Backblaze, Inc. 10-K

Item 8. Financial Statements and Supplementary Data BACKBLAZE, INC. INDEX TO THE FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (BDO USA, P.C., San Jose, California, PCAOB ID # 243 ) 54 Consolidated Balance Sheets 55 Consolidated Statements of Operations 56 Consolidated Statements of Changes in Stockholders’ Equity 57 Consolidated Statements of Cash Flows 58 Notes to Consolidated Financial Statements 60 53 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Backblaze, Inc. San Mateo, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Backblaze, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended , in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BDO USA, P.C. We have served as the Company’s auditor since 2020. San Jose, California March 29, 2024 54 Table of Contents BACKBLAZE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 12,502 $ 6,690 Accounts receivable, net 800 856 Short-term investments, net 16,799 58,733 Prepaid expenses and other current assets 8,413 8,120 Total current assets 38,514 74,399 Restricted cash, non-current 4,128 4,306 Property and equipment, net 45,600 49,375 Operating lease right-of-use assets 9,980 6,881 Capitalized internal-use software, net 32,521 16,704 Other assets 944 793 Total assets $ 131,687 $ 152,458 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 2,281 $ 3,283 Accrued expenses and other current liabilities 8,460 9,418 Finance lease liabilities and lease financing obligations, current 18,492 18,531 Operating lease liabilities, current 1,878 2,130 Deferred revenue, current 25,976 22,912 Total current liabilities 57,087 56,274 Finance lease liabilities and lease financing obligations, non-current 13,310 15,487 Operating lease liabilities, non-current 8,151 5,032 Deferred revenue, non-current 4,073 2,611 Debt facility, non-current 4,128 4,306 Total liabilities $ 86,749 $ 83,710 Commitments and contingencies (Note 10) Stockholders’ Equity Class A common stock, $ 0.0001 par value; 113,000,000 shares authorized as of December 31, 2023 and 2022; 39,150,610 and 16,198,333 shares issued and outstanding as of December 31, 2023 and 2022, respectively. 4 2 Class B common stock, $ 0.0001 par value; 295,986 and 37,000,000 shares authorized as of December 31, 2023 and 2022; zero and 17,195,404 shares issued and outstanding as of December 31, 2023 and 2022, respectively. — 2 Additional paid-in capital 192,388 156,485 Accumulated deficit ( 147,454 ) ( 87,741 ) Total stockholders’ equity 44,938 68,748 Total liabilities and stockholders’ equity $ 131,687 $ 152,458 See accompanying notes, which are an integral part of these consolidated financial statements. 55 Table of Contents BACKBLAZE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) For the Years Ended December 31, 2023 2022 Revenue $ 102,019 $ 85,155 Cost of revenue 52,162 41,292 Gross profit 49,857 43,863 Operating expenses: Research and development 39,527 33,107 Sales and marketing 41,270 35,399 General and administrative 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 ) Net loss per share attributable to Class A and Class B common stockholders, basic and diluted $ ( 1.66 ) $ ( 1.62 ) Weighted average shares used in computing net loss per share attributable to Class A and Class B common stockholders, basic and diluted (1) 36,011,446 31,662,301 (1) On July 6, 2023, all shares of the Company’s then outstanding Class B common stock were automatically converted into the same number of shares of Class A common stock, pursuant to the terms of the Company’s Amended and Restated Certificate of Incorporation. No additional shares of Class B common stock will be issued following such conversion. See Note 12 for further details. See accompanying notes, which are an integral part of these consolidated financial statements. 56 Table of Contents BACKBLAZE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands, except share data) Class A and Class B Common Stock (1) Additional Paid-in Capital Accumulated Deficit Total Shares Amount Balance as of December 31, 2021 30,384,834 $ 3 $ 131,826 $ ( 36,343 ) $ 95,486 Net loss — — — ( 51,398 ) ( 51,398 ) Issuance of Class A and Class B common stock upon exercise of stock options 2,112,819 1 4,407 — 4,408 Issuance of Class A common stock under 2021 Plan, net of taxes withheld 321,720 — ( 130 ) — ( 130 ) Issuance of Class A common stock related to the 2021 Employee Stock Purchase Plan ("ESPP") 574,364 — 2,511 — 2,511 Stock-based compensation — — 17,871 — 17,871 Balance as of December 31, 2022 33,393,737 $ 4 $ 156,485 $ ( 87,741 ) $ 68,748 Net loss — — — ( 59,713 ) ( 59,713 ) Issuance of Class A common stock upon exercise of stock options 2,446,846 — 4,613 — 4,613 Issuance of Class A common stock under 2021 Plan 2,327,073 — — — — Issuance of Class A common stock related to ESPP 695,046 — 2,339 — 2,339 Issuance of restricted stock units related to the 2022 Bonus Plan (See Note 13) 287,908 — 1,848 — 1,848 Stock-based compensation — — 27,103 — 27,103 Balance as of December 31, 2023 39,150,610 $ 4 $ 192,388 $ ( 147,454 ) $ 44,938 (1) On July 6, 2023, all shares of the Company’s then outstanding Class B common stock were automatically converted into the same number of Class A common stock, pursuant to the terms of the Company’s Amended and Restated Certificate of Incorporation. No additional shares of Class B common stock will be issued following such conversion. See Note 12 for further details. See accompanying notes, which are an integral part of these consolidated financial statements. 57 Table of Contents BACKBLAZE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ ( 59,713 ) $ ( 51,398 ) Adjustments to reconcile net loss to net cash used in operating activities: Net accretion of discount on investment securities and net realized investment gains 417 ( 863 ) Noncash lease expense on operating leases 2,350 2,457 Depreciation and amortization 24,912 20,151 Stock-based compensation 25,177 17,049 Impairment of capitalized internal-use software 232 — (Gain) loss on disposal of assets ( 292 ) 37 Changes in operating assets and liabilities: Accounts receivable 56 ( 547 ) Prepaid expenses and other current assets ( 445 ) ( 379 ) Other assets ( 389 ) 1,001 Accounts payable ( 295 ) 1,627 Accrued expenses and other current liabilities ( 1,422 ) ( 970 ) Deferred revenue 4,526 670 Operating lease liabilities ( 2,464 ) ( 2,547 ) Other long-term liabilities — ( 69 ) Net cash used in operating activities ( 7,350 ) ( 13,781 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of marketable securities ( 26,358 ) ( 145,871 ) Maturities of marketable securities 67,874 88,000 Proceeds from disposal of property and equipment 369 — Purchases of property and equipment ( 5,512 ) ( 7,349 ) Capitalized internal-use software costs ( 14,716 ) ( 8,634 ) Net cash provided by (used in) investing activities 21,657 ( 73,854 ) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on finance lease and lease financing obligations ( 19,510 ) ( 16,492 ) Payments of deferred offering costs — ( 658 ) Proceeds from debt facility 4,273 4,305 Repayment of debt facility ( 4,450 ) — Proceeds from insurance premium financing 893 — Principal payments on insurance premium financing ( 1,545 ) — Proceeds from lease financing obligations 4,450 — Employee payroll taxes paid related to net settlement of equity awards — ( 130 ) Proceeds from exercises of stock options 4,708 4,252 Proceeds from ESPP 2,339 2,511 Net cash used in financing activities ( 8,842 ) ( 6,212 ) Net increase (decrease) in cash, restricted cash and restricted cash, non-current 5,465 ( 93,847 ) Cash, restricted cash, current and restricted cash, non-current at beginning of period 11,165 105,012 Cash, restricted cash, current and restricted cash, non-current at end of period $ 16,630 $ 11,165 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 3,733 $ 3,776 Cash paid for income taxes $ 59 $ 31 Cash paid for operating lease liabilities $ 2,801 $ 2,838 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Stock-based compensation included in capitalized internal-use software $ 4,960 $ 2,674 Accrued bonus settled in restricted stock units $ 1,848 $ — Accrued bonus classified as stock-based compensation $ 3,034 $ 1,852 Financed insurance premiums included in accrued expenses and other current liabilities $ — $ 1,545 Equipment acquired through finance lease and lease financing obligations $ 13,094 $ 17,037 Accruals related to purchases of property and equipment $ 60 $ 158 58 Table of Contents Lease liabilities arising from right-of-use assets upon adoption of ASC 842 $ — $ 5,220 Assets obtained in exchange for operating lease obligations $ 5,448 $ 4,118 Receivable recorded due to stock option exercises pending settlement $ 18 $ 156 RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH Cash and cash equivalents $ 12,502 $ 6,690 Restricted cash – included in prepaid expenses and other current assets $ — $ 169 Restricted cash, non-current $ 4,128 $ 4,306 Total cash, cash equivalents, restricted cash, current and restricted cash, non-current $ 16,630 $ 11,165 See accompanying notes, which are an integral part of these consolidated financial statements. 59 Table of Contents BACKBLAZE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Organization and Description of Business Description of Business Backblaze, Inc. and its subsidiaries (collectively, “Backblaze” or the “Company”) is a storage cloud platform, providing businesses and consumers with solutions to store and use their data. Backblaze provides these cloud services through purpose-built, web-scale software built on commodity hardware. Backblaze was incorporated in the state of Delaware on April 20, 2007 and is headquartered in San Mateo, California. Note 2. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements and accompanying notes have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries, including the formation of Backblaze Netherlands B.V. and Backblaze Worldwide, Inc. subsidiaries in 2023. All intercompany balances and transactions have been eliminated in consolidation. The Company’s fiscal year ends on December 31. Emerging Growth Company The Company is an emerging growth company (“EGC”), as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, EGCs can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an EGC or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The Company expects to use the extended transition period for any other new or revised accounting standards during the period in which it remains an EGC. Segment Information The Company has a single operating and reportable segment. In reaching this conclusion, management considers the definition of the chief operating decision maker (“CODM”), how the business is defined by the CODM, the nature of the information provided to the CODM and how that information is used to make operating decisions, allocate resources and assess performance. The Company’s chief operating decision maker is its Chief Executive Officer (“CEO”), who reviews financial information presented on an aggregated basis for purposes of making operating decisions, assessing financial performance and allocating resources. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying notes. Such estimates and assumptions include the costs to be capitalized as internal-use software, which include determining whether projects will result in new or additional functionality, the useful lives of other long-lived assets, impairment considerations for long-lived assets, the incremental borrowing rate for lease agreements, lease and non-lease component allocation, estim ates related to variable consideration, valuation of the Company’s Employee Stock Purchase Plan (“ESPP”) expense, and accounting for taxes, including estimates for deferred tax assets, valuation 60 Table of Contents allowance, and uncertain tax positions. The Company bases its estimates on historical experience and on assumptions that management considers reasonable. Future actual results could differ materially from these estimates. Foreign Currency The reporting currency of the Company is the United States dollar (“USD”). The functional currency of the Company and its subsidiaries is USD. Transaction gains and losses that arise from exchange rate fluctuations on monetary transactions denominated in a currency other than the functional currency are included in general and administrative on the consolidated statements of operations when realized. Concentrations and Risks and Uncertainties Liquidity. The Company believes that its existing cash, cash equivalents and short-term investments together with cash provided by operations, will be sufficient to support its working capital and capital expenditure requirements for at least the next 12 months. However, to achieve its continued growth and objectives, the Company will need to obtain additional sources of financing which may include entering into lease agreements, sale-leaseback arrangements, credit facilities, and other debt financing arrangements for the purpose of acquiring infrastructure equipment and to fund its operations. In the event that the Company requires additional financing, it may not be able to raise such financing on terms acceptable to us or at all. If the Company is unable to obtain additional sources of financing, raise additional capital or generate cash flows necessary to expand its operations and invest in continued innovation, it may not be able to compete successfully, which would harm its business, results of operations and financial condition. Credit risk. Financial instruments that potentially subject the Company to credit risk primarily consist of cash, cash equivalents, accounts receivable, short-term investments, and unbilled accounts receivable. The Company maintains its cash, restricted cash, and short-term investments with high-quality financial institutions with investment-grade ratings. In the event of a failure of any financial institutions where the Company maintains deposits, it may lose timely access to its funds at such institutions and incur significant losses to the extent its funds exceed the $250,000 limit insured by the Federal Deposit Insurance Corporation. Deposits with these financial institutions may exceed the amount of insurance provided on such deposits. For accounts receivable, the Company is exposed to credit risk in the event of nonpayment by customers to the extent of the amount recorded on the consolidated balance sheets. In addition, the Company uses City National Bank, a subsidiary of Royal Bank of Canada (“RBC”), for its banking needs. While the Company and its bank has not been directly affected by the failures of certain banks, the banking industry overall has experienced disruption and uncertainty, which could put additional pressures on the Company’s bank and other banks, and may negatively impact the availability and costs for various banking and investment offerings. The Company does not have separate collateral requirements to support financial instruments subject to credit risk. Vendors. The Company acquires infrastructure equipment from third party vendors. Vendors may have limited sources of equipment and supplies which may expose the Company to potential supply and service disruptions that could harm the Company’s business. For the Years Ended December 31, 2023 2022 Cash disbursement concentration Number of vendors 2 2 Total cash disbursements represented by vendors listed above 21 % 25 % December 31, 2023 2022 Accounts payable concentration Number of vendors 2 2 Total accounts payable balance represented by vendors listed above 30 % 26 % Revenue. The Company derives substantially all of its revenue from the services operating on its Backblaze Storage Cloud platform: its Backblaze B2 Cloud Storage (“B2 Cloud Storage”) and Backblaze Computer Backup (“Computer Backup”) offerings. The potential for severe impact to the Company’s business could result if the Company was unable to operate its platform or serve customers through its platform, for an extended period of time. 61 Table of Contents Restructuring Restructuring costs are comprised of severance costs related to workforce reductions. The Company recognizes restructuring charges when the liability is incurred. For involuntary terminations, employee termination benefits are accrued at the date (i) management has committed to a plan of termination, which includes identification of employees to be terminated and related information, (ii) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn, and (iii) employees have been notified of their termination dates and expected severance payments. For voluntary terminations, the Company recognizes a liability when the termination benefit has been irrevocably accepted by the employee. Revenue Recognition The Backblaze Storage Cloud provides the core platform for the Company’s B2 Cloud Storage and its Computer Backup offerings. The Company derives its revenue primarily from fees earned from customers accessing these offerings through its platform. These fees are paid monthly in arrears for its consumption-based arrangements related to its B2 Cloud Storage offering, or charged upfront for subscription-based arrangements related to its Computer Backup and B2 Cloud Storage offerings. The Company provides services to its customers under Computer Backup subscription-based arrangements of one month , one-year , and two-years , which automatically renew at the end of the respective term. The Company generally provides services to its customers under its B2 Cloud Storage subscription-based offering arrangements of one-year to five-years . The Company also recognizes revenue from products offered to its customers for the ability to securely restore data using a USB drive (“USB Restore”) and for migrating large data sets to its platform using its proprietary Fireball device. The Company refers to these products as its “Physical Media revenue”. Physical Media revenue was less than 1 % of the Company’s revenue for the years ended December 31, 2023 and 2022. The Company’s monthly subscription arrangements do not provide customers with refund rights. One to five-year subscription arrangements are eligible for a full refund up to 30 days after subscribing. For its Physical Media revenue, the Company offers a full refund to its customers restoring data using a USB drive, if the drives are returned to the Company within 30 days of receipt. The Company recognizes revenue net of its estimate of expected customer cancellations, returns, and discounts. These estimates involve inherent uncertainties and use of management’s judgment. While the majority of the Company’s customers pay via credit card, amounts that have been invoiced are recorded in accounts receivable and in revenue, or deferred revenue, depending on whether appropriate revenue recognition criteria have been met. As the Company provides its offerings as a hosted service, it does not provide customers the contractual right to take possession of the software at any time, does not incur set up costs, and does not charge an installation fee for its new customers. The Company determines revenue recognition through the following five steps: 1. Identify the contract with a customer. The Company considers the terms and conditions of the contracts and its customary business practices in identifying its contracts under ASC 606. The Company determines it has a contract with a customer when: • the contract has been approved by both parties, • it can identify each party’s rights regarding the services to be transferred and the payment terms for the services, • it has determined the customer to have the ability and intent to pay, and • the contract has commercial substance. The Company applies judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors; however, as approximately 92 % and 96 % of the Company ’s 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 low and historical write-offs having been immaterial. 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. The Company’s contracts typically contain a single distinct performance obligation 62 Table of Contents representing one of its Backblaze Storage Cloud platform offerings, which includes either B2 Cloud Storage or Computer Backup services and related customer support. Customers also have the option to purchase a USB device for USB Restore and rental of its Fireball device at the standalone selling price (“SSP”). 3. Determine the transaction price. The transaction price is determined based on the consideration the Company expects to receive in exchange for transferring services to the customer. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue recognized under the contract will not occur. The Company’s variable consideration includes consumption-based revenue and revenue arrangements that offer the right of return. The Company offers a 30 day right of ret urn for its 1 to 5-year subscription-based arrangements and records a refund liability based on historical return data. Certain fees that are considered consideration payable to a customer are accounted for as a reduction of the transaction price. None of the Company’s contracts contain a significant financing component. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental entities (e.g., sales and other indirect taxes). 4. Allocate the transaction price to performance obligations in the contract. Contracts that contain multiple distinct performance obligations require an allocation of the transaction price to each performance obligation based on a relative SSP. The Company determines SSP for performance obligations based on the price it sells a good or service separately. 5. Recognize revenue when or as the Company satisfies a performance obligation. Revenue is recognized based on the output method when control of the services is transferred to the customer and in an amount that reflects the consideration the Company expects to receive in exchange for those services. Performance obligations are satisfied over time when the customer simultaneously receives and consumes the benefits as the entity performs. Revenue is generally recognized over the common measure of progress (i.e., time-based or consumption-based) for the entire performance obligation. Revenue from subscription-based arrangements is recognized on a straight-line basis over the contractual term beginning on the date that the service commences, as customers are entitled to the same benefits throughout the contractual term. Fees from consumption-based arrangements are recognized as services are delivered based on the amount of daily storage consumed. Revenue for USB Restore is recognized as USB devices are delivered to customers, and recognition of the Company’s Fireball device rental is time-based. The Company also offers a 15-day free trial pe riod for its Computer Backup subscription-based arrangements and it does not enter into a contract with the customer during this trial period. Separately, under its consumption-based arrangements, the Company does not charge customers until at least 10 gigabytes of data have been stored. The Company applied the opti onal exemption of not disclosing the transaction price allocated to the remaining performance obligations for its consumption-based contracts and contracts with original duration of one year or less. The non-current deferred revenue balance of $ 4.1 million on the Company’s consolidated balance sheet as of December 31, 2023 will be recognized starting in 2025 and going forward. As of December 31, 2022, the Company’s non-current deferred revenue balance was $ 2.6 million, which will be recognized in 2024. For revenue generated from arrangements that involve third-parties, the Company evaluates whether it is 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 the Company’s revenue is reported on a gross basis, as the Company is the principal. Cost of Revenue Cost of revenue includes costs directly associated with the delivery of services and products, which consists of expenses for providing Backblaze’s platform to its customers. These expenses include rent and utilities for operating in co-location facilities, network and bandwidth costs, shipping and handling for Physical Media revenue, depreciation of the Company’s equipment and capital lease assets in co-location facilities and other infrastructure expenses incurred in connection with its customers’ use of its services. The Company periodically receives discounts from third-party vendors that are recorded as a reduction to cost of revenue on its consolidated statements of operations. Personnel-related costs associated with customer support and maintaining service availability include salaries, benefits, bonuses and stock-based compensation. Cost of revenue also includes credit card processing fees, amortization of capitalized internal-use software development costs and allocated overhead costs. 63 Table of Contents Research and Development Costs Research and development costs consist primarily of personnel-related expenses associated with the Company’s research and development staff, including salaries, benefits, bonuses and stock-based compensation. Research and development costs also include consultants or professional services fees, costs related to the support and maintenance of systems used in product development, subscription services for use by its research and development organization and an allocation of its overhead costs. Research and development costs are generally expensed as incurred, unless they qualify as capitalized internal-use software. Advertising Costs Advertising costs are expensed as incurred and are included in sales and marketing expenses in the consolidated statements of operations. These costs were approximate ly $ 3.6 million and $ 5.7 million for the years ended December 31, 2023 and 2022, respectively. Income Taxes The Company accounts for income taxes using the asset and liability method. Deferred income taxes are recognized by applying the enacted statutory tax rates applicable to future years to differences between the carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance to amounts that are more likely than not to be realized. Where interpretation of the tax law may be uncertain, the Company recognizes, measures and discloses income tax uncertainties. The Company accounts for interest expense and penalties related to unrecognized tax benefits as income tax expense in its consolidated statements of operations. The Company is subject to periodic audits by the Internal Revenue Service and other taxing authorities, which may challenge tax positions taken by the Company. 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. The Company recognizes compensation cost for its awards on a straight-line basis over the requisite service period, which is generally a vesting period of one to four years , except for the awards granted under the Company’s 2022 Bonus Plan (see Note 13). Share-based compensation includes restricted stock units (“RSUs”), stock option grants and stock purchase rights under the ESPP. The Company uses the Black-Scholes option pricing model to measure the fair value of its stock options and the stock purchase rights under the ESPP. The Black-Scholes option pricing model requires the use of complex assumptions, which determine the fair value of stock-based awards. If an award contains a provision whereby vesting is accelerated upon a change in control, the Company recognizes stock-based compensation expense on a straight-line basis, as a change in control is considered to be outside of its control and is not considered probable until it occurs. Forfeitures are accounted for in the period in which they occur. Cash and Cash Equivalents Cash and cash equivalents include cash and certain highly liquid investments with maturities of 90 days or less at the date of purchase. Cash equivalents are primarily recorded at cost, which approximates fair value due to their short maturities. Restricted Cash A s of December 31, 2022, the Compa ny had $ 169 thousand in restricted cash related to the letter of credit established according to requirements under a lease agreement, reported as a component of other current assets on the consolidated balance sheets. As of December 31, 2023, this balance is no longer restricted as the lease agreement and associated letter of credit have been completed. Additionally, the Company had $ 4.1 million and $ 4.3 million in restricted cash as of December 31, 2023 and 2022 , respectively, related to the line of credit agreement with City National Bank. See Note 11 for further details. 64 Table of Contents Investments The Company holds all investments on a held-to-maturity basis, and they are reported at amortized cost with realized gains or losses reported in earnings. The Company determines the appropriate classification of its investment in debt securities at the time of purchase and re-evaluates such determination at each balance sheet date. The Company will recognize an allowance for estimated credit losses on its held-to-maturity securities, using a forward-looking expected loss model, which reflects losses that are expected to be incurred over the life of the financial instrument. The Company uses a roll-rate method to determine the estimated credit losses using factors including historical global average default rates and expected recovery rates on similar credit quality, bond maturity and duration, along with historical experience, current conditions, and forecasts of future economic conditions, if available. The Company monitors the credit profile of its held-to-maturity securities on a quarterly basis, using third party data to assess their credit ratings as well as any adverse conditions specifically related to the security. The allowance for credit losses is less than $ 1 thousand for the year ended December 31, 2023. The Company’s short-term investments include investment grade commercial paper with original maturities of 365 days or less at the date of purchase. Short-term investments are recorded at amortized cost on the consolidated balance sheets. Fair Value of Financial Instruments The Company measures financial assets and liabilities at fair value at each reporting date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are reported under a three-level valuation hierarchy. The classification of the Company’s financial assets within the hierarchy is as follows: Level 1 — Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 — Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Level 3 — Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. The carrying amounts reflected in the consolidated balance sheets for accounts receivable, prepaid expenses and other current assets, accounts payable, accrued liabilities and other liabilities and deferred revenue, current approximate their respective fair values due to the short maturities of those instruments. Accounts Receivable, Net Accounts receivable are recorded net of an allowance when the Company has an unconditional right to payment. The Company adopted the current expected credit loss model ("CECL") as prescribed by Accounting Standards Update 2016-13 on January 1, 2023. Under CECL, accounts receivable are carried at the original invoiced amount less an estimated allowance for expected credit losses based on the probability of future collection. The allowance is estimated based on the Company’s assessment of its ability to collect on customer accounts receivable and are $ 8 thousand and $ 13 thousand as of December 31, 2023 and 2022, respectively. The provision totaled $ 30 thousand and zero for the years ending December 31, 2023 and 2022, respectively. Direct write-offs totaled $ 35 thousand and zero for the years ending December 31, 2023 and 2022, respectively. Recoveries totaled zero and $ 22 thousand for the years ending December 31, 2023 and 2022, respectively. The Company regularly reviews the allowance by considering certain factors such as historical experience, credit quality, age of accounts receivable balances and other known conditions that may affect a customer’s ability to pay. The Company records changes in the estimate to the allowance for expected credit losses through provision for expected credit losses when a determination is made that the balance is uncollectible and collection of the receivable is no longer being actively pursued. Unbilled Accounts Receivable Unbilled accounts receivable represents revenue recognized on contracts for which billings have not yet been presented to customers due to consumption-based usage that is billed monthly in arrears. Substantially all of the Company’s unbilled 65 Table of Contents accounts receivable is charged via a credit card upon billing. Unbilled accounts receivable is included in prepaid expenses and other current assets on the consolidated balance sheets. The balance of unbilled accounts receivable as of December 31, 2023 and 2022 is presented in Note 6. Deferred Offering Costs Deferred offering costs, which consist of direct incremental legal, accounting and consulting fees relating to the Company’s IPO, are capitalized in other assets on the consolidated balance sheets. The deferred offering costs were offset against IPO proceeds upon the consummation of the IPO. Deferred Contract Costs Commissions paid to affiliates for new customers or customer renewals are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are recorded when earned and are amortized over the expected benefit period using the straight-line method. As renewal commission is commensurate with a commission in an initial sale, such amounts are capitalized and amortized over the stated contract term. Capitalized commission amounts expected to be recognized within one year of the balance sheet date are recorded as prepaid expenses and other current assets, and the remaining portion is recorded as other assets, on the Company’s consolidated balance sheets. Expenses for commissions are included in sales and marketing expenses in the consolidated statements of operations. Property and Equipment, Net Property and equipment, both owned and under capital leases, are stated at cost, less accumulated depreciation, which is computed on a straight-line basis over the asset’s estimated useful life. Leasehold improvements are depreciated over the shorter of the useful life of the asset or expected lease term. Improvements that increase functionality of the asset are capitalized and depreciated over the asset’s remaining useful life. Construction-in-progress is not depreciated. Fully depreciated assets are retained in property and equipment until removed from service. The following table presents the estimated useful lives of property and equipment: Property and Equipment Useful life Data center equipment 3 - 5 years Machinery and equipment 3 - 5 years Computer equipment 3 - 5 years Leasehold improvements Shorter of useful life or expected lease term Capitalized Internal-Use Software, Net The Company capitalizes qualifying software development costs related to new features and enhancements to the functionality of its platform and related products. The costs consist of personnel costs (including related benefits and stock-based compensation) that are incurred during the application development stage. Capitalization of costs begins when two criteria are met: (i) the preliminary project stage is completed, and (ii) it is probable that the software will be completed and used for its intended function. Capitalization ceases when the software is substantially complete and ready for its intended use, including the completion of all significant testing. Costs related to preliminary project activities and post-implementation operating activities are expensed as incurred. The Company reviews its capitalization criteria for each project individually. Capitalized costs are amortized over the estimated useful life of the software, which is generally five years , on a straight-line basis, and represents the manner in which the expected benefit will be derived. The Company determines 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 consolidated statements of operations. Significant judgments related to the capitalization of software costs include determining whether it is probable that projects will result in new or additional functionality. 66 Table of Contents Impairment of Long-lived Assets Long-lived assets with finite lives include property and equipment, capitalized internal-use software, and certain implementation costs incurred for cloud computing arrangements. The Company evaluates these long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds these estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the assets exceeds the fair value of the asset or asset group during the quarter in which the determination is made. Deferred Revenue The Company records deferred revenue when customer payments are received in advance of satisfying the performance obligations on the Company’s contracts. Subscription-based arrangements are generally billed and paid in advance of satisfaction of these performance obligations. Deferred revenue relating to the Company’s subscription-based arrangements that have a contractual expiration date of less than 12 months are classified as current. The Company classifies deferred revenue from services that will be provided in more than 12 months as non-current on its consolidated balance sheets. Leases The Company enters into finance lease arrangements for hard drives and related equipment, and operating leases for rental of co-location space in data centers and offices. The Company determines if an arrangement is or contains a lease at inception by evaluating various factors, including if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration and other facts and circumstances. As a majority of the Company’s operating leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available as of the commencement date for each lease component. The discount rate used is the rate of interest that a lessee would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment. For finance leases, the lease term generally begins on the date of initial possession of the leased asset, and for operating leases the term begins when the Company has the right to use the leased space and obtain the economic benefits. The Company does not assume renewals in its determination of the lease term unless the renewals are deemed to be reasonably assured at lease inception. Lease classification is determined at the lease commencement date. The Company records an asset and lease liability on its consolidated balance sheets for leases that have yet to commence when it has the ability to control the underlying asset as that creates a significant right and obligation to the Company. The underlying assets of finance leases are included in property and equipment, net, on the Company’s consolidated balance sheets. Variable lease payments are expensed as incurred and include certain non-lease components, such as maintenance and other services provided by the lessor to the extent the charges are variable. The Company has elected the short-term lease practical expedient for all asset classes, which allows the lessee to not apply the recognition requirements of ASC 842 to short-term leases (leases with original terms of 12 months or less and that do not include a purchase option that the lessee is reasonably certain to exercise). The Company has elected the practical expedient to combine lease and non-lease components for all of its leases, with the exception of its leases belonging to the colocation lease agreement asset class. For its colocation lease agreements, the Company only recognizes fixed minimum payments for tangible components as right-of-use assets and operating lease liabilities, as this class of agreements may include significant intangible components. 67 Table of Contents Accounting Pronouncements Recently Adopted In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires a financial asset measured at an amortized cost basis be presented at the net amount expected to be collected. For accounts receivables, unbilled receivables, loans, and other financial instruments, the Company is required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The Company adopted the guidance effective January 1, 2023 using the modified retrospective transition method with comparative periods continuing to be reported using the previous applicable guidance and determined that it did not have a material impact on its consolidated financial statements. Recently Issued Accounting Pronouncements In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740) - Improvements to Income Tax Disclosures” requiring enhancements and further transparency to certain income tax disclosures, most notably the tax rate reconciliation and income taxes paid. This ASU is effective for fiscal years beginning after December 15, 2024 on a prospective basis and retrospective application is permitted. The Company is currently evaluating the impact of the adoption of this standard. In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure.” The ASU updates reportable segment disclosure requirements, primarily through requiring enhanced disclosures about significant segment expenses and information used to assess segment performance. These disclosures are required quarterly and also applies to public entities with a single reportable segment. The ASU is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024, with early adoption permitted. It is required to be adopted retrospectively for all prior periods presented in the financial statements. The Company is currently evaluating the impact of adopting this ASU on its disclosures. Note 3. Revenues Deferred Contract Costs The following table presents the Company’s amortization of deferred contract costs (in thousands): For the Years Ended December 31, 2023 2022 Amortization of deferred contract costs $ 978 $ 892 December 31, 2023 2022 Deferred contract costs $ 489 $ 418 Deferred Revenue The following table presents information regarding the Company’s deferred revenue (in thousands): December 31, 2023 2022 Deferred revenue $ 30,049 $ 25,523 For the Years Ended December 31, 2023 2022 Total revenue recognized, included in each deferred revenue balance at the beginning of each respective period $ 22,983 $ 21,764 68 Table of Contents The Company’s deferred revenue as stated on the consolidated balance sheets presented approximates its contract liability balance as of December 31, 2023 and 2022. The Company’s total deferred revenue balance as of December 31, 2023 , approximates the aggregate amount of the transaction price allocated to remaining performance obligations (“RPOs”) as of that date. As of December 31, 2023 , the Company’s RPOs were $ 33.1 million. This amount includes deferred revenue arising from consideration invoiced for which the related performance obligations have not been satisfied, as well as future committed revenue for periods within current contracts with customers. As of December 31, 2023, the Company expects to recognize $ 27.6 million or approximately 84 % of its RPOs over the next 12 months, and substantially all of its RPOs over the next 24 months. Disaggregation of Total Revenue The following table presents the Company’s revenue disaggregated by product (in thousands): For the Years Ended December 31, 2023 2022 B2 Cloud Storage $ 46,427 $ 33,202 Computer Backup 55,592 51,953 Total revenue (1) $ 102,019 $ 85,155 ________________ (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. The following table presents the Company’s total revenue disaggregated by timing of revenue recognition (in thousands): For the Years Ended December 31, 2023 2022 Consumption-based arrangements $ 45,771 $ 33,041 Subscription-based arrangements 55,679 51,431 Physical Media (point in time) 569 683 Total revenue $ 102,019 $ 85,155 Total revenue by geographic area, based on the location of the Company’s customers, was as follows (in thousands): For the Years Ended December 31, 2023 2022 United States $ 73,262 $ 60,950 United Kingdom 5,463 4,652 Canada 5,027 4,324 Other 18,267 15,229 Total revenue $ 102,019 $ 85,155 Note 4. Investments Fair Values and Gross Unrealized Gains and Losses on Investments The following table summarizes adjusted cost, gross unrealized losses, and fair value by significant investment category. The Company’s commercial paper investments with original maturities greater than 90 days are classified as held-to-maturity and commercial paper investments with original maturities of 90 days or less are classified as cash equivalents on its consolidated balance sheets as of December 31, 2023 and 2022 . 69 Table of Contents Amortized Cost Gross Unrealized Fair Value Net Carrying Value Gains Losses As of December 31, 2023 (In Thousands) Cash equivalents Commercial paper $ 4,976 $ 10 $ — $ 4,986 $ 4,976 Total cash equivalents $ 4,976 $ 10 $ — $ 4,986 $ 4,976 Investments Commercial paper $ 16,799 $ — $ ( 10 ) $ 16,789 $ 16,799 Total investments $ 16,799 $ — $ ( 10 ) $ 16,789 $ 16,799 Amortized Cost Gross Unrealized Fair Value Net Carrying Value Gains Losses As of December 31, 2022 (In Thousands) Investments Commercial paper $ 58,733 $ — $ ( 144 ) $ 58,589 $ 58,733 Total investments $ 58,733 $ — $ ( 144 ) $ 58,589 $ 58,733 Scheduled Maturities The amortized cost and fair value of held-to-maturity securities as of December 31, 2023 and 2022 by contractual maturity are shown below. As of December 31, 2023 Amortized Cost Fair Value (In Thousands) Within one year $ 16,799 $ 16,789 After one year through five years — — After 5 years through 10 years — — After 10 years — — Total investments $ 16,799 $ 16,789 As of December 31, 2022 Amortized Cost Fair Value (In Thousands) Within one year $ 58,733 $ 58,589 After one year through five years — — After 5 years through 10 years — — After 10 years — — Total investments $ 58,733 $ 58,589 Aging of Unrealized Losses For those securities in an unrealized loss position, the length of time the securities were in such a position is as follows: 70 Table of Contents Less than 12 Months Total # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses As of December 31, 2023 (Dollars In Thousands) Investments Commercial paper 4 $ 16,789 $ ( 10 ) 4 $ 16,789 $ ( 10 ) Total 4 $ 16,789 $ ( 10 ) 4 $ 16,789 $ ( 10 ) Less than 12 Months Total # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses As of December 31, 2022 (Dollars In Thousands) Investments Commercial paper 11 $ 58,589 $ ( 144 ) 11 $ 58,589 $ ( 144 ) Total 11 $ 58,589 $ ( 144 ) 11 $ 58,589 $ ( 144 ) Note 5. Fair Value Measurements The Company classifies its fair value disclosure of held-to-maturity investments, which are comprised of investment grade commercial paper, within Level 2 of the fair value hierarchy because the fair value of these securities are priced by using inputs based on non-binding market consensus that are primarily corroborated by observable market data or quoted market prices for similar instruments. The following table summarizes the fair value of the Company’s Level 2 instruments held as of December 31, 2023 and 2022 (in thousands): December 31, 2023 2022 Commercial paper $ 16,789 $ 58,589 There were no transfers between levels of the fair value hierarchy for the year ended December 31, 2023 and 2022. The Company held no assets or liabilities that were measured at fair value on a recurring basis as of December 31, 2023 and 2022. Note 6. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following (in thousands): December 31, 2023 2022 Unbilled accounts receivable, net $ 2,375 $ 1,637 Prepaid expenses 2,313 2,600 Receivable from payment processor 1,276 644 Financed prepaid insurance 1,001 1,545 Other 1,448 1,694 Total prepaid expenses and other current assets $ 8,413 $ 8,120 71 Table of Contents Note 7. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): December 31, 2023 2022 Data center equipment $ 37,245 $ 28,531 Leased and financed data center equipment 68,757 62,300 Machinery and equipment 14,004 11,613 Computer equipment 2,472 2,503 Leasehold improvements 1,114 1,268 Construction-in-process 1,371 3,636 Total property and equipment 124,963 109,851 Less: accumulated depreciation and amortization ( 79,363 ) ( 60,476 ) Total property and equipment, net $ 45,600 $ 49,375 Depreciation expense was $ 21.3 million and $ 18.0 million for the years ended December 31, 2023 and 2022, respectively. For the Company’s equipment under finance leases and collateralized financing obligations, accumulated depreciation was $ 31.6 million and $ 24.5 million as of December 31, 2023 and 2022, respectively. The carrying value of the Company’s equipment under finance lease agreements and collateralized financing obligations was $ 37.1 million and $ 37.8 million as of December 31, 2023 and 2022, respectively. During the years ended December 31, 2023 and 2022, the Company recorded a gain of $ 0.4 million and a loss of $ 0.1 million , respectively, as a result of disposing of certain hard drives. These disposals occurred in the ordinary course of business, as the Company continuously evaluates its requirements for operating its data centers. The loss and gains are recorded as general and administrative expenses in the Company’s consolidated statements of operations. The Company had long-lived assets, comprising of property and equipment, net and operating lease right-of-use assets consisting of the following (in thousands): December 31, 2023 2022 United States $ 50,746 $ 50,176 The Netherlands 4,834 6,080 Total property and equipment, net and operating lease right-of-use assets $ 55,580 $ 56,256 Note 8. Capitalized Internal-Use Software, Net Capitalized internal-use software, net consisted of the following (in thousands): December 31, 2023 2022 Developed software $ 43,156 $ 23,777 General and administrative software 144 144 Total capitalized internal-use software 43,300 23,921 Less: accumulated amortization ( 10,779 ) ( 7,217 ) Total capitalized internal-use software, net $ 32,521 $ 16,704 Amortization expense of capitalized internal-use software was $ 3.6 million and $ 2.2 million for the years ended December 31, 2023 and 2022, respectively. Amortization of developed software and software purchased for internal use are included in cost of revenue and general and administrative expense, respectively, in the Company’s consolidated statements of operations for the years ended December 31, 2023 and 2022. 72 Table of Contents As of December 31, 2023, future amortization expense is expected to be as follows (in thousands): Year Ending December 31, 2024 $ 6,905 2025 7,304 2026 6,851 2027 6,138 2028 4,455 Thereafter 868 Total $ 32,521 The Company evaluates capitalized internal-use software for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the year ended December 31, 2023, the Company recorded an impairment expense of $ 0.2 million, related to an in-house operating system initiative that was determined to no longer provide future economic benefits during 2023. The impairment expense is recorded as research and development expense in the Company’s consolidated statement of operations. No impairment expense was recorded during the year ended December 31, 2022. Note 9. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): December 31, 2023 2022 Accrued compensation $ 4,105 $ 2,728 ESPP withholding 426 415 Accrued expenses 1,284 2,881 Accrued value-added tax ("VAT") 1,266 1,220 Financed insurance premiums (see Note 11) 893 1,545 Other 486 629 Accrued expenses and other current liabilities $ 8,460 $ 9,418 Note 10. Commitments and Contingencies Finance Leases and Lease Financing Obligations The Company enters into finance lease arrangements to obtain hard drives and related equipment for its data center operations. The terms of t hese agreements primarily range from three -to- four years and certain of these arrangements have optional renewals to extend the term of the lease generally at a fixed price. Contingent rental payments are generally not included in the Company’s finance lease agreements. Finance leases are generally secured by the underlying leased equipment. The Company’s finance leases have original lease periods expiring between 2024 and 2026. Finance leases are included in property and equipment, net on the Company’s consolidated balance sheets. As of December 31, 2023, the weighted average remaining lease term for finance lease and lease financing obligation agreements was approximately 1.7 years and the weighted average discount rate for finance leases was 11.0 %. As of December 31, 2022, the weighted average remaining lease term for finance lease and lease financing obligation agreements was approximately 2 years and the weighted average discount rate for finance leases was 10.2 %. The following table presents information regarding assets acquired through finance lease and lease financing obligation agreements, which are related to sale-leaseback agreements (in millions): 73 Table of Contents For the Years Ended December 31, 2023 2022 Depreciation expense $ 15.4 $ 13.2 Total finance lease costs $ 16.9 $ 16.1 Total interest expense included in finance lease costs $ 2.8 $ 3.9 Total lease financing obligation costs $ 1.8 $ 1.4 Total interest expense included in lease financing obligation costs $ 0.4 $ 0.3 Cash paid on interest on finance lease and lease financing obligations $ 3.2 $ 3.8 Depreciation expense on assets acquired through the Company’s finance leases and lease financing obligations is included in cost of revenue in its consolidated statements of operations. During the year ended December 31, 2023, the Company entered into two sale-leaseback arrangements with vendors to provide an aggregate of $ 4.5 million in cash proceeds for previously purchased hard drives and related equipment. The Company concluded the related lease arrangements would be classified as a lease financing obligation as the Company was reasonably certain to exercise the purchase option within the arrangement. Therefore, the transaction was deemed a failed sale-leaseback and was accounted for as a financing arrangement. The assets continue to be depreciated over their useful lives, and payments are allocated between interest expense and repayment of the financing liability. The Company did not enter into any new sale-leaseback arrangements during the year ended December 31, 2022. The future minimum commitments for these finance leases and lease financing obligations as of December 31, 2023 were as follows (in thousands): Year Ending December 31, Finance leases Lease financing obligations Total 2024 $ 16,983 $ 3,917 $ 20,900 2025 8,534 2,914 11,448 2026 2,768 — 2,768 2027 6 — 6 2028 — — — Thereafter — — — Total future minimum lease and financing commitments 28,291 6,831 35,122 Less imputed interest ( 2,430 ) ( 890 ) ( 3,320 ) Total liability $ 25,861 $ 5,941 $ 31,802 Operating Leases The Company leases its facilities for data centers and office space under non-cancelable operating leases with various expiration dates. Certain lease agreements include renewal options to extend the lease term at a price to be determined upon exercise. These options are not reasonably certain to be exercised and therefore are not factored into the determination of lease payments. Contingent rental payments are generally not included in the Company’s lease agreements. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Th e Company's leases have original lease periods expiring between 2024 and 2031 . The Company does not have a material amount of short-term leases as of December 31, 2023 . In July 2023, the Company entered into an operating lease agreement for purposes of consolidating and moving out of two offices into one office, resulting in the recognition of $ 5.3 million of operating right-of-use assets and $ 5.2 million of operating lease liabilities, current and non-current, on its consolidated balance sheets. A s of December 31, 2023, the weighted average remaining lease term for operating leases was approximately 5.5 years and the weighted average discount rate for operating leases was approximately 7.1 %. As of December 31, 2022 , the weighted average remaining lease term for operating leases was approximately 5.6 years and the weighted average discount rate for operating leases was approximately 5.4 %. 74 Table of Contents The future minimum commitments for these operating leases as of December 31, 2023 were as follows (in thousands), which excludes amounts allocated to services under operating lease agreements that are considered non-lease components: Year Ending December 31, 2024 $ 2,398 2025 2,002 2026 2,056 2027 2,118 2028 2,073 Thereafter 1,479 Total future minimum operating lease commitments 12,126 Less imputed interest ( 2,097 ) Total $ 10,029 Non-lease components included in the Company’s co-location lease agreements are related to non-tangible utilities and services used in its data center operations. The Company used judgment and third-party data in determining the stand-alone price for allocating consideration to lease and non-lease components under these co-location lease agreements, such as, the price of utilities as compared to its tangible data center footprint within each co-location facility. The future minimum commitments for the Company’s non-cancellable contractual obligations as of December 31, 2023 for non-lease components were as follows (in thousands): Year Ending December 31, 2024 $ 4,240 2025 2,623 2026 2,603 2027 2,679 2028 2,764 Thereafter 3,310 Total future minimum commitments $ 18,219 The following table presents information regarding the Company’s operating leases (in millions). Total operating lease cost does not include costs related to services. For the Years Ended December 31, 2023 2022 Rental expense for both lease and non-lease components $ 8.1 $ 6.5 Rental expense for both lease and non-lease components included in cost of revenue $ 6.8 $ 4.9 Rental expense related to lease components $ 3.1 $ 3.3 Total operating lease cost $ 10.6 $ 7.7 Total operating lease cost of $ 10.6 million for the year ended December 31, 2023 includes $ 1.8 million of variable lease costs and $ 0.7 million of short-term lease costs. Total operating lease cost of $ 7.7 million for the year ended December 31, 2022 includes $ 0.9 million of variable lease costs and $ 0.2 million of short-term lease costs. Other Contractual Commitments Other non-cancellable commitments relate mainly to service agreements used to facilitate the Company’s infrastructure operations. As of December 31, 2023, the Company had non-cancelable purchase commitments of $ 1.2 million and $ 0.6 million payable during the years ending December 31, 2024 and 2025, respectively. 75 Table of Contents During 2023, the Company made payments of $ 0.2 million to a related party, Meaningful Works, for marketing services per terms of an agreement. An executive officer of Meaningful Works is an immediate family member of the Company’s CEO. As of December 31, 2023, the scope of services has been completed per terms of the agreement. 401(k) Plan The Company sponsors a 401(k) defined contribution plan covering all eligible U.S. employees. Contributions to the 401(k) plan are discretionary. The Company contributed $ 1.9 million and $ 1.6 million to the 401(k) plan for the years ended December 31, 2023 and 2022, respectively. Legal Matters The Company is involved from time to time in various claims and legal actions arising in the ordinary course of business. While it is not feasible to predict or determine the ultimate outcome of these matters, the Company believes that none of its current legal proceedings are likely to have a material adverse effect on its financial position, results of operations or cash flows. However, the results of legal proceedings are inherently unpredictable and litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors. On July 15, 2022, the Company received a demand letter from the investors that participated in the Simple Agreement for Future Equity (“SAFE”) agreement in August 2021 related to a contractual dispute in connection with the SAFE transaction. The investors sought a refund of their original investment of $ 10.0 million . In February 2023, the Company settled with the SAFE holders for a full release of all claims related to the SAFE transaction for a one-time payment in the amount of $ 1.5 million in aggregate. The $ 1.5 million settlement is included as a general and administrative expense in the Company’s consolidated statements of operations during the year ended December 31, 2022. One of the SAFE holders, TMT Investments PLC (“TMT”), a beneficial holder of more than 5% of the Company’s capital stock, was a party to the settlement and received a pro-rata payment of $ 0.3 million as part of the SAFE settlement. Accrued VAT Liability The Company has calculated a liability for uncollected and unpaid VAT, which is generally assessed by various taxing authorities on services the Company provides to its customers. The Company accrues an amount that it considers probable to be collected and can be reasonably estimated. Based on the Company’s analysis, its total accrual for VAT tax payable was $ 1.3 million and $ 1.2 million as of December 31, 2023 and 2022, respectively. Indemnification The Company enters into indemnification provisions under agreements with other parties from time to time in the ordinary course of business. The Company has agreed in certain circumstances to indemnify and defend the indemnified party for claims and related losses suffered or incurred by the indemnified party from third-party claims due to the Company’s activities or non-compliance with certain representations and warranties made by the Company. It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. No losses have been recorded in the consolidated statements of operations in connection with the indemnification provisions. Note 11. Debt Credit Facility During April 2022 , the Company entered into a second amendment to its revolving credit agreement (as amended, the “RCA”) with City National Bank (“Lender”). Under this amendment, the amounts available to be borrowed was increased to $ 30.0 million from $ 9.5 million. During January 2023, the Company entered into a third amendment to the RCA. Under this amendment, advances on the line of credit will bear monthly interest at a variable rate equal to, at the Company’s discretion, (a) the average Secured Overnight Financing Rate (“SOFR”) plus 2.00 %, 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. There were no other material changes to the RCA as a result of the amendment. 76 Table of Contents In December 2023, the Company 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 the Company’s discretion, (a) the average SOFR plus 2.75 %, or (b) the base rate described above. The RCA has an unused line fee equal to 0.3 % of the difference between the maximum balance available under the RCA and the average daily balance outstanding during the quarter, payable within ten days of the last day of each quarter. The RCA provides for an annual commitment fee equal to 0.5 % on the amount available to be borrowed, payable annually on December 29th. The Company incurred annual commitment fees on the unused balance of the RCA of $ 0.1 million for the year ended December 31, 2023. In connection with the RCA, the Company incurred an additional $ 5 thousand of additional debt issuance costs which, together with the $ 0.1 million of commitment fees and $ 0.1 million of the then unamortized debt issuance costs, will be amortized over the remaining term of the facility. As of December 31, 2023, the C ompany had an outstanding balance of $ 4.1 million and the total amount available to the Company to be borrowed was $ 15.9 million. The outstanding balance of $ 4.1 million as of December 31, 2023 was collateralized by cash held by the Company. As such, the Company held $ 4.1 million in cash that it deemed to be restricted and is included in restricted cash, non-current on the Company’s consolidated balance sheets as of December 31, 2023. With prior written notice to the Lender, the Company has the right, at any time prior to the maturity date in December 2025, to terminate the RCA. In the event of such termination, the aggregate principal of the then outstanding amounts, including any accrued interest to date, shall be repaid and the restrictions on the associated collateralized cash would be released. As of December 31, 2023, the interest rate associated with the outstanding balance under the RCA was 8.1 %, which is a per annum rate. Interest payments on outstanding borrowing are due on the last day of each monthly interest period and payments for the commitment fee are due at the end of each calendar quarter. Total interest expense and amortization of debt issuance costs related to the RCA was $ 0.6 million and $ 0.2 million for the years ended December 31, 2023 and 2022, respectively. Advances under the RCA are due in full in December 2025. As the RCA is a multi-year revolving credit agreement, the Company classifies the facility as long-term debt on its consolidated balance sheets as it has the intent and ability to maintain the facility outstanding for longer than 12 months. The Company classifies the facility as a debt facility, non-current on its consolidated balance sheets as of December 31, 2023. Insurance Premium Financing Agreements In November 2022, the Company entered into an additional insurance policy with annual premiums totaling $ 2.1 million. The Company executed an additional finance agreement with AFCO Premium Credit LLC over a term of twelve months , with an annual interest rate and weighted average interest rate for the periods presented of 4.5 %, that finances the payment of the total premiums owed. The finance agreement required a $ 0.5 million down payment, with the remaining $ 1.5 million plus interest paid over three quarterly installments. These quarterly payments started on February 10, 2023. As of December 31, 2023, the balance of this finance agreement was fully paid. Total interest expense related to this agreement was less than $ 0.1 million for both the years ended December 31, 2023 and 2022, respectively. In November 2023, the Company entered into an insurance policy with annual premiums totaling $ 1.2 million . The Company has executed a finance agreement with AFCO Premium Credit LLC over a term of twelve months , with an annual interest rate and weighted average interest rate for the year ended December 31, 2023 of 7.0 %, that finances the payment of the total premiums owed. The agreement requires a $ 0.3 million down payment, with the remaining $ 0.9 million plus interest paid over three quarterly installments. These quarterly payments start February 10, 2024. As of December 31, 2023, the unpaid balance is $ 0.9 million , reported as a component of accrued expenses and other current liabilities on the consolidated balance sheets. Total interest expense related to this agreement was less than $ 0.1 million for the year ended December 31, 2023. Note 12. Stockholders’ Equity Common Stock. From the time of its initial public offering through July 5, 2023, the Company had two outstanding classes of common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock were identical, except for voting, transfer, and conversion rights. On July 6, 2023, all of the Company’s then-outstanding shares of the Company’s Class B common stock were automatically converted (the “Conversion”) into the same number of shares of Class A common stock pursuant to the terms of the Company’s Amended and Restated Certificate of Incorporation. No additional shares of Class B common stock will be issued following the Conversion. In addition, on July 7, 2023, the Company filed a Certificate of Retirement with the Secretary of State of the 77 Table of Contents State of Delaware effecting the retirement of the shares of Class B common stock that were issued but no longer outstanding following the Conversion. As of December 31, 2023, the Company’s sole outstanding class of common stock was its Class A common stock. The Company had reserved shares of common stock for future issuance as follows: December 31, 2023 2011 Equity Incentive Plan Options outstanding 7,988,657 Shares available for future grants — 2021 Equity Incentive Plan Options outstanding 1,318,485 Restricted stock units outstanding 5,256,833 Shares available for future grants 7,400,180 2021 Employee Stock Purchase Plan Shares available for future purchases 962,960 Total 22,927,115 Note 13. Stock-Based Compensation Equity Incentive Plans 2011 Equity Incentive Plan. In 2011, the Company’s Board of Directors approved the adoption of the 2011 Stock Plan (the “2011 Plan”). The 2011 Plan provides for the grant of stock-based awards to employees, non-employee directors, and other service providers of the Company. The 2011 Plan expired in September 2021. 2021 Equity Incentive Plan. In October 2021, the Company’s Board of Directors and stockholders adopted the 2021 Equity Incentive Plan (the “2021 Plan”) and it was approved by stockholders in October 2021. The 2021 Plan replaced the 2011 Plan. However, awards outstanding under the 2011 Plan will continue to be governed by their existing terms. The 2021 Plan has the features described below. Share Reserve . As of December 31, 2023, the number of shares of common stock available for issuance under the 2021 Plan equaled the sum of 14,662,500 shares, plus up to approximately 13,719,000 shares subject to awards granted under the 2011 Plan that expire, forfeit or are repurchased following the effective date of the 2021 Plan. In addition, the 2021 Plan includes an evergreen provision from which the number of shares reserved for issuance under the 2021 Plan will be increased automatically on the first business day of each of the Company’s fiscal years and ending on January 1, 2031, by a number equal to the lowest of (i) 4,784,100 shares, (ii) 5 % of the shares of Class A common stock outstanding on the last business day of the prior fiscal year; or (iii) the number of shares determined by the Board of Directors. Pursuant to this evergreen provision, the Company increased the number of shares reserved under the 2021 Plan by 809,916 and 411,399 shares of Class A common stock during the years ended December 31, 2023 and 2022, respectively. In July 2023, the Company increased the number of shares reserved under the 2021 Plan by 8,292,158 shares of Class A common stock pursuant to the amendment and restatement of the 2021 Plan adopted by the Company’s board of directors and approved by the stockholders. In general, to the extent that any awards under the 2021 Plan are forfeited, terminate, expire or lapse without the issuance of shares, or if the Company reacquires the shares subject to awards granted under our 2021 Plan, those shares will again become available for issuance under our 2021 Plan, as will shares applied to pay the exercise or purchase price of an award or to satisfy tax withholding obligations related to any award. Restricted Stock Units Restricted stock units (“RSUs”) granted under the 2021 Plan generally vest based on continued service up to a four-year period for employees, and over a one-year period for non-employee directors. 78 Table of Contents RSU activity for the year ended December 31, 2023 was as follows: Shares Weighted-average grant date fair value per share Unvested balance as of December 31, 2022 3,716,061 $ 6.60 Granted 4,576,424 $ 5.06 Vested ( 2,614,981 ) $ 6.06 Forfeited ( 420,671 ) $ 5.38 Unvested balance as of December 31, 2023 5,256,833 $ 5.63 The weighted-average grant-date fair value of 4,163,608 RSUs granted during the year ended December 31, 2022 was $ 6.87 . The fair value as of the respective vesting dates of RSUs was $ 14.2 million and $ 1.9 million during the years ended December 31, 2023 and 2022, respectively. Stock Options Stock Options. Stock options granted under the equity plans generally vest based on continued service over four years and expire ten years from the date of grant. The following table summarizes the Black-Scholes option pricing model weighted-average assumptions used in estimating the fair value of stock options granted to employees during the year ended December 31, 2022. No stock options were granted during the year ended December 31, 2023. For the Year Ended December 31, 2022 Expected term (in years) 6 Expected volatility 49.0 % Risk-free interest rate 1.20 % Expected dividend yield — % Expected term. For stock options considered to be “plain vanilla” options, the Company estimates the expected term based on the simplified method, which is essentially the weighted average of the vesting period and contractual term, as the Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate the expected term. Expected volatility. The Company performed an analysis using the average volatility of a peer group of representative public companies with sufficient trading history over the expected term to develop an expected volatility assumption. Risk-free interest rate. Based upon quoted market yields for the United States Treasury debt securities for a term consistent with the expected life of the awards in effect at the time of grant. Expected dividend yield. Because the Company has never paid and has no intention to pay cash dividends on common stock, the expected dividend yield is zero . A summary of equity award activity under the Company’s equity plans and related information is as follows (in thousands, except share, price and year data): 79 Table of Contents Shares available for grant Outstanding Equity Awards Weighted- average exercise Price Weighted- average remaining contractual life (years) Aggregate intrinsic value Balance as of December 31, 2022 1,836,566 12,371,281 $ 5.74 6.07 $ 32,385 Shares authorized 9,102,074 Options granted — — — Options exercised — ( 2,446,846 ) 1.89 Options cancelled 617,293 ( 617,293 ) 10.87 RSU award activity ( 4,155,753 ) — Balance as of December 31, 2023 7,400,180 9,307,142 $ 6.41 5.57 $ 31,250 Vested and exercisable as of December 31, 2023 7,747,252 $ 5.24 5.17 $ 29,480 The weighted-average grant-date fair value of options granted was $ 6.26 during the year ended December 31, 2022. The intrinsic value of options exercised was $ 8.8 million and $ 10.5 million for the years ended December 31, 2023 and 2022, respectively. Aggregate intrinsic value represents the difference between the exercise price of the options and the estimated fair value of the Company’s underlying common stock at the time of exercise. The aggregate grant-date fair value of options vested was $ 8.5 million and $ 13.0 million for the years ended December 31, 2023 and 2022, respectively. ESPP In October 2021, the Company’s Board of Directors adopted the ESPP, which became effective on the date of the IPO. The ESPP initially reserved and authorized the issuance of up to a total of 956,800 shares of Class A common stock to participating employees. Pursuant to its evergreen provision, the Company increased the number of shares reserved under the ESPP by 667,874 and 607,696 for the years ended December 31, 2023 and 2022, respectively. The initial offering period commenced in November 2021 and the first purchase date occurred in May 2022. Under the Company’s ESPP, eligible employees may authorize payroll deductions of up to 50 % of their eligible compensation, subject to IRS limitations, during prescribed offering periods to purchase shares of the Company’s Class A common stock at a price per share equal to 85 % of the lesser of (1) the stock price at the employee’s first participation in the offering period or (2) the fair market value of the Company’s common stock on the purchase date. A participant may participate in only one offering period at a time, and a new offering period generally begins each May 20th and November 20th. Each offering period is generally 24 months and consists of four exercise dates (each, generally six months following the start of the offering period or the preceding exercise date, as the case may be). If the fair market value of the Company’s Class A common stock is less on a given exercise date than on the date of grant, employee participation in that offering period ends and participants are automatically re-enrolled in the next new offering period. The ESPP shall terminate automatically 20 years after its effective date, unless the ESPP is extended by the Board of Directors and the extension is approved within 12 months by a vote of the stockholders of the Company. 695,046 and 574,364 shares of Class A common stock have been purchased under the ESPP during the years ended December 31, 2023 and 2022, respectively. The fair value of the purchase rights under the ESPP was estima ted using the Black-Scholes option pricing model with a similar methodology for determining inputs as the Company’s stock options, as described above. The Company recorded stock-based compensation expense under this plan of $ 4.2 million and $ 2.9 million f or the years ended December 31, 2023 and 2022, respectively, of which $ 0.8 million and $ 0.6 million was capitalized for the development of capitalized internal-use software. As of December 31, 2023 , the total unrecognized stock-based compensation expense related to the ESPP was $ 1.1 million and is expected to be recognized over a weighted average period of 1 year. As of December 31, 2023 , $ 0.4 million had been withheld on behalf of employees for future purchases. 80 Table of Contents The following table summarizes the Black-Scholes option pricing model weighted-average assumptions used in estimating the fair value of the stock purchase rights granted to employees under the ESPP for the years ended December 31, 2023 and 2022: For the Years Ended December 31, 2023 2022 Expected term (in years) 0.5 - 2.0 0.5 - 2.0 Expected volatility 46 % - 64 % 45 % - 68 % Risk-free interest rate 4.29 % - 5.43 % 0.10 % - 4.75 % Expected dividend yield — % — % Stock-Based Compensation Expense Stock-based compensation expense included in the consolidated statements of operations was as follows (in thousands): For the Years Ended December 31, 2023 2022 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 During the years ended December 31, 2023 and 2022 , the Company capitalized $ 5.0 million and $ 2.7 million, respectively, of stock-based compensation for the development of capitalized internal-use software. As of December 31, 2023, total unrecognized compensation cost related to stock options and RSUs not yet vested was $ 10.5 million and $ 27.4 million, respectively, which will be recognized over a weighted-average period of 1.3 and 2.1 years for stock options and RSUs, respectively. Bonus Plan During March 2022, the Company’s Compensation Committee of the Board of Directors approved a new bonus structure (“Bonus Plan”) for its employees. The Bonus Plan is contingent upon the achievement of annual corporate performance targets. In each respective calendar year, the Company accrues for the Bonus Plan. The actual payout amount is determined by the Company’s Compensation Committee based on the actual achievement with respect to the annual performance targets and is paid in the subsequent year in the variable number of RSUs equal to the payout amount. These RSUs are subject to performance and service condition vesting requirements, beginning from the grant date to the payout date. Participants must remain employed with the Company through the date of payout to maintain eligibility under the Bonus Plan. Pursuant to the Bonus Plan, during February 2023 the Company’s Compensation Committee approved the issuance of approximately 288,000 RSUs that immediately vested based on actual performance against the performance targets for 2022. The Company recognized $ 1.9 million in stock-based compensation during the year ended December 31, 2022, of which the Company capitalized $ 0.3 million of stock-based compensation expense under this plan for the development of internal-use software. During February 2023, the Company’s Board of Directors approved annual corporate performance targets under its Bonus Plan for 2023 for its employees. If these performance targets are met during 2023, employees will be paid out under the Bonus Plan in RSUs in 2024. As a result, the Company recognized $ 3.0 million in stock-based compensation during the year ended December 31, 2023 based on progress made towards these performance targets. These RSUs are subject to performance and service condition vesting requirements, beginning from the grant date to the payout date. During the year ended December 31, 2023, the Company capitalized $ 0.5 million of stock-based compensation expense under this plan for the development of internal-use software. As of December 31, 2023, the accrued bonus balance is $ 3.0 million , reported as a component of accrued expenses and other current liabilities on the consolidated balance sheets. Pursuant to the Bonus Plan, during February 2024, the Company’s Compensation Committee approved the issuance of approximately 296,000 RSUs that immediately vested. 81 Table of Contents Note 14. Net Loss per Share Attributable to Common Stockholders The Company computes net loss per share for periods prior to the Conversion using the two-class method required for multiple classes of common stock and participating securities. Prior to the Conversion, shares of Class A and Class B were the only outstanding equity in the Company. The rights of the holders of the Class A common stock and Class B common stock were identical, except with respect to voting, transfer, and conversion. Accordingly, the Class A common stock and Class B common stock shared equally in the Company’s net losses. Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potentially dilutive common stock equivalents during the period. For purposes of this calculation, the Company’s stock options, share purchase rights pursuant to the Company’s ESPP, and unvested restricted stock are considered to be potential common stock equivalents, but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is antidilutive. As discussed above in Note 12, on July 6, 2023, all of the Company’s then-outstanding shares of Class B common stock, par value $ 0.0001 per share, were automatically converted into the same number of shares of Class A common stock, par value $ 0.0001 per share, pursuant to the terms of the Company’s Amended and Restated Certificate of Incorporation. No additional shares of Class B common stock will be issued following the conversion. In addition, on July 7, 2023, the Company filed a Certificate of Retirement with the Secretary of State of the State of Delaware effecting the retirement of the shares of Class B common stock that were issued but no longer outstanding following the Conversion. As the liquidation and dividend rights were identical, the Company’s undistributed earnings or losses were allocated on a proportionate basis among the holders of Class A and Class B common stock. As a result, the net loss per share attributed to common stockholders was, therefore, the same for both Class A and Class B common stock on an individual or combined basis. The following table presents the calculation of basic and diluted net loss per share (in thousands, except share and per share data): For the Years Ended December 31, 2023 2022 (in thousands, except share and per share amounts) Class A Class B Class A Class B Numerator: Net loss attributable to common stockholders $ ( 47,656 ) $ ( 12,057 ) $ ( 20,980 ) $ ( 30,418 ) Denominator for basic and diluted net loss per share: Weighted-average shares used in computing net loss per share attributable to common stockholders – basic and diluted 28,740,173 7,271,273 12,924,084 18,738,217 Net loss per share attributable to common stockholders – basic and diluted $ ( 1.66 ) $ ( 1.66 ) $ ( 1.62 ) $ ( 1.62 ) Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common shares outstanding would have been antidilutive. The potential shares of common stock that were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented are as follows: December 31, 2023 2022 RSUs 5,256,833 3,716,061 Stock options 9,307,142 12,371,281 Shares issuable pursuant to the ESPP 101,430 120,191 Total 14,665,405 16,207,533 82 Table of Contents Note 15. Restructuring In January 2023, the Company initiated measures to reduce headcount to pursue greater cost efficiency and align strategic initiatives. These measures were substantially completed by June 30, 2023, and the total cost was $ 3.6 million. During this period, approximately 1 % and 4 % of the Company’s workforce terminated employment, which were voluntary and involuntary terminations, respectively. As a result, the Company incurred employee termination expenses and other associated costs. A summary of the restructuring charges as reported on the consolidated statement of operations for the year ended December 31, 2023, of which $ 0.7 million were related to involuntary terminations, is as follows (in thousands): Severance and other Personnel Costs For the Year Ended December 31, 2023 Research and development $ 2,311 Sales and marketing 1,025 General and administrative 280 Total $ 3,616 The following table is a summary of the charges in the severance and other personnel liabilities, included within accrued expenses and other current liabilities on the consolidated balance sheet, related to the workforce reduction (in thousands): Balance as of January 1, 2023 $ — Severance and other personnel costs 3,616 Cash payments during the period ( 3,616 ) Balance as of December 31, 2023 $ — Note 16. Income Taxes The following table presents the components of net loss before income taxes (in thousands): For the Years Ended December 31, 2023 2022 United States $ ( 59,713 ) $ ( 51,437 ) Non-U.S. — — Loss before provision for income taxes $ ( 59,713 ) $ ( 51,437 ) 83 Table of Contents The provision for income taxes included in the consolidated statement of operations is comprised of the following (in thousands): For the Years Ended December 31, 2023 2022 Current Federal $ — $ — State — ( 1 ) Non-U.S. — — Total current — ( 1 ) Deferred: Federal — ( 38 ) State — — Non-U.S. — — Total deferred $ — $ ( 38 ) Total provision $ — $ ( 39 ) The following table presents a reconciliation of the statutory federal rate and the Company’s effective tax rate, using a federal statutory rate of 21%: For the Years Ended December 31, 2023 2022 Statutory federal income (benefit) rate ( 21 ) % ( 21 ) % Increase (decrease) resulting from: State income tax rate ( 4 ) % ( 4 ) % Change in valuation allowance 29 % 28 % Stock-based compensation 2 % — % Tax credits ( 6 ) % ( 4 ) % Fixed assets — % 1 % Effective tax rate — % — % 84 Table of Contents Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company’s deferred tax assets and liabilities consisted of (in thousands): December 31, 2023 2022 Deferred tax assets: Net operating loss (“NOL”) carryforwards $ 23,111 $ 15,154 R&D credit carryforwards 10,502 6,751 Stock-based compensation 2,083 2,211 Research and experimental expenditures under IRC Section 174 14,063 5,062 Lease liability 2,507 1,734 Disallowed interest expense 2,767 1,841 Accruals and other 1,064 ( 222 ) 56,097 32,531 Valuation allowance ( 44,606 ) ( 27,049 ) Total deferred tax asset 11,491 5,482 Deferred tax liability: Fixed assets ( 1,967 ) ( 1,986 ) Right of use asset ( 2,496 ) ( 1,666 ) Capitalized internal-use software ( 7,028 ) ( 1,830 ) Total deferred tax liability $ ( 11,491 ) $ ( 5,482 ) Net deferred tax liability $ — $ — Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Based on evidence of Company's earnings history, the net U.S. deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased b y $ 17.6 million a nd $ 14.3 million during the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, the Company had federal and state NOL carryforwards of $ 91.4 million and $ 66.0 million , respectively. The federal NOL carryforwards consisted of $ 16.0 million generated before January 1, 2018, which will begin to expire in 2027 but are able to offset 100% of taxable income and $ 75.4 million generated after December 31, 2017 that will carryforward indefinitely but will be subject to 80% taxable income limitation beginning in tax years after December 31, 2021 as provided by the CARES Act. The Company has federal research and development (“R&D”) credit carryforwards of $ 8.8 million which will begin to expire in 2032 and California R&D credit carryforwards of $ 4.2 million which do not expire. The Company also has $ 0.1 million of California enterprise zone credits which will begin to expire in 2028. Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 (specifically Section 382), as amended, and similar state provisions. The Company performed a Section 382 analysis through December 31, 2022 and determined that ownership changes occurred in the year 2007, 2009 and 2012. The ownership changes identified had no significant impact on federal and state net operating losses. The annual limitations may result in the expiration of net operating losses and credits before utilization in the future. At this time, we have not finalized a Section 382 analysis through December 31, 2023 to assess whether such an ownership change has occurred that could impact these federal and state net operating losses. On August 16, 2022, the Inflation Reduction Act was enacted in the U.S. and introduced a 15% alternative minimum tax based on the financial statement income of certain large corporations (“CAMT”) and an excise tax of 1% of stock 85 Table of Contents repurchases, effective January 1, 2023. The various provisions of the Inflation Reduction Act do not have a material impact on the Company’s consolidated financial statements for the year ended December 31, 2023 . Uncertain Income Tax Positions The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands): For the Years Ended December 31, 2023 2022 Balance at beginning of year $ 1,239 $ 817 Tax positions related to the current year: Additions 649 442 Reductions — — Tax positions related to the prior year: Additions 1 — Reductions — ( 20 ) Balance at end of year $ 1,889 $ 1,239 The total amount of unrecognized tax benefits as of December 31, 2023 was $ 1.9 million, all related to federal and state tax jurisdictions . If recognized, none of the unrecognized tax benefits would affect the effective tax rate. The Company’s policy is to account for interest and penalties as income tax expense. As of December 31, 2023, the Company had no interest related to unrecognized tax benefits. No amounts of penalties related to unrecognized tax benefits were recognized in the provision for income taxes. The Company does not anticipate any significant change within twelve months of this reporting date. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal and state income tax examination for calendar tax years beginning in 2007 due to NOLs that are being carried forward for tax purposes. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None .