Backblaze(BLZE) - 2022 Q2 - Quarterly Report

Part I - Financial Information Financial Statements The company's recent financial statements show revenue growth but a widening net loss and negative operating cash flow Condensed Balance Sheets Total assets slightly decreased while total liabilities increased, driven by a shift from cash to short-term investments Condensed Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash | $7,237 | $104,843 | | Short-term investments | $80,839 | $0 | | Total Assets | $160,477 | $163,581 | | Total Liabilities | $77,491 | $68,095 | | Total Stockholders' Equity | $82,986 | $95,486 | Condensed Statements of Operations Revenue grew 28% year-over-year for the six-month period, but net loss widened due to surging operating expenses Statement of Operations Summary (in thousands) | Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $20,688 | $16,150 | $40,178 | $31,462 | | Gross Profit | $11,132 | $8,224 | $20,941 | $15,706 | | Total Operating Expenses | $21,951 | $11,958 | $43,449 | $22,257 | | Net Loss | $(11,575) | $(2,418) | $(24,105) | $(6,106) | | Net Loss Per Share | $(0.37) | $(0.13) | $(0.78) | $(0.33) | Condensed Statements of Cash Flows Operating cash flow turned negative, and investing cash outflow increased significantly due to marketable securities purchases Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(8,192) | $2,583 | | Net cash used in investing activities | $(85,006) | $(6,406) | | Net cash used in financing activities | $(4,408) | $(947) | | Net decrease in cash and restricted cash | $(97,606) | $(4,770) | Notes to Condensed Financial Statements Notes detail strong B2 Cloud Storage revenue growth, new investments, lease accounting changes, and increased stock compensation Disaggregation of Revenue (in thousands) | Revenue Source | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | B2 Cloud Storage | $7,741 | $5,335 | $14,728 | $10,050 | | Computer Backup | $12,794 | $10,663 | $25,103 | $21,055 | - The company adopted the new lease accounting standard ASC 842 on January 1, 2022, resulting in the recognition of approximately $5.2 million in operating lease right-of-use assets and $5.6 million in operating lease liabilities[45] - Total stock-based compensation expense increased significantly to $8.2 million for the first six months of 2022, compared to $2.2 million for the same period in 2021[127] - In April 2022, the company amended its revolving credit facility, increasing the amount available to be borrowed from $9.5 million to $30.0 million[101] Management's Discussion and Analysis (MD&A) Management discusses revenue growth driven by customer consumption, while increased net loss reflects planned growth investments Key Business Metrics Key metrics show strong growth in Annual Recurring Revenue and a healthy Net Revenue Retention Rate of 113% Key Business Metrics as of June 30 | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Total Company | | | | Net Revenue Retention Rate (NRR) | 113% | 110% | | Gross Customer Retention Rate | 91% | 91% | | Annual Recurring Revenue (in millions) | $82.7 | $64.8 | | B2 Cloud Storage | | | | Net Revenue Retention Rate (NRR) | 126% | 132% | | Annual Recurring Revenue (in millions) | $31.3 | $21.8 | | Computer Backup | | | | Net Revenue Retention Rate (NRR) | 107% | 102% | | Annual Recurring Revenue (in millions) | $51.4 | $43.0 | Results of Operations Revenue grew 28% in the first half of 2022, but operating loss widened due to a significant increase in operating expenses - Revenue for the six months ended June 30, 2022, increased by $8.7 million (28%) compared to 2021, primarily due to a $4.7 million increase in B2 Cloud Storage and a $4.0 million increase in Computer Backup[195] - Operating expenses for the six months ended June 30, 2022, increased significantly: R&D by 82%, Sales & Marketing by 102%, and General & Administrative by 108%, driven by higher personnel-related costs[203][206][208] Non-GAAP Financial Measures Adjusted EBITDA turned negative compared to the prior year, reflecting increased operating investments despite a stable Adjusted Gross Margin Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Loss | $(11,575) | $(2,418) | $(24,105) | $(6,106) | | Adjusted EBITDA | $(1,903) | $1,493 | $(4,894) | $3,594 | | Adjusted EBITDA Margin | (9%) | 9% | (12%) | 11% | Reconciliation of Gross Margin to Adjusted Gross Margin | Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Gross Margin | 54% | 51% | 52% | 50% | | Adjusted Gross Margin | 77% | 75% | 76% | 75% | Liquidity and Capital Resources The company maintains sufficient liquidity with $88.1 million in cash and investments and an expanded credit facility - Principal sources of liquidity as of June 30, 2022, were cash and short-term investments totaling $88.1 million[225] - In April 2022, the company increased its revolving credit facility to $30.0 million, with no outstanding balance as of June 30, 2022[229] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate fluctuations and potential foreign currency exposure from future expansion - The company's main market risks are interest rate fluctuations, which affect its finance leases and investment income, and foreign currency exchange rates[252] - Foreign currency risk is currently minimal as sales are denominated in U.S. dollars, but this exposure may increase with international expansion[255] Controls and Procedures Disclosure controls were deemed ineffective due to material weaknesses in internal control over financial reporting, with remediation underway - Management concluded that disclosure controls and procedures were not effective as of June 30, 2022, due to ongoing material weaknesses in internal control over financial reporting[260] - The five identified material weaknesses relate to: (i) timely review of transactions, (ii) revenue recognition criteria, (iii) recording of equity transactions, (iv) accounting for sales and value-added taxes, and (v) IT general controls[262] - Remediation efforts are underway, including hiring key finance personnel and implementing a new ERP system, but are not yet considered fully remediated[263][264][266] Part II - Other Information Legal Proceedings The company is not party to any material legal proceedings, and a prior investor demand for a refund has been withdrawn - The company is not presently a party to any legal proceedings expected to have a material adverse effect[272] - A demand letter from SAFE investors for a $10.0 million refund, received in July 2022, was withdrawn by the investors in August 2022[95] Risk Factors Key risks include a history of losses, intense competition, service disruptions, and material weaknesses in internal controls - Operational Risks: The company has a history of cumulative losses ($60.4 million accumulated deficit) and does not expect to be profitable in the foreseeable future[275][283] - Competitive Risks: The company faces intense competition from larger, more resourceful competitors like AWS, Google Cloud, and Microsoft Azure[276][284] - Technical & Security Risks: The business is vulnerable to service disruptions, data loss, and cybersecurity attacks, which could damage its reputation and harm operating results[276][277][285] - Financial Control Risks: The company has identified five material weaknesses in its internal controls over financial reporting, which could impact the accuracy of financial statements[279][362][364] - Corporate Structure Risks: A dual-class stock structure concentrates approximately 96% of voting power with pre-IPO stockholders, limiting the influence of new investors[280][398] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred, and the planned use of IPO proceeds remains unchanged - There were no unregistered sales of equity securities in the reported period[433] - The planned use of proceeds from the November 2021 IPO has not materially changed[434] Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[437] Mine Safety Disclosures This section is not applicable to the company's operations - None[438] Other Information No other information was required to be disclosed for the reporting period - None[439] Exhibits This section lists all exhibits filed with the report, including required CEO and CFO certifications - Lists filed exhibits, including CEO/CFO certifications (Sections 302 and 906 of Sarbanes-Oxley) and XBRL interactive data files[441]