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Item 9A. Controls and Procedures

2024-04-01 compared with 2023-03-31 · 39 added, 54 removed, 107 unchanged (47% of the section changed)

Controls and Procedures

Inherent Limitations on Effectiveness of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K.

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, our management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Form 10-K were not effective, due to the material weakness in our internal controls over financial reporting described below.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that due to the material weaknesses described below, our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2023.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2022 based on the criteria described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on this assessment, management has concluded that while we have remediated three material weaknesses, our internal control over financial reporting as of December 31, 2022 was not effective, as we still have not remediated two material weaknesses in our internal control over financial reporting described below.

This annual report does not include an attestation report of our registered public accounting firm due to an exemption for “emerging growth companies.”

Changes in Internal Control over Financial Reporting

As of December 31, 2019, we identified four material weaknesses in our internal control over financial reporting, as defined by the standards established by the Sarbanes-Oxley Act of 2002.

Each of these material weaknesses related to control activities as follows:

(1) 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, accrued compensation and income tax;

(2) 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 management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP.

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the criteria described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Based on this assessment, our management concluded that our internal control over financial reporting was not effective as of December 31, 2023, due to the three material weaknesses in our internal control over financial reporting described below.

As previously reported, management has determined that the Company had the following material weaknesses in its internal control over financial reporting, which continued to exist as of December 31, 2023:

our controls were not operating effectively to allow sufficient and timely review of significant accounting transactions, account reconciliations and presentation of the statement of cash flows;

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 instrument;

and (4) our controls were not adequately designed to consider the accurate recording of value added taxes and sales and use taxes, resulting in misstatements.

Additionally, as of December 31, 2021, we determined a material weakness existed relating to ineffective information technology general controls in the areas of user access and segregation of duties related to certain information technology systems that support our financial reporting process specifically related to expenditures.

Although these control weaknesses did not result in any material misstatement of our financial statements for the periods presented, they could have led to a material misstatement of account balances or disclosures.

During the year ended December 31, 2022, we continued implementing measures to remediate the identified material weaknesses, including:

specifically, we did not have sufficient technical resources to appropriately identify errors in the accounting for equity awards, resulting in misstatements relating to completeness and accuracy of stock-based compensation;

our controls were not adequately designed and operating effectively to allow sufficient and timely review of the key assumptions and mathematical accuracy of our going concern assessment.

Remediation activities

In response to these material weaknesses, with the oversight from the Audit Committee of the Board of Directors, we have continued to implement significant changes to improve our internal control structure.

Specifically, our remediation efforts include the following:

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

(2) user access review of systems that support financial reporting and a preliminary review of segregation of duties;

(3) implementing financial modules to support reconciliations, and other systems and processes related to fixed assets, leases, revenue recognition, and equity administration to increase capabilities over our financial statement recording and reporting processes;

(4) hiring additional full-time accounting personnel with appropriate levels of experience to increase our accounting and technical expertise, including a new Tax Manager, a Director of IT, and additional accounting staff, all with public company experience and or a Certified Public Accountant certification;

and (5) reallocating responsibilities across our accounting organization so that the appropriate level of knowledge and experience is applied based on complexity of transactions, in addition to implementation of sufficient and timely review of significant accounting transactions and reconciliations.

The actions we took were subject to ongoing executive management review and also to audit committee oversight, and resulted in the full remediation of the following material weaknesses as of December 31, 2022:

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

ineffective information technology general controls in the areas of user access and segregation of duties related to certain information technology systems that support our financial reporting process specifically related to expenditures.

As of December 31, 2022, two material weaknesses remained 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 cash and cash equivalents, prepaid expenses and other current assets, property and equipment, capitalized internal-use software, capital lease liability and sale leaseback transactions, accrued compensation and income tax;

our controls over certain equity transactions were not operating effectively to allow management to timely identify errors related to the recording of those transactions;

We have dedicated significant effort and resources towards measures to remediate the identified material weaknesses.

We are in the process of designing and implementing internal controls intended to address our remaining material weaknesses, and are also testing the operating effectiveness of these controls.

(2) enhancing the precision of control around balance sheets reconciliation and cash flow review controls, including the review of underlying source data and procedures to strengthen the retention of contemporaneous documentation of control reviews;

(3) implementing a new enterprise resource planning (“ERP”) system, additional financial modules to support reconciliations, and other systems and processes related to fixed assets, leases, revenue recognition, and equity administration to increase capabilities over our consolidated financial statement recording and reporting processes;

(4) hiring 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, an Internal Controls Manager, a Tax Manager, a Director of IT, and additional accounting staff, all with public company experience and / or a Certified Public Accountant certification;

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

We intend to continue to take steps to remediate the material weaknesses described above, design and implement additional controls, and further evolve our accounting processes.

The remaining material weaknesses cannot be considered fully 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 believe the actions described above, once fully implemented and tested, will be sufficient to remediate the identified material weaknesses and strengthen our internal controls.

Changes in Internal Control over Financial Reporting

Except as otherwise described herein, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the year ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level.

However, management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Other Information

21 unchanged sentences

Exhibit Filing Date Filed Herewith

3.1 Amended and Restated Certificate of Incorporation of Registrant, as currently in effect.

3.1 Restated Certificate of Incorporation of Registrant, as amended and currently in effect.

10-Q 001-41026

3 unchanged sentences

3.2 12/14/2021

Certificate of Retirement

4.1 Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Exchange Act of 1934

6 unchanged sentences

10.2 10/18/2021

10.3 2021 Equity Incentive Plan and form of agreements thereunder.

S-1 333-260333

10.3 10/18/2021

Amended and Restated 2021 Equity Incentive Plan and form of agreements thereunder

2021 Employee Stock Purchase Plan.

S-1 333-260333 10.4 11/02/2021

10.4 10/18/2021

Offer Letter, dated February 14, 2020, by and between the Company and Frank Patchel.

S-1 333-260333 10.5 10/18/2021

10.5 10/18/2021

Loan and Security Agreement, dated October 21, 2021, by and between the Company and City National Bank.

1 unchanged sentence

10.6 10/18/2021

10.7 Form of Simple Agreement for Future Equity, by and between the Company and certain of its investors.

S-1 333-260333

10.7 10/18/2021

First Amendment to the Loan and Security Agreement, dated October 21, 2021, by and between the Company and City National Bank.

3 unchanged sentences

Third Amendment to the Loan and Security Agreement, dated as of January 20, 2023, by and between the Registrant and City National Bank

23.1 Consent of BDO USA, LLP, Independent Registered Public Accounting Firm.

10-K 001-41026 10.10

Fourth Amendment to the Loan and Security Agreement, dated as of December 29, 2023, by and between the Registrant and City National Bank

L ist of Subsidiaries of Backblaze, Inc.

23.1 Consent of BDO USA, P.C.

, Independent Registered Public Accounting Firm.

24.1 Power of Attorney ( contained on signature page to this report ) .

5 unchanged sentences

Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Policy relating to recovery of erroneously awarded compensation, as required by applicable listing standards adopted pursuant to 17 CFR 240.10D-1

101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

8 unchanged sentences

under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.

(b) Exhibits.

+ Indicates management contract or compensatory plan, contract or agreement.

† Pursuant to Item 601(a)(5) of Regulation S-K, certain exhibits and schedules to this agreement have been omitted.

The Company hereby agrees to furnish supplementally to the Securities and Exchange Commission, upon its request, any or all of such omitted exhibits and/or schedules .

(b) Exhibits.

See Item 15(a)(3) above.

3 unchanged sentences

Not Applicable.

Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Mateo, State of California, on this 31st day of March, 2023.

Backblaze, Inc.

14 unchanged sentences

Frank Patchel

/s/ Timothy Nufire

Director March 31, 2023

Timothy Nufire

/s/ Jocelyn Carter-Miller Director March 29, 2024

7 unchanged sentences

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 9A. Controls and Procedures