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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-03-31 · 171 added, 168 removed, 385 unchanged (47% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Result 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 in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions.

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Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

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 are a leading specialized 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.

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

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

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

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

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 attra ct more than 500,000 customers as of December 31, 2023.

These customers use our Storage Cloud platform across more than 175 countries to grow and protect their business data on our over three billion gigabytes of data storage under management.

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

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

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

Our operations have historically been efficient with limited outside investment.

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 historical focus on operational efficiency, creativity, and collaborative problem solving.

We believe that focusing on storage use cases and promoting an open ecosystem allows us to integrate well with a broad range of partners.

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 customer, community, and product milestones.

Initial Public Offering

On November 15, 2021, our IPO had its first closing, in which we issued and sold 6,250,000 shares of our Class A common stock at a public offering price of $16.00 per share.

On November 17, 2021, our IPO had its second closing, in which we issued and sold 937,500 additional shares at the same per-share price pursuant to the exercise by the underwriters of their option to purchase such shares from us for the purpose of covering over-allotments.

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

We believe that focusing on storage use cases and promoting an open cloud ecosystem allows us to integrate well with a broad range of partners.

We have consistently invested in our technology platform and highly efficient content-driven and self-serve, sales, and channel go-to-market strategy, allowing us to achieve customer, community, and product milestones.

Price Increases and Product Updates

During the third quarter of 2023, we announced pricing increases and product updates across our Computer Backup and B2 Cloud Storage products, which became effective in October 2023.

Effective October 3, 2023, we increased the monthly B2 pay-as-you-go storage rate from $5 to $6 per terabyte;

the price of our B2 Reserve offering and other committed contracts did not change.

We also made egress free for all B2 Cloud Storage customers up to 3x per month the amount of data they store with us.

In addition, we increased the pricing of our Computer Backup offering to $9 per month, or $99 for a 1-year subscription plan and $189 for a 2-year subscription plan.

As part of the Computer Backup price increase, we also bundled One Year Extended Version History, which previously had been a $2 per month add-on expense if customers selected that option.

The Computer Backup price increase is being phased in over time based on renewal timing.

As part of our leadership in the open cloud movement, we also announced free egress, significant performance improvements, and new functionality to increasingly support our customers’ ability to break free from limitations on their data.

Our Business Model

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

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

We have recently implemented price increases and product updates across our Computer Backup and B2 Cloud Storage products, which generally became effective in October 2023, with no material impact on customer retention as of December 31, 2023.

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

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Adopting additional products expands usage of our platform.

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

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

For example, our Computer Backup cloud service offers Enterprise Control, which provides larger customers with more management for an additional cost.

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.

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

Our go-to-market model has two primary selling motions, including self-service and sales driven.

We believe that we have an efficient self-serve selling motion.

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

We have fostered community engagement with content we share on our blog, which includes millions of readers viewing the content we shared in 2022 alone.

We have fostered community engagement with content we share on our blog, which includes millions of readers viewing the content we sha red in 2023 alone.

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

Our free trial and self-serve sign-up processes help convert our blog readers and referrals from our brand advocates into customers, with approximately 76% of our total revenue in 2023 coming from self-serve customers.

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

In addition to self-serve, we layer on a sales driven selling motion targeting larger customers.

The sales driven motion includes our direct sales team that contracts directly with customers and our channel sales team that contracts sales through our channel partners.

More recently, we also added our Powered By Backblaze program that enables third parties to integrate Backblaze B2 and thus offer cloud storage as part of their product offering.

We also have a community of thousands of partners that has arisen as a result of our efforts.

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

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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 111% as of December 31, 2022 and 2021, respectively.

Factors Affecting Our Performance

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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 also will continue investing in optimizing the conversion rate of visitors to customers.

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

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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.

Scale Sales Efforts

We believe an increasingly important customer acquisition model is our targeted sales team that is focused on larger customers and channel sales.

The sales motion focuses on inbound inquiries, outbound prospecting targeting specific use cases, and volume expansion of our self-serve customers.

Expansion Within Existing Customers

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We intend to increase revenue from existing customer relationships through the 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.

We have developed add-on services, such as Enterprise Control 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.

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

Continued Platform Investment and New Product Launches

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International Expansion

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

Whil e our sales and marketing efforts have primarily focused on the United States, our existing customer base spans more than 175 co untries, with approximately 28% of our total revenue originating outside of the United States for the year ended December 31, 2023.

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.

We may 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.

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 investments, 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.

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Number of customers 97,842 86,874

86,874 74,349

Annual average revenue per user $ 577 $ 437

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Number of customers 431,745 436,080

436,080 433,079

Annual average revenue per user $ 140 $ 124

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_____________

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

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

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

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

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

B2 Cloud Storage

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

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

Computer Backup

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

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

Total Company

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

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

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

Our Net Revenue Retention Rate was flat for B2 Cloud Storage for the year ended December 31, 2023 compared to the year ended December 31, 2022.

Our Net Revenue Retention Rate decreased by 8% for Computer Backup for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to customer churn.

Gross Customer Retention Rate

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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.

Our Gross Customer Retention Rate was essentially flat for both B2 Cloud Storage and Computer Backup for the year ended December 31, 2023 compared to the year ended December 31, 2022.

Annual Recurring Revenue

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

See Notes to our financial statements included elsewhere in this Annual Report on Form 10-K for more information on revenue from B2 Cloud Storage and Computer Backup arrangements.

See Notes 2 and 3 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K 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.

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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.

Although most 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 122% as of December 31, 2023.

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.

Computer Backup and B2 Cloud Storage (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 Note 2 to the consolidated 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.

Our ARR increased by $19.0 million, or 49.2% for B2 Cloud Storage for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to increased storage by our customers and to a lesser extent, the price increase and increased sales from B2 Reserve.

Our ARR increased by $6.6 million, or 12.4%, for Computer Backup for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to the price increase and, to a lesser extent, growth from existing customers.

Number of Customers

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.

In Q4 2023, we refined our customer definition to include end-user customers that purchase through a reseller.

This resulted in no impact to previously reported metrics other than a 1% decrease to the 120% NRR metric reported for Q3 2023.

Annual Average Revenue Per User

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Our annual average revenue per user for B2 Cloud Storage and Computer Backup is calculated in the same manner based on the revenue and number of customers from our B2 Cloud Storage and Computer Backup solutions, respectively.

Additional Key Business Metrics Calculation Notes

The metrics for Net Revenue Retention Rate, Gross Customer Retention Rate, Number of Customers and Annual Average Revenue Per User are currently calculated using only those customers paying by credit card and exclude customers paying by invoice utilizing a different system.

The amounts related to the number of customers paying by invoice has historically been immaterial.

Impact of COVID-19

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

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

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

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

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

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

Our Annual ARPU increased for B2 Cloud Storage and Computer Backup by 32% and 13%, respectively, for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to the 2023 price increase and our focus on adding larger customers.

Key Components of Results of Operations

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

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

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

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

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

Our subscription arrangements generally range in duration from one month to three years, 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.

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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.

Research and development expenses consist primarily of our investment in 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.

We expect our investment in research and development expenses to increase in absolute dollars for the foreseeable future as we continue to focus our research and development investments 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 total revenue from period to period due to the timing and extent of these expenses.

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

Sales and marketing expenses consist primarily of our investment in personnel costs.

Sales and marketing expenses also include investments 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 investment in sales and marketing to increase in absolute dollars for the foreseeable future.

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and an allocation of our general overhead expenses.

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

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

Investment Income

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

Interest Expense

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

Investment Income

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

Income Tax (Benefit) Provision

Incom e Tax (Benefit) Provision

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

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Results of Operations

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

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

For the Years Ended

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(3,792) (4,289)

Gain on extinguishment of debt

Realized loss on SAFE — (1,436)

Loss before provision for income taxes

(59,713) (51,437)

Income tax (benefit) provision (39) 96

Income tax benefit — (39)

$ (59,713) $ (51,398)

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$ 25,177 $ 17,049

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

The consolidated statement of operations for the year ended December 31, 2023 includes additional expense of $0.9 million recorded in the fourth quarter to increase stock based compensation expense under our employee stock purchase plan (“ESPP”).

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

For the Years Ended

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Interest expense

Gain on extinguishment of debt

Realized loss on SAFE — (2)

Loss before provision for income taxes

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55,592 51,953 3,639 7 %

Physical Media revenue

683 730 (47) (6) %

Total revenue (1)

$ 102,019 $ 85,155 $ 16,864 20 %

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

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

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

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(1) For the periods presented, Physical Media revenue has been consolidated into B2 Cloud Storage or Computer Backup revenue based on the underlying offering from which it originates.

Revenue increased by $16.9 million, or 20%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

B2 Cloud Storage increased by $13.2 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, approximately $10.0 million of which was due to increased storage by our customers, $1.9 million from the price increase in October 2023 and $1.3 million from sales of B2 Reserve.

Computer Backup increased by $3.6 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, approximately $2.7 million of which was due to a prior price increases that went into effect in September 2021 and October 2023, and approximately a $0.9 million impact due to growth from existing customers.

Our price increase amounts noted above are inherent estimates that are based on an average price charged per customer and other assumptions that may offset the increase, such as free egress and impact of the price increase on the amount of data stored and customer license count.

During the third quarter of 2023, we announced pricing increases across our Computer Backup and B2 Cloud Storage products, which became effective in October 2023.

While the impact of these price increases have inherent uncertainty, we expect a favorable impact to total revenue across our products over the next 12 months, and do not expect a significant change in costs solely as a result of the increase.

As a result of this price increase, we have not experienced a material impact on customer retention as of December 31, 2023.

Cost of Revenue and Gross Margin

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Total cost of revenue increased by $10.9 million, or 26%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

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

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

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

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

The increase was primarily attributa ble to an increase of $6.0 million related to managing and operating our co-location facilities, and an increase of $4.9 million for depreciation of our infrastructure equipment, which resulted from purchasing additional hard drives and related infrastructure in order to support the growth of our business.

The increase of $6.0 million related to managing and operating our co-location facilities includes a $2.9 million increase in rent expense, a $1.7 million increase in personnel related costs, such as salaries, benefits, bonuses, and stock-based compensation due to an increase in headcount and equity awards, $0.9 million of bandwidth and utility expenses, and $0.6 million increase in credit card fees.

Gross margin decreased to 49% for the year ended December 31, 2023 compared to 52% for the year ended December 31, 2022.

The decrease in gross margin was primarily due to cost of revenue increasing at a higher rate as compared to our total revenue growth as a result of a full year of expenses in 2023 related to data centers opened in 2022 and purchase of additional infrastructure equipment in order to support the growth of our business.

While the impact of the price increase we announced during the third quarter of 2023 has inherent uncertainty, we expect a favorable impact to gross margin over the next 12 months as we do not expect a significant change in our cost of revenue solely as a result of these increases.

Further, we plan to lease and purchase additional infrastructure equipment of a similar magnitude over the next 12 months in order to support the growth of our business.

Operating Expenses

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Research and development expense increased by $6.4 million, or 19%, f or the year ended December 31, 2023 compared to the year ended December 31, 2022.

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

The increase was primarily attributable to an increas e of $6.8 million in personnel-related expenses due to an increase in engineering headcount that was partially offset by an incremental $6.1 million of personnel-related expenses capitalized related to development of internal-use software related to new features for our platform during 2023, $2.5 million related to stock-based compensation expense, $2.3 million related to restructuring charges, and $0.6 million in hosting and subscription fees supporting our research and development investments.

We expect research and development expense to increase with the growth of our business as we continue to focus our research and development investments on adding new features to our platform, improving our cloud service offerings, and increasing the functionality of our existing features.

Sales and Marketing

Sales and marketing expense increased by $5.9 million, or 17%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

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

The increase in sales and marketing expense was primarily attributable to an increase of $3.4 million related to stock-based compensation, $2.7 million in personnel-related expenses as a result of increased headcount, $1.0 million related to restructuring charges, $0.5 million in fees for consultants and contractors, and $0.1

million in overhead and general expenses, partially offset by $2.1 million decreased advertising expenses related primarily to our B2 Cloud Storage offering as we continue to focus marketing expenditures on high return initiatives.

General and Administrative

General and administrative expense increased by $3.5 million, or 15%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

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

The increase was primarily attributable to $1.3 million in personnel-related expenses as a result of increased headcount, $1.5 million related to stock-based compensation expense, $0.9 million related to indirect tax liability write-offs due to non-recurring settlement of VAT liabilities during 2022, $0.7 million in overhead and general expenses due to subscriptions to support our increasing employee population, $0.4 million in professional fees for accounting and tax services, $0.3 million related to restructuring charges, partially offset by a $1.1 million decrease in legal expenses, of which $1.5 million was related to a 2022 SAFE holder settlement that did not recur in 2023, and $0.3 million for insurance expenses.

We expect general and administrative expense to decrease in 2024, in part due to the savings from insurance premiums and consolidating our corporate headquarters from two separate office facilities into one office facility in Q3 2023.

Investment Income

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Investment income increased by $1.0 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 .

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

The increase was primarily due to increased interest rates on our marketable securities, partially offset by a lower average marketable securities portfolio balance in 2023 as compared to 2022.

Interest Expense

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$ (3,792) $ (4,289) $ 497 12 %

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

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

Income Tax Provision

Interest expense decreased by $0.5 million, or 12%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

$1.0 million of the decrease was primarily due to lower average interest rates on new finance lease agreements entered into in 2023 compared to higher interest rates in prior years, partially offset by a $0.5 million increase in higher interest expense related to our revolving line of credit due to a higher interest rate and average outstanding balance during the year compared to the same period in 2022.

Income Tax Benefit

For the Years Ended December 31,

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(in thousands, except percentages)

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

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

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

Income tax benefit

$ — $ (39) $ 39 (100) %

Our benefit for income taxes was relatively flat for the year ended December 31, 2023, compared to the same period in 2022.

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.

To supplement our consolidated 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.

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Our management uses adjusted EBITDA to assess our operating performance.

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

We define adjusted EBITDA as net loss adjusted to exclude depreciation and amortization, stock-based compensation, interest expense, investment income, income tax provision, SAFE holder settlement, and other non-recurring charges.

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

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

For the Years Ended

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Stock-based compensation (1)

Interest expense, net and investment income

Income tax (benefit) provision

Realized loss on SAFE

Gain on extinguishment of debt

25,052 17,049

Interest expense and investment income

Income tax benefit — (39)

SAFE holder settlement — 1,500

Non-recurring professional services 411 —

Workforce reduction and related severance charges 3,616 —

Adjusted EBITDA

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Adjusted EBITDA Margin (4) % (11) %

(1) During the year ended December 31, 2023 , $125 thousand of stock-based compensation expense is classified as workforce reduction and related severance charges in the table above as it was incurred as part of our restructuring program.

See Note 15 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding restructuring charges .

Liquidity and Capital Resources

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

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

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

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

Since inception, we have financed operations primarily through payments received from our customers and, in later periods from the net proceeds from our IPO.

As of December 31, 2023 and December 31, 2022, our principal sources of liquidity were cash, short-term investments and restricted cash, current and restricted cash, non-current of $33.4 million and $69.7 million, respectively.

In general, our restricted cash may only be used to pay down our credit facility.

We believe that our existing cash, cash equivalents, and short-term investments, together with cash provide d 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 material cash requirements include contractual and other obligations under our credit facility, finance and operating lease agreements, and purchase commitments as discussed below.

Our future capital requirements will depend on many factors, including our total revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the potential expansion of our data centers, 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.

We plan to enter into finance lease agreements for purchase of infrastructure equipment and may also be required or choose to seek additional equity or debt financing in addition to our existing credit facility.

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 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.

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

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

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

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

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

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

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

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

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

We valued the notes on the settlement date of November 10, 2021 based on the Class A common stock price of $16.00, which was the price of the Class A common stock sold in the IPO.

This valuation resulted in a realized loss of $1.4 million that the Company recorded in its statement of operations.

The accrued interest of $0.1 million was added to the purchased amount upon conversion into equity.

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

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

Accordingly, we recorded a gain on the forgiveness of the PPP loan as gain on extinguishment of debt on statement of operations as of June 30, 2021.

We enter into capital lease arrangements to obtain hard drives and related equipment for our data center operations.

We also enter into leases for our facilities for data centers and office space under non-cancelable operating leases with various expiration dates .

As of December 31, 2022, our future minimum payments were $37.4 million and $8.4 million under our capital and operating lease arrangements, respectively.

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

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

In October 2021, we entered into a revolving credit agreement (as amended to date, the “RCA”) with City National Bank (the “Lender”).

Under the RCA, as amended in April 2022, among other things, (i) amounts available to be borrowed are $30.0 million and (ii) advances on the line of credit will bear interest at a variable rate equal to, at our discretion, (a) the average Secured Overnight Financing Rate (“SOFR”) plus 2.75%, or (b) the base rate.

The base rate under the RCA is a rate equal to the greater of (i) 3.00% or (ii) the prime rate most recently announced by the Lender.

In January 2023, we entered into a third amendment related to the RCA.

Under this amendment, advances on the line of credit will bear interest at a variable rate equal to, at our discretion, (1) SOFR plus 2.00%, or (b) the base rate, as originally defined in the RCA.

In December 2023, we entered into a fourth amendment related to the RCA.

Under this amendment, the maximum borrowing available was reduced from $30 million to $20 million.

Furthermore, advances on the line of credit will bear monthly interest at a variable rate equal to, at our discretion, (a) the average SOFR plus 2.75%, or (b) the base rate.

T he RCA matures in December 2025.

Currently, the RCA does not have financial covenants and it requires us to hold collateral in the form of a lien prior to any advance.

In the future, we may refinance this credit facility but may not be able to do so on terms acceptable to us or at all.

Any such failure to obtain financing when needed could have a material adverse effect upon our liquidity and business.

Due to the banking failures starting in March of 2023, we have seen an adverse change for securing acceptable terms due to heightened uncertainty and risk aversion in the financial sector.

A s of December 31, 2023, the outstanding balance of our line of credit was $4.1 million, and the amount available to us was $15.9 million.

In addition, the interest rate for our credit line was 8.1% as of December 31, 2023.

The outsta nding balance is collateralized by an equal amount of cash held, which we are obligated to hold as restricted cash.

For further details, see Note 11 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

We use City National Bank, a subsidiary of RBC, for our banking needs.

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

In addition, the disruption and

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

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

In addition, the disruption and uncertainty impacting the banking industry from failures of other banks resulted in some reduced access to capital, increased costs of capital, and reduced opportunities to invest with investment grade securities, which may have also resulted in lower investment yields and investment income.

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

We generally enter into finance lease arrangements to obtain hard drives and related equipment for our data center operations.

We also generally enter into leases for our facilities for data centers and office space under non-cancelable operating leases w ith various expiration dates.

As of December 31, 2023, our future minimum commitments for these finance leases and lease financing obligations including interest were $20.9 million and $14.2 million for the year ending December 31, 2024 and thereafter, respectively.

The weighted average discount rate for finance leases was 11.0% as of December 31, 2023.

As of December 31, 2023, our future minimum commitments for operating leases, which include both lease and non-lease components, were $6.6 million for the year ending December 31, 2024 and $23.7 million thereafter.

For further information and our future minimum commitments on our finance leases and operating leases, see Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

In addition, we have purchase commitments that relate mainly to infrastructure agreements used to facilitate our operations.

As of December 31, 2023, we had non-cancelable purchase commitments of $1.2 million and $0.6 million payable for the years ending December 31, 2024 and 2025, respectively.

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

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(in thousands)

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

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

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

Net cash used in operating activities $ (7,350) $ (13,781)

Net cash provided by (used in) investing activities 21,657 (73,854)

Net cash used in financing activities (8,842) (6,212)

Operating Activities

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

For the year ended December 31, 2023, cash used in operating activities was $7.4 million, which resulted from a net loss of $59.7 million, adjusted for non-cash charges of $52.8 million and a net cash outflow of $0.4 million from changes in

operating assets and liabilities.

Non-cash charges primarily consisted of $24.9 million for depreciation and amortization expense and $25.2 million for stock-based compensation expense.

The net cash outflow from changes in operating assets and liabilities was primarily the result of a $2.5 million decrease in operating lease liabilities, a $1.4 million decrease in accrued expenses and other current liabilities, which decreased primarily due to our accrued compensation and due to timing of payment of our expenses, a $0.4 million increase in other assets, a $0.4 million increase in prepaid and other current assets and a $0.3 million decrease in accounts payable, offset in part by a $4.5 million increase of deferred revenue, which increased due to our growing customer base and upfront collections from our customers.

Cash used in operations decreased during the year ended December 31, 2023, as compared to the same period in 2022 primarily due to our growing customer base, increased storage from existing customers, and the price increase that began to take effect in October 2023, partially offset by increased expenditures related to managing and operating our co-location facilities, and increased spending in support of our expanded research and development and sales and marketing spending to support business growth.

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

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

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

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

Non-cash charges primarily consisted of $16.3 million for depreciation and amortization expense, $5.6 million for stock-based compensation expense, $1.6 million for realized loss and accrued interest from the SAFE transaction, $0.8 million for amortization of deferred contract cost and $2.3 million for the gain on extinguishment of the PPP loan.

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

Investing Activities

Cash provided by investing activities during the year ended December 31, 2023 was $21.7 million, resulting primarily from $67.9 million from the maturity of our short-term investments and $0.4 million proceeds from the disposal of property and equipment, offset in part by the purchase of short-term maturity investments of $26.4 million, $14.7 million related to the development of software for adding new features and enhanced functionality to our platform and capital expenditures of $5.5 million in support of infrastructure deployments to support our growing business.

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

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

Financing Activities

Cash used in financing activities for the year ended December 31, 2023 was $8.8 million.

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

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

Cash used in financing activities was primarily due to principal payments on our finance lease agreements and lease financing obligations of $19.5 million related to hard drives and other infrastructure equipment used in our co-location facilities, $4.5 million repayment of principal on our line of credit, $1.5 million related to repayment of principal on financed insurance premiums, offset in part by $4.7 million in proceeds from the exercise of employee stock options, $4.5 million from our lease financing transactions, $4.3 million in proceeds from our credit facility, $2.3 million in proceeds from our ESPP, and $0.9 million of proceeds from insurance premium financing.

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

Contractual Obligations and Commitments

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Our finance lease commitments relate primarily to our infrastructure equipment.

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

Purchase commitments

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

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

Critical Accounting Policies and Estimates

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

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

The preparation of consolidated 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.

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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 Annual Report on Form 10-K.

For further information, see Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Revenue Recognition

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

The Backblaze Storage Cloud provides the core platform for our B2 Cloud Storage and Computer Backup offerings.

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

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

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 also provide a B2 Cloud Storage subscription-based offering for which arrangements range from one to five years.

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 proprie tary Fireball device.

We refer to these products as our Physical Media revenue.

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

Physical Media revenue was approximately less than 1% of our total revenue for the years ended December 31, 2023 and 2022.

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.

One to five-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.

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The transaction price is determined based on the consideration we expect to receive in exchange for transferring services to the customer.

Variable consideration, which contains estimates made by us, 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.

Variable consideration, which contains estimates made by us, 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.

Certain fees that are considered consideration payable to a customer are accounted for as a reduction of the transaction price.

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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.

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

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

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

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

The amount of stock-based compensation recognized is mainly determined by headcount and the fair value of our Class A common stock.

Over the period of December 31, 2021 to December 31, 2023, we experienced rapid headcount growth, and generally lower valuations of our shares resulting in higher levels of stock-based compensation as a percentage of revenue.

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.

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Capitalized Internal-Use Software, Net

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

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.

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

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 Annual Report on Form 10-K for more information.

The amortization of costs related to the platform applications is included in cost of revenue in the statements of operations.

Significant judgments related to the capitalization of internal use software costs include determining whether it is probable that projects will result in new or additional functionality.

Recent Accounting Pronouncements

See the sections titled “Basis of Presentation and Summary of Significant Accounting Policies—Accounting Pronouncements Recently A dopted” and “Basis of Presentation and Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” in N ote 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information.

JOBS Act Accounting Election

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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.

As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis