Backblaze, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Result of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included in “Part II — Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties, as described under the heading, “Special Note Regarding Forward-Looking Statements” in “Part I — Item 1A. Risk Factors.” You should review the disclosure under the heading, “Risk Factors” for a discussion of important factors that could cause our actual results to differ materially from those described or implied in these forward-looking statements contained in the following discussion and analysis and elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Unless the context otherwise requires, all references in this report to “Backblaze,” the “Company,” “we,” our,” “us,” or similar terms refer to Backblaze, Inc. and its consolidated subsidiaries. Overview We are a leading specialized storage cloud platform, providing businesses and consumers cloud services to store, use, and protect their data in an easy and affordable manner. We provide these cloud services through a purpose-built, web-scale software infrastructure built on commodity hardware. We believe that by offering an easy to use, cost-effective, performant cloud storage solution, and thereby substantially reducing the cost, complexity and frustration of storing, using, and protecting data, we can empower customers to focus on their core business operations. Customers use us to support their AI workflows, help ensure the cyber-resilience of their organizations, streamline their media workflows, and enable a variety of other data-focused application and IT needs. Through our blog and culture of transparency, we have built a community of millions of readers and brand advocates. Our direct sales activities, channel and technology partners, and referrals from our community of brand advocates, com bined with our highly efficient and self-serve customer acquisition model have allowed us to attract over 500,000 customers as of December 31, 2024, and our direct sales activities have historically supported us in acquiring larger customers. As we seek to move up-market, we expect our direct sales activities to increasingly contribute to the acquisition of these customers. Our customers use our Storage Cloud platform across more than 175 countries to store and protect their data with an aggregate of approximately 4 billion gigabytes of data storage under management. Our Backblaze Storage Cloud provides a platform that is the foundation for our B2 Cloud Storage Infrastructure-as-a-Service (IaaS) offering and our Backblaze Computer Backup Software-as-a-Service (SaaS) offering. B2 Cloud Storage enables customers to store data, developers to build applications, and partners to expand their use cases. The amount of data stored in this cloud service can scale up and down as needed primarily on a pay-as-you-go basis or can be paid for on a capacity or committed contract basis for greater predictability. Backblaze Computer Backup automatically backs up data from laptops and desktops for businesses and individuals. This cloud backup service offers easily understood primarily flat-rate pricing to continuously back up a virtually unlimited amount of data. We believe that focusing on storage use cases and promoting an open cloud ecosystem allows us to integrate well with a broad range of partners. We have consistently invested in innovation, showcased by our technology platform and related features, allowing us to achieve customer, community, and product milestones. In 2024, we partnered with a leader in hybrid cloud solutions in Canada, which will extend our market reach in this region. As part of the partnership, we opened a new data center region in Canada. Our partner delivers managed cloud services, application development and modernization, backup and disaster recovery, security, and compliance solutions to businesses in Canada and around the world. Our operations and financial performance depend in part on economic conditions, regulatory changes, and the impact these factors have on our business. The change in administration as a result of the 2024 U.S. presidential election could lead to changes in these and other areas. We are monitoring actions and proposals, evaluating potential impacts, working with our vendors to understand any potential impacts on them, and at this point do not foresee any material impact on our business based on the actions taken to date. 35 Table of Contents Price Increases and Product Updates During the third quarter of 2023, we announced pricing increases and product updates across our Computer Backup and B2 Cloud Storage products, which became effective in October 2023. Effective October 3, 2023, we increased the monthly B2 pay-as-you-go storage rate from $5 to $6 per terabyte; the price of our B2 Reserve offering and other committed contracts did not change. We also made egress free for all B2 Cloud Storage customers up to 3x per month the amount of data they store with us. In addition, we increased the pricing of our Computer Backup offering to $9 per month, or $99 for a 1-year subscription plan and $189 for a 2-year subscription plan. As part of the Computer Backup price increase, we also bundled One Year Extended Version History, which previously had been a $2 per month add-on expense if customers selected that option. The Computer Backup price increase is being phased in over time based on renewal timing. As part of our leadership in the open cloud movement, we also announced free egress (up to 3x), significant performance improvements, and new functionality to increasingly support our customers’ ability to break free from limitations on their data. 2024 Financial Developments Follow-On Public Offering On November 20, 2024, we issued and sold an aggregate of 6,250,000 shares (the “Shares”) of our Class A common stock, par value $0.0001 per share (the “Common Stock”) at a public offering price of $5.60 per share (the “Follow-On Offering”). We also granted the underwriters an option to purchase up to an additional 937,500 shares of Common Stock at the same per-share price of $5.60 per share, which they exercised. We received net proceeds of $37.4 million from the offering, after deducting the underwriting discounts and commissions and other offering expenses. Banking Relationship and Line of Credit On December 10, 2024, we voluntarily terminated our Loan and Security Agreement with City National Bank, dated October 21, 2021, as amended, which included a revolving line of credit that was 100% collateralized by cash held by us. At the time of termination, no amounts were outstanding under the revolving line of credit, as we had fully paid down the revolving credit amount following the completion of our Follow-On Offering in November 2024. 2024 Restructuring Plan In November 2024, we implemented a restructuring plan intended to improve our cost structure and operating efficiency (the “2024 Restructuring Plan”). The 2024 Restructuring Plan included a reduction in headcount and in our facilities footprint at our corporate headquarters. See “Item 8. Consolidated Financial Statements — Note 16. Restructuring — Restructuring Plans” for additional information. Our Business Model Our solutions are designed for individuals and businesses of all sizes, from large-scale enterprise businesses to small and medium-sized businesses (“SMB”) and across all industries. Our solutions appeal to customers with a desire for easy-to-use and cost-effective solutions while also delivering reliability and performance. We generate revenue primarily from our two cloud services: • Backblaze B2 Cloud Storage, which enables customers to store data for a wide range of use cases, and for developers to embed our platform into their applications. In both cases, our customers use this offering on a consumption-based or capacity-based model or committed contract basis, and • Backblaze Computer Backup, which provides virtually unlimited backup to businesses and consumers in a SaaS subscription model using primarily flat-rate pricing. We believe our pricing is simple and straightforward, with fees and terms that are generally shared transparently on our website. We believe we provide simple pricing for usage of our cloud services and increase revenue per customer through our customers’ natural data growth. Additionally, we provide customers with additional value through cross-sell, upsell, and 36 Table of Contents use case expansion that can result in additional revenue per customer. These options for cross-selling and upselling include the following: • Cross-Sell: After adopting any of our products, customers may expand to other products as their use cases grow, including Computer Backup customers who adopt B2 Cloud Storage to facilitate broader use cases. Adopting additional products expands usage of our platform. • Upsell: Customers can choose to use various features and services for additional fees, such as Enterprise Control, Snapshots, cloud replication, and enhanced support tiers. For example, our Computer Backup cloud service offers Enterprise Control, which provides larger customers with more management for an additional cost. B2 Cloud Storage offers Snapshots that allow customers to create moment-in-time versions of their data, and we also allow customers to keep their data in multiple geographic regions, both of which provide more customer value. Additionally, customers receive email and chat support for free, but can also opt for enhanced support tiers for an additional cost, which provide dedicated customer support contacts and 24/7 response. • Use Case Expansion: B2 Cloud Storage customers may adopt the service for one business need, but can expand their use cases as their business evolves. One such example would be a business using B2 Cloud Storage for media asset management storage, which decides to also use the service as an origin store for content distribution; another would be a business that adopts B2 Cloud Storage for backup and archive purposes, which decides to also enable Object Lock for ransomware protection. Use case expansion enables the opportunity to deepen our relationship with our customers and increase revenue. For prospective customers interested in B2 Cloud Storage, we offer a free tier and a simple, intuitive sign-up process, allowing them to quickly on-board and start using our solutions. Once prospective customers grow beyond the free storage limit, they have the flexibility to only pay for what they need and pay as they go, without any lock-in or long-term commitments. This is delivered via a consumption-based model, and we charge a fixed price per month per gigabyte of data stored on our platform. Customers may purchase our B2 Cloud Storage on a capacity or committed contract basis for greater predictability. For prospective customers interested in Computer Backup, we offer a free 15-day trial and automatically start to back up all their files securely to our Backblaze Storage Cloud. Prospective customers can then choose to sign up on a per computer basis. The service is delivered via a SaaS model where revenue is recognized ratably over the subscription term. Subscriptions are offered to customers on a monthly, annual, or biennial basis, providing customers flexibility to choose their commitment lengths. We generally charge a flat rate for this solution and provide virtually unlimited backup capabilities to customers. Our go-to-market model has several selling motions, including direct sales, channel and self-service. Our direct sales team that contracts directly with customers, particularly targeting larger customers, and our channel and partner sales teams that contracts sales through our channel and technology partners. More recently, we also added our Powered By Backblaze program, a white label solution that enables third parties to integrate B2 and thus offer cloud storage as part of their product offering under their brand. In addition, we have a self-serve selling motion. Prospective customers find us through a variety of channels including our website, partners, and brand advocates. We have fostered community engagement with content we share on our blog, which includes millions of readers viewing the content we sha red in 2024 alone. Our content is intended to encourage organic, inbound traffic that we believe serves as our greatest source of advocates and referrals. Our free trial and self-serve sign-up processes help convert our blog readers and referrals from our brand advocates into customers, with approximately 73% of our total revenue in 2024 coming from self-serve customers. Substantially all of our revenue is recurring in nature. We employ a land-and-expand model that seeks to drive additional revenue from existing customers. As customers generate, store, and back up more data, their use of our platform increases, creating natural opportunities for revenue expansion. We are able to further expand our relationships with our customers when they adopt new features and use cases that lead to increased usage of our platform. Factors Affecting Our Performance We believe that the future growth and performance of our business will depend on several factors, including the following: Scale Sales Efforts 37 Table of Contents We believe an increasingly important customer acquisition model is our targeted direct sales team that is focused on larger customers as well as our channel and partner sales teams. We intend to continue to uplevel and expand our sales team to focus on more and larger customers. We also plan to continue to build our ecosystem of partners. We believe that delivering our Storage Cloud solutions through our alliance, developer, and MSP partnerships is an area of opportunity for us. By adding more partners and deepening our relationships with them, we expand our use cases and drive new customer acquisition. Expansion Within Existing Customers Our future success will depend in part on our ability to increase usage and adoption of our solutions with existing customers. We intend to increase revenue from existing customer relationships through the development of additional features and use cases, expanding our Customer Success initiatives, and natural customer data growth. We have developed add-on services, such as Enterprise Control and multi-region selection, which customers pay for on top of existing offerings. Examples of expanding use cases include utilizing Backblaze for additional purposes such as media storage, hybrid cloud support, analytics repositories, and others. We also plan to grow our Customer Success initiatives to ensure customers avail themselves of the full benefits of our platform, thus resulting in increased adoption. As these customers continue to generate, store, and back up data, their use of our platform increases, creating natural opportunities for revenue expansion. Scale Self Service Customer Acquisition Our business depends, in part, on our ability to add new customers. We believe there is a significant opportunity to further grow our customer base by continuing to make investments in sales and marketing. We will continue investing in our customer acquisition and inbound demand generation activities, which is driven predominantly by our blog content, our case studies, social sharing, earned media, and our self-serve sign up model. We also will continue investing in optimizing the conversion rate of visitors to customers. We intend to leverage this model as an efficient approach to attract new customers, turning them into brand advocates, partners, and more referrals. Continued Platform Investment and New Product Launches We are committed to delivering market-leading products that continue to make cloud storage and backup easy. We believe we must maintain our product and platform quality and strength of our brand in order to retain the current customer base as well as drive further revenue growth in our business. We intend to continue investing in our research and development activities to build upon our strong position in the technology community. We also plan to launch new products that are adjacent to our current offerings, which will provide us with the ability to further cross-sell and upsell. International Expansion Whil e our sales and marketing efforts have primarily focused on the United States, our existing customer base spans more th an 175 countries, with 26% of our total revenue originating outside of the United States for the year ended December 31, 2024. We believe international expansion may represent a meaningful opportunity. We may invest in our operations internationally to reach new customers by expanding in targeted key geographies where we believe there are opportunities for significant return on investment. For example, in January 2025 we opened a data center region in Toronto, Canada and partnered with a leader in hybrid cloud solutions in Canada, to extend our market reach in Canada, as noted above. 38 Table of Contents Key Business Metrics We monitor the key business metrics set forth below to help us evaluate our business and growth trends, establish budgets, measure the effectiveness of our sales and marketing investments, and assess operational efficiencies. The calculation of the key metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts, or investors. December 31, 2024 2023 B2 Cloud Storage Net revenue retention rate (NRR) 123 % 122 % Gross customer retention rate 89 % 90 % Annual recurring revenue (in millions) $ 70.2 $ 57.6 Number of customers 107,616 97,842 Annual average revenue per user $ 645 $ 577 Computer Backup Net revenue retention rate (NRR) 109 % 100 % Gross customer retention rate 90 % 91 % Annual recurring revenue (in millions) $ 66.5 $ 60.0 Number of customers 417,845 431,745 Annual average revenue per user $ 159 $ 140 Total Company Net revenue retention rate (NRR) 116 % 109 % Gross customer retention rate 90 % 91 % Annual recurring revenue (in millions) $ 136.7 $ 117.6 Number of customers (1) 507,647 511,942 Annual average revenue per user $ 268 $ 228 (1) The number of customers for each of B2 Cloud Storage and Computer Backup solutions include customers that use both our B2 Cloud Storage and Computer Backup solutions. Net Revenue Retention Rate We believe the growth in the use of our platform by our existing customers is an important measure of the health of our business and our future growth prospects. We measure this growth by monitoring our overall net revenue retention rate, which measures our ability to retain and expand revenue from existing customers. We believe that we can drive this metric by continuing to focus on our customers and by adding additional products and functionality to our platform. Our overall net revenue retention rate is a trailing four-quarter average of the recurring revenue from a cohort of customers in a quarter as compared to the same quarter in the prior year. We calculate our overall net revenue retention rate for a quarter by dividing (i) recurring revenue in the current quarter from any accounts that were active at the end of the same quarter of the prior year by (ii) recurring revenue in the current corresponding quarter from those same accounts. Our overall net revenue retention rate includes any expansion of revenue from existing customers and is net of revenue contraction and customer attrition, and excludes revenue from new customers in the current period. Our net revenue retention rate for B2 Cloud Storage and Computer Backup is calculated in the same manner as our overall net revenue retention rate based on the revenue from our B2 Cloud Storage and Computer Backup solutions, respectively. Our Net Revenue Retention Rate was essentially flat for B2 Cloud Storage for the year ended December 31, 2024 compared to the year ended December 31, 2023 . Our Net Revenue Retention Rate increased by 9% for Computer Backup for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to the price increase. 39 Table of Contents Gross Customer Retention Rate We use gross customer retention rate to measure our ability to retain our customers. Our gross customer retention rate reflects only customer losses and does not reflect the expansion or contraction of revenue we earn from our existing customers. We believe our high gross customer retention rates demonstrate that we provide a vital service to our customers, as the vast majority of our customers tend to continue to use our platform from one period to the next. To calculate our gross customer retention rate, we take the trailing four-quarter average of the percentage of cohort of customers who were active at the end of the quarter in the prior year that are still active at the end of the current quarter. We calculate our gross customer retention rate for a quarter by dividing (i) the number of accounts that generated revenue in the last month of the current quarter that also generated recurring revenue during the last month of the corresponding quarter in the prior year, by (ii) the number of accounts that generated recurring revenue during the last month of the corresponding quarter in the prior year. Our Gross Customer Retention Rate decreased by 1% for both B2 Cloud Storage and Computer Backup for the year ended December 31, 2024 compared to the year ended December 31, 2023. Annual Recurring Revenue We define annual recurring revenue (“ARR”) as the annualized value of all B2 Cloud Storage and Computer Backup arrangements as of the end of a period. Given the renewable nature of our business, we view ARR as an important indicator of our financial performance and operating results, and we believe it is a useful metric for internal planning and analysis. ARR is calculated based on multiplying the monthly revenue from all B2 Cloud Storage and Computer Backup arrangements, which represent greater than 98% of our total revenue for the periods presented (and excludes Physical Media revenue), for the last month of a period by 12. Our annual recurring revenue for B2 Cloud Storage and Computer Backup is calculated in the same manner as our overall annual recurring revenue based on the revenue from our Computer Backup and B2 Cloud Storage solutions, respectively. See Notes 2 and 3 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information on revenue from B2 Cloud Storage and Computer Backup arrangements. ARR does not have a standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and is not intended to be combined with or to replace that item. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers. While ARR is not a guarantee of future revenue, we consider substantially all of our revenue as recurring in nature for the periods presented. As noted above, our gross customer retention rate has been consistent over the periods presented at approximately 90%. Although B2 Cloud Storage is generally paid for by customers in arrears, we recognize revenue in the month these storage services are delivered, and consider this revenue recurring as customers are charged as long as their data is stored with us. Further, during the periods presented, customers who store data with us generally increase the amount of their data stored over time, as evidenced by our B2 Cloud Storage net revenue retention r ate of 123% as of December 31, 2024. Fees from B2 Cloud Storage (consumption-based arrangements) are recognized as services are delivered. Computer Backup (subscription-based arrangements) revenue is recognized on a straight-line basis over the contractual term of the arrangement beginning on the date that the service commences, provided that all other revenue recognition criteria have been met. See Note 2 to our consolidated financial statements for details on our revenue recognition policy. Additional limitations of ARR include the fact that consumption-based revenue is not guaranteed for future periods, although we believe that our high historic gross customer retention rate is indicative of ARR, and the fact that our subscription terms can be on a monthly basis, although the significant majority of our customers have subscription terms of one year or longer during the periods presented above. Our ARR increased by $12.6 million, or 22% for B2 Cloud Storage for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to the price increase and increased storage from new and existing customers. Our ARR incre ased by $6.5 million, or 11%, for Comp uter Backup for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to the price increase. 40 Table of Contents Number of Customers We define a customer at the end of any period as a distinct account, as identified by a unique account identifier, that has paid for our cloud services, which makes up substantially all of our user base. In the fourth quarter of 2023, we refined our customer definition to include end-user customers that purchase through a reseller. Annual Average Revenue Per User We define annual average revenue per user (“Annual ARPU”) as the annualized value for the average revenue per customer. Annual ARPU is calculated by dividing our revenue for the last month of a period by the total number of customers as of the last day of the same period, and then multiplying the resulting quotient by 12. Our annual average revenue per user for B2 Cloud Storage and Computer Backup is calculated in the same manner based on the revenue and number of customers from our B2 Cloud Storage and Computer Backup solutions, respectively. Our Annual ARPU increased for B2 Cloud Storage and Computer Backup by 12% and 14%, respectively, for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to increased storage and our focus on adding larger customers. Key Components of Results of Operations Revenue We generate revenue primarily from our B2 Cloud Storage and Computer Backup cloud services offered on our platform. Our platform is offered to our customers primarily through either a consumption or committed contract basis or a subscription-based arrangement through B2 Cloud Storage and Computer Backup, respectively. Our subscription arrangements generally range in duration from one month to three years, for which we bill our customers up front for the entire period. Consumption-based revenue is variable and is related to fees charged for our customers’ use of our platform and is recognized as revenue in the period in which the consumption occurs. For our subscription arrangements, we provide our cloud services evenly over the contractual period, for which revenue is recognized on a straight-line basis over the contract term beginning on the date that the service is made available to the customer. During the third quarter of 2023, we announced pricing increases across our Computer Backup and B2 Cloud Storage products, which became effective in October 2023. We realized a favorable impact to total revenue across our products, and did not experience a significant change in costs as a result of the increase. We have not experienced a material impact on customer retention as a result of this price increase through December 31, 2024. Cost of Revenue and Gross Margin Cost of revenue consists of our expenses in providing our platform and cloud services to our customers. These expenses include operating in colocation facilities, network and bandwidth costs, and depreciation of our equipment and finance leased equipment in colocation facilities. Personnel-related costs associated with customer support and maintaining service availability, including salaries, benefits, bonuses, and stock-based compensation are also included. Cost of revenue also includes credit card processing fees, amortization of capitalized internal-use software development costs, and allocated overhead costs. We intend to continue to invest additional resources in our infrastructure to support the growth of our business. Some of these investments, including costs of infrastructure equipment (including related depreciation) and expansion, and software development costs and related amortization are incurred in advance of generating revenue, and either the failure to generate anticipated revenue or fluctuations in the timing of revenue could affect our gross margin from period to period. Operating Expenses The most significant components of our operating expenses are personnel costs, which consist of salaries, benefits, bonuses, and stock-based compensation. We also incur other non-personnel costs related to our general overhead expenses. 41 Table of Contents We expect that our operating expenses will decrease in the near-term as a result of our 2024 Restructuring Plan, however, our operating expenses may increase over time in absolute dollars as we grow our business. Research and Development Research and development expenses consist primarily of our investment in personnel costs, costs related to technical operations, and an allocation of our general overhead expenses. We capitalize the portion of our software development costs that meets the criteria for capitalization. We expect our investment in research and development to increase in absolute dollars for the foreseeable future as we continue to focus our research and development investments on adding new features to our platform, improving our cloud service offerings, and increasing the functionality of our existing features. Our research and development expenses may fluctuate as a percentage of total revenue from period to period due to the timing and extent of these expenses. Sales and Marketing Sales and marketing expenses consist primarily of our investment in personnel costs. Sales and marketing expenses also include investments related to advertising, marketing, our brand awareness activities, commissions paid to marketing partners, sales commissions paid to our employees that are recognized as expenses over the period of benefit, and an allocation of our general overhead expenses. We plan to continue investing in sales initiatives, supplementing our self-serve model with a direct sales approach, expanding our partner ecosystem, driving our go-to-market strategies, building our lead generation and brand awareness, and sponsoring marketing events. As a result, we expect our investment in sales and marketing to decrease as a percentage of revenue in the near-term as a result of our 2024 Restructuring Plan, however, our investment in sales and marketing may increase over time in absolute dollars as we grow our business. Sales a nd marketing expenses may fluctuate as a percentage of total revenue from period to period because of the timing and extent of these expenses. General and Administrative General and administrative expenses consist primarily of personnel costs for our accounting, finance, legal, IT, security, human resources, and administrative support personnel and executives. General and administrative expenses also include costs related to legal and other professional services fees, sales and other taxes; depreciation and amortization; and an allocation of our general overhead expenses. We expect to continue incurring general and administrative expenses as a result of operating as a public company, including expenses for insurance, costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, investor relations, and professional services expenses. As a result, we expect our general and administrative costs to increase over time, as our business continues to grow. Investment Income Investment income consists primarily of interest earned on our cash balances and investments. Interest Expense, net Interest expense, net consists primarily of interest related to our finance lease agreements and interest on the previously outstanding balance of our debt facility. Incom e Tax Provision Provision for income taxes consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance against our U.S. deferred tax assets because we have concluded that it is more likely than not that our deferred tax assets will not be realized. 42 Table of Contents Results of Operations The following table sets forth our consolidated statements of operations and comprehensive loss data for the periods indicated: For the Years Ended December 31, 2024 2023 (in thousands) Revenue $ 127,628 $ 102,019 Cost of revenue (1) 58,285 52,162 Gross profit 69,343 49,857 Operating expenses: Research and development (1) 42,098 39,527 Sales and marketing (1) 44,440 41,270 General and administrative (1) 29,094 26,965 Total operating expenses 115,632 107,762 Loss from operations (46,289) (57,905) Investment income 1,422 1,984 Interest expense, net (3,658) (3,792) Loss before provision for income taxes (48,525) (59,713) Income tax provision 6 — Net loss and comprehensive loss $ (48,531) $ (59,713) __________________ (1) Includes stock-based compensation expense as follows: For the Years Ended December 31, 2024 2023 (in thousands) Cost of revenue $ 1,907 $ 1,986 Research and development 11,277 9,218 Sales and marketing 9,505 8,801 General and administrative 5,939 5,172 Total stock-based compensation expense $ 28,628 $ 25,177 (1) Stock-based compensation expense includes restructuring charges of $2.5 million and $0.1 million , incurred during the years ended December 31, 2024 and 2023. Of the $2.5 million in stock-based compensation restructuring charges incurred during the year ended December 31, 2024, $0.3 million related to cost of revenue , $0.9 million related to research and development costs, $1.2 million related to sales and marketing costs, and $0.1 million related to general and administrative costs. Of the $0.1 million in stock-based compensation restructuring charges occurred during 2023. $0.1 million were related to sales and marketing and general and administrative costs. 43 Table of Contents The following table sets forth our consolidated statements of operations and comprehensive loss data expressed as a percentage of revenue for the periods indicated: For the Years Ended December 31, 2024 2023 Revenue 100 % 100 % Cost of revenue 46 51 Gross profit 54 49 Operating expenses: Research and development 33 39 Sales and marketing 35 40 General and administrative 23 26 Total operating expenses 91 106 Loss from operations (36) (57) Investment income 1 2 Interest expense, net (3) (4) Loss before provision for income taxes (38) (59) Income tax provision — — Net loss (38) % (59) % Comparison of the Years Ended December 31, 2024 and 2023 Revenue For the Years Ended December 31, 2024 2023 Change % Change (in thousands, except percentages) B2 Cloud Storage revenue $ 63,335 $ 46,427 $ 16,908 36 % Computer Backup revenue 64,293 55,592 8,701 16 % Total revenue (1) $ 127,628 $ 102,019 $ 25,609 25 % ________________ (1) For the periods presented, Physical Media revenue has been consolidated into B2 Cloud Storage or Computer Backup revenue based on the underlying offering from which it originates. Revenue increa sed by $25.6 million, or 25%, for the year ended December 31, 2024. B2 Cloud Storage increased by $16.9 million, or 36% for the year ended December 31, 2024. The increase was largely due to increased storage from new and existing customers of $8.9 million, the impact of the price increase in October 2023 of $6.0 million, and increased sales of B2 Reserve of $2.0 million . Computer Backup increased by $8.7 million, or 16% for the year ended December 31, 2024. The increase was due to the impact of the price increase in October 2023 of $10.6 million and increased storage fees for version history longer than 1 year of $0.7 million. The increases were partially offset by $2.6 million due to the decreased license count. Our price increase amounts noted above are inherent estimates that are based on an average price charged per customer and other assumptions that may offset the increase, such as free egress and impact of the price increase on the amount of data stored and customer license count. 44 Table of Contents Cost of Revenue and Gross Margin For the Years Ended December 31, 2024 2023 Change % Change (in thousands, except percentages) Cost of revenue $ 58,285 $ 52,162 $ 6,123 12 % Gross margin 54 % 49 % Total cost of revenue increased by $6.1 million, or 12%, for the year ended December 31, 2024. The increase was primarily attributable to an increase of $3.4 million for depreciation of our infrastructure equipment, resulting from purchasing additional hard drives and related infrastructure in order to support the growth of our business, a $2.0 million increase in rent, bandwidth, and utility expenses, an increase of $0.8 million in credit card fees, and an increase of $0.5 million related to restructuring charges. These increases were partially offset by a $0.4 million decrease in stock-based compensation. Gross margin in creased to 54% for the year ended December 31, 2024 compared to 49% for the year ended December 31, 2023. The increase in gross margin was primarily due to our total revenue growth from the price increases as described above. Operating Expenses For the Years Ended December 31, 2024 2023 Change % Change (in thousands, except percentages) Research and development $ 42,098 $ 39,527 $ 2,571 7 % Sales and marketing 44,440 41,270 3,170 8 % General and administrative 29,094 26,965 2,129 8 % Research and Development Research and development expense incre ased by $2.6 million, or 7%, for the year ended December 31, 2024. The increase was primarily attributable to an increas e of $3.7 million in personnel-related expenses due to an increase in engineering headcount, $1.2 million related to stock-based compensation expense, partially offset by $1.0 million decrease related to restructuring charges, $0.7 million decrease in overhead and general office expenses, and $0.4 million decrease in facilities related and consultant expenses. Sales and Marketing Sales and marketing expense increas ed by $3.2 million, or 8%, for the year ended December 31, 2024. The increase in sales and marketing expense was primarily attributable to $2.6 million in personnel-related expenses as a result of increased headcount, $0.8 million related to restructuring charges, $0.6 million increased advertising and other expenses related primarily to our B2 Cloud Storage offering as we continue to focus marketing expenditures on high return initiatives, partially offset by a decrease of $0.4 million related to stock-based compensation, and a $0.4 million decrease in fees for consultants and contractors. General and Administrative General and administrative expense increased by $2.1 million, or 8%, for the year ended December 31, 2024. The increase was primarily attributable to $1.0 million in overhead and general expenses due to subscriptions to support our increasing employee population, $1.0 million related to restructuring charges, $0.8 million increase in consultant and contractor expenses, $0.7 million related to stock-based compensation expense, $0.6 million in personnel-related expenses as a result of increased headcount, partially offset by a $0.8 million decrease related to insurance expense, and a decrease of $1.1 million related to professional services fees. 45 Table of Contents Investment Income For the Years Ended December 31, 2024 2023 Change % Change (in thousands, except percentages) Investment income $ 1,422 $ 1,984 $ (562) (28) % Investment income decreased by $0.6 million for the year ended December 31, 2024. The decrease was primarily d ue to lower average marketable securities portfolio balance in 2024 as compared to 2023. Interest Expense, net For the Years Ended December 31, 2024 2023 Change % Change (in thousands, except percentages) Interest expense, net $ (3,658) $ (3,792) $ 134 4 % Interest expense, net was relatively flat for the year ended December 31, 2024, compared to the same period in 2023. Income Tax Provision For the Years Ended December 31, 2024 2023 Change % Change (in thousands, except percentages) Income tax provision $ 6 $ — $ 6 — % Our provision for income taxes was relatively flat for the year ended December 31, 2024, compared to the same period in 2023. Non-GAAP Financial Measures To supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP, we provide investors with non-GAAP financial measures including adjusted gross margin, adjusted EBITDA, and adjusted EBITDA margin, each as defined below. These measures are presented for supplemental informational purposes only, have limitations as analytical tools and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of these measures as tools for comparison. Because of these limitations, when evaluating our performance, you should consider each of these non-GAAP financial measures alongside other financial performance measures, including the most directly comparable financial measure calculated in accordance with GAAP and our other GAAP results. A reconciliation of each of our non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with GAAP is set forth below. Adjusted Gross Margin We believe adjusted gross margin, when taken together with our GAAP financial results, provides a meaningful assessment of our performance, and is useful to us for evaluating our ongoing operations and for internal planning and forecasting purposes. We define adjusted gross margin as gross profit, excluding stock-based compensation expense, depreciation and amortization and restructuring charges within cost of revenue, as a percentage of adjusted gross profit to revenue. We exclude stock-based compensation, which is a non-cash item, and restructuring charges because we do not consider it indicative of our core operating performance. We exclude depreciation expense of our property and equipment and amortization expense of capitalized internal-use software because these may not reflect current or future cash spending levels to support our business. We believe adjusted gross margin provides consistency and comparability with our past 46 Table of Contents financial performance and facilitates period-to-period comparisons of operations, as this metric eliminates the effects of depreciation and amortization. The following table presents a reconciliation of gross margin, the most directly comparable financial measure stated in accordance with GAAP, to adjusted gross margin, for each of the periods presented: For the Years Ended December 31, 2024 2023 (in thousands, except percentages) Gross profit $ 69,343 $ 49,857 Adjustments: Stock-based compensation 1,616 1,986 Depreciation and amortization 27,761 24,330 Restructuring charges 460 — Adjusted gross profit $ 99,180 $ 76,173 Gross margin 54 % 49 % Adjusted gross margin 78 % 75 % Adjusted EBITDA and Adjusted EBITDA Margin We define Adjusted EBITDA as net loss adjusted to exclude depreciation and amortization, stock-based compensation, interest expense, net, investment income, income tax provision, realized and unrealized gains and losses on foreign currency transactions, impairment of long-lived assets, restructuring charges, legal settlement costs, and other non-recurring charges. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenues for the period. We use adjusted EBITDA and Adjusted EBITDA Margin to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that adjusted EBITDA and Adjusted EBITDA Margin, when taken together with our GAAP financial results, provides meaningful supplemental information regarding our operating performance by excluding certain items that may not be indicative of our business, results of operations, or outlook. We consider Adjusted EBITDA and Adjusted EBITDA Margin to be important measures because they help illustrate underlying trends in our business and our historical operating performance on a more consistent basis. Our calculation of Adjusted EBITDA may differ from the calculations of Adjusted EBITDA by other companies and therefore comparability may be limited. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results. The following table presents a reconciliation of net loss, the most directly comparable financial measure stated in accordance with GAAP, to Adjusted EBITDA for each of the periods presented: For the Years Ended December 31, 2024 2023 (in thousands, except percentages) Net loss $ (48,531) $ (59,713) Adjustments: Depreciation and amortization 28,328 24,912 Stock-based compensation (1) 26,104 25,052 Interest expense and investment income 2,236 1,808 Income tax provision 6 — Foreign exchange loss (2) 32 123 Non-recurring professional services — 411 Restructuring charges (3) 4,861 3,616 Adjusted EBITDA $ 13,036 $ (3,791) Adjusted EBITDA Margin 10 % (4) % 47 Table of Contents (1) During the three months ended December 31, 2024 , $2.5 million of stock-based compensation expense is classified as restructuring charges in the table above, as it was incurred as part of our restructuring program. No stock-based compensation related to restructuring charges was recognized during the three months ended December 31, 2023. During the years ended December 31, 2024 and 2023, $2.5 million and $0.1 million, respectively, of stock-based compensation is classified as restructuring charges in the table above. See Note 16 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding restructuring charges . (2) As of December 31, 2024, we included foreign exchange loss in the reconciliation of net loss to Adjusted EBITDA. Adjusted EBITDA and Adjusted EBITDA margin for the prior periods presented have been updated to conform with current presentation. (3) Restructuring charges represent costs incurred in connection with our restructuring plans. Costs incurred in connection with the 2024 Restructuring Plan include: (i) $3.9 million of severance and benefits related to impacted employees, (ii) $0.9 million related to the expected sublease of a portion of our corporate headquarters, and (iii) $0.1 million of professional service fees related to the execution of the 2024 Restructuring Plan. Costs incurred during the year ended December 31, 2023 relate to severance and benefits for the employees impacted by the restructuring plan initiated in 2023. Liquidity and Capital Resources Since inception, we have financed operations primarily through payments received from our customers and, in later periods from the net proceeds from our initial public offering. As of December 31, 2024 and 2023 , our principal sources of liquidity were cash, restricted cash, and short-term investments of $54.9 million and $33.4 million, respectively. We believe that our existing cash, cash equivalents, and short-term investments, together with cash provide d by operations, will be sufficient to support our working capital and capital expenditure requirements for at least the next 12 months. Our material cash requirements include contractual and other obligations under our finance and operating lease agreements, and purchase commitments as discussed below. Our future capital requirements will depend on many factors, including our total revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the potential expansion of our data centers, the price at which we are able to purchase or lease infrastructure equipment, the impact of inflation on interest rates, the introduction of platform enhancements, and the continuing market adoption of our platform. In the future, we may enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We plan to continue to enter into finance lease agreements for purchase of infrastructure equipment and may also be required or choose to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, results of operations, and financial condition. In October 2021, we entered into a revolving credit agreement (as amended to date, the “RCA”) with City National Bank (the “Lender”). Under the RCA, as amended in December 2023, the maximum borrowing available was reduced from $30 million to $20 million and advances on the line of credit will bear monthly interest at a variable rate equal to, at our discretion, (a) the average SOFR plus 2.75%, or (b) the base rate. On December 10, 2024, the Company voluntarily terminated its RCA At the time of termination, no amounts were outstanding under the revolving line of credit, as the Company had fully paid down the revolving credit amount following the completion of its Follow-On public offering in November 2024. The RCA did not have financial covenants and it required us to hold collateral in the form of a lien prior to any advance. The outsta nding balance was collateralized by an equal amount of cash held, which we were obligated to hold as restricted cash. For further details, see Note 12 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We use City National Bank, a subsidiary of RBC, for our banking needs. In the event of a failure of any financial institutions where we maintain deposits, we may lose timely access to our funds at such institutions and incur significant losses to the extent our funds exceed the $250,000 limit insured by the Federal Deposit Insurance Corporation. In addition, the disruption and uncertainty impacting the banking industry from failures of other banks resulted in some reduced access to capital, increased costs of capital, and reduced opportunities to invest with investment grade securities, which may have 48 Table of Contents also resulted in lower investment yields and investment income. Any further impact could have a material adverse effect upon our liquidity and business. We are currently evaluating other options for our banking needs, which may allow greater flexibility and access to additional capital in the future. We generally enter into finance lease arrangements to obtain hard drives and related equipment for our data center operations. We also generally enter into leases for our facilities for data centers and office space under non-cancelable operating leases w ith various expiration dates. See “Item 8. Financial Statement and Supplementary Data — Note 10. Finance Leases and Lease Financing Obligations” for our future minimum commitments related to our finance leases. The weighted average discount rate for finance leases was 11.9% as of December 31, 2024. For further information on our future minimum commitments on our operating leases, s ee “Item 8. Financial Statement and Supplementary Data — Note 11. Commitments and Contingencies” to our consolidated financial statements. In addition, we have purchase commitments that relate mainly to infrastructure agreements used to facilitate our operations. As of December 31, 2024, we had non-cancelable purchase commitments of $1.0 million and $0.4 million payable for the years ending December 31, 2025 and 2026, respectively. The following table shows a summary of our cash flows for the periods presente d: For the Years Ended December 31, 2024 2023 (in thousands) Net cash provided by (used in) operating activities $ 12,505 $ (7,350) Net cash (used in) provided by investing activities $ (6,131) $ 21,657 Net cash provided by (used in) financing activities $ 22,772 $ (8,842) Operating Activities Our largest source of operating cash is payments received from our customers. Our primary uses of cash from operating activities are for personnel-related expenses, sales and marketing expenses, infrastructure expenses, and overhead expenses. Cash flows from operating activities primarily consist of our net loss adjusted for certain non-cash items, including stock-based compensation, depreciation, and amortization of property and equipment, amortization of capitalized internal-use software, net, noncash lease expense, and changes in operating assets and liabilities during each period. For the year ended December 31, 2024, cash used in operating activities was $12.5 million, which resulted from a net loss of $48.5 million, adjusted for non-cash charges of $60.8 million and a net cash inflow of $0.2 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $28.3 million for depreciation and amortization expense, $28.6 million for stock-based compensation expense, noncash lease expense of $2.7 million, and $0.9 million related to loss on impairment of right-of-use assets. The net cash inflow from changes in operating assets and liabilities was primarily the result of a $5.5 million increase of deferred revenue, which increased due to our growing sales and to timing of collections from our customers and a $0.9 million increase in accrued expenses and other current liabilities. The cash inflows were largely offset by payments of operating lease liabilities of $2.6 million, an increase of $1.3 million in other assets, and an increase in accounts receivable of $1.0 million due to timing of collections. Prepaid expenses and other current assets increased $0.7 million and accounts payable decreased $0.5 million. Cash provided by operations increased during the year ended December 31, 2024, as compared to the same period in 2023 primarily due to our growing customer base, increased storage from new and existing customers and the price increase that began to take effect in October 2023, partially offset by increased expenditures related to managing and operating our co-location facilities, and increased spending in support of our expanded research and development and sales and marketing spending to support business growth. For the year ended December 31, 2023, cash used in operating activities was $7.4 million, which resulted from a net loss of $59.7 million, adjusted for non-cash charges of $52.8 million and a net cash outflow of $0.4 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $24.9 million for depreciation and amortization expense and $25.2 million for stock-based compensation expense. The net cash outflow from changes in operating assets and liabilities was primarily the result of a $2.5 million decrease in operating lease liabilities, a $1.4 million decrease in 49 Table of Contents accrued expenses and other current liabilities, which decreased primarily due to our accrued compensation and due to timing of payment of our expenses, a $0.4 million increase in other assets, a $0.4 million increase in prepaid and other current assets and a $0.3 million decrease in accounts payable, offset in part by a $4.5 million increase of deferred revenue, which increased due to our growing customer base and upfront collections from our customers. Cash used in operations decreased during the year ended December 31, 2023, as compared to the same period in 2022 primarily due to our growing customer base, increased storage from existing customers, and the price increase that began to take effect in October 2023, partially offset by increased expenditures related to managing and operating our co-location facilities, and increased spending in support of our expanded research and development and sales and marketing spending to support business growth. Investing Activities Cash used in investing activities during the year ended December 31, 2024 was $6.1 million, resulting primarily from the purchase of short-term maturity investments of $38.1 million. Additionally, cash used of $12.5 million was related to the development of internal-use software for adding new features and enhanced functionality to our platform, and $1.7 million was used on capital expenditures in support of infrastructure deployments to support our growing business. Cash used was partially offset by proceeds of $45.7 million from the maturity of our short-term investments and $0.5 million of proceeds from the disposal of property and equipment, primarily related to the disposition of certain hard drives. Cash provided by investing activities during the year ended December 31, 2023 was $21.7 million, resulting primarily from $67.9 million from the maturity of our short-term investments and $0.4 million proceeds from the disposal of property and equipment, offset in part by the purchase of short-term maturity investments of $26.4 million, $14.7 million related to the development of software for adding new features and enhanced functionality to our platform and capital expenditures of $5.5 million in support of infrastructure deployments to support our growing business. Financing Activities Cash provided by financing activities was primarily due to $37.4 million of proceeds from the Follow-On Offering. Cash provided of $7.5 million and $2.8 million were related to proceeds from the exercise of employee stock options and proceeds from our ESPP, respectively. Proceeds of $0.6 million related to the credit facility prior to its termination. Cash provided was partially offset by cash used of $19.5 million for principal payments on our finance lease agreements and lease financing obligations related to hard drives and other infrastructure equipment used in our co-location facilities, and $0.9 million related to repayment of principal on financed insurance premiums. We used $4.7 million to repay, in full, our line of credit. We also incurred $0.4 million of offering costs in connection with our Follow-On Offering. Cash used in financing activities for the year ended December 31, 2023 was $8.8 million. Cash used in financing activities was primarily due to principal payments on our finance lease agreements and lease financing obligations of $19.5 million related to hard drives and other infrastructure equipment used in our co-location facilities, $4.5 million repayment of principal on our line of credit, $1.5 million related to repayment of principal on financed insurance premiums, offset in part by $4.7 million in proceeds from the exercise of employee stock options, $4.5 million from our lease financing transactions, $4.3 million in proceeds from our credit facility, $2.3 million in proceeds from our ESPP, and $0.9 million of proceeds from insurance premium financing. Contractual Obligations and Commitments Our commitments are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. Operating lease commitments relate primarily to our rental of office space and co-location facilities. Our finance lease commitments relate primarily to our infrastructure equipment. Purchase commitments relate mainly to infrastructure agreements and subscription arrangements used to facilitate our operations. For more information, see Note 11 to our consolidated financial statements located elsewhere in this Annual Report on Form 10-K. Critical Accounting Estimates Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be 50 Table of Contents reasonable under the circumstances. Actual results could differ significantly from the estimates made by management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. Our accounting estimates do not involve significant estimation uncertainty that may have or is reasonably likely to have a material impact on our financial condition or results of operations. Additional information about estimates and other accounting policies are discussed in Note 2 to our accompanying consolidated financial statements. Recent Accounting Pronouncements See the sections titled “Basis of Presentation and Summary of Significant Accounting Policies—Accounting Pronouncements Recently A dopted” and “Basis of Presentation and Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” in N ote 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information. JOBS Act Accounting Election We are an emerging growth company, as defined in the Jumpstart Our Business Startups (JOBS) Act. For so long as we continue to be an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation. The JOBS Act also provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards applicable to public companies. This provision allows an emerging growth company to delay the adoption of some accounting standards unless and until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.