Backblaze, Inc. 10-K

Item 7. 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 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. You should review the section titled “Special Note Regarding Forward-Looking Statements” for a discussion of forward-looking statements and in Part I, Item 1A,“Risk Factors”, for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview 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. We believe that by substantially reducing the complexity and frustration of storing, using, and protecting data, we can empower customers to focus on their core business operations. 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 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. The amount of data stored in this cloud service can scale up and down as needed primarily on a pay-as-you-go basis or can be paid for on a capacity basis for greater predictability, which we refer to as our B2 Reserve offering. Backblaze Computer Backup automatically backs up data from laptops and desktops for businesses and individuals. This cloud backup service offers easily understood primarily flat-rate pricing to continuously back up a virtually unlimited amount of data. 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. 34 Table of Contents Our Business Model Our solutions are designed for individuals and businesses of all sizes and across all industries but have a particularly strong appeal to mid-market organizations (which we define as organizations with 10 to 999 employees) due to their desire for easy-to-use and cost-effective solutions. We generate revenue primarily from our two cloud services: • Backblaze B2 Cloud Storage, which enables customers to store data for any use case, and for developers to embed our platform into their applications. In both cases, our customers use this offering in a consumption-based or capacity based model, and • Backblaze Computer Backup, which provides virtually unlimited backup to businesses and consumers in a SaaS subscription model. We believe our pricing is simple and straightforward, with fees and terms that are generally shared transparently on our website. 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. Additionally, we provide customers with additional value through cross-sell, upsell, and use case expansion that can result in additional revenue per customer. These options for cross-selling and upselling include the following: • Cross-Sell: After adopting any of our products, customers may expand to other products as their use cases grow, including Computer Backup customers who adopt B2 Cloud Storage to facilitate broader use cases. Adopting additional products expands usage of our platform. • Upsell: Customers can choose to use various features and services for additional fees, such as 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. Additionally, customers receive email and chat support for free, but can also opt for enhanced support tiers for an additional cost, which provide dedicated customer support contacts and 24/7 response. • Use Case Expansion: B2 Cloud Storage customers may adopt the service for one business need, but can expand their use cases as their business evolves. One such example would be a business using B2 Cloud Storage for media asset management storage, which decides to also use the service as an origin store for content distribution; another would be a business that adopts B2 Cloud Storage for backup and archive purposes, which decides to also enable Object Lock for ransomware protection. Use case expansion enables the opportunity to deepen our relationship with our customers and increase revenue. For prospective customers interested in B2 Cloud Storage, we offer a free tier and a simple, intuitive sign-up process, allowing them to quickly on-board and start using our solutions. Once prospective customers grow beyond the free storage limit, they have the flexibility to only pay for what they need and pay as they go, without any lock-in or long-term commitments. This is delivered via a consumption-based model, and we charge a fixed price per month per gigabyte of data stored on our platform. Customers may purchase our B2 Cloud Storage on a capacity basis for greater predictability, which we refer to as our B2 Reserve offering. For prospective customers interested in Computer Backup, we offer a free 15-day trial and automatically start to back up all their files securely to our Backblaze Storage Cloud. Prospective customers can then choose to sign up on a per computer basis. The service is delivered via a SaaS model where revenue is recognized ratably over the subscription term. Subscriptions are offered to customers on a monthly, annual, or biennial basis, providing customers flexibility to choose their commitment lengths. We charge a flat rate for this solution and provide virtually unlimited backup capabilities to customers. There are no storage limits or tiers. 35 Table of Contents 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 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 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. In addition to our self-serve selling motion, we have a sales-assisted selling motion to identify opportunities to increase business with existing customers and to assist larger customers in adopting our services. Our sales-assisted selling motion helps customers that, in 2023, generally were much larger in terms of average revenue per customer than our self-serve customers. Substantially all of our revenue is recurring in nature. We employ a land-and-expand model that seeks to drive additional revenue from existing customers. As customers generate, store, and back up more data, their use of our platform increases, creating natural opportunities for revenue expansion. We are able to further expand our relationships with our customers when they adopt new features and use cases that lead to increased usage of our platform. Factors Affecting Our Performance We believe that the future growth and performance of our business will depend on several factors, including the following: Scale Self Service Customer Acquisition Our business depends, in part, on our ability to add new customers. We believe there is a significant opportunity to further grow our customer base by continuing to make investments in sales and marketing. We will continue investing in our customer acquisition and inbound demand generation activities, which is driven predominantly by our blog content, our case studies, social sharing, earned media, and our self-serve sign up model. We 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. Furthermore, we plan to continue to build and scale our paid lead generation and outbound sales motion to increasingly grow in the mid-market. We also plan to continue to build our ecosystem of partners. We believe that delivering our Storage Cloud solutions through our alliance, developer, and MSP partnerships is an area of opportunity for us. By adding more partners and deepening our relationships with them, we expand our use cases and drive new customer acquisition. Scale Sales 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 Our future success will depend in part on our ability to increase usage and adoption of our solutions with existing customers. We intend to increase revenue from existing customer relationships through the 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 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 36 Table of Contents customers continue to generate, store, and back up data, their use of our platform increases, creating natural opportunities for revenue expansion. Continued Platform Investment and New Product Launches We are committed to delivering market-leading products that continue to make cloud storage and backup easy. We believe we must maintain our product quality and strength of our brand in order to retain the current customer base as well as drive further revenue growth in our business. We intend to continue investing in our research and development activities to build upon our strong position in the technology community. We also plan to launch new products that are adjacent to our current offerings, which will provide us with the ability to further cross-sell and upsell. Investments for Continued Scaling We are focused on our long-term revenue potential and building out our infrastructure to sustain that growth. On a routine basis, we plan to focus resources on optimizing the efficiency of our data storage. In some scenarios, we may choose to pass on potential cost savings to the customer, but in other scenarios we may choose to reinvest cost savings back into infrastructure and design. International Expansion 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 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. 37 Table of Contents 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 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. December 31, 2023 2022 B2 Cloud Storage Net revenue retention rate (NRR) 122 % 122 % Gross customer retention rate 90 % 90 % Annual recurring revenue (in millions) $ 57.6 $ 38.6 Number of customers 97,842 86,874 Annual average revenue per user $ 577 $ 437 Computer Backup Net revenue retention rate (NRR) 100 % 108 % Gross customer retention rate 91 % 90 % Annual recurring revenue (in millions) $ 60.0 $ 53.4 Number of customers 431,745 436,080 Annual average revenue per user $ 140 $ 124 Total Company Net revenue retention rate (NRR) 109 % 113 % Gross customer retention rate 91 % 91 % Annual recurring revenue (in millions) $ 117.6 $ 92.0 Number of customers (1) 511,942 506,456 Annual average revenue per user $ 228 $ 181 _____________ (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. Net Revenue Retention Rate We believe the growth in use of our platform by our existing customers is an important measure of the health of our business and our future growth prospects. We measure this growth by monitoring our overall net revenue retention rate, which measures our ability to retain and expand revenue from existing customers. We believe that we can drive this metric by continuing to focus on our customers and by adding additional products and functionality to our platform. Our overall net revenue retention rate is a trailing four-quarter average of the recurring revenue from a cohort of customers in a quarter as compared to the same quarter in the prior year. We calculate our overall net revenue retention rate for a quarter by dividing (i) recurring revenue in the current quarter from any accounts that were active at the end of the same quarter of the prior year by (ii) recurring revenue in the current corresponding quarter from those same accounts. Our overall net revenue retention rate includes any expansion of revenue from existing customers and is net of revenue contraction and customer attrition, and excludes revenue from new customers in the current period. Our net revenue retention rate for 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. 38 Table of Contents Gross Customer Retention Rate We use gross customer retention rate to measure our ability to retain our customers. Our gross customer retention rate reflects only customer losses and does not reflect the expansion or contraction of revenue we earn from our existing customers. We believe our high gross customer retention rates demonstrate that we serve a vital service to our customers, as the vast majority of our customers tend to continue to use our platform from one period to the next. To calculate our gross customer retention rate, we take the trailing four-quarter average of the percentage of cohort of customers who were active at the end of the quarter in the prior year that are still active at the end of the current quarter. We calculate our gross customer retention rate for a quarter by dividing (i) the number of accounts that generated revenue in the last month of the current quarter that also generated recurring revenue during the last month of the corresponding quarter in the prior year, by (ii) the number of accounts that generated recurring revenue during the last month of the corresponding quarter in the prior year. 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 We define annual recurring revenue (“ARR”) as the annualized value of all B2 Cloud Storage and Computer Backup arrangements as of the end of a period. Given the renewable nature of our business, we view ARR as an important indicator of our financial performance and operating results, and we believe it is a useful metric for internal planning and analysis. ARR is calculated based on multiplying the monthly revenue from all B2 Cloud Storage and Computer Backup arrangements, which represent greater than 98% of our total revenue for the periods presented (and excludes Physical Media revenue), for the last month of a period by 12. 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 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. ARR should be viewed independently of revenue and is not intended to be combined with or to replace that item. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers. While ARR is not a guarantee of future revenue, we consider over 98% of our total revenue recurring for the periods presented. As noted above, our gross customer retention rate has been consistent over the periods presented at approximately 90%. Although 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 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 39 Table of Contents 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 We define annual average revenue per user (“Annual ARPU”) as the annualized value for the average revenue per customer. Annual ARPU is calculated by dividing our revenue for the last month of a period by the total number of customers as of the last day of the same period, and then multiplying the resulting quotient by 12. Our annual average revenue per user for 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. 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 Revenue 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. Consumption-based revenue is variable and is related to fees charged for our customers’ use of our platform and is recognized as revenue in the period in which the consumption occurs. For our subscription arrangements, we provide our cloud services evenly over the contractual period, for which revenue is recognized on a straight-line basis over the contract term beginning on the date that the service is made available to the customer. In support of our platform, we also derive revenue from products offered to our customers for the ability to securely restore data using a USB drive (“USB Restore”) and for migrating large data sets to our platform using our proprietary Fireball device. Revenue from USB Restore is recognized as our products are delivered to our customers. Revenue recognized from customer rentals of our Fireball device is time-based. Cost of Revenue and Gross Margin Cost of revenue consists of expenses for providing our platform and cloud services to our customers. These expenses include operating in co-location facilities, network and bandwidth costs, and depreciation of our equipment and capital lease equipment in co-location facilities. Personnel-related costs associated with customer support and maintaining service availability, including salaries, benefits, bonuses, and stock-based compensation are also included. Cost of revenue also includes credit card processing fees, amortization of capitalized internal-use software development costs, and allocated overhead costs. We intend to continue to invest additional resources in our infrastructure and related personnel, and our customer support organization, to support the growth of our business. Some of these investments, including costs of infrastructure equipment (including related depreciation) and expansion, are incurred in advance of generating revenue, and either the failure to generate anticipated revenue or fluctuations in the timing of revenue could affect our gross margin from period to period. Operating Expenses The most significant components of our operating expenses are personnel costs, which consist of salaries, benefits, bonuses, and stock-based compensation. We also incur other non-personnel costs related to our general overhead expenses. We expect that our operating expenses will increase in absolute dollars as we grow our business. 40 Table of Contents Research and Development 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 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 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. Sales a nd marketing expenses may fluctuate as a percentage of total revenue from period to period because of the timing and extent of these expenses. General and Administrative General and administrative expenses consist primarily of personnel costs for our accounting, finance, legal, IT, security, human resources, and administrative support personnel and executives. General and administrative expenses also include costs related to legal and other professional services fees, sales and other taxes; depreciation and amortization; and an allocation of our general overhead expenses. We expect 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. 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. We maintain a full valuation allowance against our U.S. deferred tax assets because we have concluded that it is more likely than not that our deferred tax assets will not be realized. 41 Table of Contents Results of Operations The following table sets forth our consolidated statements of operations data for the periods indicated: For the Years Ended December 31, 2023 2022 (in thousands) Revenue $ 102,019 $ 85,155 Cost of revenue (1) 52,162 41,292 Gross profit 49,857 43,863 Operating expenses: Research and development (1) 39,527 33,107 Sales and marketing (1) 41,270 35,399 General and administrative (1) 26,965 23,470 Total operating expenses 107,762 91,976 Loss from operations (57,905) (48,113) Investment income 1,984 965 Interest expense (3,792) (4,289) Loss before provision for income taxes (59,713) (51,437) Income tax benefit — (39) Net loss $ (59,713) $ (51,398) __________________ (1) Includes stock-based compensation expense as follows: For the Years Ended December 31, 2023 2022 (in thousands) Cost of revenue $ 1,986 $ 1,267 Research and development 9,218 6,698 Sales and marketing 8,801 5,360 General and administrative 5,172 3,724 Total stock-based compensation expense $ 25,177 $ 17,049 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”). 42 Table of Contents 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 December 31, 2023 2022 Revenue 100 % 100 % Cost of revenue 51 48 Gross profit 49 52 Operating expenses: Research and development 39 39 Sales and marketing 40 42 General and administrative 26 28 Total operating expenses 106 108 Loss from operations (57) (57) Investment income 2 1 Interest expense (4) (5) Loss before provision for income taxes (59) (60) Income tax (benefit) provision — — Net loss (59) % (60) % Comparison of the Years Ended December 31, 2023 and 2022 Revenue For the Years Ended December 31, 2023 2022 Change % Change (in thousands, except percentages) B2 Cloud Storage revenue $ 46,427 $ 33,202 $ 13,225 40 % Computer Backup revenue 55,592 51,953 3,639 7 % Total revenue (1) $ 102,019 $ 85,155 $ 16,864 20 % ________________ (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. 43 Table of Contents Cost of Revenue and Gross Margin For the Years Ended December 31, 2023 2022 Change % Change (in thousands, except percentages) Cost of revenue $ 52,162 $ 41,292 $ 10,870 26 % Gross margin 49 % 52 % 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 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 For the Years Ended December 31, 2023 2022 Change % Change (in thousands, except percentages) Research and development $ 39,527 $ 33,107 $ 6,420 19 % Sales and marketing 41,270 35,399 5,871 17 % General and administrative 26,965 23,470 3,495 15 % Research and Development 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 $6.8 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 $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 44 Table of Contents 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 $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 For the Years Ended December 31, 2023 2022 Change % Change (in thousands, except percentages) Investment income $ 1,984 $ 965 $ 1,019 106 % 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 rates on our marketable securities, partially offset by a lower average marketable securities portfolio balance in 2023 as compared to 2022. Interest Expense For the Years Ended December 31, 2023 2022 Change % Change (in thousands, except percentages) Interest expense $ (3,792) $ (4,289) $ 497 12 % 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, 2023 2022 Change % Change (in thousands, except percentages) 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 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 45 Table of Contents supplemental informational purposes only, have limitations as analytical tools and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of these measures as tools for comparison. Because of these limitations, when evaluating our performance, you should consider each of these non-GAAP financial measures alongside other financial performance measures, including the most directly comparable financial measure calculated in accordance with GAAP and our other GAAP results. A reconciliation of each of our non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with GAAP is set forth below. Adjusted Gross Margin We believe adjusted gross margin, when taken together with our GAAP financial results, provides a meaningful assessment of our performance, and is useful to us for evaluating our ongoing operations and for internal planning and forecasting purposes. We define adjusted gross margin as gross profit, excluding stock-based compensation expense, depreciation and amortization within cost of revenue, as a percentage of adjusted gross profit to total revenue. We exclude stock-based compensation, which is a non-cash item, because we do not consider it indicative of our core operating performance. We exclude depreciation expense of our property and equipment and amortization expense of capitalized internal-use software, because these may not reflect current or future cash spending levels to support our business. We believe adjusted gross margin provides consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this metric eliminates the effects of depreciation and amortization. The following table presents a reconciliation of gross profit, the most directly comparable financial measure stated in accordance with GAAP, to adjusted gross profit, for each of the periods presented: For the Years Ended December 31, 2023 2022 (in thousands, except percentages) Gross profit $ 49,857 $ 43,863 Adjustments: Stock-based compensation 1,986 1,267 Depreciation and amortization 24,330 19,487 Adjusted gross profit $ 76,173 $ 64,617 Gross margin 49 % 52 % Adjusted gross margin 75 % 76 % Adjusted EBITDA Our management uses adjusted EBITDA to assess our operating performance. We define adjusted EBITDA as net loss adjusted to exclude depreciation and amortization, stock-based compensation, interest expense, 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. We believe that adjusted EBITDA, when taken together with our GAAP financial results, provides meaningful supplemental information regarding our operating performance by excluding certain items that may not be indicative of our business, results of operations or outlook. We consider adjusted EBITDA to be an important measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. We define adjusted EBITDA margin as adjusted EBITDA as a percentage of total revenue. Our calculation of adjusted EBITDA may differ from the calculations of adjusted EBITDA by other companies and therefore comparability may be limited. Because of these limitations, when evaluating our performance, you should consider adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results. 46 Table of Contents 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 December 31, 2023 2022 (in thousands, except percentages) Net loss $ (59,713) $ (51,398) Adjustments: Depreciation and amortization 24,912 20,151 Stock-based compensation (1) 25,052 17,049 Interest expense and investment income 1,808 3,324 Income tax benefit — (39) SAFE holder settlement — 1,500 Non-recurring professional services 411 — Workforce reduction and related severance charges 3,616 — Adjusted EBITDA $ (3,914) $ (9,413) 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 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 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 (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. 47 Table of Contents 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 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: For the Years Ended December 31, 2023 2022 (in thousands) 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 Our largest source of operating cash is payments received from our customers. Our primary uses of cash from operating activities are for personnel-related expenses, sales and marketing expenses, infrastructure expenses, and overhead expenses. Cash 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 48 Table of Contents 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. Non-cash charges primarily consisted of $20.2 million for depreciation and amortization expense and $17.0 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 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. 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. 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 $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. 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 ESPP. Contractual Obligations and Commitments Our commitments are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. Operating lease commitments relate primarily to our rental of office space and co-location facilities. Our finance lease commitments relate primarily to our infrastructure equipment. Purchase commitments 49 Table of Contents 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 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. Actual results could differ significantly from the estimates made by management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. We believe that the accounting policies described below involve a substantial degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. For further information, see Note 2 to our 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 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 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 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 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. We recognize revenue net of our estimate of expected customer cancellations and returns. These estimates involve inherent uncertainties and use of management’s judgment. As we provide our offerings as a hosted service, we do not provide customers the contractual right to take possession of the software at any time, do not incur set up costs, nor charge an installation fee to new customers. We determine revenue recognition through the following five steps, which include inherent estimates: 1. Identify the contract with a customer. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s payment history; however, as approximately 92% and 96% of our revenue was generated from customers paying via credit card during the years ended December 31, 2023 and 2022, respectively, the risk of non-payment is reduced. 2. Identify the performance obligations in the contract . Performance obligations promised in a contract are identified based on the services and products that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract. Our contracts typically contain a single distinct performance obligation representing our Backblaze Storage Cloud platform offerings, which includes Computer Backup and B2 Cloud Storage services and customer support. 3. Determine the transaction price . The transaction price is determined based on the consideration we expect to receive in exchange for transferring services to the customer. Variable consideration, 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 50 Table of Contents 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. 4. Allocate the transaction price to performance obligations in the contract . We determine the relative standalone selling price for performance obligations based on the price we sell a good or service for separately. 5. Recognize revenue when or as we satisfy a performance obligation . Revenue is recognized when control of the services is transferred to the customers, in an amount that reflects the consideration that we expect to receive in exchange for those services. Performance obligations are satisfied over time as the customer simultaneously receives and consumes the benefits as the entity performs. Revenue is generally recognized over the common measure of progress (i.e., time-based or consumption-based) for the entire performance obligation. For revenue generated from arrangements that involve third-parties, we evaluate whether we are the principal or the agent based on maintaining control over the services being provided and maintaining the relationship with the end-customer. Substantially all of our revenue is reported on a gross basis, as we are the principal. Stock-Based Compensation All stock-based compensation to employees is measured on the grant date based on the fair value of the awards on the date of grant. We recognize compensation cost for awards on a straight-line basis over the requisite service period, which is 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. 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. Forfeitures are accounted for in the period in which they occur. We use the Black-Scholes option pricing model to estimate the fair value of our stock options and stock purchase rights under our ESPP. The Black-Scholes option pricing model requires the use of complex assumptions, which determine the fair value of stock-based awards. Our option-pricing model requires the input of certain assumptions, including the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent our best estimates. These estimates involve inherent uncertainties and the application of judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense. Capitalized Internal-Use Software, Net We capitalize qualifying software development costs related to new features and enhancements to the functionality of our platform and related products. The costs consist of personnel costs (including related benefits and stock-based compensation) that are incurred during the application development stage. 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 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. 51 Table of Contents 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 We are an emerging growth company, as defined in the Jumpstart Our Business Startups (JOBS) Act. For so long as we continue to be an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation. The JOBS Act also provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards applicable to public companies. This provision allows an emerging growth company to delay the adoption of some accounting standards unless and until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.