshare are increasingly shaping their products and solutions to serve these preferences.

 

   

Cybersecurity threats, such as ransomware, are costly and on the rise. The frequency and impact of cybersecurity threats continues to grow, and the cost of these attacks is increasing. Cybersecurity Ventures estimates that the global cost of ransomware attacks alone will reach $20 billion in 2021, a significant increase compared to estimated damages of $11.5 billion and $8 billion in 2019 and 2018, respectively. Ransomware targets victims by encrypting their files and demanding payment for access to the decryption key. According to the Threat Landscape Report in 2020 by Bitdefender, the total number of global ransomware reports increased by 715% year over year in the first half of 2020.

 

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Our Platform and Cloud Services

 

LOGO

Our Platform: Backblaze Storage Cloud

The Backblaze Storage Cloud provides the core platform for our cloud services. This storage cloud organizes, safeguards, and keeps over 500 billion files available on demand and is designed to store trillions more in the future. By architecting our platform to administer this complexity, we free customers from having to worry about their data. Through our interfaces, customers can upload, manage, safeguard, build upon, and utilize their data while remaining free of the financial and logistical hurdles of maintaining on-premises technology or the complexity of administering diversified cloud solutions. The Backblaze Storage Cloud acts as the foundation for our two primary services, Backblaze B2 Cloud Storage and Backblaze Computer Backup. Each of these cloud services unlocks a multitude of use cases and additional services for our partners and customers.

Our Cloud Service Offerings

Backblaze B2 Cloud Storage. Backblaze B2 provides customers direct access to our Storage Cloud to store, use, and protect data. Users can access the platform through industry standard and native application programming interfaces (APIs) software development kits (SDKs), our web interface, or hundreds of third-party integrations. The wide range of options for accessing B2 Cloud Storage allows anyone to easily use it, including developers and partners who seamlessly integrate storage capabilities into their technology stack or build their own solutions on top of our platform. Customers also strategically tier backups of their core data systems to Backblaze B2, including on-premises and virtual machine servers and other high-capacity storage devices.

 

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Backblaze B2 Use Cases

As companies adopt cloud infrastructure and undergo digital transformation, we believe Backblaze B2 will increasingly become a foundational element of our customers’ overall technology stack. Customers leverage Backblaze B2 for a wide range of use cases, including:

 

   

Public, hybrid, and multi-cloud data storage. Backblaze B2 supports customers who want the option to deploy different cloud configurations, whether to migrate to or build natively in the cloud, support a mixed on-premises and cloud environment, or who desire a neutral vendor in their multi-cloud strategy. Additionally, we provide customers solutions to enable all of these use cases with a combination of on-premises-to-cloud, synchronization, and cloud-to-cloud migration services.

 

   

Application development and DevOps. Software developers require key infrastructure building blocks—including storage, compute, databases, content delivery networks (CDNs), and more—to rapidly develop, deploy, and scale their applications. Backblaze B2 provides one of the most critical and frequently used of these building blocks to enable developers to store, use, and deliver data. With our easy-to-use APIs and on-demand platform, we allow developers to build efficiently and support their ability to scale with their success.

 

   

Content delivery and edge computing. Our Storage Cloud is connected to CDN and edge computing partners to store and deliver digital content to global audiences in a fast and easy manner. We serve as the origin store, making us the reliable place to house data for others to distribute.

 

   

Security and ransomware protection. We help protect data through a combination of cloud services and features. Backup services provide the primary line of protection against ransomware. Our Object Lock feature enables customers to lock files so that data cannot be illicitly modified or deleted. In addition, our privacy and authorization features ensure only appropriate entities can access their data. Our Lifecycle Rules also enable customers to easily support retention of their data to meet expanding regulatory and compliance requirements.

 

   

Media management. Backblaze B2 is the trusted provider to many companies that produce, edit, and deliver precious media content. Our solutions optimize media production workflows by allowing for the simultaneous ingestion and archiving of raw footage, providing scalable storage to free up media production storage systems, and enabling real-time delivery of media content directly from Backblaze B2.

 

 

   

Backup, archive, and tape replacement. Backblaze B2 provides customers with a scalable and affordable storage destination for their backup and archive needs. Customers automate backups for servers, network-attached storage (NAS), virtual machines, laptops and desktops, and other endpoints. Backups are readily available for quick retrieval and not constrained to a cold archive that puts organizations at risk by delaying access to critical data. Customers use our solution to replace complex legacy tape systems, as well as other legacy on-premises storage solutions and expensive, complex, diversified cloud vendor solutions.

 

   

Repository for analytics, artificial intelligence, and machine learning. Backblaze B2 serves as a destination for vast amounts of data at scale. Customers have the ability to store, directly access, and use their data in real time. This enables organizations to keep and use the data sets that underpin all analytics, artificial intelligence, and machine learning.

 

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Internet of Things (IoT). The network of connected devices has grown considerably, driving the volume of data creation and the need for real-time accessibility. Backblaze B2 provides storage for data created and accessed by these devices. Our storage solutions can be used for a wide range of IoT use cases including storing data for surveillance systems, autonomous vehicles, and smart devices.

Backblaze Computer Backup. Our Computer Backup cloud service backs up laptops, desktops, and external hard drives in a continuous and automated fashion. Whether for home computers or a business’ full fleet of machines, customers can back up a virtually unlimited number of files without size or speed constraints. This cloud service includes a lightweight agent that runs locally on each end user’s computer, continuously searching for new and changed files in a manner unobtrusive to the user. When a new or changed file is detected, the altered data is backed up and sent to the Backblaze Storage Cloud. Once there, it is accessible to the end user or business administrator responsible for managing the account. In the event of data loss, customers can restore all or portions of their backed-up data.

Computer Backup

Use Cases

 

   

Mac and PC backup. Backs up all new and changed data on laptops, desktops, and external hard drives.

 

   

Ransomware protection. Backups provide a critical line of defense against ransomware, providing secure recovery of all data when customers’ systems are corrupted.

 

   

Theft and loss recovery. Data is backed up and available via our website and mobile applications, or data can be shipped worldwide on encrypted hard drives in the event of theft or loss. Customers can use our Locate My Computer functionality to also help retrieve lost or stolen computers.

 

   

Data Archiving. Computer Backup offers 30-day version history by default, but individual users and administrators can use Extended Version History for a fee to increase the retention period of deleted, changed, or updated files to one year or indefinitely.

 

   

Organization and MSP-level management. The Backblaze Groups functionality allows administrators to manage the backups of their business fleet through one centralized account, empowering organizations, MSP partners, and individuals with administrative features such as centralized billing, account maintenance, and system alerts.

 

   

Remote access. Customers can access all backed up files remotely through our website. Additionally, Backblaze provides mobile apps running on iOS and Android that provide customers convenient access from anywhere to their data stored with Backblaze, without requiring the customer to have a laptop or desktop computer with them.

Competitive Strengths

Our competitive strengths include:

 

   

Robust technology platform and rapid innovation. Our differentiated technology platform provides durable, available, scalable, performant storage at web scale, all while maximizing cost efficiency. We believe that the scale of our platform and the intellectual property we have gained through developing it, including our software management layer, provide a significant competitive moat. We also have a successful track record of launching new features and capabilities for our products, and we expect to continue doing so in the future.

 

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Purpose-built for cloud storage. We are a pure-play storage provider and our engineering decisions are optimized for data storage use cases, which enables us to develop targeted solutions for the most critical storage needs of our customers. The result is easy, affordable, and predictable data storage and access.

 

   

Attractive ecosystem partner with best-of-breed cloud platforms. Our position as a storage provider purpose built for web scale, with interoperability and an open ecosystem in mind, creates natural partnership opportunities with other independent cloud platforms. This ecosystem of integrated partnerships provides customers the flexibility to choose the best combination of solutions and create the optimal technology stack for their needs. As the partner ecosystem expands, it provides for compounding revenue growth opportunities: each partner brings additional customers, each of these customers brings additional data, and each customer can adopt additional services.

 

   

Customer acquisition propelled by community-driven inbound marketing. Our content marketing engine—driven by our blog, which was visited by more than 3 million readers in 2020 alone—propels our highly efficient customer acquisition. We believe such a large, engaged audience and the trust we have developed organically with them over 14 years of sharing valuable, unique content, would be difficult for any competitor to replicate.

 

   

Frictionless go-to-market model. Customers can quickly test and sign up for our solutions through a self-serve process, which led to over 80% of our revenue in 2020. After signing up for our products, customers increasingly rely on the platform, generating, storing, and backing up more data, creating natural opportunities for revenue expansion.

 

   

Developer-friendly, interoperable platform. Our API-driven platform was built by developers for developers. We create a strong community among developers through our valuable, relevant blog content. With our free-to-test approach and self-serve sign up process, developers can get started quickly. Our native and S3 compatible API, SDKs, and command line interface (CLI) enable developers to easily integrate Backblaze B2 into their applications. And, our interoperability with other leading developer-focused cloud platforms allow developers to build on a best-of-breed technology stack without having to choose between access and affordability.

 

   

Efficiently serve the mid-market. Our frictionless go-to-market approach as well as our high-efficiency sales and support models offer a highly compelling solution that positions us to attract, win, and serve mid-market customers at scale.

 

   

Highly performant with a low total cost of ownership. Due to our purpose-built architecture, we provide solutions that are both highly performant and have a low total cost of ownership. We also partner with other leading cloud platforms to reduce or eliminate data transfer fees between our platforms, thereby providing further cost efficiency for customers.

 

   

Strong company culture drives performance and results. Our culture is a cornerstone of our company and provides a unique, enduring competitive advantage. As evidenced by our Glassdoor 4.9/5.0 rating, 100% CEO Approval, and 100% Recommend to a Friend ratings as of December 31, 2020, we have a strongly aligned and engaged workforce with little employee turnover and long tenure.

 

   

In trusted and neutral hands. With approximately 2 exabytes of data storage under management and a 14-year track record, our Storage Cloud has been proven over time and significant use to be a trusted solution for customers. As an independent storage cloud platform, we align with the

 

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interests of our customers and partners. We do not aim to compete with our customers and we do not sell their data. Our long track record and independence, combined with our desire to do business and communicate in an open, transparent manner helps us succeed with our customers and partners.

Our Growth Strategy

Key elements of our growth strategy include:

 

   

Accelerate customer acquisition. A key component of our growth has been fueled by our content engine, free-to-test approach, and self-serve sign-up process. We are accelerating our customer acquisition through increased investments in content creation, thought leadership, social media engagement, search engine optimization, and public relations campaigns with the goal of growing our community and attracting new visitors. Additionally, in recent years we have begun to invest in a sales-assisted selling motion to identify opportunities to increase business with existing customers and to assist larger customers in adopting our services.

 

   

Increase revenue from existing customers. We are investing in increasing revenue from customers by developing additional features and use cases, expanding our Customer Success initiatives, and empowering natural customer data growth. As a result of our efforts to-date, as of June 30, 2021, our revenue per customer has grown 45% since the first quarter of 2019. This revenue expansion potential and the inherent stickiness of our platform is also evidenced by our overall net revenue retention rate of 114% as of December 31, 2020.

 

   

Develop new solutions and use cases. We are focused on developing new solutions and features to deliver additional capabilities to our customers. For example, in 2020, we introduced the S3 Compatible API, and we also launched Object Lock, which offers added protection against some of the most sophisticated ransomware attacks being carried out today. We believe investments such as these will enable new growth opportunities by meaningfully increasing our market penetration as well as growing revenue.

 

   

Expand and deepen partner ecosystem. We will continue to grow the number of our partners and deepen relationships with them on solutions and go-to-market activities to help us jointly succeed. Our developer partners include Cloudflare, Fastly, and Equinix, while alliance partners include Veeam, Synology and QNAP. With the development of the S3 Compatible API, we have significantly expanded our platform’s support for integrations.

 

   

Extend global footprint. We believe continued international expansion represents a meaningful opportunity to generate further demand for our solutions in international geographies. While our sales and marketing efforts have primarily focused on the United States, our existing customer base spans more than 175 countries, with 28% of our revenue originating outside of the United States for the year ended December 31, 2020.

Recent Developments

Set forth below are preliminary estimates of selected unaudited financial and other information for the three months ended September 30, 2021 and actual unaudited financial results and other information for the three months ended September 30, 2020. Our unaudited interim financial statements as of and for the three months ended September 30, 2021 are not yet available and will not be available until after the completion of this offering. The following information reflects our preliminary estimates based on currently available information and is subject to change. We have provided ranges, rather than specific amounts, for the preliminary estimates of


 

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the financial information described below primarily because our financial closing procedures for the three months ended September 30, 2021 are not yet complete and, as a result, our final results upon completion of our closing procedures may vary from the preliminary estimates.

 

     Three Months Ended September 30,  
   2020      2021  
   (in millions, unaudited)  
          Low      High  

B2 Cloud Storage

   $ 3.7      $ 5.7      $ 5.8  

Computer Backup

     9.9        11.1        11.3  

Physical Media

     0.2        0.2        0.2  

Revenue

   $ 13.8      $ 17.0      $ 17.3  

Annual recurring revenue (as of end date of period)

   $ 55      $ 69      $ 71  

Net loss

   $ (1.9    $ (7.5    $ (6.5

Adjusted EBITDA

   $ 2.8      $ 0.3      $ 0.8  

 

   

For the three months ended September 30, 2021, we expect to report revenue in the range of $17.0 million to $17.3 million, representing growth in the range of 23% to 25% compared to the three months ended September 30, 2020. Revenue growth was driven primarily by increased usage of our cloud services, as well as an August 2021 price increase for our Computer Backup offering.

 

   

As of September 30, 2021, we expect to report annual recurring revenue in the range of $69 million to $71 million, representing growth in the range of 25% to 29% compared to September 30, 2020. Annual recurring revenue growth was also driven primarily by increased usage of our cloud services and a price increase. For a definition of annual recurring revenue, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics.”

 

   

For the three months ended September 30, 2021, we expect to report a net loss in the range of $7.5 million to $6.5 million, as compared to a net loss of $1.9 million for the three months ended September 30, 2020. This expected net loss is primarily due to investments in growing our business and costs related to becoming a public company.

The following table reconciles expected net loss to adjusted EBITDA, which is a non-GAAP measure, for the three months ended September 30, 2021, and reconciles actual net income to adjusted EBITDA for the three months ended September 30, 2020:

 

     Three Months Ended September 30,  
     2020      2021  
     (in millions, unaudited)  
            Low      High  

Net loss

   $ (1.9    $ (7.5    $ (6.5

Adjustments:

        

Depreciation and amortization

     3.4        4.1        4.1  

Stock-based compensation

     0.5        1.5        1.4  

Interest expense

     0.8        1.0        1.0  

Income tax provision

                    

Gain on extinguishment of debt

                    

Unrealized loss on SAFE

            1.2        0.8  
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 2.8      $ 0.3      $ 0.8  
  

 

 

    

 

 

    

 

 

 

 

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For more information on adjusted EBITDA, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

The data presented above reflects our preliminary estimates for the three months ended September 30, 2021 based solely upon information available to us as of the date of this prospectus and is not a comprehensive statement of our financial or other results for the three months ended September 30, 2021. This data has been prepared by, and is the responsibility of, our management. Our independent registered public accounting firm, BDO USA, LLP, has not audited, reviewed, compiled or applied agreed-upon procedures with respect to this preliminary financial information. Accordingly, BDO USA, LLP does not express an opinion or any other form of assurance with respect thereto. We currently expect that our final results will be consistent with the estimates set forth above, but such estimates are preliminary and our final results could differ from these estimates due to the completion of our financial closing procedures, final adjustments and other developments that may arise between now and the time such unaudited interim financial statements for the three months ended September 30, 2021 are issued. For example, during the course of the preparation of the respective financial statements and related notes, additional items that would require adjustments to be made to the preliminary estimated financial information presented above may be identified, and those changes could be material. Accordingly, you should not place undue reliance on these preliminary results. There can be no assurance that these estimates will be realized, and estimates are subject to risks and uncertainties, many of which are not within our control. We undertake no obligation to update this information. In addition, these preliminary results are not necessarily indicative of the results that may be reported for the remainder of fiscal 2021 or any future periods. See “Risk Factors,” “Special Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding these risks and uncertainties, including other factors that could cause our preliminary estimates to differ from the actual financial results that we will report for the three months ended September 30, 2021.

Risk Factors Summary

An investment in our Class A common stock involves a high degree of risk. Below is a summary of the principal factors that make an investment in our Class A common stock speculative or risky. Importantly, this summary does not address all of the risks that we face. Our ability to execute our business strategy is subject to numerous risks, as more fully described in the section titled “Risk Factors” immediately following this summary. These risks include, among others:

 

   

We have a history of cumulative losses, and we do not expect to be profitable for the foreseeable future.

 

   

The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results would be harmed.

 

   

Any significant disruption in our service or loss, or delay in availability, of our customers’ data, could damage our reputation and harm our business and operating results.

 

   

If we are unable to maintain our brand and reputation, our business, results of operations, and financial condition may be adversely affected.

 

   

If our information technology systems, including the data of our customers stored in our systems, are breached or subject to cybersecurity attacks, our reputation and business may be harmed.

 

   

If we are unable to attract and retain customers on a cost-effective basis, our revenue and operating results would be adversely affected.


 

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If we are unable to provide successful enhancements, new features, and modifications to our cloud services, our business could be adversely affected.

 

   

Material defects or errors in our software could harm our reputation, result in significant costs to us, and negatively impact our ability to sell our cloud services.

 

   

We rely on third-party vendors and suppliers, including data center and hard drive providers, which may have limited sources of supply, and this reliance exposes us to potential supply and service disruptions that could harm our business.

 

   

Our business depends, in part, on the success of our strategic relationships with third parties.

 

   

We have identified material weaknesses in our internal controls over financial reporting, and the failure to achieve and maintain effective internal controls over financial reporting could harm our business and negatively impact the value of our Class A common stock.

 

   

The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of this offering, including our executive officers, employees, and directors and their affiliates, which will limit your ability to influence the outcome of important transactions, including a change in control.

Corporate Information

We were incorporated in Delaware in April 2007. Our principal executive offices are located at 500 Ben Franklin Ct, San Mateo, CA 94401. Our telephone number is (650) 352-3738. Our website address is https://www.backblaze.com. We have included our website address in this prospectus solely as an inactive textual reference. The inclusion of our website address in this prospectus does not include or incorporate by reference the information on, or accessible through, our website into this prospectus.

Trademarks

Backblaze, the Backblaze logo, and our other registered or common law trademarks appearing in this prospectus are the property of Backblaze, Inc. This prospectus contains references to our trademarks and service marks as well as to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork, and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.

Implications of Being an Emerging Growth Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. We will remain an emerging growth company until the earliest to occur of: (i) the last day of the fiscal year in which we have more than $1.07 billion in annual gross revenue; (ii) the date we qualify as a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, with at least $700 million of equity securities held by non-affiliates; (iii) the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; or (iv) the last day of the fiscal year ending after the fifth anniversary of our initial public offering. As a result of this status, we have taken advantage of certain exemptions from various reporting requirements in this prospectus that are applicable to other publicly-traded

 

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entities that are not emerging growth companies and may elect to take advantage of other exemptions from reporting requirements in our future filings with the Securities Exchange Commission (SEC). In particular, in this prospectus, these exemptions include:

 

   

the option to present only two years of audited financial statements and only two years of Management’s Discussion and Analysis of Financial Condition and Results of Operations;

 

   

not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended (the Sarbanes Oxley Act);

 

   

not being required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency,” and “say-on-golden parachutes;” and

 

   

not being required to disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

As a result, some investors may find our Class A common stock less attractive. The result may be a less active trading market for our common stock, and the price of our Class A common stock may become more volatile.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. Even after we no longer qualify as an emerging growth company, we may qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements including reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements, if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million.

 

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THE OFFERING

 

Issuer

Backblaze, Inc.

 

Shares of Class A common stock we are offering

6,250,000 shares.

 

Underwriters’ option to purchase additional shares

We have granted the underwriters an option for a period of 30 days to purchase up to 937,500 additional shares of our Class A common stock.

 

Shares of Class A common stock to be outstanding immediately after this offering

6,250,000 shares (or 7,187,500 shares if the underwriters exercise their option to purchase additional shares in full).

 

Shares of Class B common stock to be outstanding immediately after this offering

22,295,893 shares.

 

Total shares of Class A common stock and Class B common stock to be outstanding immediately after
this offering

28,545,893 shares.

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $89.5 million, or $103.4 million if the underwriters exercise their option to purchase additional shares in full, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, assuming an initial public offering price of $16.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus.

 

  The principal purposes of this offering are to increase our financial flexibility and create a public market for our Class A common stock, obtain additional working capital, and facilitate our future access to the public equity markets to allow us to implement our business plan. We currently intend to use the net proceeds received by us from this offering for general corporate purposes, including working capital, operating expenses, and sales and marketing expenses to fund the growth of our business, research and development, and capital expenditures. In addition, we may use a portion of the net proceeds to acquire complementary businesses, products, services, or technologies. However, we have no current understandings, agreements, or commitments for any specific acquisitions at this time. For a more complete description of our intended use of the proceeds from this offering, see the section of this prospectus titled “Use of Proceeds.”

 

Voting rights

Each share of our Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally. Each share of our Class B common stock entitles its holder to 10 votes on all matters to be voted on by stockholders generally.

 

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  Holders of our Class A common stock and Class B common stock will generally vote together as a single class, unless otherwise required by law or our Amended and Restated Certificate of Incorporation.

 

  The holders of our outstanding Class B common stock will hold approximately 97% of the voting power of our outstanding capital stock following this offering and will initially have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change in control transaction. For additional information, see the sections of this prospectus titled “Description of Capital Stock.”

 

  All shares of Class B common stock will automatically convert, on a one-for-one basis, into shares of Class A common stock on the earliest of (i) the seven-year anniversary of the closing date of this offering, (ii) the date on which the number of outstanding shares of Class B common stock represents less than 10% of the aggregate combined number of outstanding shares of Class A common stock and Class B common stock, or (iii) the date specified by a vote of the holders of a majority of the then outstanding shares of Class B common stock.

 

Concentration of ownership

Following this offering, the holders of our outstanding Class B common stock will beneficially own 78% of our outstanding capital stock and 97% of the voting power of our outstanding shares and our directors, executive officers, greater than 5% stockholders and their respective affiliates will hold in the aggregate approximately 80% of the voting power of our outstanding capital stock following this offering.

 

Proposed NASDAQ Global Market trading symbol

“BLZE”

 

Directed share program

At our request, the underwriters have reserved up to 312,500 shares of Class A common stock, or up to 5% of the shares offered by this prospectus, for sale at the initial public offering price through a directed share program to certain of our business partners and qualifying customers who are located in the United States. Fidelity Capital Markets, a division of National Financial Services LLC, will administer our directed share program. The number of shares of our Class A common stock available for sale to the general public in this offering will be reduced to the extent that such partners and qualifying customers purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of Class A common stock offered by this prospectus. Participants in the directed share program will not be subject to lockup or market standoff restrictions with the underwriters or with us with respect to any shares purchased through the directed share program. For additional information, see the section titled “Underwriting.”

 

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The number of shares of our Class A common stock and Class B common stock that will be outstanding after this offering is based on 22,295,893 shares of our Class B common stock outstanding as of June 30, 2021 (including our convertible preferred stock on an as-converted basis), and this amount excludes:

 

   

13,230,932 shares of our Class B common stock issuable upon the exercise of options outstanding as of June 30, 2021 under our 2011 Stock Plan (2011 Plan), with a weighted-average exercise price of approximately $3.02 per share;

 

   

654,840 shares of our Class B common stock issuable upon the exercise of options granted under our 2011 Plan after June 30, 2021 with an exercise price of $10.06 per share;

 

   

727,371 shares of our Class A common stock issuable upon the conversion of our convertible notes (which we also refer to as a Simple Agreement for Future Equity agreement (SAFE)) issued in a private placement to investors in August 2021 (based on an assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus);

 

   

522,349 shares of our Class B common stock reserved for issuance under our 2011 Plan as of June 30, 2021, which will become available for issuance under our 2021 Equity Incentive Plan (2021 Plan) on the date of this prospectus;

 

   

5,262,500 shares of our Class A common stock reserved for future issuance under our 2021 Plan, which will become effective upon the effectiveness of the registration statement of which this prospectus forms a part, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan; and

 

   

956,800 shares of our Class A common stock reserved for issuance under our 2021 Employee Stock Purchase Plan (2021 ESPP), which will become effective upon the effectiveness of the registration statement of which this prospectus forms a part, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan.

On the date of this prospectus we will cease granting awards under our 2011 Plan. Our 2021 Plan and 2021 ESPP also provide for automatic annual increases in the number of shares reserved thereunder (evergreen provisions), as more fully described in “Executive Compensation—2021 Equity Incentive Plan” and “Executive Compensation—2021 Employee Stock Purchase Plan.”

Except as otherwise indicated, all information in this prospectus assumes or gives effect to the following:

 

   

the filing of our Amended and Restated Certificate of Incorporation in Delaware and the adoption of our Amended and Restated Bylaws, each of which will occur immediately prior to the completion of this offering;

 

   

the reclassification of all outstanding shares of our common stock into an equivalent number of shares of our Class B common stock, as if such reclassification had occurred prior to the completion of this offering;

 

   

the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 3,359,195 shares of our Class B common stock, the conversion of which will occur immediately prior to the completion of this offering;


 

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the automatic conversion of convertible notes (which we also refer to as a Simple Agreement for Future Equity agreement (SAFE)) into 727,371 shares of Class A common stock (based on an assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus);

 

   

the effectiveness of a 3.6-for-1 stock split of our common stock effected on October 29, 2021; and

 

   

no exercise by the underwriters of their option to purchase up to an additional 937,500 shares of our Class A common stock.

 

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SUMMARY FINANCIAL DATA

The following tables set forth a summary of our historical financial data as of, and for the years ended on, the dates indicated. The statements of operations data for the fiscal years ended December 31, 2019 and 2020 are derived from our audited financial statements and related notes included elsewhere in this prospectus. The statements of operations data for the six months ended June 30, 2020 and 2021 and balance sheet data as of June 30, 2021 are derived from our unaudited financial statements and related notes included elsewhere in this prospectus. The unaudited financial data set forth below have been prepared on the same basis as our audited financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair statement of such data. You should read this data together with our financial statements and related notes appearing elsewhere in this prospectus and the information in the sections titled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of the results to be expected in the future.

 

    

For the Year Ended December 31,

   

For the Six Months Ended June 30,

 
    

2019

   

2020

   

2020

   

2021

 
                 (unaudited)  
     (in thousands, except share and per share data)    

Revenue

   $ 40,748     $ 53,784     $ 25,379     $ 31,462  

Cost of revenue(1)

     20,127       25,801       11,678       15,756  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     20,621       27,983       13,701       15,706  

Operating expenses:

        

Research and development(1)

     8,436       13,069       5,832       8,976  

Sales and marketing(1)

     8,166       11,924       5,423       8,124  

General and administrative(1)

     3,070       6,722       2,638       5,157  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     19,672       31,715       13,893       22,257  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     949       (3,732     (192     (6,551

Interest expense

     (1,929     (2,886     (1,153     (1,718

Gain on extinguishment of debt

     —         —         —         2,299  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (980     (6,618     (1,345     (5,970

Income tax provision

     (16     (5           (136
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (996)     $ (6,623   $ (1,345   $ (6,106
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (0.05)     $ (0.36   $ (0.07   $ (0.33
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing net
loss per share, basic and diluted

     18,596,772       18,609,422       18,603,922       18,691,938  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share, basic and diluted (unaudited)(2)

     $ (0.30     $ (0.28
    

 

 

     

 

 

 

Weighted-average shares outstanding used in computing pro forma net loss per share, basic and diluted (unaudited)(2)

       21,968,618         22,051,134  
    

 

 

     

 

 

 

 

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(1)

Includes stock-based compensation expense as follows:

 

    

For the Year Ended

December 31,

    

For the Six
Months Ended
June 30,

 
    

2019

    

2020

    

2020

    

2021

 
                   (unaudited)  
    

(in thousands)

 

Cost of revenue

   $ 130      $ 100      $ 23      $ 194  

Research and development

     549        750        341        911  

Sales and marketing

     546        670        249        568  

General and administrative

     162        359        130        490  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,387      $ 1,879      $ 743      $ 2,163  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)

Unaudited pro forma basic and diluted net loss per share were computed to give effect to the automatic conversion of all outstanding shares of convertible preferred stock into shares of common stock in connection with a qualified initial public offering, using the as-converted method as though the conversion had occurred as of the beginning of the period presented or the date of issuance, if later.

 

   

As of June 30, 2021

 
   

Actual

   

Pro Forma(1)

   

Pro Forma
As Adjusted(2)(3)

 
          (unaudited)        
    (in thousands)  

Balance Sheet Data

     

Cash and cash equivalents

  $ 1,306     $ 1,306     $ 100,786  

Total assets

    51,952       51,952       151,432  

Capital lease liability and lease financing obligation, non-current

    16,482       16,482       16,482  

Convertible preferred stock

    2,784       —         —    

Accumulated deficit

    (20,745     (20,745     (22,383

Total stockholders’ (deficit) equity

    (10,521     (7,737     91,743  

 

(1)

The pro forma balance sheet data gives effect to the conversion of all outstanding shares of our convertible preferred stock at June 30, 2021 into an aggregate of 3,359,195 shares of Class B common stock, which will occur immediately prior to the completion of this offering and the filing and effectiveness of our Amended and Restated Certificate of Incorporation.

(2)

Reflects the pro forma adjustments described in footnote (1) above and to the issuance and sale of 6,250,000 shares of Class A common stock in this offering at the assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and giving effect to the issuance of convertible notes in August 2021 in the amount of $10.0 million and the automatic conversion of convertible notes (which we also refer to as a Simple Agreement for Future Equity agreement (SAFE)) into 727,371 shares of Class A common stock (based on an assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus).

(3)

Each $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, total assets, and total stockholders’ (deficit) equity by approximately $5.8 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares offered by us at the assumed initial public offering price after deducting estimated underwriting discounts and commissions would increase (decrease) each of cash and cash equivalents, total assets, and total stockholders’ (deficit) equity by approximately $14.9 million. The pro forma information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of our initial public offering determined at pricing.


 

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RISK FACTORS

Investing in our Class A common stock is speculative and involves a high degree of risk. Before investing in our Class A common stock, you should consider carefully the risks described below, together with the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus. If any of the following risks occur, our business, financial condition, results of operations, and future growth prospects could be materially and adversely affected. In these circumstances, the market price of our Class A common stock could decline, and you may lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including the risks described below. See “Information Regarding Forward-Looking Statements.”

Risks Related to Our Business and Our Industry

We have a history of cumulative losses, and we do not expect to be profitable for the foreseeable future.

We incurred net losses of $1.0 million and $6.6 million for the years ended December 31, 2019 and 2020. Over our 14 years of operations, we had an accumulated deficit of $20.7 million as of June 30, 2021. We cannot guarantee that we will continue operating our business similar to past performance. We intend to continue scaling our business to increase our customer base and to meet the increasingly complex needs of our customers. We have invested, and expect to continue to invest, in our sales and marketing organization to sell our cloud services around the world and in our development organization to deliver additional features and capabilities of our cloud services to address our customers’ evolving needs. We also expect to continue to make significant investments in our data center infrastructure and technical operations organization as we further scale our business. As a result of our continuing investments to scale our business in each of these areas, we do not expect to be profitable for the foreseeable future. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will sustain profitability.

The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results would be harmed.

The markets in which we operate are highly competitive, with relatively low barriers to entry for certain applications and services. Some of our competitors include cloud-based services such as those offered by Amazon.com, Inc. through Amazon Web Services, Alphabet Inc. through Google Cloud Platform, and Microsoft Corporation through Azure, and on-premises offerings such as those offered by EMC/Dell and NetApp. Many of our competitors and potential competitors are larger and have greater name and brand recognition; much longer operating histories; larger marketing budgets for the development, promotion and sale of their products or services; broader service offerings and capabilities; and significantly greater resources than we do. In addition, many of our competitors have established marketing and distribution relationships with channel partners, consultants, system integrators, and resellers. Our competitors may also be able to respond more quickly and effectively to new or changing opportunities, technologies, standards, or customer requirements. Competition may intensify in the future and may also include new market entrants. Our competitors could offer their products or services at a lower price or in some combination with other services or applications that we do not offer, which could result in pricing pressures on our business. Increased competition generally could result in reduced sales, lower margins, losses, or the failure of our cloud services to achieve or maintain widespread market acceptance, any of which could harm our business.

Any significant disruption in our service or loss, or delay in availability of our customers’ data, could damage our reputation and harm our business and operating results.

Our brand, reputation, and ability to manage our systems; attract, retain, and serve our customers; and interface with our partners, are dependent upon the reliable performance of our platform, including our underlying technical infrastructure, as well as the systems and infrastructure of various third parties, including third-party hosted data centers that we use and internet access and infrastructure used by us and our customers

 

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and partners. Our customers rely on our platform to store and access their data, including financial records, business information, personal information, documents, media, and other important content. There are various reasons that our platform, or the systems that are used to access or support our platform, could experience a disruption in service, some of which are entirely outside of our control. For example, our facilities as well as the data centers that we use are vulnerable to damage or interruption from human error, intentional bad acts, earthquakes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures, and similar events, any of which could disrupt our service, destroy user content, or prevent us from being able to continuously back up or record changes in our users’ content. If any of these events occur, customer data could be lost and it may take a significant period of time to achieve full resumption of our cloud services. Our disaster recovery planning cannot account for all eventualities and even if we anticipate an incident, our disaster recovery plans may not be sufficient to timely and effectively address the issue. Moreover, our platform and technical infrastructure may not be adequately designed with sufficient reliability and redundancy to avoid delays or outages that could be harmful to our business. If our platform is unavailable when users attempt to access it, or if it does not load as quickly as they expect, or if data is lost, users may not use our platform as often in the future, or at all.

If we are unable to maintain our brand and reputation, our business, results of operations, and financial condition may be adversely affected.

The successful promotion of our brand and our ability to maintain our reputation will depend on a number of factors, including our performance and the reliability of our cloud services; our advertising and marketing efforts, including our blog and social media presence, which have been important to building and maintaining our brand and reputation; our ability to continue to develop high-quality features and cloud services; and our ability to successfully differentiate our cloud services from competitive products and services. Our brand promotion activities may not be successful or yield increased revenue.

The promotion of our brand may require us to make substantial expenditures, particularly as our markets become more competitive and we expand into new markets or offer additional features. Expenditures intended to maintain and enhance our brand may not be cost-effective or effective at all. If we do not successfully maintain and enhance our brand, we may have reduced pricing power relative to our competitors, we could lose customers, we could fail to attract potential new customers or retain our existing customers, or our blog and thought leadership in our industry may decline in popularity, all of which could materially and adversely affect our business.

If our information technology systems, including the data of our customers stored in our systems, are breached or subject to cybersecurity attacks, our reputation and business may be harmed.

Our customers rely on our solutions to store their files, which may include confidential or personally identifiable information, critical business information, photos, and other meaningful content. To manage and maintain such data, we are highly dependent on internal and external information technology systems and infrastructure, including the internet, to securely process, transmit, and store critical information. Although we take measures to protect sensitive information from unauthorized access or disclosure, third parties may be able to circumvent our security by deploying viruses, worms, and other malicious software programs that are designed to attack or attempt to infiltrate our systems and networks, including distributed denial of service (DDoS) attacks that can undermine the availability and performance of our systems and cloud services, or phishing attacks that can be used to fraudulently steal data. Moreover, cybersecurity attacks evolve rapidly and may utilize new methods not recognized. We may be unable to successfully identify, stop, or resolve such attacks, or implement adequate preventative measures. In addition, employee or consultant error, malfeasance, or other errors in the storage, use, or transmission of customer data could result in a breach. For example, in late March 2021, it was discovered that a Backblaze marketing campaign leveraging the Facebook ad network, which had been launched two weeks earlier, had been incorrectly configured to run on all Backblaze platform pages instead of only the Backblaze marketing pages as intended. Once we became aware of the issue, it was promptly resolved. Although we believe that less than 2% of Backblaze customers may have been affected, and no actual customer files, file contents, or user account information were shared at any time, certain file metadata may have been inadvertently

 

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shared with Facebook. Even if a breach is detected, the full extent of the breach may not be determined immediately, or at all. While we maintain insurance coverage to mitigate the potential financial impact of these risks, our insurance may not cover all such events or may be insufficient to compensate us for potentially significant losses, including the potential damage to the future growth of our business, that may result from any such breach. In addition, our business utilizes information technology systems of our partners and vendors, who are also subject to similar cybersecurity risks that could adversely impact the security of our systems and business. We may have little or no control over how cybersecurity attacks on our partners or vendors are addressed. An actual or perceived breach of our network security and systems or other cybersecurity-related events that cause the loss, theft or unauthorized disclosure of our customers’ information, including any delay in determining the full extent of a potential breach, could have a material adverse impact on our business, results of operations, and financial condition, including harm to our reputation and brand, reduced demand for our solutions, time-consuming and expensive litigation, fines, penalties, and other damages.

If we are unable to attract and retain customers on a cost-effective basis, our revenue and operating results would be adversely affected.

We generate substantially all of our revenue from the sale of our cloud services either on a consumption or subscription model. To grow, we must continue to attract a large number of customers on a cost-effective basis. We have historically used, and plan to increase our use of, a variety of advertising and marketing programs to promote our cloud services. These programs, including any expansion of existing programs and new programs to promote our cloud services, may not be successful or provide a reasonable return on investment within a desired timeframe. Significant increases in the pricing of one or more of our advertising channels would increase our advertising and marketing costs or cause us to choose less expensive and perhaps less effective channels. We may also need to expand into channels with significantly higher costs, which could adversely affect our operating results. We may also incur advertising and marketing expenses significantly in advance of the time we anticipate recognizing any revenue generated by such expenses, and we may only at a later date, or never, experience an increase in revenue or brand awareness as a result of such expenditures. If we are unable to maintain effective advertising and marketing programs, our ability to attract new customers could be adversely affected, our advertising and marketing expenses could increase substantially, and our operating results may suffer.

A portion of our potential customers locate our website through search engines, such as Google, Bing, and Yahoo!. Our ability to maintain the number of visitors directed to our website is not entirely within our control. If search engine companies modify their search algorithms in a manner that reduces the prominence of our listing, or if our competitors’ search engine optimization efforts are more successful than ours, fewer potential customers may click through to our website. In addition, the cost of purchased listings has increased in the past and may increase in the future. A decrease in website traffic or an increase in promoted search result costs could adversely affect our customer acquisition efforts and our operating results. In addition, we also rely on our blog and word of mouth to drive additional customers. To the extent our blog does not continue to attract readers or if our reputation is harmed, these additional means of attracting customers may no longer provide significant numbers of customers in the future.

In addition, because we offer our Computer Backup cloud service at a fixed price, the amount of data our customers back up affects our costs and gross margins. To the extent current or future customers back up unusually large amounts of data, or growth in the amount of data backed up per customer outpaces decreases in storage costs, our costs and gross margins could be adversely affected.

If we are unable to provide successful enhancements, new features, and modifications to our cloud services, our business could be adversely affected.

Our industry is marked by rapid technological developments and new and enhanced applications and cloud services. If we are unable to provide enhancements and new features for our existing services or new services that achieve market acceptance or that keep pace with rapid technological developments, our business could be adversely affected. In addition, because our cloud services are designed to operate on a variety of

 

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systems, we will need to continuously modify and enhance our cloud services to keep pace with changes in internet-related hardware, operating systems, and other software, communication, browser, and database technologies, including the systems of our partners, vendors, and competitors. We may not be successful in either developing these modifications and enhancements or in bringing them to market in a timely fashion. For example, we may not be successful in launching our cloud replication feature in the timeframe we anticipate. Any failure of our cloud services to operate effectively and on a timely basis with network platforms and technologies could reduce the demand for our cloud services, result in customer dissatisfaction and adversely affect our business. Furthermore, future enhancements may increase our research and development expenses and infrastructure costs, which could adversely impact our pricing advantage, undermine our ease of use, make it more difficult to attract and retain customers, and harm our results of operations.

Material defects or errors in our software could harm our reputation, result in significant costs to us, and negatively impact our ability to sell our cloud services.

The software underlying our cloud services is inherently complex and may contain material defects or errors, particularly when first introduced or when new versions or enhancements are released. We have from time to time found defects or errors in our cloud services, and new defects or errors in our existing solutions may be detected in the future by us, our customers or partners, or other third parties. The costs incurred in correcting such defects or errors may be substantial and could harm our operating results. Backblaze employees could also introduce defects or errors through incompetence, malfeasance, or a mistake that would lead to data loss. For example, to the extent that the encryption keys for encrypted customer data stored by Backblaze were to be deleted or corrupted, the data could become unrecoverable. In addition, we rely on hardware purchased or leased and software licensed from third parties to offer our cloud services. Any defects in, or unavailability of, our software that cause interruptions to the availability of our cloud services could, among other things:

 

   

require us to issue refunds to our customers or expose us to claims for damages,

 

   

cause us to lose existing customers and make it more difficult to attract new customers,

 

   

divert our development resources or require us to make extensive changes to our cloud services or software, and

 

   

harm our reputation and brand.

If we fail to effectively manage our growth, our business would be harmed.

We have recently experienced, and continue to experience, a period of rapid growth. For example, our headcount grew from 82 employees as of December 31, 2018, to 126 employees as of December 31, 2019, to 188 employees as of December 31, 2020 and to 228 employees as of June 30, 2021. Also, in just the last two years the amount of storage deployed by us has more than doubled. The number of customers and customer requests on our network has also increased rapidly in recent years. While we expect to continue to expand our operations and to increase our headcount, network, and product offerings significantly in the future, our growth may not be sustainable. Our growth has placed, and future growth will continue to place, a significant strain on our management, corporate culture, quality of our cloud services, and administrative, operational, security, and financial infrastructure. Our success will depend in part on our ability to manage this growth effectively, which will require that we, among other things, continue to improve our administrative, operational, financial, and management systems and controls.

Our business depends on our ability to retain and increase revenue from customers, and if we are unable to do so, our revenue and operating results would be adversely affected.

It is important for our business that our customers continue to use, and even increase their use of, our cloud services. Many of our customers can terminate their use of our cloud services at will with little-to-no advance notice. Even though some of our customers enter into longer-term agreements of up to two years, they generally have no obligation to renew their subscriptions or increase usage. Due to our varied customer base and

 

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lack of long-term customer and usage commitments, it can be difficult to accurately predict our customer retention rate on a quarterly basis or long-term basis. Our customer retention and the amount of data that they store with us may decline or fluctuate as a result of a number of factors, including potential customer dissatisfaction with our cloud services and offerings; pricing plans; our customers’ own business conditions; customer decisions to delete unneeded or redundant data; the perception, whether or not accurate, that competitive products provide better options; changes in our brand or reputation; and overall general economic conditions. Our future financial performance also depends in part on our ability to continue to increase revenue from our customers through additional paid products, such as Extended Version History and multi-region selection. Our customers’ decision whether to opt for additional paid products is driven by a number of factors. If our customers do not perceive the value in such additional paid offerings, we may not realize the anticipated benefits of our investments in such additional features, and our financial results could be harmed. If we cannot successfully retain our existing customers and add new customers consistent with historical rates, including maintaining or growing the amount of data that our customers store with us, our revenue and ability to grow may be adversely affected.

To the extent we target different types of customers, we may face increased demands and challenges that adversely impact our business and operations.

Historically, most of our customers consisted of small-to-medium sized businesses and individuals. To the extent we target other types of customers or customers with different needs, we may face greater demand for certain service enhancements or features that we do not currently offer, or additional performance, availability, durability, and security requirements. Certain types of customers may also have longer sales cycles, less predictability or higher volatility in the amount of data they store with us, increased pricing or negotiation leverage, and increased customer education and overall customer engagement needs. In addition, some customers may demand more customization, integration, and support services. Any of these factors could require us to devote greater sales, engineering, operations, and support services as well as make significant infrastructure changes, which could increase our costs, divert key resources from other current and prospective customers, and otherwise adversely affect our business and operating results. These increased demands and challenges may also be for the benefit of a limited number of customers. Moreover, we cannot assure you that any such efforts will be successful or justify the additional investments in a timely manner, or at all.    

The material stored using our cloud services may subject us to negative publicity, legal liability, and harm our business.

We are not aware of the contents of the data that customers store using our cloud services. While we do have a detailed process to address any third-party complaint regarding illegal or other inappropriate use of our cloud services by a customer that would violate our terms of service, we do not actively monitor the content of data that is being stored with us. To the extent that sensitive, personally identifiable, illegal, or controversial data is stored in our servers and that becomes known publicly, particularly given the highly volatile nature of the political landscape throughout the world and immediate access by individuals to social media platforms with a broad outreach, it may create negative publicity and adversely impact our reputation and harm our business.    

Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.

Our quarterly results of operations may vary significantly in the future. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Our quarterly results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control, and as a result may not fully reflect the underlying performance of our business. Fluctuation in quarterly results may negatively impact the trading price of our Class A common stock. Factors that may cause fluctuations in our quarterly results of operations include, without limitation:

 

   

our ability to attract new customers;

 

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the amount of customer churn;

 

   

fluctuations in the amount of data customers store with us;

 

   

the amount and timing of operating expenses and equipment purchases related to the maintenance and expansion of our business;

 

   

interruptions or loss of service of our offerings;

 

   

the timing and success of new product feature and service introductions by us or our competitors;

 

   

our ability to retain and increase revenue from customers;

 

   

the timing of expenses and recognition of revenue;

 

   

the impact of COVID-19 or other pandemics on our business or that of our customers and partners;

 

   

changes in the competitive dynamics of our industry, including consolidation among competitors;

 

   

security breaches of our systems;

 

   

our involvement in litigation, or the threat thereof;

 

   

the length of the sales cycle;

 

   

seasonal fluctuations;

 

   

the timing of expenses and receipt of perceived benefits related to any acquisitions;

 

   

changes in laws and regulations that impact our business; and

 

   

general economic and market conditions.

Further, as we continue to grow and scale our business to meet the needs of our customers, we may overestimate or underestimate our infrastructure capacity requirements, which could adversely affect our results of operations. The costs associated with leasing and maintaining our custom-built infrastructure in co-location facilities and third-party data centers already constitute a significant portion of our capital and operating expenses. We continuously evaluate our short and long-term infrastructure capacity requirements and seek to ensure adequate capacity for new and existing users while minimizing unnecessary excess capacity costs. However, we may not be able to sufficiently predict future demand, or the availability of hardware or infrastructure necessary to support increased demand on a timely basis. If we overestimate the demand for our platform and therefore secure excess infrastructure capacity or equipment, our gross margins could be reduced. If we underestimate our infrastructure capacity requirements or availability of necessary hardware or infrastructure, we may not be able to service the needs of new and existing customers; durability, reliability, and performance could suffer; our costs could rise; and our business could be harmed.

We rely on the performance of key personnel, including our management and other key employees, and the loss of one or more of such personnel, or of a significant number of our team members, could harm our business.

We believe our success has depended, and continues to depend, on the efforts and talents of senior management, including our founders and other key personnel. All of our employees, including our senior

 

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management, are employed on an at-will basis. Furthermore, our founders and other key personnel hold shares or equity awards that are largely vested, and as result, they may not be incentivized to remain with our company once there is a trading market for our Class A common stock. We cannot ensure that we will be able to retain the services of any member of our senior management or other key employees or that we would be able to timely replace members of our senior management or other key employees should any of them depart. The loss of one or more members of our senior management or other key employees could harm our business.

The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy.

To execute our business strategy, we must attract and retain highly qualified personnel. Competition for executive officers, software developers, sales personnel, operational personnel, and other key employees in our industry is intense. In particular, we compete with many other companies for software developers with high levels of experience in designing, developing, and managing cloud-based software, as well as for skilled sales and operations professionals. In addition, we believe that the success of our business and corporate culture depends on employing a diverse workforce, and the competition for such personnel is significant. The market for such talented personnel is particularly competitive in the San Francisco Bay Area, where our headquarters is located. Many of the companies with which we compete for experienced personnel have greater resources than we do and can frequently offer such personnel substantially greater compensation than we can offer. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business would be harmed.

Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity, and teamwork fostered by our culture, and our business may be harmed.

We have a culture that encourages employees to be open, collaborate, strive to do the right thing, and develop and launch new and innovative solutions, which we believe is essential to attracting customers and partners and serving the best, long-term interests of our company. As our business grows and becomes more complex, and as we become a public company, it may become more difficult to maintain this cultural emphasis. Any failure to preserve our culture could negatively affect our ability to retain and recruit personnel, which is critical to our growth, and to effectively focus on and pursue our strategies. If we fail to maintain our company culture, our business and competitive position may be harmed.

As we expand our operations outside the United States, we may be subject to increased business, regulatory and economic risks that could impact our results of operations.

In 2020, we derived approximately 28% of our revenue from customers outside of the United States. We may also expand our international operations, which may include hiring employees, building out technical infrastructure, and opening offices in foreign jurisdictions. Any new markets or countries into which we attempt to market and sell our cloud services may not be receptive. For example, we may be unable to expand further in some markets if we are unable to satisfy various government- and region-specific requirements. In addition, our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to the particular challenges and complexities of deploying infrastructure internationally and supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal and regulatory systems, alternative dispute systems, and commercial markets. International expansion has required, and will continue to require, investment of significant funds and other resources. Growth in our international operations will subject us to new risks and may increase risks that we currently face, including risks associated with:

 

   

higher costs of doing business internationally, including increased infrastructure, accounting, travel, and legal compliance costs;

 

   

providing our platform, building out the necessary infrastructure and operating our business across a significant distance, in different languages and among different cultures, including the potential

 

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need to modify our platform and features to ensure that they are culturally appropriate and relevant in different countries;

 

   

compliance with applicable international laws and regulations, including laws and regulations with respect to privacy, data protection, consumer protection, and unsolicited email, and the risk of penalties to our users and individual members of management or employees if our practices are deemed to be out of compliance;

 

   

recruiting and retaining talented and capable employees outside the United States, and maintaining our company culture across all of our offices;

 

   

management of an employee base in jurisdictions that may not give us the same employment and retention flexibility as does the United States;

 

   

operating in jurisdictions that do not protect intellectual property rights to the same extent as does the United States;

 

   

compliance by us and our business partners with anti-corruption laws, anti-bribery, anti-money laundering, and similar laws; import and export control laws; tariffs and trade barriers; economic sanctions; and other regulatory limitations on our ability to provide our cloud services in international markets;

 

   

foreign exchange controls that might require significant lead time in setting up operations in certain geographic territories;

 

   

restrictions that might prevent us from repatriating cash earned outside the United States;

 

   

double taxation of our international earnings and potentially adverse tax consequences due to changes in the income and other tax laws of the United States or the international jurisdictions in which we operate; and

 

   

political and economic instability in various jurisdictions.

Expanding our international operations and complying with applicable foreign laws and regulations may substantially increase our cost of doing business in international jurisdictions. We may also be unable to keep current with changes in laws and regulations as they develop, and we or our employees, contractors, partners, and agents may fail to maintain compliance with applicable laws and regulations. Any violations could result in enforcement actions, fines, civil and criminal penalties, damages, injunctions, or reputational harm. If we are unable to comply with these laws and regulations or manage the complexity of our global operations successfully, our business, results of operations, and financial condition could be adversely affected.

We store personal information and other customer data, which subjects us to various data privacy laws, governmental regulations, and other related legal obligations, and any actual or perceived failure to comply with such requirements could harm our business.

We store personal information and other customer data, as well as use certain cookies on our website, that are subject to numerous federal, state, local, and foreign laws regarding privacy and the storing and protection of personal information and other customer data, and disclosure requirements regarding the use and certain breaches of such laws. For example, we are subject to the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA), among other laws and regulations around the world. Other comprehensive data privacy or data protection laws or regulations requiring local data residency and/or restricting the international transfer of data have been passed or are under consideration in other jurisdictions. In

 

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addition, some industries have industry-specific requirements relating to compliance with certain security and regulatory standards, such as those required by the Health Insurance Portability and Accountability Act (HIPAA). For example, HIPAA imposes privacy, security, and breach reporting obligations with respect to individually identifiable health information upon “covered entities” (e.g., health plans, health care clearinghouses, and certain health care providers), and their respective business associates, individuals, or entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. Such laws give rise to an increasingly complex set of compliance obligations on us regarding our ability to gather, use, and store customer data and customer account data.

These laws are subject to rapid change, differing interpretations, and can be inconsistent among regulatory frameworks or conflict with other rules or our business practices. We strive to comply with all applicable laws, policies, legal obligations, and industry codes of conduct relating to privacy and data protection to the extent possible. Our efforts to comply with the complex matrix of data privacy laws around the world subjects us to increasing costs to review and comply with such laws, including updating our policies, procedures, and business practices to address such evolving privacy laws. We also make public statements and commitments regarding our use and disclosure of personal information through our privacy policy, information provided on our website, and data processing agreements with customers and other third parties. Because the interpretation and application of data protection laws, regulations, standards, and other obligations are often uncertain and in flux, and sometimes contradictory, it is possible that the scope and requirements of these laws and other obligations may be interpreted and applied in a manner that is inconsistent with our practices, and our efforts to comply with rapidly evolving data protection laws and obligations may be unsuccessful. For example, we previously relied on the EU-US Privacy Shield framework, which was invalidated by a European court in July 2020. As a result of such a decision, we have had to take additional steps to comply with applicable EU data protection requirements, including implementation of standard contractual clauses.

Any failure, or perceived failure, by us to comply with applicable privacy and security laws, policies, or related contractual obligations, or any compromise of security that results in unauthorized access, or the use or transmission of personal information or other customer data, could result in a variety of claims against us, including governmental enforcement actions and investigations, audits, inquiries, whistleblower complaints, class action privacy litigation in certain jurisdictions, and proceedings by data protection authorities. For example, under the GDPR we may be subject to fines of up to €20 million or up to 4% of the total worldwide annual group turnover of the preceding financial year, as well as potentially face claims from individuals. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. Any non-compliance with data privacy requirements could subject us to significant fines and penalties, adverse media coverage, reputational damage, the loss of current and potential customers, loss of export privileges, or criminal or other civil sanctions, any of which could materially adversely affect our business and financial condition.

The ongoing COVID-19 pandemic, and resulting global economic downturn, has impacted how we, our customers, and our partners are operating, and could result in a material adverse effect on our business.

The ongoing COVID-19 pandemic, and measures taken to control its spread such as travel restrictions, shelter-in-place orders, and business shutdowns, have affected all of the regions in which we conduct business and in which our customers, partners, and suppliers are located; have adversely impacted global economic activity; and have contributed to volatility in financial markets. As the situation around the spread of the COVID-19 pandemic evolves, we have continued to operate in a modified manner—employing precautionary measures designed to protect the health of our employees while enabling us to support our customers and partners. Among other modifications, we generally required our employees to work remotely; instituted business-related travel restrictions; and virtualized, postponed, or cancelled various sales and marketing, employee, and industry events. The remote work measures that we implemented have generally allowed us to provide uninterrupted service to our customers and partners, but have also introduced additional challenges and

 

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operational risks, including increased supply chain risks and cybersecurity risks, and have affected the way we conduct various other activities. For example, starting in April 2020, we began to acquire additional hard drives and related infrastructure through capital lease agreements in order to minimize the impact of potential supply chain disruptions. The additional leased hard drives resulted in a higher balance of capital equipment and related lease liability, an increase in cash used in financing activities from principal payments, as well as a higher ongoing interest and depreciation expense related to these lease agreements. The supply chain for other infrastructure and related equipment essential to our business may also become constrained or unavailable on favorable terms or at all.

The COVID-19 pandemic has been challenging and a hardship on many of our employees, and required us to operate under substantially novel constraints. The pandemic has resulted in various inefficiencies, delays, and additional costs across our company, which may continue or worsen as the pandemic continues. In addition, work from home and related business practice modifications present significant challenges to maintaining our corporate culture, including employee engagement and productivity, both during the immediate pandemic crisis and as we make additional adjustments in the eventual transition from it.

The duration and severity of the COVID-19 pandemic, including variants of COVID-19 that may be more transmissible, more likely to result in severe illness or death, or less susceptible to treatments or protection from existing vaccines, and the degree of its impact on our business remains uncertain and difficult to predict. Our customers or partners could experience downturns or uncertainty in their own business operations or revenue due to COVID-19, which may result in decreased revenue for our business, especially as it may disproportionally adversely affect mid-market businesses on which we are especially dependent. As a result, we may experience customer losses due to customer bankruptcy or cessation of operations, or otherwise.

If the COVID-19 pandemic worsens or is prolonged, especially in regions where we have material operations or sales, our business operations in affected areas, including sales-related and customer support activities, could be adversely affected by continued or additional business closures, travel restrictions impacting employees and partners, and other precautionary measures. While we have developed and continue to develop plans to help mitigate the negative impact of the pandemic on our business, these efforts may not be effective and a protracted economic downturn may limit the effectiveness of our mitigation efforts. The COVID-19 pandemic may also have the effect of heightening many of the other risks described in this “Risk Factors” section.

Our business is substantially dependent on mid-market organizations, which may be more vulnerable to market fluctuations and other economic factors, and their vulnerability to such factors could negatively impact our business.

If we are unable to successfully market and sell our cloud services to mid-market organizations, our ability to grow our revenue and achieve profitability will be harmed. We expect it will be more difficult and expensive to attract and retain mid-market organization customers than other customers because mid-market organizations are more frequently forced to curtail or cease operations due to the sale or failure of their business; can be more difficult to identify and may require more expensive, targeted sales campaigns; and generally have lesser amounts of data to store than larger organizations, thus requiring us to successfully sell to and support more mid-market organizations for meaningful revenue impact. In addition, mid-market organizations frequently have limited budgets and are more likely to be significantly affected by economic downturns than larger, more established companies. As a result, mid-market organizations may choose to spend funds on items other than our cloud services, particularly during difficult economic times. If we do not achieve continued success among mid-market organizations, our business, operating results, and future growth would be adversely affected.

We are dependent on a small number of service offerings, and any reduced market adoption of these offerings would result in lower revenue and harm our business.

As a pure-play cloud vendor, we are dependent on a small number of offerings focused on cloud storage and computer backup, and a limited number of corresponding use cases. Our B2 Cloud Storage and Computer

 

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Backup offerings have accounted for substantially all of our total revenue to date and we anticipate that they will continue to do so for the foreseeable future. As a result, our revenue could be reduced as a result of any general or industry decline in demand for cloud-based storage solutions, particularly given that we would not have meaningful revenue from other market sectors to offset any temporary or longer-term downturn in demand for cloud-based storage solutions.

Adverse economic conditions may adversely impact our revenue and profitability.

Our operations and financial performance depend in part on worldwide economic conditions and the impact these conditions have on levels of spending on cloud storage solutions. Our business depends on the overall demand for these products and on the economic health and general willingness of our current and prospective customers to purchase our cloud services. Some of our paying customers may view use of cloud storage services as a discretionary purchase and may reduce their discretionary spending on our cloud services during an economic downturn. Weak economic conditions, whether due to COVID-19 or other factors, could cause a reduction in spending on products and solutions storage, which could reduce sales, lengthen sales cycles, increase customer churn, and lower demand for our cloud services, any of which could adversely affect our business, results of operations, and financial condition.

Our ability to maintain customer adoption and satisfaction depends in part on the ease of use of our cloud services, and any such failure could have an adverse effect on our business.

Our success in retaining existing customers and obtaining new customers is dependent in part on the ease of use of our cloud services. If our platform and cloud services, including new service offerings and features as they become available, become more complicated and less easy-to-use, customers could experience increased difficulties or disruption with storing or accessing their data, and we may lose existing customers or experience increased challenges obtaining new customers or existing customers may not choose to use additional features of our cloud services. In addition, our customers sometimes depend on our technical support services to resolve issues relating to our platform. If we do not succeed in helping our customers quickly resolve issues or provide effective ongoing education related to our platform, our reputation and business may be harmed.

Future acquisitions and investments could disrupt our business and harm our financial condition and operating results.

Our success will depend, in part, on our ability to grow our business in response to changing technologies, customer demands, and competitive pressures. In some circumstances, we may choose to do so through the acquisition of complementary businesses and technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming, and costly, and we may be unable to successfully complete proposed acquisitions. The risks we face in connection with acquisitions include:

 

   

diversion of management time and focus from operating our business to addressing acquisition integration challenges;

 

   

coordination of research and development, operational, and sales and marketing functions;

 

   

retention of key employees from the acquired company;

 

   

cultural challenges associated with integrating employees from the acquired company into our organization;

 

   

integration of the acquired company’s accounting, management information, human resources, and other administrative systems;

 

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the need to implement or improve controls, procedures, and policies at a business that prior to the acquisition may have lacked effective controls, procedures, and policies;

 

   

liability for activities of the acquired company prior to our acquisition of them, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities;

 

   

unanticipated write-offs or charges; and

 

   

litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders, or other third parties.

Future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses, incremental operating expenses, or the write-off of goodwill, any of which could harm our financial condition or operating results.

We may require additional capital to support our operations or the growth of our business, and we cannot be certain that this capital will be available on reasonable terms when required, or at all.

We may need additional financing to operate or grow our business. Our ability to obtain additional financing, if and when required, will depend on investor and lender demand, our operating performance, the condition of the capital markets, and other factors. For example, we often use capital leases to finance the equipment we use to provide our cloud-based services. Without additional access to this kind of capital on commercially reasonable terms, or at all, we may not be able to respond to increased demand for our cloud services on a timely or cost-effective basis. We cannot guarantee that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-linked, or debt securities, those securities may have rights, preferences, or privileges senior to the rights of our Class A common stock, and our existing stockholders may experience dilution. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support the operation or growth of our business could be significantly impaired and our operating results may be harmed.

We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our Class A common stock less attractive to investors.

We are an emerging growth company, and for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including: not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the Sarbanes Oxley Act), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this accommodation allowing for delayed adoption of new or revised accounting standards, and therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We could be an emerging growth company for up to five years following the completion of this offering or until we reach certain thresholds. Investors may find our Class A common stock less attractive due to our election to rely on these exemptions and there may be a less active trading market for our Class A common stock and the market price of our Class A common stock may be more volatile.

 

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We are exposed to fluctuations in currency exchange rates, which could negatively affect our results of operations.

All of our sales contracts are currently denominated in U.S. dollars and therefore, our revenue is not directly subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our cloud services to our customers outside of the United States, which could reduce demand for our cloud services and adversely affect our financial condition and results of operations. In addition, as we expand our international operations, we may become more exposed to foreign currency risk and may have some of our sales denominated in one or more currencies other than the U.S. dollar. If we become more exposed to currency fluctuations and are unable to successfully hedge against the risks associated with currency fluctuations, our results of operations could be materially and adversely affected.

Certain of our market opportunity estimates, growth forecasts, and other metrics included in this prospectus could prove to be inaccurate, and any real or perceived inaccuracies may harm our reputation and negatively affect our business.

Certain estimates and information contained in this prospectus, including general expectations concerning our industry and the market in which we operate, market opportunity, and market size, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Moreover, much of this information is based on information provided by third-party providers. Although we believe the information from such third-party sources is reliable, we have not independently verified the accuracy or completeness of the data contained in such third-party sources or the methodologies for collecting such data, and such information may also not prove to be accurate. If there are any limitations or errors with respect to such data or methodologies, our business opportunities may be limited, which could negatively affect our shares of Class A common stock. Even if the markets in which we compete meet the size estimates and growth forecasted in this prospectus, our business could fail to grow at similar rates, if at all.

Any future litigation against us could be costly and time-consuming to defend.

We may become subject to legal proceedings, investigations, and claims that arise in the ordinary course of business. For example, we may be subject to claims brought by customers in connection with commercial disputes or employment claims made by our current or former employees. Litigation can often be expensive, even when there is a successful outcome, and can divert management’s attention and resources, which could harm our business and financial condition. Any adverse outcome could also result in significant monetary damages or other types of unfavorable relief, which could harm our business as well as our reputation. Although we may have various insurance policies, insurance might not cover such claims or provide sufficient payments to cover all the costs to resolve one or more such claims, and might not continue to be available on terms acceptable to us, including premium increases or the imposition of large deductible or co-insurance requirements. In addition, we may also be subject to subpoena requests from third parties as well as governmental agencies from time to time that require us to provide certain information relating to matters targeted against other third parties, which can be time consuming.

Risks Related to Reliance on Infrastructure and Third Parties

We rely on third-party vendors and suppliers, including data center and hard drive providers, which may have limited sources of supply, and this reliance exposes us to potential supply and service disruptions that could harm our business.

We depend on a limited number of third-party data centers and other providers to safely house our equipment and provide sufficient power, bandwidth, and other infrastructure needs to support our operations and cloud services. We also rely on key components for our platform, including hard drives and semiconductors, which come from limited sources of supply. For example, the 2011 Thailand floods decreased hard drive supply

 

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globally due to related manufacturing stoppages. A similar decrease in hard drive availability could negatively impact our operations. The COVID-19 pandemic as well as fluctuating demands in the cryptocurrency mining markets also have impacted, and could continue to impact, our ability to source components in a timely and cost-effective manner from third-party suppliers. For example, starting in April 2020, we began to acquire additional hard drives and related infrastructure through capital lease agreements in order to minimize the impact of potential supply chain disruptions due to the COVID-19 pandemic. The additional leased hard drives resulted in a higher balance of capital equipment and related lease liability, an increase in cash used in financing activities from principal payments, as well as a higher ongoing interest and depreciation expense related to these lease agreements. The semiconductor industry is also experiencing a global chip shortage due to the COVID-19 pandemic and various other factors. Any shortage of key components, including hard drives, could materially and adversely affect our ability to provide our cloud services, as well as negatively impact our financial results by increasing our costs, lease liabilities, interest and depreciation expenses, and inventory levels. Shortages or pricing fluctuations could be material in the future. In the event of a shortage, supply interruption, or material pricing change from our suppliers, we may be unable to develop alternate sources in a timely manner or at all. Developing alternate sources of supply for these infrastructure needs may be time-consuming, difficult, and costly and we may be unable to source them on terms that are acceptable to us, or at all, which may undermine our ability to scale our platform and harm our business.

Our business depends, in part, on the success of our strategic relationships with third parties.

To maintain and grow our business, we anticipate that we will continue to depend on relationships with third parties, such as channel partners and integrators. Identifying partners and negotiating and building relationships with them requires significant time and resources. Our competitors may be effective in providing incentives to third parties to favor their services over us. In addition, any industry consolidation of such partners or integrators by our competitors or others could result in a decrease in the number of our current and potential customers, as these partners or integrators may no longer facilitate the adoption of our applications by potential customers. Interoperability between our platform and other third-party platforms is also important to our business. Further, some of our partners or integrators are or may become competitive with certain aspects of our cloud services and may elect to no longer integrate with, or support, our platform and cloud services. If we are unsuccessful in establishing or maintaining our relationships with such third parties and maintaining interoperability, our ability to compete in the marketplace or to grow our revenue could be impaired, and our business may suffer. Even if we are successful, we cannot assure you that these relationships will result in increased customer usage of our cloud services or increased revenue.

Our business is exposed to risks associated with online payment processing methods.

Many of our customers pay for our cloud services and products using credit cards. We rely on internal systems as well as those of third parties to process payments. Acceptance and processing of these payment methods are subject to certain rules and regulations and require payment of interchange and other fees. To the extent there are increases in payment processing fees, material changes in the payment ecosystem, such as large re-issuances of payment cards, delays in receiving payments from payment processors, changes to rules or regulations concerning payment processing, loss of payment partners, and/or disruptions or failures in our payment processing systems or payment products, including products we use to update payment information, our revenue, operating expenses, and results of operation could be adversely impacted.

We rely on third-party software for certain essential financial and operational services, and a failure or disruption in these services could materially and adversely affect our ability to manage our business effectively.

We rely on third-party software to provide many essential financial and operational services to support our business, including HubSpot, NetSuite, PagerDuty, Stripe, and ZenDesk. Some of these vendors are less established and have shorter operating histories than traditional software vendors. Moreover, many of these

 

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vendors provide their services to us via a cloud-based model instead of software that is installed on our premises. As a result, we depend upon these vendors to provide us with services that are always available and are free of errors or defects that could cause disruptions in our business processes. Any failure by these vendors to do so, or any disruption in our ability to access the internet, would materially and adversely affect our ability to manage our operations, disrupt the delivery of our cloud services to customers, and affect other areas such as our ability to timely provide required financial reporting.

Risks Related to Accounting and Tax Matters

We have identified material weaknesses in our internal controls over financial reporting, and the failure to achieve and maintain effective internal controls over financial reporting could harm our business and negatively impact the value of our Class A common stock.

We have identified material weaknesses in our internal controls over financial reporting, and if we are not able to effectively remediate our material weaknesses or are otherwise unable to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or timely file our periodic reports. As a result, investors may lose confidence in the accuracy and completeness of our financial reports, and the market price of our Class A common stock may be materially impacted.

Our management determined that as of December 31, 2019 we did not maintain effective internal controls over financial reporting, and identified four material weaknesses, specifically related to control activities, as follows:

 

   

our controls were not operating effectively to allow sufficient and timely review of significant accounting transactions and reconciliations. These deficiencies resulted in errors in certain financial statement areas, such as cash and cash equivalents, prepaid expenses and other current assets, property and equipment, capitalized internal-use software, capital lease liability and sale leaseback transactions;

 

   

our controls were not adequately designed to consider certain revenue recognition criteria, specifically related to the timing of revenue recognition, appropriate presentation and satisfaction of criteria for revenue recognition, which could have resulted in a material misstatement;

 

   

our controls over certain equity transactions were not operating effectively to allow management to timely identify errors related to the recording of those transactions. Specifically, we did not have sufficient technical resources to appropriately identify errors in the accounting for equity awards and preferred stock transactions, resulting in misstatements relating to completeness and accuracy of stock-based compensation and classification of equity instruments; and

 

   

our controls were not adequately designed to consider the accurate recording of value added taxes and sales and use taxes, resulting in misstatements.

Our management also determined that the above material weaknesses had not been remediated as of December 31, 2020 and as a result, we did not maintain effective internal control over financial reporting as of December 31, 2020.

We are working to remediate these material weaknesses through the development and implementation of processes and controls, as well as hiring additional personnel in our finance and accounting group. Specifically, we have:

 

   

strengthened our internal controls over financial reporting and the design of our internal-control framework through enhanced accounting policies, control activities, and monitoring;

 

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implemented a new enterprise resource planning (ERP) system and other systems and processes related to revenue recognition and equity administration to increase capabilities over our financial statement recording and reporting processes;

 

   

hired additional full-time accounting personnel with appropriate levels of experience to increase our accounting and technical expertise, including a new Chief Financial Officer, a Corporate Controller and an Internal Controls Manager; and

 

   

reallocated responsibilities across our accounting organization so that the appropriate level of knowledge and experience is applied based on complexity of transactions.

While we have made progress to enhance our internal controls over financial reporting, we are still in the process of implementing, documenting, and testing these processes, procedures, and controls. Additional time is required to complete implementation and to assess and evaluate the sufficiency of these procedures and related actions. We will continue to devote significant time and attention to these remediation efforts. However, these material weaknesses cannot be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

We cannot assure you that the measures we have taken to date will be sufficient to remediate the material weaknesses we identified or prevent additional material weaknesses in the future. Although we plan to complete this remediation, if the steps we take do not remediate the material weakness in a timely or sufficient manner, there could continue to be a reasonable possibility that these control deficiencies or others could result in a material misstatement of our annual or interim financial statements that would not be prevented or detected on a timely basis.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal controls over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal controls over financial reporting is documented, designed, or operating. Any failure to maintain effective disclosure controls and internal controls over financial reporting could materially and adversely affect our business, results of operations, and financial condition and could cause a decline in the trading price of our Class A common stock.

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, we may be unable to produce timely and accurate financial statements or comply with applicable regulations, which could negatively impact the price of our Class A common stock.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), the Sarbanes-Oxley Act, and the rules and regulations of the NASDAQ Global Market. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming, and costly, and place significant strain on our personnel, systems, and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures and internal controls over financial reporting and expect that we will need to continue to expend significant resources, including accounting-related costs, and significant management oversight, to meet such requirements. However, our current controls and any new controls that we develop may not be adequate, and weaknesses in our disclosure controls may be discovered in the future. Additionally, we have identified material weaknesses in our internal controls over financial reporting, and additional such weaknesses may be discovered in the future. See “—We have identified material weaknesses in our internal controls over financial reporting, and the failure to achieve and maintain effective internal controls over financial

 

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reporting could harm our business and negatively impact the value of our Class A common stock.” Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal controls over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal controls over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal controls over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our Class A common stock.

Because we recognize revenue from our subscription services over the term of the subscription, downturns or upturns in new business may not be immediately reflected in our operating results.

We generally recognize revenue from customers of our subscription agreements related to data backup services ratably over the terms of their subscription agreements, a majority of which are one or two-year agreements. Accordingly, the corresponding revenue we report in each quarter from such arrangements is the result of subscription agreements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter may only be partially reflected in our revenue results for that quarter. However, any such decline will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our cloud services, and potential changes in our retention rate may not be fully reflected in our operating results until future periods. This subscription model also makes it difficult for us to rapidly increase our revenue through additional subscription sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

Our operating results may be harmed if we are required to collect sales or other related taxes for our cloud services in jurisdictions where we have not historically done so.

We collect sales and value-added tax in connection with our cloud services in a number of jurisdictions. One or more states or countries may seek to impose incremental or new sales, use, or other tax collection obligations on us, including for past sales by us or our resellers and other partners. Online sellers can be required to collect sales and use tax despite not having a physical presence in the buyer’s state. A successful assertion by a state, country, or other jurisdiction that we should have been or should be collecting additional sales, use, or other taxes on our cloud services could, among other things, result in substantial tax liabilities for past sales, create significant administrative burdens for us, discourage users from purchasing our platform, or otherwise harm our business, results of operations, and financial condition.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

As of December 31, 2020 we had net operating loss carryforwards for U.S. federal income tax purposes of $45.1 million available to offset future U.S. federal taxable income. Also, as of December 31, 2020, we had net operating loss carryforwards for state income tax purposes of $8.5 million available to offset future state taxable income. If not utilized, both the federal and state tax credit carryforwards will begin to expire in 2034.

Utilization of our net operating loss carryforwards and other tax attributes, such as research and development tax credits, may be subject to annual limitations, or could be subject to other limitations on utilization or benefit due to the ownership change limitations provided by Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code), and other similar provisions. Under Sections 382 and 383 of the Code, if a corporation undergoes an “ownership change,” our ability to use pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset post-change income may be limited. Similar rules may apply under state tax laws. At this time, we have not completed a study to assess whether such an ownership change has occurred, or whether there have been multiple ownership changes since

 

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our formation. We may experience ownership changes in the future as a result of subsequent changes in our stock ownership, some of which may be outside our control. Accordingly, our ability to utilize the aforementioned carryforwards may be limited.

Further, legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act (Tax Act), as modified by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) changed the federal rules governing net operating loss carryforwards. For net operating loss carryforwards arising in tax years beginning after December 31, 2017, the Tax Act limits a taxpayer’s ability to utilize such carryforwards to 80% of taxable income. In addition, net operating loss carryforwards arising in tax years ending after December 31, 2017 can be carried forward indefinitely, but carryback is generally prohibited. Net operating loss carryforwards generated before January 1, 2018 (which represent the substantial majority of our net operating losses) will not be subject to the Tax Act’s taxable income limitation and will continue to have a twenty-year carryforward period. Nevertheless, our net operating loss carryforwards and other tax assets could expire before utilization and could be subject to limitations, which could harm our business, revenue, and financial results.

If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes appearing elsewhere in this prospectus. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant estimates and judgments involve those related to costs to be capitalized as internal-use software and their useful life; the useful lives of other long-lived assets; impairment considerations for long-lived assets; expected lease term for capital leases; calculation of the sales reserve; valuation of our common stock and stock options and accounting for taxes; including estimates for sales tax and value-added tax liability; deferred tax assets; valuation allowance; and uncertain tax positions among others. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions.

Risks Related to Intellectual Property

Assertions by a third party that our cloud services infringe, misappropriate, or otherwise violate their intellectual property could subject us to costly and time-consuming litigation and adversely impact our business.

There is frequent litigation in the software and technology industries based on allegations of infringement, misappropriation, or other violations of intellectual property rights. Some software and technology companies, including some of our competitors, as well as non-practicing entities, own patents and other intellectual property rights that they may use to assert claims against us. In our case, third parties have asserted, and may in the future assert, that we have infringed, misappropriated, or otherwise violated their patents or other intellectual property rights. For example, we have faced infringement claims from other non-practicing entities in the past. There may be intellectual property rights held by others, including issued or pending patents, that cover significant aspects of our technologies or solutions, and we cannot assure you that we are not infringing, misappropriating, or violating, and have not infringed, misappropriated, or violated, any third-party intellectual property rights or that we will not be held to have done so or be accused of doing so in the future. In addition, as we face increasing competition and become increasingly visible as a publicly-traded company, or if we become more successful, the possibility of new third-party claims may increase.

 

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Any claim that we have violated intellectual property or other proprietary rights of third parties, with or without merit, could be time-consuming and costly to address and resolve, could divert the time and attention of management and technical personnel from our business, could place limitations on our ability to use our current websites and technologies, and could result in an inability to market or provide all or a portion of our cloud services. Furthermore, we could be required to pay substantial monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a party’s intellectual property rights. We may also be required to enter into a royalty or licensing agreement that could include significant upfront and future licensing fees or expend significant resources to redesign our technologies or solutions, which efforts may not be timely or prove successful at all and require us to indemnify customers or other third parties. Royalty or licensing agreements may be unavailable on terms acceptable to us, or at all. If we cannot develop or license technology for any allegedly infringing aspect of our business, we could be forced to limit our cloud services and may be unable to compete effectively. Any of these events could have a material adverse effect on our business.

If we are unable to adequately establish, maintain, protect, and enforce our intellectual property and proprietary rights, our reputation may be harmed, we may be subject to litigation, and our business may be adversely affected.

Our future success and competitive position depend in large part on our ability to establish, maintain, protect, and enforce our intellectual property and proprietary rights. We do not own any issued patents and rely on a combination of trademark, copyright, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection and may not now or in the future provide us with a competitive advantage. The steps we have taken and will take may not prevent unauthorized use, reverse engineering, or misappropriation of our technologies and we may be unable to detect any of the foregoing. Furthermore, effective trademark, copyright, and trade secret protection may not be available in every country in which our cloud services are available. Our lack of patent protection may restrict our ability to protect our technologies and processes from competition. Defending and enforcing our intellectual property rights may result in litigation, which can be costly and divert management attention and resources. If our efforts to protect our technologies and intellectual property are inadequate, the value of our brand and other intangible assets may be diminished and competitors may be able to mimic our cloud services. Any of these events could have a material adverse effect on our business.

With respect to our technology platform, we consider trade secrets and know-how to be one of our primary sources of intellectual property. However, trade secrets and know-how can be difficult to protect. We seek to protect these trade secrets and other proprietary technology, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, outside contractors, consultants, advisors, and other third parties. We also enter into confidentiality and invention assignment agreements with our employees and consultants. The confidentiality agreements are designed to protect our proprietary information and, in the case of agreements or clauses containing invention assignment, to grant us ownership of technologies that are developed through a relationship with employees or third parties. We cannot guarantee that we have entered into such agreements with each party that may have or has had access to our trade secrets or proprietary information, including our technology and processes. Despite these efforts, no assurance can be given that the confidentiality agreements we enter into will be effective in controlling access to such proprietary information and trade secrets. The confidentiality agreements on which we rely to protect certain technologies may be breached, may not be adequate to protect our confidential information, trade secrets, and proprietary technologies and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, trade secrets or proprietary technology. Further, these agreements do not prevent our competitors or others from independently developing the same or similar technologies and processes, which may allow them to provide a service similar or superior to ours, which could harm our competitive position.

 

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Our use of “open-source” software could negatively affect our ability to sell our cloud services and subject us to possible litigation.

A portion of the technologies used by us incorporates “open-source” software, and we may incorporate open-source software in the future. Such open-source software is generally licensed by its authors or other third parties under open-source licenses. Companies that incorporate open-source software into their solutions have, from time to time, faced claims challenging the use of open-source software and compliance with open-source license terms. These licenses may subject us to certain unfavorable conditions, including requirements that we offer all or parts of our technology or services that incorporate the open-source software at no cost, that we make publicly available source code for modifications or derivative works we create based upon, incorporating, or using the open-source software, and/or that we license such modifications or derivative works under the terms of the particular open-source licensor other license granting third parties certain rights of further use. Although we monitor our use of open-source software, we cannot assure you that all open-source software is reviewed prior to use in our cloud services, that our developers have not incorporated open-source software into our technology platform or services, or that they will not do so in the future. In the event that we become subject to such claims, we could be subject to significant damages, enjoined from the sale of our solutions that contained the open-source software, and required to comply with onerous conditions. In addition, the terms of open-source software licenses may require us to provide software that we develop using such open-source software to others on unfavorable license terms. As a result of our current or future use of open-source software, we may face claims or litigation, be required to release our proprietary source code, pay damages for breach of contract, re-engineer our solutions, discontinue making our solutions available in the event re-engineering cannot be accomplished on a timely basis or take other remedial action. Any such re-engineering or other remediation efforts could require significant additional research and development resources, and we may not be able to successfully complete any such re-engineering or other remediation efforts on a timely basis, or at all. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could disrupt the distribution and sale of our solutions and have a material adverse effect on our business and operating results.

Risks Related to Ownership of Our Class A Common Stock and This Offering

We may invest or spend the proceeds of this offering in ways with which investors may not agree or in ways which may not yield a return.

Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. Our net proceeds from the sale of shares of our Class A common stock in this offering will be used for general corporate purposes, including working capital, operating expenses, and capital expenditures and to fund new growth initiatives. In addition, although we do not have any agreements or commitments for any specific material acquisitions at this time, we may use a portion of the net proceeds to acquire businesses, products, services, or technologies. Also, prior to a private financing round consisting of $10.0 million of convertible notes (which we also refer to as a Simple Agreement for Future Equity agreement (SAFE)) in August 2021, we had raised less than $3.0 million of outside equity investment since our founding in 2007. As a result, we do not have an established track record for the use of significant proceeds from the sale of shares of our stock. We may spend the proceeds in ways that may not yield a significant return or provide the anticipated benefits in a timely manner, or at all. In addition, until the net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.

The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of this offering, including our executive officers, employees, and directors and their affiliates, which will limit your ability to influence the outcome of important transactions, including a change in control.

Our Class B common stock has 10 votes per share, and our Class A common stock, which is the stock we are offering in this offering, has one vote per share. Upon the completion of this offering, stockholders who

 

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hold shares of our Class B common stock, including our executive officers, employees, and directors and their affiliates, will collectively hold approximately 97% of the voting power of our outstanding capital stock. Because of the ten-to-one voting ratio between our Class B common stock and Class A common stock, after the completion of this offering, the holders of our Class B common stock will collectively continue to control a majority of the combined voting power of our capital stock and therefore be able to control all matters submitted to our stockholders for approval so long as the shares of our Class B common stock represent at least 10% of all outstanding shares of our Class A common stock and Class B common stock. These holders of our Class B common stock may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentrated control may have the effect of delaying, preventing, or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their capital stock as part of a sale of our company and might ultimately affect the market price of our Class A common stock.

Future transfers by holders of our Class B common stock will generally result in those shares converting into shares of our Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning or charitable purposes. The conversion of shares of our Class B common stock into shares of our Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example, any of our founders or other large existing stockholders that hold significant shares of Class B common stock retain a significant portion of their holdings of our Class B common stock for an extended period of time, they could control a significant portion of the voting power of our capital stock for the foreseeable future. For a description of the dual class structure, see the section titled “Description of Capital Stock.”

We cannot predict the impact our dual class structure may have on the market price of our Class A common stock.

We cannot predict whether our dual class structure, combined with the concentrated control of our stockholders who held our capital stock prior to the completion of our offering, including our executive officers, employees, and directors and their affiliates, will result in a lower or more volatile market price of our Class A common stock or in adverse publicity or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple class share structures in certain of their indices. In July 2017, FTSE Russell and Standard & Poor’s announced that they would cease to allow most newly public companies utilizing dual or multi-class capital structures to be included in their indices. Under the announced policies, our dual class capital structure would make us ineligible for inclusion in any of these indices. Given the sustained flow of investment funds into passive strategies that seek to track certain indexes, exclusion from stock indexes would likely preclude investment by many of these funds and could make our Class A common stock less attractive to other investors. As a result, the market price of our Class A common stock could be adversely affected.

Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, and Delaware law contain or will contain provisions which could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our Board of Directors. Among other things, our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws will include provisions:

 

   

creating a classified Board of Directors whose members serve staggered three-year terms;

 

   

authorizing “blank check” preferred stock, which could be issued by our Board of Directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock;

 

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limiting the liability of, and providing indemnification to, our directors and officers;

 

   

limiting the ability of our stockholders to call and bring business before special meetings;

 

   

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our Board of Directors;

 

   

controlling the procedures for the conduct and scheduling of Board of Directors and stockholder meetings; and

 

   

authorizing two classes of common stock, as discussed above.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents certain stockholders holding more than 15% of our outstanding capital stock from engaging in certain business combinations without approval of the holders of at least two-thirds of our outstanding common stock not held by such stockholder. Any provision of our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, or Delaware law that has the effect of delaying, preventing, or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock, and could also affect the price that some investors are willing to pay for our Class A common stock.

An active trading market for our Class A common stock may never develop or be sustained.

Even if we successfully complete our initial public offering, we cannot assure you that an active trading market for our Class A common stock will develop, or if developed, that any market will be sustained. Accordingly, we cannot assure you of the liquidity of any trading market, your ability to sell your shares of our Class A common stock when desired or the prices that you may obtain for your shares of our Class A common stock.

The market price of our Class A common stock may be volatile, and you could lose all or part of your investment.

Prior to the completion of this offering, there has been no public market for shares of our Class A common stock. The initial public offering price of our Class A common stock will be determined through negotiation between us and the underwriters. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our Class A common stock following this offering. In addition, the market price of our Class A common stock following this offering is likely to be highly volatile, may be higher or lower than the initial public offering price of our Class A common stock, and could be subject to wide fluctuations in response to various factors, some of which are beyond our control and may not be related to our operating performance.

Fluctuations in the price of our Class A common stock could cause you to lose all or part of your investment because you may be unable to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the market price of our Class A common stock include the following:

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

volatility in the market prices and trading volumes of technology stocks;

 

   

the impact of the COVID-19 pandemic;

 

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changes in operating performance and stock market valuations of other technology companies generally or those in our industry in particular;

 

   

sales of shares of our Class A common stock by us or our stockholders;

 

   

failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow us, or our failure to meet these estimates or the expectations of investors;

 

   

the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;

 

   

announcements by us or our competitors of new products or services;

 

   

the public’s reaction to our press releases, other public announcements, and filings with the SEC;

 

   

rumors and market speculation involving us or other companies in our industry;

 

   

actual or anticipated changes in our operating results or fluctuations in our operating results;

 

   

actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally;

 

   

litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors;

 

   

developments or disputes concerning our intellectual property or other proprietary rights;

 

   

announced or completed acquisitions of businesses or technologies by us or our competitors;

 

   

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

   

changes in accounting standards, policies, guidelines, interpretations, or principles;

 

   

any significant change in our management; and

 

   

general economic conditions and slow or negative growth of our markets.

In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

The large number of shares of our capital stock eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our Class A common stock.

The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock in the market after this offering, and the perception that these sales could occur may also depress the market price of our Class A common stock. Based on shares of our capital stock outstanding as of June 30, 2021, we will have 29,273,264 shares of our capital stock outstanding after this offering. Our executive officers, directors and the holders of substantially all of our capital stock and securities convertible into or exchangeable for our capital stock have entered into market standoff agreements with us or

 

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will enter into lock-up agreements with the underwriters under which they have agreed or will agree, subject to specific exceptions, not to sell any of our capital stock for 180 days following the date of this prospectus, other than in the case of shares of Class A common stock to be issued upon the automatic conversion of our convertible notes (which we also refer to as a Simple Agreement for Future Equity agreement (SAFE)), without first obtaining the written consent of Oppenheimer & Co. Inc., subject to certain exceptions as set forth in “Underwriting”. As a result of these agreements, the provisions of our investors’ rights agreement described further in the section titled “Description of Capital Stock—Registration Rights” and the provisions of Rule 144 or Rule 701 under the Securities Act of 1933, as amended (the Securities Act), shares of our capital stock will be available for sale in the public market as follows:

 

   

beginning on the date of this prospectus, all 6,250,000 shares of our Class A common stock sold in this offering will be immediately available for sale in the public market;

 

   

beginning 90 days after the date of this prospectus, two-thirds of the shares of Class A common stock to be issued upon automatic conversion of our convertible notes will become eligible for sale in the public market (or 484,914 shares, based on an assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus); and

 

   

beginning 181 days after the date of this prospectus, if not earlier released, the remainder of the shares of our capital stock will be eligible for sale in the public market from time to time thereafter, subject in some cases to the volume and other restrictions of Rule 144 and our insider trading policy.

Following the expiration of the lock-up agreements referred to above, stockholders owning an aggregate of up to 4,066,595 shares of our Class B common stock can require us to register shares of our capital stock owned by them for public sale in the United States. In addition, we intend to file a registration statement to register approximately 20,865,000 shares of our capital stock reserved for future issuance under our equity compensation plans. Upon effectiveness of that registration statement, subject to the satisfaction of applicable exercise periods and expiration of the market standoff agreements and lock-up agreements referred to above, the shares of our capital stock issued upon exercise of outstanding options to purchase shares of our Class B common stock will be available for immediate resale in the United States in the open market.

Sales of our Class A common stock as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause the market price of our Class A common stock to fall and make it more difficult for you to sell shares of our Class A common stock.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, is substantially higher than the pro forma net tangible book value per share of our outstanding capital stock upon the completion of this offering. Therefore, if you purchase shares of our Class A common stock in this offering, you will incur immediate dilution of $13.11 in the net tangible book value per share from the price you paid. In addition, investors purchasing shares of our Class A common stock from us in this offering will have contributed approximately 88% of the total consideration paid to us by all stockholders who purchased shares of our common stock, in exchange for acquiring approximately 21% of the outstanding shares of our common stock as of June 30, 2021, after giving effect to this offering. The exercise of outstanding options to purchase shares of our Class B common stock will result in further dilution.

 

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If securities or industry analysts do not publish or cease publishing research or reports about us, our business, our market, or our competitors, or if they adversely change their recommendations regarding our Class A common stock, the market price of our Class A common stock and trading volume could decline.

The trading market for our Class A common stock will be influenced by the research and reports that securities or industry analysts may publish about us, our business, our market, or our competitors. If any of the analysts who may cover us adversely change their recommendations regarding our Class A common stock or provide more favorable recommendations about our competitors, the market price of our Class A common stock would likely decline. If any of the analysts who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price of our Class A common stock or trading volume to decline.

We do not expect to declare any dividends in the foreseeable future.

We do not anticipate declaring any cash dividends to holders of our Class A common stock in the foreseeable future. Consequently, investors may need to rely on sales of our Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase shares of our Class A common stock.

Our Amended and Restated Certificate of Incorporation will provide that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our Amended and Restated Certificate of Incorporation will provide that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees. Specifically, our Amended and Restated Certificate of Incorporation will provide that the Court of Chancery of the State of Delaware is the exclusive forum provision for: (i) any derivative action or proceeding brought on behalf of us; (ii) any action asserting a claim of breach of a fiduciary duty; (iii) any action arising pursuant to any provision of the DGCL, our Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws (as either may be amended from time to time); (iv) any action to interpret, apply, enforce, or determine the validity of our Amended and Restated Certificate of Incorporation or our Amended and Restated Bylaws; (v) any action asserting a claim against us that is governed by the internal affairs doctrine; or (vi) any action asserting an “internal corporate claim” as defined in the DGCL.

These exclusive forum provisions would not apply to suits brought to enforce a duty or liability created by the Exchange Act.

Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our Amended and Restated Certificate of Incorporation will further provide that the U.S. federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our Amended and Restated Certificate of Incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.

 

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These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees. If a court were to find any of the exclusive forum provisions of our Amended and Restated Certificate of Incorporation to be inapplicable to or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.

Operating as a public company will require us to incur substantial costs and will require substantial management attention.

As a public company, we will incur substantial legal, accounting, and other expenses that we did not incur as a private company. For example, we are subject to the reporting requirements of the Exchange Act, the applicable requirements of the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the rules and regulations of the SEC, and the listing standards of the NASDAQ Global Market. For example, the Exchange Act requires, among other things, we file annual, quarterly, and current reports with respect to our business, financial condition, and results of operations. Compliance with these rules and regulations will increase our legal and financial compliance costs, and increase demand on our systems, particularly after we are no longer an emerging growth company. In addition, as a public company, we may be subject to stockholder activism, which can lead to additional substantial costs, distract management, and impact the manner in which we operate our business in ways we cannot currently anticipate. As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors.

Some members of our management team also have limited experience managing a publicly traded company, interacting with public company investors, and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition, and results of operations.

 

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A Letter from the Founders

To Our Customers and Future Stockholders,

Backblaze was incorporated in 2007 by five founders who are all still with the company today, but its origins go back much farther than that. Our journey started when the same five individuals—Gleb, Brian, and Casey, joined shortly thereafter by Tim and Billy—launched our first startup in 1999, where we developed a philosophy around building easy-to-use products.

Our collaboration continued through our second startup as we further refined our principles to be customer focused, fair, and transparent. Then, as a result of a phone call from a friend who had lost some data (one in a long line of similarly frantic calls) with no backup because “no one has the time for that,” Brian gathered the same five people together a third time in 2007 to form Backblaze—with the intention of making storing, using, and protecting data so astonishingly easy that Brian wouldn’t have to field frantic phone calls like that ever again.

After building two successful businesses together, we embarked on this next part of our journey as a seasoned team with clear vision and purpose for this startup: We wanted to focus on customers. We wanted to create a great product. We wanted to offer that product at a fair price. We wanted customers to not only be glad to do business with us, but also trust us enough to enthusiastically recommend our products and cloud services to others.

Bootstrapped and Focused on Customers

To achieve this, we decided to create Backblaze differently, and with essentially no venture capital funding. As a result, the business has grown with an almost entirely bootstrapped approach—prior to 2021, we had raised less than $3 million in outside equity since our founding in 2007. This has helped us to focus exclusively on building an efficient culture and serving our customers.

The real source of Backblaze’s financial success and growth has been, and will continue to be, our customers. Building storage cloud products for our customers and keeping their most valuable data safe is what drives our entire culture.

Trust and Transparency

In 2007 Brian crafted a “Backblaze Statement of Core Values,” which outlined several of our founding principles. Here is the first:

Core Value #1—Be Fair and Customer Oriented

At Backblaze, we want to provide a quality product for a fair price. We want to be honest and up front with our customers as to what we can and cannot do and we want to be paid only the money honestly owed to us, and never engage in sleazy or misleading business practices where customers are misled in any way or pay for a service they do not receive. We are the “good guys”, and we act like it.

and our founding principles continue...

Backblaze strives to be open and transparent to customers, and open and transparent to all partners, employees, and investors. Any information you are ashamed to share with any one of the groups on this list is a warning sign that you might be doing something wrong.

These values sit at the very core of our culture. Transparency is more than a value for us, it’s our default approach. We release quarterly hard drive reports detailing the performance of each serial number and brand of

 

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the nearly 200,000 drives in our datacenter. We shared exactly how we store customer data redundantly, and how we do it inexpensively. We shared the source code algorithms used to encode and replicate our customer data to keep it safe. When we face problems, like we did during a 2010 power outage at a datacenter, we openly share what went wrong and how we will do better in the future. When there are problems with our software, we share what went wrong and the steps being taken to fix it, like in 2016 when a bug in a different company’s software caused problems with the Backblaze client if both pieces of software ran on the same customer laptop.

This openness has been met with customer appreciation and loyalty, which encourages us to stay true to these core Backblaze values.

Our Team, Our Culture

Early on, we grew our team by hiring co-workers from previous companies who we trusted with what we consider to be our lives and livelihood—our customers’ data. The first two after the five original founders deserve special mention as demi-founders: Damon Uyeda and Nilay Patel. Most of us went entirely without salary for more than a year in order to spend all of Backblaze’s resources building products our customers would love. In the spirit of that original bond, we formed a salary tontine where, until the public offering is finalized, a core group of the original founders and some other very early employees agreed to make the same salary. This solidarity helped us build and sustain our culture through the first 14 years of our evolution.

Our founding team is a diverse group of open-minded people born in four different countries, practicing at least five different religions, bound together by mutual respect and the common belief in making excellent products. We embrace what each individual brings to the business; diversity is one of our strengths. Leveraging this strength means discussing our differences in an open dialog—Backblaze is not afraid of diverging opinions. The free exchange of ideas is a strength, not a weakness.

Of the first 100 employees, more than half worked with us at previous companies, which speaks to our reputation, as do our Glassdoor ratings—4.9/5.0 stars, 100% CEO Approval, and 100% Recommend to a Friend as of December 31, 2020.

Backblaze welcomed its 228th employee as of June 30, 2021. One of the things we are the most proud of as founders is the team of exceptionally talented people who have chosen to work at Backblaze. They are highly sought-after individuals with extraordinary reputations who could have chosen to work at any tech company. To attract and retain such a team, we provide a warm, friendly office environment where families and well-behaved dogs are welcome.

Becoming a Public Company

Becoming publicly traded is a natural step for any company that wishes to stay independent, rather than being absorbed by a firm that may not share our core values. For us, the only question was when to take that step.

There were several factors that led us to make the transition now. First and foremost, we feel that there is a market opportunity to grow our customer base, and we are raising capital to pursue that opportunity. We do not plan to change our customer focus, nor our dedication to staying efficient. These additional funds are intended to expand on that focus, not to spend irresponsibly.

Second, Backblaze is employee owned. We grant stock options to every employee so that all employees share in our success. After 14 years of operation, it is time to give our most loyal, long-term team members some liquidity. We owe them that, and more.

Third, we want to invite our customers, community, and advocates as well as investors to become part owners in the next stage of our adventure. We feel that they have always been a part of our family, and we welcome them to take part in our continued success and growth.

 

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Finally, an IPO is a branding event—a coming of age party. It marks the end of the startup period and the beginning of an era where we are a trusted, mature company without the “startup” qualifier.

As Backblaze becomes a public company, we plan to maintain our core values, our focus on sustainable growth, and our commitment to our customers. We are building on that foundation by welcoming an independent board and raising IPO funds to continue investing in and accelerating Backblaze’s growth.

Thank you and Next Steps

It has indeed been an incredible journey building Backblaze into what it is today. We are grateful to our customers for their business and trust, and we plan to continue earning that trust every day. We are thankful to our team members for their dedication to Backblaze and our values. And we are thankful for our friends, family members, and everybody else who helped and encouraged us along the way. We could not possibly have made it this far without you.

Data has become the digital world’s most precious resource. We have spent the last 14 years making it astonishingly easy to store, use, and protect that data. And we’re just getting started. As data continues to grow in volume and importance, we believe Backblaze will be a foundational element of the overall technology stack.

We invite you to join us in this next step in our evolution, the next part of our adventure—building Backblaze as a public company.

Gleb Budman, CEO & Chairperson

Brian Wilson, CTO & Director

Timothy Nufire, CCO & Director

Charles (Casey) Jones, VP Design

Kwok Hang (Billy) Ng, Web Architect

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy, as well as plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other important factors that are in some cases beyond our control and may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.

The words “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these terms or other similar expressions are intended to identify forward-looking statements. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

   

the sufficiency of our cash and cash equivalents to meet our projected operating requirements;

 

   

our ability to maintain the security of our platform;

 

   

our ability to sell our platform to new customers;

 

   

our ability to retain, and expand use of our platform by our existing customers;

 

   

our ability to successfully expand in our existing markets and into new markets;

 

   

our ability to effectively manage our growth and future expenses;

 

   

our ability to expand our partner ecosystem;

 

   

our ability to establish, maintain, protect and enforce our intellectual property and proprietary rights;

 

   

our estimated total addressable market;

 

   

the attraction and retention of qualified employees and key personnel;

 

   

our anticipated investments in sales and marketing, research and development, general and administrative, and cost of revenue;

 

   

our ability to successfully defend litigation brought against us;

 

   

the impact of the COVID-19 pandemic and other disruptive events on our business or that of our customers and partners;

 

   

our ability to successfully remediate and prevent material weaknesses in internal controls over financing reporting;

 

   

the increased expenses associated with being a public company; and

 

   

our use of the net proceeds from this offering.

These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors” elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained

 

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in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, advancements, discoveries, levels of activity, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the Securities and Exchange Commission as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.

 

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MARKET, INDUSTRY, AND OTHER DATA

This prospectus contains estimates, projections, and other information concerning our industry, our business, and our target markets. We obtained the industry, market, and similar data set forth in this prospectus from our internal estimates and research. Information based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by third parties, industry, general publications, and similar sources.

Certain information in this prospectus is contained in independent industry publications. The source of these independent industry publications is provided below:

 

   

International Data Corporation, Inc., Worldwide Global DataSphere (XLS), April 2020;

 

   

International Data Corporation, Inc., Data Age 2025: the Digitization of the World From Edge to Core, November 2018;

 

   

International Data Corporation, Inc., Worldwide Data Protection as a Service Forecast, 2020-2024, November 2020;

 

   

International Data Corporation, Inc., Worldwide Data Protection as a Service Forecast, August 2021;

 

   

International Data Corporation, Inc., Worldwide Data Protection as a Service Forecast, August 2021;

 

   

International Data Corporation, Inc., Worldwide Public Cloud Infrastructure as a Service Forecast, 2020-2024, July 2020;

 

   

International Data Corporation, Inc., Worldwide Public Cloud Infrastructure as a Service Forecast, July 2021;

 

   

International Data Corporation, Inc., Worldwide Public Cloud Infrastructure as a Service Forecast, 2020-2024 (XLS);

 

   

International Data Corporation, Inc., Worldwide Public Cloud Infrastructure as a Service Forecast, July 2021;

 

   

International Data Corporation, Inc., Worldwide Semiannual Public Cloud Services Spending Guide Taxonomy, 2019;

 

   

International Data Corporation, Inc., Worldwide Global DataSphere Forecast, 2020–2024: The COVID-19 Data Bump and the Future of Data Growth, April 2020;

 

   

Frost & Sullivan, Data & Storage: Results from 2020 Frost & Sullivan Surveys, December 2020;

 

   

Bitdefender, The ‘New Normal’ State of Cybersecurity: 2020 Business Threat Landscape Report, November 2020; and

 

   

Flexera, 2020 State of the Cloud Report, April 2020.

 

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USE OF PROCEEDS

We estimate that the net proceeds from this offering will be approximately $89.5 million, or $103.4 million if the underwriters exercise their option to purchase additional shares in full, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, assuming an initial public offering price of $16.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus.

Each $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by $5.8 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. An increase (decrease) of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) our net proceeds from this offering by $14.9 million, assuming no change in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions.

The principal purposes of this offering are to increase our capitalization and financial flexibility and create a public market for our Class A common stock, obtain additional working capital, and facilitate our future access to the public equity markets to allow us to implement our business plan. We currently intend to use the net proceeds received by us from this offering for general corporate purposes, including working capital, operating expenses, sales and marketing expenses to fund the growth of our business, research and development, and capital expenditures. In addition, we may use a portion of the net proceeds to acquire complementary businesses, products, services, or technologies. However, we have no current understandings, agreements, or commitments for any specific material acquisitions at this time. We cannot specify with certainty the particular uses of the net proceeds that we received from this offering. Accordingly, we will have broad discretion in using these proceeds.

Pending our use of the net proceeds from this offering, we plan to invest the net proceeds in a variety of capital preservation investments, including short-term interest-bearing investment-grade securities, certificates of deposit, or government securities.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock and we do not currently intend to pay any cash dividends on our capital stock for the foreseeable future. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. Any future determination to pay dividends will be made at the discretion of our Board of Directors subject to applicable laws and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions, and capital requirements. Our future ability to pay cash dividends on our capital stock may also be limited by the terms of any future debt or preferred securities or future credit facility. Our revolving credit agreement with City National Bank contains certain restrictive covenants that prevent us from paying cash dividends on our capital stock.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and total capitalization as of June 30, 2021, as follows on:

 

   

an actual basis;

 

   

a pro forma basis to give effect to: (i) the automatic conversion of all outstanding shares of our convertible preferred stock into 3,359,195 shares of Class B common stock, (ii) the reclassification of all outstanding shares of our common stock into an equivalent number of shares of our Class B common stock and (iii) the filing and effectiveness of our Amended and Restated Certificate of Incorporation in Delaware; and

 

   

a pro forma as adjusted basis to give effect to: (i) the pro forma adjustments set forth above, (ii) our sale and issuance in this offering of 6,250,000 shares of Class A common stock at the assumed initial public offering price of $16.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and (iii) the automatic conversion of convertible notes (which we also refer to as a Simple Agreement for Future Equity agreement (SAFE)) into 727,371 shares of Class A common stock (based on an assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus).

 

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You should read this information in conjunction with our financial statements and the related notes appearing elsewhere in this prospectus, as well as the sections of this prospectus titled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    

As of June 30, 2021    

 
    

    Actual    

   

    Pro Forma    

   

    Pro Forma As    
Adjusted(1)

 
    

(unaudited)

(in thousands, except share and per

share data)

 

Cash and cash equivalents

   $ 1,306     $ 1,306     $ 100,786  
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock, $0.001 par value; 9,000,000 shares authorized, 3,359,195 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     2,784       -       -  

Stockholders’ (deficit) equity:

      

Preferred stock, $0.001 par value; no shares authorized, issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     -       -       -  

Common stock, $0.0001 par value; 36,000,000 shares authorized, 18,936,698 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     5       -       -  

Class A common stock, $0.0001 par value; no shares authorized, issued or outstanding, actual; 113,000,000 shares authorized, no shares issued and outstanding pro forma; 6,977,371 shares issued and outstanding, pro forma as adjusted

     -       -       1  

Class B common stock, $0.0001 par value; no shares authorized, issued or outstanding, actual; 37,000,000 shares authorized, 22,295,893 shares issued and outstanding, pro forma and pro forma as adjusted

     -       2       2  

Additional paid-in capital

     10,219       13,006       114,123  

Accumulated deficit

     (20,745     (20,745     (22,383
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (10,521     (7,737     91,743  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ (7,737   $ (7,737   $ 91,743  
  

 

 

   

 

 

   

 

 

 

 

(1)

Each $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $5.8 million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. Each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $14.9 million, assuming the assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

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The number of shares of our Class A common stock and Class B common stock issued and outstanding, pro forma and pro forma adjusted, in the table above is based on no shares of our Class A common stock and 22,295,893 shares of our Class B common stock (including our convertible preferred stock on an as-converted basis) outstanding as of June 30, 2021, and excludes:

 

   

13,230,932 shares of our Class B common stock issuable upon the exercise of options outstanding as of June 30, 2021 under our 2011 Plan, with a weighted-average exercise price of approximately $3.02 per share;

 

   

the issuance and automatic conversion of convertible notes (which we also refer to as a Simple Agreement for Future Equity agreement (SAFE)) into 727,371 shares of Class A common stock (based on an assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus);

 

   

7,396,489 shares of our common stock reserved for issuance under our equity compensation plans, consisting of:

 

   

654,840 shares of our Class B common stock issuable upon the exercise of options granted under our 2011 Plan after June 30, 2021 with an exercise price of $10.06 per share;

 

   

522,349 shares of our Class B common stock reserved for issuance under our 2011 Plan as of June 30, 2021, which will become available for issuance under our 2021 Plan on the date of this prospectus;

 

   

5,262,500 shares of our Class A common stock reserved for future issuance under our 2021 Plan, which will become effective upon the effectiveness of the registration statement of which this prospectus forms a part, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan; and

 

   

956,800 shares of our Class A common stock reserved for issuance under our 2021 ESPP, which will become effective upon the effectiveness of the registration statement of which this prospectus forms a part, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan.

 

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DILUTION

If you invest in our Class A common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the assumed initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after this offering. Although our common stock and preferred stock will convert to Class B, for illustrative purposes within this section, common stock and preferred stock has been shown as converting into Class A.

Historical net tangible book value (deficit) per share represents our total tangible assets less our liabilities and preferred stock that is not included in equity divided by the total number of shares of Class A common stock outstanding, for illustrative purposes. As of June 30, 2021, our historical net tangible book value (deficit) was approximately $(17.4) million, or $(0.92) per share. Our pro forma net tangible book value as of June 30, 2021, was approximately $(14.7) million, or $(0.66) per share, after giving effect to the (i) automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 3,359,195 shares of Class A common stock for illustrative purposes and (ii) the reclassification of all outstanding shares of our common stock into an equivalent number of shares of our Class A common stock for illustrative purposes.

After giving effect to (i) the pro forma adjustments set forth above, (ii) our sale in this offering of 6,250,000 shares of Class A common stock at an assumed initial public offering price of $16.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus and after deducting estimated underwriting discounts and commissions and (iii) the issuance and automatic conversion of convertible notes (which we also refer to as a Simple Agreement for Future Equity agreement (SAFE)) into 727,371 shares of Class A common stock (based on an assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus) immediately prior to the completion of this offering, our pro forma as adjusted net tangible book value as of June 30, 2021 would have been approximately $84.8 million, or $2.89 per share of our Class A common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $3.09 per share to our existing stockholders, which is in addition to a $0.46 increase in pro forma net tangible book value per share attributable to holders of the SAFE, and an immediate dilution of $13.11 per share to investors purchasing Class A common stock in this offering.

The following table illustrates this dilution to new investors on a per share basis:

 

Assumed initial public offering price per share

                  $ 16.00  

Pro forma net tangible book value (deficit) per share as of June 30, 2021

   $ (0.66  

Increase in pro forma net tangible book value (deficit) per share from the issuance and automatic conversion of the SAFE

  

$

0.46

 

 

Increase in pro forma net tangible book value per share attributable to new investors in this offering

   $ 3.09    
  

 

 

   

Pro forma as adjusted net tangible book value per share immediately after this offering

                  $ 2.89  
    

 

 

 

Dilution per share to new investors purchasing shares in this offering

                  $ 13.11  
    

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value, by $0.20 per share and the dilution per share to new investors by $0.80 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions. We may also increase (decrease) the number of shares we are offering.

If the underwriters’ option to purchase additional shares in this offering is exercised in full, the pro forma as adjusted net tangible book value would be $3.27 per share, the increase in the pro forma net tangible book value per share for existing stockholders would be $0.37 per share and the dilution to new investors participating in this offering would be $(0.37) per share.

 

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We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 shares in the number of shares we are offering would increase (decrease) our pro forma as adjusted net tangible book value by approximately $14.9 million, or $0.40 per share, and the pro forma dilution per share to investors in this offering by $(0.40) per share, assuming that the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions. The pro forma information discussed above is illustrative only and will change based on the actual initial public offering price, number of shares and other terms of this offering determined at pricing.

The following table summarizes as of June 30, 2021, after giving effect to the pro forma adjustments set forth above, the number of shares of our Class A common stock, the total consideration, and the average price per share (i) paid to us by our existing stockholders including our convertible preferred stock, (ii) paid to us by our investors related to the issuance and automatic conversion of convertible notes (which we also refer to as a Simple Agreement for Future Equity agreement (SAFE)) into 727,371 shares of Class A common stock (based on an assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus) immediately prior to the completion of this offering, in addition to estimated accrued interest on the SAFE notes prior to the completion of this offering, and (iii) to be paid by new investors participating in this offering at an assumed initial public offering price of $16.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions.

 

    

Shares Purchased

   

Total Consideration

   

Average
Price Per
Share

 
    

Number

    

Percent

   

Amount

    

Percent

 

Existing stockholders

     22,295,893        76   $ 3,170,552        3   $ 0.14  

SAFE investors

     727,371        3     10,125,000        9     13.92  

New investors

     6,250,000        21     100,000,000        88     16.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     29,273,264        100   $ 113,295,552        100  
  

 

 

    

 

 

   

 

 

    

 

 

   

In addition, if the underwriters’ option to purchase additional shares is exercised in full, the number of shares held by existing stockholders will be reduced to 74% of the total number of shares of Class A common stock to be outstanding upon completion of this offering, and the number of shares of Class A common stock held by new investors participating in this offering will be further increased to 24% of the total number of shares of Class A common stock to be outstanding upon completion of the offering.

Each $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) total consideration paid by new investors by $6.3 million and increase (decrease) the percent of total consideration paid by new investors by 1%, assuming the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares offered by us would increase (decrease) total consideration paid by new investors by $16.0 million, assuming that the assumed initial price to the public remains the same, and after deducting the estimated underwriting discounts and commissions.

The number of shares of existing stockholders in the table above is based on (i) 18,936,698 shares of our Class B common stock outstanding as of June 30, 2021, after giving effect to the reclassification of all outstanding shares of our common stock into an equivalent number of our Class B common stock and the filing and effectiveness of our Amended and Restated Certificate of Incorporation in Delaware and (ii) the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 3,359,195 shares of our Class B common stock, the conversion of which will occur immediately prior to the completion of this offering. The number of shares of SAFE investors in the table above are based on the issuance and automatic conversion of convertible notes (which we also refer to as a Simple Agreement for Future Equity agreement

 

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(SAFE)) into 727,371 shares of Class A common stock (based on an assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus). The table above excludes:

 

   

13,230,932 shares of our Class B common stock issuable upon the exercise of options outstanding as of June 30, 2021 under our 2011 Plan, with a weighted-average exercise price of approximately $3.02 per share;

 

   

7,396,489 shares of our common stock reserved for issuance under our equity compensation plans, consisting of:

 

   

654,840 shares of our Class B common stock issuable upon the exercise of options granted under our 2011 Plan after June 30, 2021 with an exercise price of $10.06 per share;

 

   

522,349 shares of our Class B common stock reserved for issuance under our 2011 Plan as of June 30, 2021, which will become available for issuance under our 2021 Plan on the date of this prospectus;

 

   

5,262,500 shares of our Class A common stock reserved for future issuance under our 2021 Plan, which will become effective upon the effectiveness of the registration statement of which this prospectus forms a part, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan; and

 

   

956,800 shares of our Class A common stock reserved for issuance under our 2021 ESPP, which will become effective upon the effectiveness of the registration statement of which this prospectus forms a part, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan.

To the extent that any outstanding options are exercised or new awards are granted under our equity compensation plans, new investors will experience further dilution.

 

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SELECTED FINANCIAL DATA

The statements of operations data for the years ended December 31, 2019 and 2020 and the balance sheet data as of December 31, 2019 and 2020, are derived from our audited financial statements and related notes included elsewhere in this prospectus. The statements of operations data for the six months ended June 30, 2020 and 2021 and the balance sheet data as of June 30, 2021, are derived from our unaudited financial statements and related notes included elsewhere in this prospectus. The unaudited financial data set forth below have been prepared on the same basis as our audited financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair statement of such data. Our historical results are not necessarily indicative of the results to be expected in the future. The selected financial data in this section are not intended to replace our financial statements and the related notes, and are qualified in their entirety by the financial statements and related notes included elsewhere in this prospectus.

 

    

For the Year Ended December 31,

   

For the Six Months Ended June 30,

 
    

2019

    

2020

   

2020

   

2021

 
                  (unaudited)  
     (in thousands, except share and per share data)  

Statement of Operations Data

  

Revenue

   $ 40,748      $ 53,784     $ 25,379     $ 31,462  

Cost of revenue(1)

     20,127        25,801       11,678       15,756  
  

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     20,621        27,983       13,701       15,706  

Operating expenses:

         

Research and development(1)

     8,436        13,069       5,832       8,976  

Sales and marketing(1)

     8,166        11,924       5,423       8,124  

General and administrative(1)

     3,070        6,722       2,638       5,157  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     19,672        31,715       13,893       22,257  
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     949        (3,732     (192     (6,551

Interest expense

     (1,929)        (2,886     (1,153     (1,718

Gain on extinguishment of debt

     —          —         —         2,299  
  

 

 

    

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (980)        (6,618     (1,345     (5,970

Income tax provision

     (16)        (5     —         (136
  

 

 

    

 

 

   

 

 

   

 

 

 

Net loss

   $ (996)      $ (6,623   $ (1,345   $ (6,106
  

 

 

    

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (0.05)      $ (0.36   $ (0.07   $ (0.33
  

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing net loss per share, basic and diluted

     18,596,772        18,609,422       18,603,922       18,691,938  
  

 

 

    

 

 

   

 

 

   

 

 

 

Pro forma net loss per share, basic and diluted (unaudited)(2)

      $ (0.30     $ (0.28
     

 

 

     

 

 

 

Weighted-average shares outstanding used in computing pro forma net loss per share, basic and diluted (unaudited)(2)

        21,968,618         22,051,134  
     

 

 

     

 

 

 

 

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(1)

Includes stock-based compensation expense as follows:

 

    

For the Year Ended
December 31,

    

For the Six Months
Ended June 30,

 
    

2019

    

2020

    

2020

    

2021

 
                   (unaudited)  
     (in thousands)  

Cost of revenue

   $ 130      $ 100      $ 23      $ 194  

Research and development

     549        750        341        911  

Sales and marketing

     546        670        249        568  

General and administrative

     162        359        130        490  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,387      $ 1,879      $ 743      $ 2,163  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)

Unaudited pro forma basic and diluted net loss per share were computed to give effect to the automatic conversion of all outstanding shares of convertible preferred stock into shares of common stock in connection with a qualified initial public offering, using the as-converted method as though the conversion had occurred as of the beginning of the period presented or the date of issuance, if later.

 

    

As of December 31, 2020

    

As of June 30,
2021

 
    

    2019    

    

    2020    

 
                   (unaudited)  
     (in thousands)  

Balance Sheet Data

        

Cash and cash equivalents

   $ 6,978      $ 6,076      $ 1,306  

Total assets

     38,626        54,469        51,952  

Capital lease liability and lease financing obligation, non-current

     8,529        17,886        16,482  

Debt, non-current

     —          1,644        —    

Convertible preferred stock

     2,784        2,784        2,784  

Accumulated deficit

     (8,283      (14,639      (20,745

Total stockholders’ deficit

     (2,594      (6,840      (10,521

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this prospectus. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the section titled “Risk Factors” and elsewhere in this prospectus. See the section titled “Special Note Regarding Forward-Looking Statements” elsewhere in this prospectus.

Overview

We are a leading storage cloud platform, providing businesses and consumers cloud services to store, use, and protect their data in an easy and affordable manner. We provide these cloud services through a purpose-built, web-scale software infrastructure built on commodity hardware. From genome sequencing to mapping the world, from saving lives to playing online games, from interacting with a business to running one, data is central to modern existence. By substantially reducing the complexity and frustration of storing, using, and protecting data, we empower customers to focus on their core business operations. Through our blog and culture of transparency, we have built a devoted community of millions of readers and brand advocates. Referrals from our community of brand advocates, combined with our highly efficient and primarily self-serve customer acquisition model and an ecosystem of thousands of partners, have allowed us to attract over 480,000 customers as of June 30, 2021. These customers use our Storage Cloud platform across more than 175 countries to grow and protect their business data on our approximately 2 exabytes, or 2 trillion megabytes, of data storage under management. As businesses and consumers shift to the cloud, we believe our cloud services will increasingly become a foundational element of their overall technology stack.

Through our purpose-built software, our Backblaze Storage Cloud provides a platform that is durable, scalable, performant, and secure. This platform is the foundation for our Backblaze B2 Cloud Storage Infrastructure-as-a-Service (IaaS) consumption-based offering and our Backblaze Computer Backup Software-as-a-Service (SaaS) subscription-based offering. Backblaze B2 enables customers to store data, developers to build applications, and partners to expand their use cases. The amount of data stored in this cloud service can scale up and down as needed on a pay-as-you-go basis. Backblaze Computer Backup automatically backs up data from laptops and desktops for businesses and individuals. This cloud backup service offers easily understood flat-rate pricing to continuously back up a virtually unlimited amount of data.

 

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Our operations have historically been efficient with limited outside investment. Prior to issuing $10.0 million of convertible notes (which we also refer to as a Simple Agreement for Future Equity agreement (SAFE)) in a private financing round in August 2021, we had raised less than $3.0 million in outside equity since our founding in 2007. This has helped create a culture based on operational efficiency, creativity, and collaborative problem solving. Focusing on storage use cases and promoting an open ecosystem allows us to integrate well with a broad range of partners. From our straightforward pricing model, to our transparent communication with customers, to the popular and insightful content on our blog—we have established ourselves as an open and trusted provider and partner. We have consistently invested in our technology platform and highly efficient content-driven and primarily self-serve go-to-market strategy, allowing us to achieve the following customer, community, and product milestones:

 

 

LOGO

Our Business Model

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

 

   

Backblaze B2 Cloud Storage, which enables customers to store data for any use case, and for developers to embed our platform into their applications. In both cases, our customers use this offering in a consumption-based model, and

 

   

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

 

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Our pricing is simple and straightforward, with fees and terms that are shared transparently on our website. The chart below is a summary of the primary solutions and pricing options we offer.

 

 

LOGO

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

We provide simple pricing for usage of our cloud services and increase revenue per customer through our customers’ natural data growth or employee growth. Additionally, we provide customers with additional value through cross-sell, upsell, and use case expansion that result in additional revenue per customer. These options for cross-selling and upselling include the following:

 

   

Cross-Sell: After adopting any of our products, customers may expand to other products as their use cases grow, including Computer Backup customers who adopt B2 Cloud Storage to facilitate broader use cases. Adopting additional products expands usage of our platform.

 

   

Upsell: Customers can choose to use various features and services for additional fees, such as Extended Version History, Snapshots, cloud replication (anticipated to be available in the first half of 2022), and enhanced support tiers. For example, our Computer Backup cloud service includes 30-day file version history with all subscriptions; with Extended Version History customers can keep versions as long as they wish for $2/month plus $0.005/GB/month for files saved beyond one year. B2 Cloud Storage offers Snapshots that allow customers to create moment-in-time versions of their data, and we also allow customers to keep their data in multiple geographic regions, both of which provide more customer value and are charged at the current $0.005/GB/month pricing. Additionally, customers receive email and chat support for free, but can also opt for enhanced support tiers up to $700/month which provide dedicated customer support contacts and 24/7 response.

 

   

Use Case Expansion: B2 Cloud Storage customers may adopt the service for one business need, but can expand their use cases as their business evolves. One such example would be a business using B2 Cloud Storage for media asset management storage, which decides to also use the service as an origin store for content distribution; another would be a business that adopts B2 Cloud Storage for backup and archive purposes, which decides to also enable Object Lock for ransomware protection. Use case expansion enables the opportunity to deepen our relationship with our customers and increase revenue.

 

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For prospective customers interested in B2 Cloud Storage, we offer a free tier and a simple, intuitive sign-up process, allowing them to quickly on-board and start using our solutions. Once prospective customers grow beyond the free storage limit, they have the flexibility to only pay for what they need and pay as they go, without any lock-in or long-term commitments. This is delivered via a consumption-based model, and we charge a fixed price per month per gigabyte of data stored on our platform.

For prospective customers interested in Computer Backup, we offer a free 15-day trial and automatically start to back up all their files securely to our Storage Cloud. Prospective customers can then choose to sign up on a per computer basis. The service is delivered via a SaaS model where revenue is recognized ratably over the subscription term. Subscriptions are offered to customers on a monthly, annual, or bi-annual basis, providing customers flexibility to choose their commitment lengths. We charge a flat rate for this solution and provide virtually unlimited backup capabilities to customers. There are no storage limits or tiers. Customers also have the option to subscribe to Extended Version History, which enables them to extend retention of old file versions and deleted files, which are typically saved for 30 days, to a year or perpetually.

We have a highly efficient go-to-market model that is built on a self-serve selling motion. Prospective customers find us through a variety of channels including our website, partners, and brand advocates. We have fostered deep community engagement with valuable content we share on our blog—in 2020 alone, more than 3 million readers consumed content that we shared there. Our content encourages organic, inbound traffic that we believe serves as our greatest source of advocates and referrals. Our frictionless free trial and self-serve sign-up processes help convert our blog readers and referrals from our brand advocates into customers, with over 80% of our revenue in 2020 coming from self-serve customers. In addition to generating customers, a community of thousands of partners has arisen as a result of our efforts. Our developer, alliance, and managed service provider (MSP) partners expand use cases and attract customers, thereby increasing usage of our Storage Cloud and helping to drive revenue growth. New customers and partners ultimately lead to more insight, content, and community engagement, which creates a positive feedback loop that drives additional customers and partners. In addition to our self-serve selling motion, in recent years we have begun to invest in a sales-assisted selling motion to identify opportunities to increase business with existing customers and to assist larger customers in adopting our services. Our sales-assisted selling motion has experienced substantial growth and helps customers that, in 2020, were approximately 20 times larger in terms of average revenue per customer than our self-serve customers. These efficient and effective go-to-market motions have helped us grow rapidly.

Substantially all of our revenue is recurring in nature. We employ a land-and-expand model that drives additional revenue from existing customers. As customers generate, store, and back up more data, their use of our platform increases, creating natural opportunities for revenue expansion. We are able to further expand our relationships with our customers when they adopt new features and use cases that lead to increased usage of our platform. Our land-and-expand strategy is evidenced by our overall net revenue retention rate of 113% and 114% as of December 31, 2019 and 2020, respectively.

The propensity of our customer relationships to expand over time is indicated by the chart below. Each cohort represents customers that were brought onto our platform in that given year.

 

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Revenue by Customer Cohort

 

LOGO

Factors Affecting Our Performance

We believe that the future growth and performance of our business will depend on several factors, including the following:

Scale Self Service Customer Acquisition

Our business depends, in part, on our ability to add new customers. We believe there is a significant opportunity to further grow our customer base by continuing to make investments in sales and marketing. We will continue investing in our customer acquisition and inbound demand generation activities, which is driven predominantly by our blog content, our case studies, social sharing, earned media, and our self-serve sign up model. We intend to leverage this model as an efficient approach to attract new customers, turning them into brand advocates, partners, and more referrals. Furthermore, we plan to continue to build and scale our paid lead generation and outbound sales motion to increasingly grow in the mid-market.

We also plan to continue to build our ecosystem of partners. We believe that delivering our Storage Cloud solutions through our alliance, developer, and MSP partnerships is an area of opportunity for us. By adding more partners and deepening our relationships with them, we expand our use cases and drive new customer acquisition.

Scale Sales-Assisted Efforts

We believe an increasingly important complement to our self-serve customer acquisition model is our targeted inside Sales team that is focused on a low-touch “sales-assisted” model that supports our larger customers if the need arises. This team focuses on inbound inquiries, outbound prospecting targeting specific use cases, and volume expansion of our self-serve customers.

Expansion Within Existing Customers

Our future success will depend in part on our ability to increase usage and adoption of our solutions with existing customers. We intend to increase revenue from existing customer relationships through the

 

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development of additional features and use cases, expanding our Customer Success initiatives, and natural customer data growth. We have developed add-on services, such as Extended Version History and multi-region selection, which customers pay for on top of existing offerings. Examples of expanding use cases include utilizing Backblaze for additional purposes such as media storage, hybrid cloud support, analytics repositories, and others. We also plan to grow our Customer Success initiatives to ensure customers avail themselves of the full benefits of our platform, thus resulting in increased adoption. As these customers continue to generate, store, and back up data, their use of our platform increases, creating natural opportunities for revenue expansion.

Continued Platform Investment and New Product Launches

We are committed to delivering market-leading products that continue to make cloud storage and backup easy. We believe we must maintain our product quality and strength of our brand in order to retain the current customer base as well as drive further revenue growth in our business. We intend to continue investing in our research and development activities to build upon our strong position in the technology community. We have a history of introducing successful new features and capabilities for our products, and we intend to continue investing heavily to grow our business to take advantage of our expansive market opportunity. We also expect to launch new products that are adjacent to our current offerings, which will provide us with the ability to further cross-sell and upsell.

Investments for Continued Scaling

We are focused on our long-term revenue potential and building out our infrastructure to sustain that growth. On a routine basis, we will focus resources on optimizing the efficiency of our data storage. In some scenarios, we will choose to pass on potential cost savings to the customer, but in other scenarios we will choose to reinvest cost savings back into infrastructure and design.

International Expansion

While our sales and marketing efforts have primarily focused on the United States, our existing customer base spans more than 175 countries, with 28% of our revenue originating outside of the United States for the year ended December 31, 2020. We believe international expansion represents a meaningful opportunity to generate further demand for our solutions in international geographies. We plan to invest in our operations internationally to reach new customers by expanding in targeted key geographies where we believe there are opportunities for significant return on investment.

Key Business Metrics

We monitor the key business metrics set forth below to help us evaluate our business and growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies. The calculation of the key metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts, or investors.

 

    

As of

December 31,

    

As of

June 30,

 
     2019      2020      2020      2021  

Number of customers

     427,169        466,298        447,513        484,630  

Net revenue retention rate

     113%        114%        116%        110%  

Gross customer retention rate

     90%        90%        90%        91%  

Annual recurring revenue (in millions)

   $ 46.0      $ 59.2      $ 52.3      $ 64.8  

 

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    As of  
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
    March 31,
2021
    June 30,
2021
 

Number of customers (in thousands)

    394       406       417       427       436       448       458       466       476       485  

Annual average revenue per user

  $ 92     $ 98     $ 103     $ 108     $ 112     $ 116     $ 120     $ 124     $ 128     $ 133  

We also monitor the key business metrics set forth below with respect to our B2 Cloud Storage and Computer Backup solutions.

 

    

For the Year ended
December 31,

    

For the Six Months Ended
June 30,

 
    

        2019         

    

        2020         

    

        2020         

    

        2021         

 
                   (unaudited)  
     (in millions)  

B2 Cloud Storage revenue

   $ 8.6      $ 14.2      $ 6.3      $ 10.1  

Computer Backup revenue

   $ 31.7      $ 38.9      $ 18.8      $ 21.1  

 

    As of December 31,     As of June 30,  
    2019     2020     2020     2021  
    B2 Cloud
Storage
    Computer
Backup
    B2 Cloud
Storage
    Computer
Backup
    B2 Cloud
Storage
    Computer
Backup
    B2 Cloud
Storage
    Computer
Backup
 

Number of customers (in thousands)(1)

    44       392       59       419       52       407       68       431  

Net revenue retention rate

    151     107     135     108     144     110     130     104

Annual recurring revenue (in millions)

  $ 11.4     $ 34.6     $ 17.1     $ 42.1     $ 14.0     $ 38.3     $ 21.8     $ 43.0  

Gross customer retention

    92     90     92     91     92     90     92     91

Annual average revenue per user

  $ 241     $ 90     $ 292     $ 97     $ 267     $ 94     $ 326     $ 99  

 

 

(1)

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

Number of Customers

We believe our ability to grow the number of customers, and revenue generated per customer, on our platform provides a key indicator of the growth of our business and our future business opportunities. We also believe that the number of our customers is an important indicator of the market acceptance of our cloud services, engagement with our platform, and future revenue trends. We define a customer at the end of any period as a distinct account, as identified by a unique account identifier, that has paid for our cloud services, which makes up substantially all of our user base.

Net Revenue Retention Rate

We believe the growth in use of our platform by our existing customers is an important measure of the health of our business and our future growth prospects. We measure this growth by monitoring our overall net revenue retention rate, which measures our ability to retain and expand revenue from existing customers. We believe that we can drive this metric by continuing to focus on our customers and by adding additional products and functionality to our platform.

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

 

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revenue retention rate for a quarter by dividing (i) recurring revenue in the current quarter from any accounts that were active at the end of the same quarter of the prior year by (ii) recurring revenue in the current corresponding quarter from those same accounts. Our overall net revenue retention rate includes any expansion of revenue from existing customers and is net of revenue contraction and customer attrition, and excludes revenue from new customers in the current period. Our net revenue retention rate for Computer Backup and B2 Cloud Storage is calculated in the same manner as our overall net revenue retention rate based on the revenue from our Computer Backup and B2 Cloud Storage solutions, respectively.

Gross Customer Retention Rate

We use gross customer retention rate to measure our ability to retain our customers. Our gross customer retention rate reflects only customer losses and does not reflect the expansion or contraction of revenue we earn from our existing customers. We believe our high gross customer retention rates demonstrate that we serve a vital service to our customers, as the vast majority of our customers tend to continue to use our platform from one period to the next. To calculate our gross customer retention rate, we take the trailing four-quarter average of the percentage of cohort of customers who were active at the end of the quarter in the prior year that are still active at the end of the current quarter. We calculate our gross customer retention rate for a quarter by dividing (i) the number of accounts that generated revenue in the last month of the current quarter that also generated recurring revenue during the last month of the corresponding quarter in the prior year, by (ii) the number of accounts that generated recurring revenue during the last month of the corresponding quarter in the prior year.

Annual Recurring Revenue

We define annual recurring revenue (ARR) as the annualized value of all Backblaze B2 and Computer Backup arrangements as of the end of a period. Given the renewable nature of our business, we view ARR as an important indicator of our financial performance and operating results, and we believe it is a useful metric for internal planning and analysis. ARR is calculated based on multiplying the monthly revenue from all Backblaze B2 and Computer Backup arrangements, which represent greater than 98% of our revenue for the periods presented, (and excludes Physical Media revenue) for the last month of a period and multiplying it by 12. Our annual recurring revenue for Computer Backup and B2 Cloud Storage is calculated in the same manner as our overall annual recurring revenue based on the revenue from our Computer Backup and B2 Cloud Storage solutions, respectively. See Notes to our financial statements included elsewhere in this prospectus for more information on revenue from B2 Cloud Storage and Computer Backup arrangements.

ARR does not have a standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and is not intended to be combined with or to replace that item. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.

While ARR is not a guarantee of future revenue, we consider over 98% of our revenue recurring for the periods presented. As noted above, our gross customer retention rate has been consistent over the periods presented at approximately 90%. Although B2 Cloud Storage is paid for by customers in arrears, we recognize revenue in the month these storage services are delivered, and consider this revenue recurring as customers are charged as long as their data is stored with us. Further, during the periods presented, customers who store data with us generally increase the amount of their data stored over time, as evidenced by our B2 Cloud Storage net revenue retention rate of 130% as of June 30, 2021. Fees from B2 Cloud Storage (consumption-based arrangements) are recognized as services are delivered. Computer Backup (subscription-based arrangements) revenue is recognized on a straight-line basis over the contractual term of the arrangement beginning on the date that the service commences, provided that all other revenue recognition criteria have been met. See Notes to the financial statements for details on our revenue recognition policy. Additional limitations of ARR include the fact that consumption-based revenue is not guaranteed for future periods, although we believe that our high historic gross customer retention rate is indicative of ARR, and the fact that our subscription terms can be on a monthly basis, although the significant majority of our customers have subscription terms of one year or longer during the periods presented above.

 

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Annual Average Revenue Per User

We define annual average revenue per user (Annual ARPU) as the annualized value for the average revenue per customer. We believe Annual ARPU provides a useful indicator of our financial performance and revenue contributions per customer, and is an important metric for internal planning and analysis. Annual ARPU is calculated by dividing our revenue for the last month of a period by the total number of customers as of the last day of the same period, and then multiplying the resulting quotient by 12. Our annual average revenue per user for Computer Backup and B2 Cloud Storage is calculated in the same manner based on the revenue and number of customers from our Computer Backup and B2 Cloud Storage solutions, respectively.

Non-GAAP Financial Measures

To supplement our financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP, we provide investors with non-GAAP financial measures including adjusted gross margin and adjusted EBITDA, each as defined below. These measures are presented for supplemental informational purposes only, have limitations as analytical tools and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of these measures as tools for comparison. Because of these limitations, when evaluating our performance, you should consider each of these non-GAAP financial measures alongside other financial performance measures, including the most directly comparable financial measure calculated in accordance with GAAP and our other GAAP results. A reconciliation of each of our non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with GAAP is set forth below.

Adjusted Gross Margin

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

We define adjusted gross margin as gross profit, exclusive of stock-based compensation expense, depreciation expense of our property and equipment, and amortization expense of capitalized internal-use software included within cost of revenue, as a percentage of adjusted gross profit to revenue. We exclude stock-based compensation, which is a non-cash item, because we do not consider it indicative of our core operating performance. We exclude depreciation expense of our property and equipment and amortization expense of capitalized internal-use software, because these may not reflect current or future cash spending levels to support our business. We believe adjusted gross margin provides consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this metric eliminates the effects of depreciation and amortization.

 

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

 

     For the Year Ended
December 31,
     For the Six Months
Ended June 30,
 
     2019      2020      2020      2021  
                   (unaudited)  
     (in thousands)  

Gross profit

   $ 20,621      $ 27,983      $ 13,701      $ 15,706  

Adjustments:

           

Stock-based compensation

     130        100        23        194  

Depreciation and amortization

     9,083        12,402        5,534        7,683  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted gross profit

   $ 29,834      $ 40,485      $ 19,258      $ 23,583  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     51      52      54      50

Adjusted gross margin

     73      75      76      75

Adjusted EBITDA

Our management uses adjusted EBITDA to assess our operating performance. We define adjusted EBITDA as net loss adjusted to exclude depreciation and amortization, stock-based compensation, interest expense, income tax provision, and gain on extinguishment of debt. We use adjusted EBITDA to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that adjusted EBITDA, when taken together with our GAAP financial results, provides meaningful supplemental information regarding our operating performance by excluding certain items that may not be indicative of our business, results of operations or outlook. We consider adjusted EBITDA to be an important measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis.

Our calculation of adjusted EBITDA may differ from the calculations of adjusted EBITDA by other companies and therefore comparability may be limited. Because of these limitations, when evaluating our performance, you should consider adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results. The following table presents a reconciliation of net loss, the most directly comparable financial measure stated in accordance with GAAP, to adjusted EBITDA for each of the periods presented:

 

     For the Year Ended
December 31,
     For the Six Months
Ended June 30,
 
     2019      2020      2020      2021  
                   (unaudited)  
     (in thousands)  

Net loss

   $ (996    $ (6,623    $ (1,345    $ (6,106

Adjustments:

           

Depreciation and amortization

     9,318        12,951        5,749        7,982  

Stock-based compensation

     1,387        1,879        743        2,163  

Interest expense

     1,929        2,886        1,153        1,718  

Income tax provision

     16        5        —          136  

Gain on extinguishment of debt

     —          —          —          (2,299
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 11,654      $ 11,098      $ 6,300      $ 3,594  
  

 

 

    

 

 

    

 

 

    

 

 

 

Impact of COVID-19

The worldwide spread of COVID-19 has created significant uncertainty in the global economy. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of COVID-19 and the extent to which COVID-19

 

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continues to impact our business will depend on future developments, which are highly uncertain and difficult to predict.

While the full impact of the pandemic to our business remains unknown and we believe that our results of operations and financial condition have not been materially adversely impacted to date, we also believe that the pandemic has had some impact on our business. Our potential customers, customers, or partners may have experienced, or in the future could experience, downturns or uncertainty in their own business operations due to COVID-19, which may have affected or could affect purchasing and operating decisions. For example, although we believe our ability to retain customers has not been materially impacted by the pandemic, we also believe that the pandemic may have caused some customers to reduce their use of cloud storage with us or to delay increasing their use of our cloud storage offerings. In addition, the pandemic may have caused potential customers to delay their purchasing decisions or to store less data with us. We may also experience customer losses due to customer bankruptcy or cessation of operations, or otherwise.

In addition to the impact on customers, the pandemic has had some impact to our supply chain. For example, starting in April 2020, we began to acquire additional hard drives and related infrastructure through capital lease agreements in order to minimize the impact of potential supply chain disruptions due to the pandemic. The additional leased hard drives resulted in a higher balance of capital equipment and related lease liability, an increase in cash used in financing activities from principal payments, as well as a higher ongoing interest and depreciation expense related to these lease agreements. Accordingly, our supply chain in the future may be disrupted, or we may be unable to obtain infrastructure and related equipment essential to our business on favorable terms or at all. However, based on the impact from the pandemic to date, we believe we have sufficient reserves to minimize any material impact to our business operations should such a disruption occur.

In response to the COVID-19 pandemic, in the first quarter of 2020, we temporarily closed our office, enabled our non-essential workforce to work remotely, and implemented travel restrictions for non-essential business. These changes remain in effect in the second quarter of 2021 and could extend into future quarters. The changes we have implemented to date have not affected and are not expected to materially affect our ability to maintain operations, including financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures. Furthermore, after the outbreak of COVID-19, we have seen slower growth in certain operating expenses due to reduced business travel and the virtualization or cancellation of customer and employee events.

In April 2020, we applied for a payroll forgiveness loan and received $2.3 million from the Small Business Administration’s Paycheck Protection Program (PPP). We submitted our PPP forgiveness application in July 2020, and in June 2021 we received notification from the SBA that our forgiveness application of the PPP loan and accrued interest, totaling $2.3 million, was approved in full, and we had no further obligations related to the PPP loan. Accordingly, we recorded a gain on the forgiveness of the PPP loan as gain on extinguishment of debt on our statement of operations as of June 30, 2021. While we believe our loan was properly obtained and forgiven, there can be no assurance regarding the outcome of an SBA review. We have not been informed that a review will occur and we have not accrued any liability associated with the risk of an adverse SBA review.

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

Key Components of Results of Operations

Revenue

We generate revenue primarily from our Backblaze B2 Cloud Storage and Backblaze Computer Backup cloud services offered on our platform. Our platform is offered to our customers through either a consumption or

 

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a subscription-based arrangement through Backblaze B2 and Backblaze Computer Backup, respectively. Our subscription arrangements range in duration from one month to 24 months, for which we bill our customers up front for the entire period. Our consumption-based arrangements do not have a contractual term and are billed monthly in arrears.

For our subscription arrangements, we provide our cloud services evenly over the contractual period, for which revenue is recognized on a straight-line basis over the contract term beginning on the date that the service is made available to the customer. Consumption-based revenue is variable and is related to fees charged for our customers’ use of our platform and is recognized as revenue in the period in which the consumption occurs.

In support of our platform, we also derive revenue from products offered to our customers for the ability to securely restore data using a USB drive (USB Restore) and for migrating large data sets to our platform using our proprietary Fireball device. Revenue from USB Restore is recognized as our products are delivered to our customers. Revenue recognized from customer rentals of our Fireball device is time-based.

We adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606) as of January 1, 2020.

Cost of Revenue and Gross Margin

Cost of revenue consists of expenses for providing our platform and cloud services to our customers. These expenses include operating in co-location facilities, network and bandwidth costs, and depreciation of our equipment and capital lease equipment in co-location facilities. Personnel-related costs associated with customer support and maintaining service availability, including salaries, benefits, bonuses, and stock-based compensation are also included. Cost of revenue also includes credit card processing fees, amortization of capitalized internal-use software development costs, and allocated overhead costs.

We intend to continue to invest additional resources in our infrastructure and related personnel, and our customer support organization, to support the growth of our business. Some of these investments, including costs of infrastructure equipment (including related depreciation) and expansion, are incurred in advance of generating revenue, and either the failure to generate anticipated revenue or fluctuations in the timing of revenue could affect our gross margin from period to period.

Operating Expenses

The most significant components of our operating expenses are personnel costs, which consist of salaries, benefits, bonuses, and stock-based compensation. We also incur other non-personnel costs related to our general overhead expenses. We expect that our operating expenses will increase in absolute dollars as we grow our business.

Research and Development

Research and development expenses consist primarily of personnel costs, consultant fees, costs related to technical operations, subscription services for use by our research and development organization and an allocation of our general overhead expenses. We capitalize the portion of our software development costs that meets the criteria for capitalization.

We expect our research and development expenses to increase in absolute dollars for the foreseeable future as we continue to focus our research and development efforts on adding new features to our platform, improving our cloud service offerings, and increasing the functionality of our existing features. Our research and development expenses may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses.

 

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Sales and Marketing

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

We plan to continue investing in sales and marketing by increasing our sales and marketing headcount, supplementing our self-serve model with a direct sales approach, expanding our partner ecosystem, driving our go-to-market strategies, building our lead generation and brand awareness, and sponsoring additional marketing events. As a result, we expect our sales and marketing expenses to increase in absolute dollars for the foreseeable future. Sales and marketing expenses may fluctuate as a percentage of revenue from period to period because of the timing and extent of these expenses.

General and Administrative

General and administrative expenses consist primarily of personnel costs for our accounting, finance, legal, IT, security, human resources, and administrative support personnel and executives. General and administrative expenses also include costs related to legal and other professional services fees, sales, and other taxes; depreciation and amortization; and an allocation of our general overhead expenses. We expect our general and administrative expenses to increase in absolute dollars as our business grows. Following the completion of this offering, we will incur additional general and administrative expenses as a result of operating as a public company, including increased expenses for insurance, costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, investor relations, and professional services expenses.

Interest Expense

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

Income Tax Provision

Provision for income taxes consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance against our U.S. deferred tax assets because we have concluded that it is more likely than not that our deferred tax assets will not be realized.

 

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Results of Operations

The following table sets forth our statements of operations data for the periods indicated:

 

    

For the Year Ended
December 31,

    

For the Six Months Ended
June 30,

 
    

2019

    

2020

    

    2020    

    

    2021    

 
                   (Unaudited)  
     (in thousands)  

Revenue

   $ 40,748      $ 53,784      $ 25,379      $ 31,462  

Cost of revenue(1)

     20,127        25,801        11,678        15,756  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     20,621        27,983        13,701        15,706  

Operating expenses:

           

Research and development(1)

     8,436        13,069        5,832        8,976  

Sales and marketing(1)

     8,166        11,924        5,423        8,124  

General and administrative(1)

     3,070        6,722        2,638        5,157  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     19,672        31,715        13,893        22,257  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from operations

     949        (3,732      (192      (6,551

Interest expense

     (1,929      (2,886      (1,153      (1,718

Gain on extinguishment of debt

     —          —          —          2,299  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss before provision for income taxes

     (980      (6,618      (1,345      (5,970

Income tax provision

     (16      (5      —          (136
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

   $ (996    $ (6,623    $ (1,345    $ (6,106
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes stock-based compensation expense as follows:

 

    

For the Year Ended
December 31,

    

For the Six Months Ended
June 30,

 
    

2019

    

2020

    

    2020    

    

    2021    

 
                   (unaudited)  
     (in thousands)  

Cost of revenue

   $ 130      $ 100      $ 23      $ 194  

Research and development

     549        750        341        911  

Sales and marketing

     546        670        249        568  

General and administrative

     162        359        130        490  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,387      $ 1,879      $ 743      $ 2,163  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

    

For the Year Ended

December 31,

   

For the Six Months
Ended June 30,

 
    

2019

   

2020

   

2020

   

2021

 
                 (unaudited)  

Revenue

     100     100     100     100

Cost of revenue

     49       48       46       50  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     51       52       54       50  

Operating expenses:

        

Research and development

     21       24       23       29  

Sales and marketing

     20       22       21       26  

General and administrative

     8       12       10       16  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     48       59       55       71  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     2       (7     (1     (21

Interest expense

     (5     (5     (5     (5

Gain on extinguishment of debt

     —         —         —         7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (2     (12     (5     (19

Income tax provision

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (2 )%      (12 )%      (5 )%      (19 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Six Months Ended June 30, 2020 and 2021

Revenue

 

    

For the Six Months
Ended June 30,

        
    

2020

    

2021

    

Change

    

% Change

 
     (in thousands)                

B2 Cloud Storage revenue

   $ 6,261      $ 10,050      $ 3,789        61

Computer Backup revenue

     18,803        21,055        2,252        12

Physical Media revenue

     315        357        42        13
  

 

 

    

 

 

    

 

 

    

Revenue

   $ 25,379      $ 31,462      $ 6,083        24

Total revenue increased by $6.1 million, or 24%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. $3.8 million of the increase was from consumption-based revenue (B2 Cloud Storage), which increased by approximately $1.8 million from new customers and approximately $2.0 million from increased usage of our cloud services by existing customers. The remaining increase of $2.3 million was due to subscription-based revenue (Computer Backup), which increased by approximately $1.5 million from new customers and approximately $0.8 million primarily from expansion of existing customers. Additionally, COVID-19 was ongoing during the full six months ended June 30, 2021, and may have impacted our customers and potential customers, while the same period in 2020 had only a partial impact of the pandemic.

 

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Cost of Revenue and Gross Margin

 

    

For the Six Months
Ended June 30,

              
    

2020

   

2021

   

Change

    

% Change

 
     (in thousands, except
percentages)
              

Cost of revenue

   $ 11,678     $ 15,756     $ 4,078        35

Gross margin

     54     50     

Total cost of revenue increased by $4.1 million, or 35%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was primarily attributable to an increase of $1.9 million for depreciation of our infrastructure equipment, which was mainly a result of purchasing additional hard drives and related infrastructure in order to minimize the impact of potential supply chain disruptions caused by COVID-19, and an increase of $1.7 million related to managing and operating our co-location facilities.

Gross margin decreased to 50% for the six months ended June 30, 2021 compared to 54% for the six months ended June 30, 2020. The decrease in gross margin was primarily due to cost of revenue increasing at a higher rate as compared to our revenue due primarily to investment in our infrastructure, as described above.

Operating Expenses

 

    

For the Six Months
Ended June 30,

    

 

    

 

 
    

2020

    

2021

    

Change

    

% Change

 
     (in thousands)                

Research and development

   $ 5,832      $ 8,976      $ 3,144        54

Sales and marketing

     5,423        8,124        2,701        50

General and administrative

     2,638        5,157        2,519        95

Research and Development

Research and development expense increased by $3.1 million, or 54%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was primarily attributable to an increase of $2.1 million in personnel-related expenses as a result of increased headcount, an increase of $0.2 million related to facilities and IT overhead allocation, and an increase of $0.6 million related to stock-based compensation expense.

Sales and Marketing

Sales and marketing expense increased by $2.7 million, or 50%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase in sales and marketing expense was primarily attributable to an increase of $1.6 million in personnel-related expenses as a result of increased headcount, an increase of $0.3 million related to stock-based compensation and an increase of $0.6 million due to increased advertising expenses.

General and Administrative

General and administrative expense increased by $2.5 million, or 95%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was primarily attributable to an increase of $1.3 million in personnel-related expenses as a result of increased headcount, an increase of $0.5 million in professional fees for accounting and tax services, and an increase of $0.4 million related to stock-based compensation expense.

 

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Interest Expense

 

    

For the Six Months
Ended June 30,

        
    

2020

    

2021

    

Change

    

% Change

 
     (in thousands)                

Interest expense

   $ (1,153    $ (1,718    $ (565      49

Interest expense increased by $0.6 million, or 49%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was primarily due to interest expense from capital lease agreements we entered into during the second half of 2020, which increased our capital lease liability significantly to $27.6 million as of June 30, 2021. The capital lease agreements were for additional hard drives and related infrastructure that we purchased in response to the COVID-19 pandemic, in order to minimize the impact of potential supply chain disruptions.

Income Tax Provision

 

    

For the Six Months
Ended June 30,

        
    

2020

    

2021

    

Change

    

% Change

 
     (in thousands)                
   $ —        $ (136    $ (136      —  

Our provision for income taxes increased by $0.1 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to a charge related to the limitation on post-2017 federal net operating losses which are limited to 80% beginning in years after December 31, 2020.

Comparison of the Years Ended December 31, 2019 and 2020

Revenue

 

    

For the Year Ended
December 31,

        
    

2019

    

2020

    

Change

    

% Change

 
     (in thousands)                

B2 Cloud Storage revenue

   $ 8,569      $ 14,240      $ 5,671        66

Computer Backup revenue

     31,726        38,926        7,200        23

Physical Media revenue

     453        618        165        36
  

 

 

    

 

 

    

 

 

    

Revenue:

   $ 40,748      $ 53,784      $ 13,036        32

Total revenue increased by $13.0 million, or 32%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. $5.7 million of the increase was from consumption-based revenue (B2 Cloud Storage), which increased by approximately $2.6 million from new customers and approximately $3.1 million from increased usage of our cloud services by existing customers. $7.2 million of the increase was due to subscription-based revenue (Computer Backup), which increased by approximately $4.7 million as a result of new customers and approximately $2.5 million primarily from expansion of existing customers. The year ended December 31, 2020 included the full impact of our 2019 price increase.

Cost of Revenue and Gross Margin

 

    

For the Year Ended

December 31,

              
    

2019

   

2020

   

Change

    

% Change

 
     (in thousands, except
percentages)
              

Cost of revenue

   $ 20,127     $ 25,801     $ 5,674        28

Gross margin

     51     52     

 

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Total cost of revenue increased by $5.7 million, or 28%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily attributable to an increase of $3.0 million for depreciation of our infrastructure equipment and an increase of $2.2 million related to managing and operating our co-location facilities.

Gross margin increased to 52% for the year ended December 31, 2020 compared to 51% for the year ended December 31, 2019.

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

Operating Expenses

 

    

For the Year Ended

December 31,

        
    

2019

    

2020

    

Change

    

% Change

 
     (in thousands)                

Research and development

   $ 8,436      $ 13,069      $ 4,633        55

Sales and marketing

     8,166        11,924        3,758        46

General and administrative

     3,070        6,722        3,652        119

Research and Development

Research and development expense increased by $4.6 million, or 55%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily attributable to an increase of $4.2 million in personnel-related expenses as a result of increased headcount, an increase of $0.2 million related to facilities and IT overhead allocation, and an increase of $0.2 million related to stock-based compensation expense.

Sales and Marketing

Sales and marketing expense increased by $3.8 million, or 46%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase in sales and marketing expense was primarily attributable to an increase of $3.3 million in personnel-related expenses as a result of increased headcount and an increase of $0.5 million related to facilities and IT overhead allocation, partially offset by a decrease of $0.2 million in reduced spending for tradeshows as a result of the COVID-19 pandemic.

General and Administrative

General and administrative expense increased by $3.7 million, or 119%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily attributable to an increase of $3.4 million in personnel-related expenses as a result of increased headcount, increase of $0.5 million in professional fees for accounting and other consulting services, and an increase of $0.2 million related to stock-based compensation expense, partially offset by a decrease of $0.3 million in reduced spending for in-office employee expenses and travel as a result of the COVID-19 pandemic.

Interest Expense

 

    

For the Year Ended

December 31,

        
    

2019

    

2020

    

Change

    

% Change

 
     (in thousands)                

Interest expense

   $ (1,929    $ (2,886    $ (957      50

 

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Interest expense increased by $1.0 million, or 50%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily due to interest expense from $23.1 million in capital lease agreements we entered into during 2020, which increased our capital lease liability from $16.8 million as of December 31, 2019 to $29.2 million as of December 31, 2020. The capital lease agreements were for additional hard drives and related infrastructure that we purchased in response to the COVID-19 pandemic, in order to minimize the impact of potential supply chain disruptions.

Income Tax Provision

 

     For the Year Ended
December 31,
        
     2019      2020      Change      % Change  
     (in thousands)                

Income tax provision

   $ (16    $ (5    $ 11        (69 )% 

Our provision for income taxes did not change significantly, decreasing by less than $0.1 million, or 69%, for the year ended December 31, 2020 compared to the year ended December 31, 2019.

Quarterly Results of Operations

The following tables set forth selected unaudited quarterly statements of operations data for each of the six fiscal quarters ended June 30, 2021, as well as the percentage of revenue that each line item represents for each quarter. The information for each of these quarters has been prepared on the same basis as the audited annual financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. This data should be read in conjunction with our financial statements and related notes included elsewhere in this prospectus. These quarterly results are not necessarily indicative of our results of operations to be expected for any future period.

Statements of Operations Data

 

    

Three Months Ended

 
    

March 31,
2020

   

June 30,
2020

   

September 30,
2020

   

December 31,
2020

   

March 31,
2021

   

June 30,
2021

 
     (in thousands, unaudited)  

Revenue

   $ 12,358     $ 13,021     $ 13,817     $ 14,588     $ 15,312     $ 16,150  

Cost of revenue(1)

     5,448       6,230       7,097       7,026       7,830       7,926  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     6,910       6,791       6,720       7,562       7,482       8,224  

Operating expenses:

            

Research and development(1)

     2,660       3,172       3,300       3,937       4,269       4,707  

Sales and marketing(1)

     2,570       2,853       2,956       3,545       3,777       4,347  

General and administrative(1)

     1,129       1,509       1,519       2,565       2,253       2,904  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     6,359       7,534       7,775       10,047       10,299       11,958  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     551       (743     (1,055     (2,485     (2,817     (3,734

Interest expense

     (538     (615     (793     (940     (871     (847

Gain on extinguishment of debt

     —         —         —         —         —         2,299  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     13       (1,358     (1,848     (3,425     (3,688     (2,282

Income tax (provision) benefit

     —         —         (12     7       —         (136
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 13     $ (1,358   $ (1,860   $ (3,418   $ (3,688   $ (2,418
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)

Includes stock-based compensation expense as follows:

 

   

Three Months Ended

 
   

March 31,
2020

   

June 30,
2020

   

September 30,
2020

   

December 31,
2020

   

March 31,
2021

   

June 30,
2021

 
    (in thousands, unaudited)  

Cost of revenue

    —       $ 23     $ 34     $ 43     $ 85     $ 109  

Research and development

    149       192       195       214       399       512  

Sales and marketing

    107       142       137       284       189       379  

General and administrative

    44       86       105       124       235       255  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $ 300     $ 443     $ 471     $ 665     $ 908     $ 1,255  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Revenue Data

 

    

Three Months Ended

 
    

March 31,
2020

   

June 30,
2020

   

September 30,
2020

   

December 31,
2020

   

March 31,
2021

   

June 30,
2021

 
     (unaudited)  

Revenue

     100     100     100     100     100     100

Cost of revenue

     44       48       51       48       51       49  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     56       52       49       52       49       51  

Operating expenses:

            

Research and development

     22       24       24       27       28       29  

Sales and marketing

     21       22       21       24       25       27  

General and administrative

     9       12       11       18       15       18  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     51       58       56       69       67       74  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     4       (6     (8     (17     (18     (23

Interest expense

     (4     (5     (6     (6     (6     (5

Gain on extinguishment of debt

     —         —         —         —         —         14  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     —         (10     (13     (23     (24     (14

Income tax (provision) benefit

     —         —         —         —         —         1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     —         (10 )%      (13 )%      (23 )%      (24 )%      (15 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Changes in Revenue

Revenue increased sequentially in each of the quarters presented primarily due to the addition of new customers and increased usage of our cloud services. Additionally, the COVID-19 pandemic began during the first quarter of 2020, and was ongoing during the remaining quarterly periods presented, and may have impacted our customers and potential customers due to the economic impact of the pandemic. Increases or decreases in new sales or renewals in any one period may not be immediately reflected in our revenue for that period and may instead affect future periods. For our subscription arrangements, a portion of the revenue that we report in each period may be attributable to the recognition of deferred revenue recorded in prior periods.

Quarterly Changes in Cost of Revenue and Gross Margin

Cost of revenue generally increased in each of the quarters presented primarily as a result of increased infrastructure expenses, driven by the initial cost of new deployments for supporting the increased use of our platform by new and existing customers, as well as increased personnel-related expenses resulting from increased headcount. As we continue to scale our business, we are increasing the efficiency of our infrastructure, which

 

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should drive our cost of revenue as a percentage of revenue lower over the long term and increase our gross margin.

As a result of COVID-19, starting in April 2020, we began to lease additional hard drives to minimize the potential impact of any supply chain disruptions. The additional expenditures adversely impacted our gross margin and maintaining an increased supply of leased equipment may continue to adversely impact our gross margins in the future.

Quarterly Changes in Operating Expenses

Operating expenses have generally increased in each of the quarters presented primarily due to increased headcount and other related costs to support our growth. However, after the outbreak of COVID-19, we have seen slower growth in certain operating expenses due to reduced business travel, deferred hiring for some positions and the virtualization or cancellation of customer and employee events. Our research and development expenses have generally increased as we continued to add headcount for the development of enhancements and features to our platform. We intend to continue to make significant investments in research and development. We also intend to invest in our sales and marketing organization and programs to drive future revenue growth. General and administrative expenses increase as our business grows, consisting primarily of personnel costs for our accounting, finance, legal, human resources and administrative support personnel and executives. We expect to incur additional general and administrative expenses as a result of operating as a public company.

Key Business Metrics

 

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

B2 Cloud Storage

           

Number of customers (in thousands)(1)

    47       52       55       59       63       68  

Net revenue retention rate

    148     144     139     135     131     130

Annual recurring revenue (in millions)

  $ 11.9     $ 14.0     $ 15.6     $ 17.1     $ 19.3     $ 21.8  

Annual average revenue per user

  $ 248     $ 267     $ 281     $ 292     $ 297     $ 326  

Gross customer retention

    92     92     92     92     92     92

Quarterly revenue (in millions, unaudited)

  $ 2.9     $ 3.3     $ 3.8     $ 4.2     $ 4.7     $ 5.3  

Computer Backup

           

Number of customers (in thousands)(1)

    399       407       414       419       426       431  

Net revenue retention rate

    110     110     109     108     105     104

Annual recurring revenue (in millions)

  $ 37.9     $ 38.3     $ 39.7     $ 42.1     $ 42.4     $ 43.0  

Annual average revenue per user

  $ 94     $ 94     $ 95     $ 97     $ 99     $ 99  

Gross customer retention

    90     90     90     91     91     91

Quarterly revenue (in millions, unaudited)

  $ 9.2     $ 9.6     $ 9.9     $ 10.2     $ 10.4     $ 10.7  

Total Company

           

Number of customers (in thousands)

    436       448       458       466       476       485  

Net revenue retention rate

    116     116     116     114     111     110

Annual recurring revenue (in millions)

  $ 49.7     $ 52.3     $ 55.3     $ 59.2     $ 61.7     $ 64.8  

Annual average revenue per user

  $ 112     $ 116     $ 120     $ 124     $ 128     $ 133  

Gross customer retention

    90     90     90     90     91     91

Quarterly revenue (in millions, unaudited)

  $ 12.4     $ 13.0     $ 13.8     $ 14.6     $ 15.3     $ 16.2  

 

(1)

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

 

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Quarterly Changes in Key Business Metrics

Number of customers, annual recurring revenue, and annual average revenue per user generally increased sequentially in each of the quarters presented due to the addition of new customers, including customers with larger data storage and backup needs, and a continuing benefit from a prior Computer Backup price increase initially effected in 2019. Gross customer retention remained essentially flat for each of the quarters presented, while net revenue retention decreased sequentially for the quarters presented due to existing customers slowing their rate of usage expansion of our Computer Backup and B2 Cloud Services, which we believe may have been impacted by the COVID-19 pandemic.

Liquidity and Capital Resources

Since inception, we have financed operations primarily through payments received from our customers. As of December 31, 2020 and June 30, 2021, our principal sources of liquidity were cash and cash equivalents of $6.1 million and $1.3 million, respectively.

We believe that our existing cash and cash equivalents, together with cash provided by operations and our revolving credit facility, will be sufficient to support our working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the price at which we are able to purchase or lease infrastructure equipment, the introduction of platform enhancements, and the continuing market adoption of our platform. In the future, we may enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required or choose to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, results of operations, and financial condition.

In October 2017, we entered into a $15.0 million revolving credit agreement with HomeStreet Bank. Under this agreement, amounts available to be borrowed are based on the lesser of $15.0 million or our trailing four months’ monthly recurring revenue multiplied by a retention rate as defined in the agreement. Borrowings are secured by substantially all of our assets, with limited exceptions. During April 2021, we amended our revolving credit agreement. Under this amendment, among other things, (i) amounts available to be borrowed are based on the lesser of $10.0 million or our trailing four months monthly recurring revenue multiplied by a retention rate set forth in the amendment and (ii) advances on the line of credit bear interest payable monthly at the Wall Street Journal prime rate plus 1.00%. As amended, the revolving credit agreement matures in June 2022.

In October 2021, we entered into a revolving credit agreement with City National Bank. Under this agreement, among other things, (i) amounts available to be borrowed are $9.5 million and (ii) advances on the line of credit bear interest payable monthly at the average SOFR rate plus 2.75%. The revolving credit agreement matures in September 2024. In connection with this agreement, we fully repaid and subsequently terminated our 2017 revolving credit agreement with HomeStreet Bank.

We also have access to additional equipment lease financing capacity through certain lessors. In addition, during March 2021, we entered into an agreement with a lessor for up to $10.0 million of additional equipment lease financing under similar terms as outstanding leases with the lessor.

In April 2020, we applied for a payroll forgiveness loan and received $2.3 million from the Small Business Administration’s Paycheck Protection Program (PPP). We submitted our PPP forgiveness application in July 2020, and in June 2021 we received notification from the SBA that our forgiveness application of the PPP

 

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loan and accrued interest, totaling $2.3 million, was approved in full, and we had no further obligations related to the PPP loan. Accordingly, we recorded a gain on the forgiveness of the PPP loan as gain on extinguishment of debt on statement of operations as of June 30, 2021. While we believe our loan was properly obtained and forgiven, there can be no assurance regarding the outcome of an SBA review. We have not been informed that a review will occur and we have not accrued any liability associated with the risk of an adverse SBA review.

In August 2021, we issued $10.0 million of convertible notes in a private financing round to continue investing in our growth initiatives and for general corporate purposes. We also refer to these convertible notes security as a Simple Agreement for Future Equity agreement (SAFE). The convertible notes are automatically convertible into shares of our Class A common stock upon the completion of this offering (or other liquidity event if sooner) at a discounted price to the value of our common stock at the time of such event. The discount shall initially be equal to 10% and shall increase by an additional 10% annually following the effective date of the agreement, subject to a maximum discount of 50%. The discount shall be adjusted pro-rata on a monthly basis, increasing on the monthly anniversary of the effective date of the agreement. Interest shall accrue at the simple rate of 5% per annum of the outstanding amount commencing upon the effective date of the agreement and continuing until the outstanding principal amount has been paid in full or converted. The accrued interest shall be added to the purchased amount upon conversion into equity.

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

 

    

For the Year Ended
December 31,

    

For the Six Months
Ended June 30,

 
    

2019

    

2020

    

2020

    

2021

 
                   (unaudited)  
     (in thousands)      (in thousands)  

Net cash provided by operating activities

   $ 13,203      $ 12,819      $ 6,994      $ 2,583  

Net cash (used in) investing activities

     (3,232)        (4,973      (2,449      (6,406

Net cash (used in) financing activities

     (7,733)        (8,748      (2,175      (947

Operating Activities

Our largest source of operating cash is payments received from our customers. Our primary uses of cash from operating activities are for personnel-related expenses, sales and marketing expenses, infrastructure expenses, and overhead expenses.

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

For the six months ended June 30, 2021, cash provided by operating activities was $2.6 million, which resulted from a net loss of $6.1 million, adjusted for non-cash charges of $8.2 million and net cash inflow of $0.5 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $8.0 million for depreciation and amortization expense, $2.3 million for the gain on extinguishment of the PPP loan and $2.2 million for stock-based compensation expense. The net cash inflow from changes in operating assets and liabilities was primarily the result of a $0.9 million increase in deferred revenue, which increased due to our growing customer base and timing of collections from our customers. Cash provided by operations decreased during the six months ended June 30, 2021, as compared to the same period in 2020 primarily due to increased spending in support of our business growth.

For the six months ended June 30, 2020, cash provided by operating activities was $7.0 million, which resulted from a net loss of $1.3 million, adjusted for non-cash charges of $6.8 million and net cash inflow of $1.5 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $5.7 million for depreciation and amortization expense and $0.7 million for stock-based compensation expense. The net cash

 

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inflow from changes in operating assets and liabilities was primarily the result of a $1.5 million increase in deferred revenue, which increased due to our growing customer base and timing of collections from our customers.

For the year ended December 31, 2020, cash provided by operating activities was $12.8 million, which resulted from a net loss of $6.6 million, adjusted for non-cash charges of $15.5 million and a net cash inflow of $3.9 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $13.0 million for depreciation and amortization expense and $1.9 million for stock-based compensation expense. The net cash inflow from changes in operating assets and liabilities was primarily the result of a $2.0 million increase in deferred revenue, which increased due to our growing customer base and timing of collections from our customers, in addition to a $2.3 million increase in accrued expenses and other current liabilities, which increased due to timing of payment of our expenses.

For the year ended December 31, 2019, cash provided by operating activities was $13.2 million which resulted from a net loss of $1.0 million, adjusted for non-cash charges of $10.5 million and net cash inflow of $3.7 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $9.3 million for depreciation and amortization expense and $1.4 million for stock-based compensation expense. The net cash inflow from changes in operating assets and liabilities was primarily the result of a $3.6 million increase in deferred revenue, which increased due to our growing customer base and timing of collections from our customers.

Investing Activities

Cash used in investing activities during the six months ended June 30, 2021 was $6.4 million, resulting primarily from capital expenditures of $4.5 million in support of infrastructure deployments to support our growing business, and $1.9 million related to the development of internal-use software for adding new features and enhanced functionality to our platform.

Cash used in investing activities during the six months ended June 30, 2020 was $2.4 million, resulting primarily from capital expenditures of $1.2 million in support of our infrastructure deployments to support our growing business, and $1.3 million related to the development of internal-use software for adding new features and enhanced functionality to our platform.

Cash used in investing activities during the year ended December 31, 2020 was $5.0 million, resulting primarily from capital expenditures of $2.1 million in support of infrastructure deployments to support our growing business, and $2.9 million related to the development of internal-use software for adding new features and enhanced functionality to our platform.

Cash used in investing activities during the year ended December 31, 2019 was $3.2 million, resulting primarily from capital expenditures of $1.6 million in support of our infrastructure deployments to support our growing business, and $2.0 million related to the development of internal-use software for adding new features and enhanced functionality to our platform.

Financing Activities

Cash used in financing activities for the six months ended June 30, 2021 was $0.9 million. Cash used in financing activities was from principal payments on our capital lease agreements of $5.7 million related to hard drives and other infrastructure equipment used in our co-location facilities and $1.8 million related to payments made for offering costs that are deferred, offset by $3.5 million in proceeds received from our credit facility and $2.9 million in proceeds received from lease financing transactions.

Cash used in financing activities for the six months ended June 30, 2020 was $2.2 million. Cash used in financing activities was from principal payments on our capital lease agreements of $4.5 million related to hard

 

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drives and other infrastructure equipment used in our co-location facilities, offset by $2.3 million in proceeds received from the PPP loan.

Cash used in financing activities for the year ended December 31, 2020 was $8.7 million. Cash used in financing activities was from principal payments on our capital lease agreements of $10.9 million related to hard drives and other infrastructure equipment used in our co-location facilities, offset by $2.3 million in proceeds received from the PPP loan.

Cash used in financing activities for the year ended December 31, 2019 was $7.7 million. Cash used in financing activities was from principal payments on our capital lease agreements related to hard drives and other infrastructure equipment used in our co-location facilities.

Contractual Obligations and Commitments

Our commitments are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. Operating lease commitments relate primarily to our rental of office space and co-location facilities. Our capital lease commitments relate primarily to our infrastructure equipment. Purchase commitments relate mainly to infrastructure agreements and subscription arrangements used to facilitate our operations.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Quantitative and Qualitative Disclosure About Market Risk

We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency exchange rates.

Interest Rate Risk

Our exposure to interest rate risk primarily relates to our capital lease arrangements for obtaining hard drives and related equipment for our data center operations, which may be impacted by interest rate changes. We also earn interest income generated by cash and cash equivalents held at City National Bank, which is relatively insensitive to interest rate changes. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our operating results or financial condition.

Our credit facility with City National Bank is at a variable interest rate.

Foreign Currency Exchange Rate Risk

Our sales are currently denominated in the U.S. dollar and we have minimal foreign currency risk related to our revenue. In addition, most of our operating expenses are denominated in the U.S. dollar, resulting in minimal foreign currency risks. The volatility of exchange rates depends on many factors that we cannot accurately forecast. In the future, if our international sales increase or more of our expenses are denominated in currencies other than the U.S. dollar, our operating results may be adversely affected by fluctuations in the

 

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exchange rates of the currencies in which we do business. At this time we do not, but we may in the future, enter into derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the impact hedging activities could have on our results of operations.

Critical Accounting Policies and Estimates

Our financial statements and the related notes thereto included elsewhere in this prospectus are prepared in accordance with U.S. GAAP. The preparation of financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.

We believe that the accounting policies described below involve a substantial degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. For further information, see Note 2 to our financial statements included elsewhere in this prospectus.

Revenue Recognition

The Backblaze Storage Cloud provides the core platform for our Backblaze B2 consumption-based offering and our Backblaze Computer Backup subscription-based offering. We derive our revenue primarily from fees earned from customers accessing these offerings through our platform, paid monthly in arrears for consumption-based arrangements for Backblaze B2, or charged upfront for subscription-based arrangements for Backblaze Computer Backup. We provide services to our customers under subscription-based arrangements of one month, one year and two years, which automatically renew at the end of the respective term.

We also recognize revenue from products offered to our customers for the ability to securely restore data using a USB drive (USB Restore) and for migrating large data sets to our platform using our proprietary Fireball device. We refer to these products as our Physical Media revenue. Physical Media revenue was approximately 1% of our revenue for the years ended December 31, 2020 and 2019, and for the six months ended June 30, 2020 and 2021.

Our monthly subscription arrangements do not provide customers with refund rights. One- and two-year subscription arrangements are eligible for a full refund for up to 30 days after subscribing. For Physical Media revenue, we offer a full refund to our customers restoring data using USB drives, if the drives are returned to us within 30 days of receipt. We recognize revenue net of our estimate of expected customer cancellations and returns. These estimates involve inherent uncertainties and use of management’s judgment.

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

Revenue recognition under ASC 605

We recognize revenue from these transactions when all of the following criteria are satisfied:

 

   

there is persuasive evidence of an arrangement;

 

   

the service has been or is being provided to the customer;

 

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the amount of the fees to be paid by the customer is fixed or determinable; and

 

   

collectability of the fees is reasonably assured.

Subscription arrangements revenue is recognized on a straight-line basis over the contractual term of the arrangement beginning on the date that the service is made available to the customer, provided that all other revenue recognition criteria have been met. Revenue from consumption-based arrangements is recognized as services are delivered, which is also when it is earned.

Revenue recognition under ASC 606

On January 1, 2020, we adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASC 606).

We determine revenue recognition in accordance with ASC 606 through the following five steps:

1. Identify the contract with a customer. We consider the terms and conditions of the contracts and our customary business practices in identifying our contracts under ASC 606. We determine we have a contract with a customer when the contract has been approved by both parties, we can identify each party’s rights regarding the services to be transferred and the payment terms for the services, we have determined the customer to have the ability and intent to pay, and the contract has commercial substance. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s payment history; however, as approximately 99% and 98% of our revenue was generated from customers paying via credit card during the year ended December 31, 2020 and six months ended June 30, 2021 (unaudited), respectively, the risk of non-payment is reduced.

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. Our contracts typically contain a single distinct performance obligation representing our Backblaze Storage Cloud platform offerings, which includes Computer Backup and B2 Cloud Storage services and customer support.

3. Determine the transaction price. The transaction price is determined based on the consideration we expect to receive in exchange for transferring services to the customer. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue recognized under the contract will not occur. Our variable consideration includes consumption-based revenue and revenue arrangements that offer the right of return. We offer a 30 day right of return for 1 and 2-year subscription based arrangements and record 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 our contracts contain a significant financing component.

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 standalone selling price (SSP). We determine the relative standalone selling price for performance obligations based on the price we sell a good or service for separately.

5. Recognize revenue when or as we satisfy a performance obligation. Revenue is recognized when control of the services is transferred to the customers, in an amount that reflects the consideration that we expect to receive in exchange for those services. Performance obligations are satisfied over time as 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

 

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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 through our Fireball device rental is time-based.

For revenue generated from arrangements that involve third-parties, we evaluate whether we are 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 our revenue is reported on a gross basis, as we are the principal.

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

If an award contains a provision whereby vesting is accelerated upon a change in control, we recognize stock-based compensation expense on a straight-line basis, as a change in control is considered to be outside of our control and is not considered probable until it occurs. Forfeitures are accounted for in the period in which they occur.

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

Our option-pricing model requires the input of subjective assumptions, including the fair value of the underlying common stock, the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent our best estimates. These estimates involve inherent uncertainties and the application of judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

These assumptions are estimated as follows:

 

   

Fair value of underlying common stock. Because our common stock is not yet publicly traded, we must estimate the fair value of our common stock. Our Board of Directors considers objective and subjective factors to determine the fair value of our common stock at each meeting in which equity grants are approved, including corroboration from contemporaneous third-party valuations;

 

   

Expected volatility. Expected volatility is a measure of the amount by which the stock price is expected to fluctuate. Since we do not have sufficient trading history of our common stock, we estimate the expected volatility of our options at the grant date by taking the average historical volatility of a group of comparable publicly traded companies over a period equal to the expected term of the options;

 

   

Expected term. We determine the expected term based on the average period the options are expected to remain outstanding using the simplified method, generally calculated as the midpoint of the options’ vesting term and contractual expiration period, as we do not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior;

 

   

Risk-free rate. We use the U.S. Treasury yield for our risk-free interest rate that corresponds with the expected term; and

 

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Expected dividend yield. We utilize a dividend yield of zero, as we do not currently issue dividends, nor do we expect to do so in the foreseeable future.

We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense. The intrinsic value of all outstanding options as of June 30, 2021 was approximately $171.7 million, based on an assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated price range set forth on the cover of this prospectus, of which approximately $106.9 million is related to vested options and approximately $64.9 million is related to unvested options.

Common Stock Valuations

The fair value of the common stock underlying our stock-based awards has historically been determined by our Board of Directors, with input from management and corroboration from contemporaneous third-party valuations. We believe that our Board of Directors has the relevant experience and expertise to determine the fair value of our common stock. Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our Board of Directors exercised reasonable judgment and considered objective and subjective factors to determine the best estimate of the fair value of our common stock at each grant date.

In valuing our common stock, the fair value of our business was determined through third-party valuations using various valuation methods, including combinations of income and market approaches with input from management. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate that is derived from an analysis of the cost of capital of comparable publicly traded companies in our industry or similar business operations as of each valuation date and is adjusted to reflect the risks inherent in our cash flows. The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple is determined and then applied to the subject company’s financial forecasts to estimate the value of the subject company.

Application of these approaches and methodologies involves the use of estimates, judgments, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, and future cash flows, discount rates, market multiples, the selection of comparable public companies, and the probability of and timing associated with possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.

For valuations after the closing of this offering, our Board of Directors will determine the fair value of each share of underlying common stock based on the closing price of our common stock as reported on the date of grant. Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.

Capitalized Internal-use Software, Net

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

 

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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.

We review capitalization criteria for each project individually. Capitalized costs are amortized over the estimated useful life of the software, which is five years, on a straight-line basis, which represents the manner in which the expected benefit will be derived. We determine 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 statement of operations.

Significant judgments related to the capitalization of internal use 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.

Recently Adopted Accounting Pronouncements

See the sections titled “Basis of Presentation and Summary of Significant Accounting Policies—Accounting Pronouncements Recently Adopted” and “Basis of Presentation and Summary of Significant Accounting Policies—Accounting Pronouncements Not Yet Adopted” in Note 2 to our financial statements included elsewhere in this prospectus for more information.

JOBS Act Accounting Election

We are an emerging growth company, as defined in the Jumpstart Our Business Startups (JOBS) Act. For so long as we continue to be an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation. The JOBS Act also provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards applicable to public companies. This provision allows an emerging growth company to delay the adoption of some accounting standards unless and until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

 

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BUSINESS

Our Mission

Data is the digital world’s most precious resource.

Our mission is to make storing, using, and protecting that data astonishingly easy.

Company Overview

We are a leading storage cloud platform, providing businesses and consumers cloud services to store, use, and protect their data in an easy and affordable manner. We provide these cloud services through a purpose-built, web-scale software infrastructure built on commodity hardware. From genome sequencing to mapping the world, from saving lives to playing online games, from interacting with a business to running one, data is central to modern existence. By substantially reducing the complexity and frustration of storing, using, and protecting data, we empower customers to focus on their core business operations. Through our blog and culture of transparency, we have built a devoted community of millions of readers and brand advocates. Referrals from our community of brand advocates, combined with our highly efficient and primarily self-serve customer acquisition model and an ecosystem of thousands of partners, have allowed us to attract over 480,000 customers as of June 30, 2021. These customers use the Backblaze Storage Cloud platform across more than 175 countries to grow and protect their business data on our approximately 2 exabytes, or 2 trillion megabytes, of data storage under management. As businesses and consumers shift to the cloud, we believe our cloud services will increasingly become a foundational element of their overall technology stack.

At its founding, Backblaze set out to simplify the process of storing, using, and protecting data. Over the following years we focused relentlessly on cutting away the complexity common among diversified cloud vendors’ services and legacy on-premises system vendors. Today, our solutions are differentiated by their ease of use and affordability. Focusing on storage use cases and promoting an open ecosystem allows us to integrate well with a broad range of partners. From our straightforward pricing model, to our transparent communication with customers, to the popular and insightful content on our blog—we have established ourselves as an open and trusted provider and partner.

The Backblaze Storage Cloud organizes, safeguards, and keeps over 500 billion files available on demand and is designed to store trillions more in the future. Through our purpose-built software, we provide a platform that is durable, scalable, performant, and secure. This software manages our global physical infrastructure of nearly 200,000 hard drives and one terabit per second (one million megabits) of network capacity across 5 data centers that are interconnected by private network infrastructure. Our scale, along with our efficiency and expertise developed over years of growing the Backblaze Storage Cloud, provide a robust platform and significant barriers to entry. Our two cloud services that we offer on our Storage Cloud are:

 

   

Backblaze B2 Cloud Storage: Enables customers to store data, developers to build applications, and partners to expand their use cases. The amount of data stored in this cloud service can scale up and down as needed on a pay-as-you-go basis. This service is offered as consumption-based Infrastructure-as-a-Service (IaaS) and serves use cases including backups, multi-cloud, application development, and ransomware protection.

 

   

Backblaze Computer Backup: Automatically backs up data from laptops and desktops for businesses and individuals. This cloud backup service offers easily understood flat-rate pricing to continuously back up a virtually unlimited amount of data. This service is offered as a subscription-based Software-as-a-Service (SaaS) and serves use cases including computer backup, ransomware protection, theft and loss protection, and remote access.

Public cloud adoption has been rapid and transformational for a wide range of companies. However, the market is demanding alternatives to the traditional, diversified public cloud vendors for multiple reasons. These

 

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public cloud vendors have increasingly focused on the largest enterprises, resulting in significant complexity in their products and pricing that leaves behind mid-market businesses. Due to their walled-garden approach, these public cloud vendors have made it expensive for customers to use their data in multi-cloud and hybrid cloud deployments and with other independent cloud platforms. Additionally, such diversified public cloud vendors increasingly compete with their customers and partners in an ever-widening range of industries.

Backblaze, on the other hand, is designed to fulfill major unmet market needs, particularly among mid-market businesses, by providing straightforward cloud storage offerings with easy-to-understand and affordable pricing from a trusted and independent provider.

Our solutions are designed for individuals and businesses of all sizes and across all industries but have a particularly strong appeal to mid-market organizations (which we define as organizations with 10 to 999 employees) due to their desire for easy-to-use and cost-effective solutions. We serve both the Public Cloud IaaS Storage market and Data-Protection-as-a-Service market (DPaaS). According to forecasts from International Data Corporation (IDC), the worldwide market for Public Cloud IaaS Storage is $27.6 billion in 2020 and is expected to grow to $91.0 billion by 2025. Additionally, according to IDC, the worldwide market for DPaaS is $7.7 billion in 2020 and expected to grow to $18.4 billion by 2025. Based on our analysis of IDC data, we believe the Backblaze opportunity in the mid-market alone for Public Cloud IaaS is expected to grow to $54.6 billion by 2025, representing a CAGR of 27%, and for DPaaS to $11.0 billion by 2025, representing a CAGR of 19%.

We have a highly efficient go-to-market model that is built on a self-serve selling motion. Prospective customers find us through a variety of channels including our website, partners, and brand advocates. We have fostered deep community engagement with valuable content we share on our blog—in 2020 alone, more than 3 million readers consumed content that we shared there. Our content encourages organic, inbound traffic that we believe serves as our greatest source of advocates and referrals. Our frictionless free trial and self-serve sign-up processes help convert our blog readers and referrals from our brand advocates into customers, with over 80% of our revenue in 2020 coming from self-serve customers. In addition to generating customers, a community of thousands of partners has arisen as a result of our efforts. Our developer, alliance, and managed service provider (MSP) partners expand use cases and attract customers, thereby increasing usage of our Storage Cloud and helping to drive revenue growth. New customers and partners ultimately lead to more insight, content, and community engagement, which creates a positive feedback loop that drives additional customers and partners. In addition to our self-serve selling motion, in recent years we have begun to invest in a sales-assisted selling motion to identify opportunities to increase business with existing customers and to assist larger customers in adopting our services. Our sales-assisted selling motion has experienced substantial growth and helps customers that, in 2020, were approximately 20 times larger in terms of average revenue per customer than our self-serve customers. These efficient and effective go-to-market motions have helped us grow rapidly.

Substantially all of our revenue is recurring in nature. We employ a land-and-expand model that drives additional revenue from existing customers. As customers generate, store, and back up more data, their use of our platform increases, creating natural opportunities for revenue expansion. We are able to further expand our relationships with our customers when they adopt new features and use cases that lead to increased usage of our platform. Our land-and-expand strategy is evidenced by our overall net revenue retention rate of 113% and 114% as of December 31, 2019 and 2020, respectively.

Our B2 Cloud Storage revenue grew by 66% during the year ended December 31, 2020 and our Computer Backup cloud service revenue grew by 23% during the year ended December 31, 2020. We also have recently launched offerings such as Extended Version History, multi-region selection, and our new ransomware protection functionality, Object Lock. By expanding our offerings, we are able to further expand our revenue and market opportunity. Our operations have historically been efficient with limited outside investment. Prior to issuing $10.0 million of convertible notes (which we also refer to as a Simple Agreement for Future Equity agreement (SAFE)) in a private financing round August 2021, we had raised less than $3.0 million in outside equity since our founding in 2007. This has helped create a culture based on operational efficiency, creativity,

 

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and collaborative problem solving. This culture, combined with the software and infrastructure we have scaled, refined, and enhanced over a decade, our innovation roadmap, our efficient go-to-market, large community of brand advocates, and position as an independent cloud platform, is what enables us—now and in the future—to succeed. This is evident in the significant growth we have achieved in recent periods. In the years ended December 31, 2019 and 2020, our revenue was $40.7 million, $53.8 million, respectively, representing growth of 32%. We incurred net losses of $1.0 million and $6.6 million for the years ended December 31, 2019 and 2020, respectively. As of June 30, 2021, our annual recurring revenue (as defined below) was $64.8 million and we incurred net losses of $6.1 million for the six months ended June 30, 2021. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Annual Recurring Revenue” for more information on annual recurring revenue.

Industry Background

We believe data is an increasingly critical part of the global economy. The fundamental shift in how data is created and consumed is fueling the growth and evolution of storage:

 

   

Data storage growth is rapidly expanding to enable our digital universe. Organizations ranging from large companies to small enterprises, startups, municipalities, and educational institutions are digitally transforming and must evolve to effectively compete, or risk becoming irrelevant to customers and being left behind by the market. From gaming to social media to streaming video, entire industries are being built around data. Modern advancements across a range of industries drive data creation and consumption from applications such as artificial intelligence and machine learning. Additionally, increasing regulatory and compliance requirements are also driving retention requirements. As a result, it is a business imperative for companies to retain significantly more data and keep it much longer.

 

   

Data is migrating to the cloud. Historically, data was managed on-premises using legacy storage systems. Organizations are increasingly migrating to the cloud to capitalize on improved flexibility, agility, and scalability, and much of their stored data is moving along with them. IDC estimates that approximately only 4% of global data was stored in public cloud environments in 2010 compared to a projected 53% in 2024.

 

   

Companies are choosing multi-cloud solutions and demanding alternatives to the diversified cloud vendors. Multi-cloud deployments are becoming more commonplace as companies seek to avoid vendor lock-in, minimize latency, and provide redundancy for their mission critical data. According to Frost & Sullivan’s 2020 Global Cloud User Survey, 43% of respondents indicated current adoption of multi-cloud in 2020 and 84% of respondents indicated planned adoption of multi-cloud in 2022.

 

   

Non-specialists are making purchasing decisions and driving demand for easy, self-serve solutions. Today, IT generalists who are responsible for broad areas of technology, along with other professionals—including cinematographers, DNA scientists, and software developers—and a multitude of roles within an organization that have traditionally not had deep storage expertise can be the purchasing decision makers. These decision makers desire self-serve solutions that work easily and address their needs.

 

   

Developers are a driving force for digital transformation and technology selection. Developers and the applications they create are at the forefront of digital transformation, often guiding business strategy for organizations. As a result, developers are able to influence what technologies, platforms, and solutions are adopted by the broader organization, often seeking platform features such as self-serve, immediacy, and efficiency. Developer-focused, independent cloud platforms that provide services like payment processing, communications, compute, edge distribution, and more

 

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have generated billions in revenue by serving these customers. Vendors looking to capture a critical mass of developer mindshare are increasingly shaping their products and solutions to serve these preferences.

 

   

Cybersecurity threats, such as ransomware, are costly and on the rise. The frequency and impact of cybersecurity threats continues to grow, and the cost of these attacks is increasing. Cybersecurity Ventures estimates that the global cost of ransomware attacks alone will reach $20 billion in 2021, a significant increase compared to estimated damages of $11.5 billion and $8 billion in 2019 and 2018, respectively. Ransomware targets victims by encrypting their files and demanding payment for access to the decryption key. According to the Threat Landscape Report in 2020 by Bitdefender, the total number of global ransomware reports increased by 715% year over year in the first half of 2020.

Limitations of Existing Solutions

The explosion of data and the complexity of how businesses and individuals interact with it has made handling data storage needs difficult and expensive, particularly for mid-market companies.

Limitations of Diversified Cloud Vendors

Organizations undergoing digital transformation or growing digital-native businesses are increasingly considering diversified cloud vendors to address the limitations of current solutions. However, with diversified cloud vendors, much of the benefit of the public cloud remains out of reach because those solutions are:

 

   

Focused largely on serving the enterprise sector. Diversified cloud vendors optimize for large multinational enterprises with significant IT resources and expansive, complex use cases. According to Flexera’s 2020 State of Cloud survey, businesses with fewer than 1,000 employees have substantially lower cloud bills and IT spend, and on average 56% of these businesses are spending less than $600,000 annually compared with only 12% of enterprises. The financial opportunity that enterprise customers represent influences the product roadmap and engineering focus of diversified cloud vendors, resulting in solutions that are not optimal for mid-market businesses. Additionally, these providers typically lack sales motions and support resources that are focused on non-enterprise organizations.

 

   

Closed ecosystems that limit customer choice and promote vendor lock-in. Existing diversified cloud vendors promote policies and impose fees that lock customers into a provider’s infrastructure, add-on services, and pricing models. Their proprietary standards inhibit interoperability and portability of applications from vendor to vendor. High egress fees cause significant budget strain, often blocking businesses and customers from finding more suitable solutions or using multi-cloud infrastructures, and thereby hampering their innovation and long-term growth.

 

   

Complicated, creating barriers to adoption. Diversified cloud vendors typically have over 100 different services, with multiple subsets of each, and a plethora of miscellaneous features that cause complexity and choice overload, often necessitating consultants to help facilitate customers’ decisions. These issues result in mid-market customers being unable to fully take advantage of the benefits of the cloud.

 

   

Expensive with opaque pricing models. Diversified cloud vendors have complicated pricing models with hidden and add-on fees, making it difficult for organizations to understand what they are paying for. The pricing of existing cloud storage solutions can vary in terms of storage minimums, tiers, egress fees, geography, and more. A new variety of business consultancy has developed just to decipher and optimize invoices from diversified cloud vendors. Often, these

 

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charges impose a larger than anticipated financial burden on customers. Customers who expect cost savings using the cloud can get locked in, surprised by unexpected bills, and may be forced to make painful internal budgetary decisions as a result.

 

   

Forcing trade-offs between making data available and affordable. Existing public cloud solutions require organizations to assess what data they need to keep, and how they will use it. Customers must choose between prioritizing their data into expensive tiers to keep it readily available or archiving their data in cold tiers, which are storage solutions that feature long retrieval times and high egress fees. As a result, organizations must weigh the trade-off between availability and cost, limiting the organization’s ability to use data to its full potential.

Limitations of Legacy On-Premises Solutions

Some organizations use legacy on-premises storage solutions for data management, but these solutions are ill-suited to modern data needs because of:

 

   

Burdensome set up and ongoing management: Setting up on-premises environments requires the commitment of data center space, selection and installation of various types of equipment, and hiring dedicated personnel with specialized skill sets. To maintain these environments, organizations need sufficient resources as well as staff who continually work to attempt to minimize downtime, secure data access, and ensure data availability and durability.

 

   

Challenging forecasting which inhibits scaling: Businesses have to ensure the correct amount of storage is available when needed for on-premises IT environments. Forecasting this amount is difficult, and businesses constantly need to balance excess storage capacity with underutilized and idle storage resources. Purchasing too much storage is inefficient and wasteful while the lack of excess capacity may create conflicts between data retention and other business needs. Ultimately, businesses can find it difficult to strike the right balance, resulting in operational challenges and an inability to effectively scale.

 

   

High total cost of ownership: On-premises storage systems require significant capital expenditures and often necessitate upfront financing for purchase. These storage systems also require frequent maintenance and hardware upgrades, particularly as equipment ages. In addition, other costs including ongoing personnel, end of life disposals, unexpected equipment failures, and potential consulting fees, combine to make on premises solutions heavy burdens on mid-market businesses.

Key Benefits for Customers

Our Storage Cloud provides customers with the following key benefits:

 

   

Foundational storage platform at web scale. Our Storage Cloud serves as a foundational element of their overall technology stack, delivering storage on-demand at web scale, thus freeing the customer from the need to manage storage themselves. Our Storage Cloud architecture is unconstrained by number of files, file sizes, geography, and speed, providing customers with virtually unlimited storage that is durable, available, and secure.

 

   

Enables customers to readily use their data. Backblaze makes all data available and easily portable. With no cold tiers, customers can access any piece of data directly. Further, by connecting with other leading cloud providers, Backblaze makes it easy and free to build applications on an open ecosystem and support multi-cloud deployments.

 

   

Easy and intuitive for everyone. Businesses and consumers desire streamlined and easy-to-use solutions. Our Storage Cloud provides customers the ability to leverage the benefits of the public

 

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cloud without its challenges. Based on our analysis of market research, we believe our customers could experience significant time savings by using our B2 Cloud Storage solution for managing periodic cloud operations, including managing users, data tiers and billing, compared to other cloud service providers. From our free trial to our self-serve sign up to our intuitive use cases, every step of onboarding and ongoing usage is optimized for ease of use and customer efficiency.

 

   

Flexible with ability to right-size usage. If a customer’s data needs rapidly increase, that customer can simply store more data or reduce storage use if no longer needed. This eliminates the concern about underutilized resources or wasted spend. Additionally, customers only need to pay for what they use and do not need to commit to a minimum storage size or duration.

 

   

Affordable with increased ROI. We were founded on principles of cost efficiency and delivering the most value for our customers. These principles drove our platform development, which resulted in a cost-optimized design. We have passed these cost-optimizations on to our customers to enable them to store and serve data at a fraction of the list price of diversified cloud vendors, providing increased ROI from day one.

 

   

Businesses and consumers do not need to choose between availability and cost. Customers can easily store all their data on our Storage Cloud, enabling it to be both available and affordable at the same time. They no longer need to predetermine what data is worth keeping immediately available versus archiving, and thereby what requires a higher tier and price of service.

 

   

Transparent and predictable. We pride ourselves on being transparent with customers and providing straightforward, simple pricing. Customers either pay only for the data they store or a fixed rate for backup services. We make our service provisions clear with no complicated or hidden fees.

Competitive Strengths

Our competitive strengths include:

 

   

Robust technology platform and rapid innovation. Our differentiated technology platform provides durable, available, scalable, performant storage at web scale, all while maximizing cost efficiency. We believe that the scale of our platform and the intellectual property we have gained through developing it—including our software layer, fine-tuned over a decade of managing the complexity of data storage; the experience from running the massive infrastructure that software operates; and the learnings gained from supporting over 480,000 customers—provides a significant competitive moat. We also have a successful track record of launching new features and capabilities for our products, and we expect to continue doing so in the future. Recent examples of our innovation include the Backblaze S3 Compatible API, regional choice, Cross Origin Resource Sharing, Extended Version History, and our new ransomware protection functionality, Object Lock. We believe our innovation will help us continue to capture and expand our estimated total addressable market.

 

   

Purpose-built for cloud storage. We are a pure-play storage provider and our engineering decisions are optimized for data storage use cases. Specializing in one area of the cloud computing stack enables us to develop targeted solutions for the most critical storage needs of our customers. The result is easy, affordable, and predictable data storage and access.

 

   

Attractive ecosystem partner with best-of-breed cloud platforms. Our position as a storage provider purpose built for web scale, with interoperability and an open ecosystem in mind, creates natural partnership opportunities with other independent cloud platforms. For these partners, we are an attractive provider of storage for both our quality of service and our neutrality—as compared to diversified cloud vendors who provide competing cloud service offerings. This ecosystem of

 

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integrated partnerships provides customers the flexibility to choose the best combination of solutions and create the optimal technology stack for their needs. As the partner ecosystem expands, it provides for compounding revenue growth opportunities: each partner brings additional customers, each of these customers brings additional data, and each customer can adopt additional services.

 

   

Customer acquisition propelled by community-driven inbound marketing. Our content marketing engine—driven by our blog, which was visited by more than 3 million readers in 2020 alone—propels our highly efficient customer acquisition. We use public relations and social media to drive deeper engagement, and our free-to-test approach and self-serve sign-up process ease conversions from this audience. Customers often reference our content as their first point of interaction with Backblaze, and as a reason they choose our cloud services. We believe such a large, engaged audience and the trust we have developed organically with them over 14 years of sharing valuable, unique content, would be difficult for any competitor to replicate. We believe the audience our content engine generates serves as our greatest source of advocates, referrals, new customers, and partners. These new customers and partners ultimately lead to more insight, content, and community engagement, which perpetuate a powerful positive feedback loop that drives additional customers and partners, as illustrated in the image below.

 

 

LOGO

 

   

Frictionless go-to-market model. We believe our large inbound marketing footprint, easy and intuitive onboarding process, expansive partner ecosystem, and land-and-expand model create a differentiated and powerful go-to-market approach. Customers can quickly test and sign up for our solutions through a self-serve process, which led to over 80% of our revenue in 2020. Our partner ecosystem enables us to provide joint solutions for customers and to collaborate on go-to-market activities, thereby expanding our reach. After signing up for our products, customers increasingly rely on the platform, generating, storing, and backing up more data, creating natural opportunities for revenue expansion. The combination of these approaches makes this model extremely efficient.

 

   

Developer-friendly, interoperable platform. Our API-driven platform was built by developers for developers. We create a strong community among developers through our valuable, relevant blog content. With our free-to-test approach and self-serve sign up process, developers can get started quickly. Our native and S3 compatible API, SDKs, and command line interface (CLI) enable developers to easily integrate Backblaze B2 into their applications. And, our interoperability with other leading developer-focused cloud platforms allow developers to build on a best-of-breed technology stack without having to choose between access and affordability.

 

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Efficiently serve the mid-market. By focusing on ease of use and common use cases, we offer solutions with great appeal to mid-market organizations. Historically, this market has been underserved and overlooked by incumbents who have not devoted meaningful attention to the problems that mid-market organizations face. Our frictionless go-to-market approach as well as our high-efficiency sales and support models offer a highly compelling solution that positions us to attract, win, and serve mid-market customers at scale.

 

   

Highly performant with a low total cost of ownership. Due to our purpose-built architecture, we provide solutions that are both highly performant and have a low total cost of ownership. Our solutions provide speed, durability, high availability, and scalability, at an affordable price. We also partner with other leading cloud platforms to reduce or eliminate data transfer fees between our platforms, thereby providing further cost efficiency for customers.

 

   

Strong company culture drives performance and results. Our culture is a cornerstone of our company and provides a unique, enduring competitive advantage. Transparency, collaboration, operational efficiency, and striving to do the right thing have guided us from day one and built a team of caring individuals united in working toward a common goal. As evidenced by our Glassdoor 4.9/5.0 rating, 100% CEO Approval, and 100% Recommend to a Friend ratings as of December 31, 2020, we have a strongly aligned and engaged workforce with little employee turnover and long tenure.

 

   

In trusted and neutral hands. With approximately 2 exabytes of data storage under management and a 14-year track record, our Storage Cloud has been proven over time and significant use to be a trusted solution for customers. Unlike diversified cloud vendors, as an independent storage cloud platform, we align with the interests of our customers and partners. We do not aim to compete with our customers and we do not sell their data. Our long track record and independence, combined with our desire to do business and communicate in an open, transparent manner helps us succeed with our customers and partners.

Partner Ecosystem

Our ecosystem of partners—including developer partners, alliance partners, and MSPs—helps us expand our platform in existing and new markets. Our partners leverage our cloud services to provide storage solutions to their customers or our mutual customers and in turn, we