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What changed in Backblaze, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Backblaze, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+386 added−347 removedSource: 10-K (2024-04-01) vs 10-K (2023-03-31)

Top changes in Backblaze, Inc.'s 2023 10-K

386 paragraphs added · 347 removed · 274 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeWhile we compete primarily based on offering services that are significantly easier to use and lower cost, but also through continued innovation; key platform features; availability, durability, scalability, and performance; brand awareness and reputation; transparency; customer support; independence; security; interoperability; partner ecosystem; and capabilities for configurability and APIs, we believe we stand out by offering a substantially easier to use product and significantly lower pricing.
Biggest changeWe compete primarily based on the ease of use of our product and lower pricing, along with our support for an open cloud ecosystem. Our innovation increasingly plays a role in how we attract and win customers, including work on key platform features; interoperability; capabilities for configurability and APIs; and, availability, durability, scalability, and performance.
We believe that focusing on storage use cases and promoting an open ecosystem helps position us to integrate well with a broad range of partners. From our straightforward pricing model, to our transparent communication with customers, to the popular and insightful content on our blog—we believe we have established ourselves as an open and trusted provider and partner.
We believe that focusing on storage use cases and promoting an open cloud ecosystem helps position us to integrate well with a broad range of partners. From our straightforward pricing model, to our transparent communication with customers, to the popular and insightful content on our blog—we believe we have established ourselves as an open and trusted provider and partner.
The marketing team consists primarily of product marketing, corporate communications and publishing, social media, growth marketing, and website teams. We leverage both online and offline marketing channels such as blogs, events and trade shows, seminars and webinars, whitepapers, case studies, search engines, and email marketing.
The marketing team consists primarily of product marketing, corporate communications and publishing, social media, growth marketing, and website teams. We leverage both online and offline marketing channels such as blogs, events and trade shows, seminars and webinars, whitepapers, case studies, search engines, advertising and email marketing.
Our platform, alongside the platforms of our technology and developer partners, enables software developers to efficiently build their applications and provides a cloud storage destination for partners whose products require storage to serve their customers.
Our platform, alongside the platforms of our technology partners, enables software developers to efficiently build their applications and provides a cloud storage destination for partners whose products require storage to serve their customers.
The Backblaze Storage Cloud organizes, safeguards, and keeps ov er 500 billion files available on demand and is designed to handle much more in the future. Through our purpose-built software that manages our global physical infrastructure, we provide a platform that we believe is durable, scalable, performant, and secure.
The Backblaze Storage Cloud organizes, safeguards, and keeps ov er 850 billion files available on demand and is designed to handle much more in the future. Through our purpose-built software that manages our global physical infrastructure, we provide a platform that we believe is durable, scalable, performant, and secure.
Our Platform and Cloud Services Our Platform: Backblaze Storage Cloud The Backblaze Storage Cloud provides the core platform for our cloud services and is designed to be durable, available, scalable, secure, performant and predictive. This storage cloud organizes, safeguards, and keeps ov er 500 billion files available on demand and is designed to handle many more in the future.
Our Platform and Cloud Services Our Platform: Backblaze Storage Cloud The Backblaze Storage Cloud provides the core platform for our cloud services and is designed to be durable, available, scalable, secure, performant and predictive. This storage cloud organizes, safeguards, and keeps ov er 850 billion files available on demand and is designed to handle many more in the future.
Over the following years we focused relentlessly on cutting away the complexity common among diversified cloud vendors’ services and legacy on-premises system vendors. Today, we believe our solutions are differentiated by their ease of use and affordability.
Over the following years we focused relentlessly on cutting away the complexity common among traditional cloud vendors’ services and legacy on-premises system vendors. Today, we believe our solutions are differentiated by their ease of use and affordability.
This Infrastructure-as-a-Service (IaaS) enables use cases including backups, multi-cloud, application storage, and ransomware protection. • Backblaze Computer Backup: Automatically backs up data from laptops and desktops for businesses and individuals. This cloud backup service offers easily understood flat-rate pricing to continuously back up a virtually unlimited amount of data.
This Infrastructure-as-a-Service (IaaS) enables use cases including backups, multi-cloud, application storage, ransomware protection, and storage for AI/ML workflows. • Backblaze Computer Backup: Automatically backs up data from laptops and desktops for businesses and individuals. This cloud backup service offers easily understood flat-rate pricing to continuously back up a virtually unlimited amount of data.
Our offices reopened during 2022 and most employees located in proximity to our headquarters office location utilize a hybrid approach which includes a mixture of working in the office and working remotely from home. Culture is very important at Backblaze and we recognize that employees are our greatest asset.
Our offices reopened in 2022 after the pandemic, and most employees located in proximity to our headquarters office location utilize a hybrid approach which includes a mixture of working in the office and working remotely from home. Culture is very important at Backblaze and we recognize that employees are our greatest asset.
Competition Our current primary competitors generally fall into the following categories: diversified public cloud vendors, such as Amazon.com, Inc. through Amazon Web Services, Alphabet Inc. through Google Cloud Platform, and Microsoft Corporation through Azure; certain smaller cloud storage competitors; and legacy on-premises storage vendors such as Dell EMC.
Competition Our current primary competitors generally fall into the following categories: traditional public cloud vendors, such as Amazon.com, Inc. through Amazon Web Services, Alphabet Inc. through Google Cloud Platform, and Microsoft Corporation through Azure; certain smaller and private cloud storage competitors; and legacy on-premises storage vendors such as Dell EMC.
Item 1. Business 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.
Item 1. Business We are a leading specialized storage cloud platform, providing cloud services to store, use, and protect data in an easy and affordable manner. We provide these cloud services through a purpose-built, web-scale software infrastructure built on commodity hardware.
Customers also strategically tier backups of their core data systems to B2 Cloud Storage, including on-premises and virtual machine servers and other high-capacity storage devices.
Customers also strategically tier backups of their core data systems to our cloud, including on-premises and virtual machine servers and other high-capacity storage devices.
Alongside these core processes, the software layer also manages load balancing, caching, data compression, deletion, billing, as well as numerous other essential functions for hundreds of thousands of customers. Generally weekly code updates regularly enhance these functions. Our vault architecture creates redundancy for the storage of customer data using proprietary and other algorithms.
Alongside these core processes, our software layer also manages load balancing, caching, deletion, 3 Table of Contents billing, as well as numerous other essential functions for hundreds of thousands of customers. Generally weekly code updates regularly enhance these functions. Our vault architecture creates redundancy for the storage of customer data using proprietary and other algorithms.
We recognize and value the importance of diversity, equity and inclusion and have a Diversity, Equity and Inclusion Committee that is comprised of a diverse group of employees and management.
We recognize and value the impor tance of diversity, equity and inclusion and have a Diversity, Equity and Inclusion Committee that is comprised of a diverse group of employees and management.
Our customers span a range of industries, including a broad range of businesses, MSPs, developers, media innovators, creative agencies, academic institutions, government agencies, research institutes, gaming companies, and individuals. Our customer base is highly diversified, with no single customer accounting for more than 1% of our total revenue in 2022 or 2021.
Our customers span a range of industries, including a broad range of businesses, MSPs, developers, media teams, AI innovators, creative agencies, academic institutions, government agencies, research institutes, gaming companies, and 4 Table of Contents individuals. Our customer base is highly diversified, with no single customer accounting for more than 1% of our total revenue in 2023 or 2022.
We employ a land-and-expand model that drives 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 can further expand our relationships with our customers when they adopt new features and use cases that lead to increased usage of our platform.
As customers generate, store, and back up more data, their use of our platform increases, creating natural opportunities for revenue expansion. We can further expand our relationships with our customers when they adopt new features and use cases that lead to increased usage of our platform.
Referrals from our community of brand advocates, com bined with our highly efficient and primarily self-serve customer acquisition model and an ecosystem of thousands of partners, have allowed us to attract more than 500,000 customers as of December 31, 2022 .
Referrals from our community of brand advocates, com bined with our highly efficient and primarily self-serve customer acquisition model and an ecosystem of thousands of partners, have allowed us to attract more than 500,000 customers as of December 31, 2023, and our sales and channel efforts have supported us acquiring larger customers.
Customers leverage B2 Cloud Storage for a wide range of use cases, including public, hybrid and multi-cloud data storage; application development and DevOps; content delivery and edge computing; security and ransomware protection; media management; backup, archive and tape replacement; repository for analytics, artificial intelligence (AI) and machine learning; and Internet of Things (e.g., storing data for surveillance systems, autonomous vehicles, and smart devices) .
Customers leverage B2 Cloud Storage for a wide range of other use cases as well, including public, hybrid and multi-cloud data storage; application development and DevOps; content delivery and edge computing; security and ransomware protection; media management; backup, archive and tape replacement; and Internet of Things (e.g., storing data for surveillance systems, autonomous vehicles, and smart devices) .
Available Information Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, are filed with the Securities and Exchange Commission, or the SEC.
Our website address is www.backblaze.com. 6 Table of Contents Available Information Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, are filed with the Securities and Exchange Commission, or the SEC.
We believe that by substantially reducing the complexity and frustration of storing, using, and protecting data, we can empower customers to focus on their core business operations. Through our blog and culture of transparency, we have built a community of millions of readers and brand advocates.
We believe that by offering an easy to use, cost-effective 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. Through our blog and culture of transparency, we have built a community of millions of readers and brand advocates.
These customers use our Storage Cloud platform across more than 175 countries to grow and protect their business data on our over 2.5 exabytes, or 2.5 trillion megabytes, of data storage under management. At its founding, Backblaze set out to simplify the process of storing, using, and protecting data.
These customers use our Storage Cloud platform across more than 175 countries to grow and protect their business data on our over 3 billion gigabytes , of data storage under management. At its founding, Backblaze set out to dramatically simplify the process of storing, using, and protecting data.
Our solutions are designed for individuals and businesses of all sizes and across all industries but have a particularly strong appeal to mid-market organizations (which we define as organizations with 10 to 999 employees) due to their desire for easy-to-use and cost-effective solutions. We have a go-to-market model that was primarily built on a self-serve selling motion.
Our solutions are designed for individuals and businesses of all sizes and across all industries but have a particularly strong appeal to mid-market organizations (which we define as organizations with 10 to 999 employees) due to their desire for easy-to-use and cost-effective solutions.
We have plans to increase our investment in our sales and marketing capabilities to capitalize on our large and global market opportunity. We have also stood up a Developer Evangelism team to support our focus on supporting developers and applications storage use cases, and scaled up our partnerships team to grow our technology and channel partnership opportunity.
We have invested, and expect to continue to invest, in our sales and marketing capabilities to capitalize on our large market opportunity. We have also established a Developer Evangelism function to support our focus on supporting developers and applications storage use cases, and scaled up our partnerships team to grow our technology and channel partnership opportunity.
As of December 31, 2022, we had over 500,000 customers in over 175 countries, including approximately 436,000 customers using our Computer Backup cloud services solution and approximately 87,000 customers using our B2 Cloud Storage solution (approximately 16,000 custo mers use both our B2 Cloud Storage and Computer Backup solutions).
As of December 31, 2023, we had over 500,000 customers in over 175 countries, including approximately 432,000 customers using our Compu ter Backup cloud services solution and approximately 98,000 customers using our B2 Cloud Storage solution (approximately 17,000 custo mers use both our B2 Cloud Storage and Computer Backup solutions).
Our B2 Cloud Storage revenue grew by 46% during the year ended December 31, 2022 and our Computer Backup cloud service revenue grew by 17% during the year ended December 31, 2022. Our ecosystem of partners—including technology and developer partners, channel partners, and MSPs—helps us expand our platform in existing and new markets.
Our B2 Cloud Storage revenue grew b y 40% during the year ended December 31, 2023 and our Computer Backup cloud service revenue grew by 7% during the year ended December 31, 2023. Our ecosystem of partners—including tech nology partners, channel partners, and MSPs—helps us expand our platform in existing and new markets. • Technology Partners.
A significant amount of our employees are based out of our San Mateo, California headquarters. However, since March 2020 and throughout all of 2021, e mployees generally worked remotely due to the COVI D pandemic.
A significant amount of our employees are based out of our San Mateo, California headquarters. However, since March 2020 and throughout the COVID pandemic, employees generally worked remotely.
We complement our self-serve customer acquisition model with a growing inside sales team that is focused on a low-touch sales assisted model that supports our larger customers if the need arises. Among other things, our sales and marketing teams focus on inbound inquiries, outbound prospecting targeting specific use cases, and volume expansion of our self-serve customers.
We complement our self-serve customer acquisition model with a growing sales team that is focused on larger customers. Among other things, our sales and marketing teams focus on inbound inquiries, outbound prospecting targeting specific use cases, and growing the adoption of our offerings in existing customers.
Our globally distributed storage platform also offers customers multi-region geographic choice for their data—currently between East and West Coast regions in the United States and Europe—providing flexibility for different needs including geopolitical considerations, regulatory requirements, and performance optimization.
Multiple vaults are grouped together to form one cluster, and one or more clusters are organized into a region. Our globally distributed storage platform also offers customers multi-region geographic choice for their data—currently between East and West Coast regions in the United States and Europe—providing flexibility for different needs including geopolitical considerations, regulatory requirements, and performance optimization.
This web-scale software layer receives, stores, and delivers data for customers across the globe. Our code achieves this for billions of files under management by intelligently allocating storage locations in line with capacity and demand.
This web-scale software layer receives, stores, and delivers data for customers across the globe. Our code achieves this for billions of files under management by intelligently allocating storage locations in line with capacity and demand. Continued investment in developing data compaction, compression, and other software innovation further improves our ability to efficiently leverage hardware.
This software manages our global physical infrastructure of more than 250,000 hard drives and one terabit per second (one million megabits per second) of network capacity across multiple data centers. Our systems also manage the automation, monitoring, and security of this infrastructure. As our customers’ data grows, and our total revenue with it, we continuously and smoothly deploy additional infrastructure.
Our software manages our global physical infrastructure of more than 300,000 hard drives and one terabit per second (one million megabits per second) of network capacity across multiple data centers. Our systems also manage the automation, monitoring, and security of this infrastructure.
Our technology and developer, channel, and MSP partners expand use cases and attract customers, thereby increasing the usage of our platform. 4 Table of Contents Our marketing efforts focus on establishing our brand, generating awareness, creating leads, and cultivating the Backblaze community.
In addition to generating customers, our content generation efforts have contributed to building a community of thousands of partners. Our technology, channel, and MSP partners expand use cases and attract customers, thereby increasing the usage of our platform. Our marketing efforts focus on establishing our brand, generating awareness, creating leads, and cultivating the Backblaze community.
We completed our initial public offering in November 2021 and our common stock is listed on The Nasdaq Stock Market LLC under the symbol “BLZE.” Our principal executive offices are located at 500 Ben Franklin Ct, San Mateo, CA 94401 and our telephone number is (650) 352-3738. Our website address is www.backblaze.com.
Corporate Information We were incorporated in Delaware in 2007 under the name Backblaze, Inc. We completed our initial public offering in November 2021 and our common stock is listed on The Nasdaq Stock Market LLC under the symbol “BLZE.” Our principal executive offices are located at 201 Baldwin Ave., San Mateo, CA 94401 and our telephone number is (650) 352-3738.
According to IDC forecasts, the worldwide market for Public Cloud IaaS Storage is expected to grow to $91.0 billion by 2025. Additionally, according to IDC, the worldwide market for DPaaS is expected to grow to $18.4 billion by 2025.
The markets addressed by our platform include Public Cloud Infrastructure-as-a-Service (IaaS) storage as well as Data-Protection-as-a-Service (DPaaS). According to IDC forecasts, the worldwide market for Public Cloud IaaS Storage is expected to grow to $91.0 billion by 2025. Additionally, according to IDC, the worldwide market for DPaaS is expected to grow to $18.4 billion by 2025.
For more information regarding risks related to intellectual property, please see “Risk Factors—Risks Related to Intellectual Property.” 5 Table of Contents Employees and Human Capital We believe we have an aligned and engaged workforce with relatively limited employee turnover. As of December 31, 2022, we had 393 full-time employees, including a net of 123 new full-time employees hired during 2022.
For more information regarding risks related to intellectual property, please see “Risk Factors—Risks Related to Intellectual Property.” Employees and Human Capital W e believe we have an aligned and engaged workforce with relatively limited employee turnover. As of December 31, 2023, we had 381 f ull-time employees.
Intellectual Property Our success depends in part on our ability to obtain and maintain intellectual property protection for our technology platform and cloud services, defend and enforce our intellectual property rights, preserve the confidentiality of our trade secrets, and operate without infringing, misappropriating, or otherwise violating the intellectual property rights of others.
We are also differentiated by brand awareness and reputation; transparency of our pricing with customers; customer support; independence; security; and our partner ecosystem. 5 Table of Contents Intellectual Property Our success depends in part on our ability to obtain and maintain intellectual property protection for our technology platform and cloud services, defend and enforce our intellectual property rights, preserve the confidentiality of our trade secrets, and operate without infringing, misappropriating, or otherwise violating the intellectual property rights of others.
We believe these providers are drawn to our solutions due to our support of the breadth of their offerings, competitive pricing which helps MSPs with their own margin profile, and ease of use. The markets addressed by our platform include Public Cloud Infrastructure-as-a-Service (IaaS) storage as well as Data-Protection-as-a-Service (DPaaS).
We believe these providers are drawn to our solutions due to our support of the breadth of their offerings, competitive pricing which helps MSPs with their own margin profile, and ease of use.
No employees are represented by a labor union with respect to his or her employment by us. We have not experienced any work stoppages, and we consider our relations with our employees to be good, as evidenced by our Glassdoor 4.8/5.0 rating, 95% CEO Approval, and 95% Recommend to a Friend ratings as of February 1, 2023.
No employees are represented by a labor union with respect to his or her employment by us. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
Facilities Our principal executive offices are located in San Mateo, California. We lease data center facilities in California, Arizona, Virginia, and Amsterdam, the Netherlands. We believe that our properties are generally suitable to meet our needs for the foreseeable future.
We lease data center facilities in California, Arizona, Virginia, and Amsterdam, the Netherlands. We believe that our properties are generally suitable to meet our needs for the foreseeable future. In addition, to the extent we require additional space in the future, we believe that it would be available on commercially reasonable terms.
Our software splits each uploaded customer file into several data parts, adds multiple redundant parts, and stores these parts across discrete hard drives in different servers in a data center.
Our software splits each uploaded customer file into several data parts, adds multiple redundant parts, and stores these parts across discrete hard drives in different servers in a data center. As a result, even if a few of the parts are entirely lost or offline, we are able to reconstruct the customer data from the remaining parts for durability.
Research and Development We invest substantial resources in research and development. We have an internal technology roadmap to introduce new features and functionality to our platform. Substantially all of our R&D organization, which makes up approximately one-third of our company, is focused on software development.
Research and Development We invest substantial resources in research and development. We have an internal technology roadmap to introduce new features and functionality to our platform.
We generally have a continuous product release cycle and we typically release updates on a weekly basis. We establish priorities for our organization by collaborating closely with our customers, community, and employees.
We establish priorities for our organization by collaborating closely with our customers, community, and employees.
In addition to our self-serve selling motion, we have a sales-assisted selling motion to identify opportunities to increase business with existing customers and to assist larger customers in adopting our services. Our sales-assisted selling motion customers are frequently significantly larger in terms of average revenue per customer than our self-serve customers. Substantially all of our revenue is recurring in nature.
Customers acquired by our sales motion frequently have a significantly larger average revenue per customer than our self-serve customers. 2 Table of Contents Substantially all of our revenue is recurring in nature. We employ a land-and-expand model that drives additional revenue from existing customers.
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—in 2022 alone, millions of readers consumed content that we shared there.
We have fostered community engagement with content we share on our blog—in 2023 alone, millions of readers consumed content that we shared there. Our free trial and self-serve sign-up processes help convert our blog readers and referrals from our brand advocates into customers, with approximately 76% of our total revenue in 2023 coming from self-serve customers.
Our free trial and self-serve sign-up processes help convert our blog readers and referrals from our brand advocates into customers, with approximately 80% of our total revenue in 2022 coming from self-serve customers. Our technology, channel, affiliate, and managed service provider (MSP) partners help expand use cases and sales channels and attract customers, thereby increasing usage of our Storage Cloud.
Our technology, channel and managed service provider (MSP) partners help expand use cases and sales channels and attract customers, thereby increasing usage of our Storage Cloud. Our sales driven selling motion focuses on selling our cloud services to larger customers and opportunities to increase revenue with existing customers.
Sales and Marketing We believe we have an efficient go-to-market model that is built on a self-serve selling motion. Prospective customers find us through a number of channels including our website, partners, and brand advocates. We have fostered community engagement through the content shared on our blog.
Sales and Marketing We have a layered go-to-market model that includes our self-service motion and our sales driven motion that focuses on larger customers. The sales driven motion includes our direct sales team that contracts directly with customers and our channel sales team that contracts directly with customers and our channel sales team that contracts sales through our channel partners.
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Our land-and-expand strategy is evidenced by our overall net revenue retention rate of 113% and 111% as of December 31, 2022 and 2021, respectively.
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Our go-to-market model is a layered approach that includes our self-service motion and our sales driven motion that focuses on larger customers. The sales driven motion includes our direct sales team that contracts directly with customers and our channel sales team that contracts sales through our channel partners.
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For more 2 Table of Contents information about net revenue retention rate and how it is calculated, please see the section titled “Key Business Metrics” in Item 7, Management’s Discussion and Analysis of Financial Condition and Result of Operations included elsewhere in this Annual Report on Form 10-K.
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More recently, we also added our Powered By Backblaze program that enables third parties to integrate Backblaze and thus offer cloud storage as part of their product offering. Prospective customers find us through a variety of channels including our website, partners, and brand advocates.
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Our partners leverage our cloud services to provide storage solutions to their customers or our mutual customers and in turn, we are able to expand our use cases and overall reach. • Technology and Developer Partners.
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We have programs to support these partners, and our newly launched Powered By Backblaze program supports Technology Partners, MSPs, and others by enabling them to more easily integrate our cloud storage and offer it directly to their customers. This expands both their opportunity and ours.
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As a result, even if a few of the parts are entirely lost or 3 Table of Contents offline, we are able to reconstruct the customer data from the remaining parts for durability. Multiple vaults are grouped together to form one cluster, and one or more clusters are organized into a region.
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As our customers’ data grows, and our total revenue with it, we seek to continuously and smoothly deploy additional infrastructure and utilize finance leases to match the capital outlays with additional incoming revenue.
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In addition to generating customers, our content generation efforts have contributed to building a community of thousands of partners.
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More recently, businesses are incorporating B2 Cloud Storage into artificial intelligence (AI) and machine learning (ML) workflows ranging from storing large media libraries for later analysis and categorization to housing the large quantities of data that AI models generate.
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In addition, to the extent we require additional space in the future, we believe that it would be available on commercially reasonable terms. Corporate Information We were incorporated in Delaware in 2007 under the name Backblaze, Inc.
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More recently, we also added our Powered By Backblaze program that enables third party platform providers to purchase Backblaze to then sell it to their customers as a part of their product offering. Prospective customers find us through a number of sources including our website, partners, and brand advocates.
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We regularly optimize our website, and in 2023 we modernized our website to improve the user experience and increase traffic through search engine optimization to accelerate lead generation. We have fostered community engagement through the content shared on our blog, which is read by millions of people.
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Those investments have continued to result in innovations to the platform such as shard stash which improves small file uploads up to 30% faster than competitors and product enhancements such as Powered By Backblaze which enables customers to sell B2 Cloud Storage on their platform.
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Development of software based solutions such as Computer Backup Enterprise Control provides up-selling opportunities that help customers while improving our gross margin profile. Substantially all of our engineering organization is focused on software development. We generally have a continuous product release cycle and we typically release updates on a weekly basis.
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We also note strong survey ratings about our company, as evidenced by our Glassdoor 4.4/5.0 rating, 92% approval of our CEO, 88% “Recommend to a Friend” rating as of March 8, 2023, and inclusion on the “Great Place to Work” nationally recognized list. Facilities Our principal executive offices are located in San Mateo, California.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

106 edited+53 added−33 removed209 unchanged
Biggest changeThese deficiencies resulted in errors in cash and cash equivalents, prepaid expenses and other current assets, property and equipment, capitalized internal-use software, capital lease liability and sale leaseback transactions, accrued compensation and income tax; and ii. our controls over certain equity transactions were not operating effectively to allow management to timely identify errors related to the recording of those transactions; specifically, we did not have sufficient technical resources to appropriately identify errors in the accounting for equity awards and preferred stock transactions, resulting in 20 Table of Contents misstatements relating to completeness and accuracy of stock-based compensation and classification of equity instrument.
Biggest changeAs of December 31, 2023, we had three unremediated material weaknesses, specifically related to control activities, as follows: i. our controls were not operating effectively to allow sufficient and timely review of significant accounting transactions, account reconciliations and presentation of the statement of cash flows; ii. our controls over certain equity transactions were not operating effectively to allow management to timely identify errors related to the recording of those transactions; specifically, we did not have sufficient technical resources to appropriately identify errors in the accounting for equity awards, resulting in misstatements relating to completeness and accuracy of stock-based compensation; and iii. our controls were not adequately designed and operating effectively to allow sufficient and timely review of the key assumptions and mathematical accuracy of our going concern assessment.
The risks we face in connection with acquisitions include: • diversion of management time and focus from operating our business to addressing acquisition integration challenges; • coordination of research and development, operational, and sales and marketing functions; 16 Table of Contents • retention of key employees from the acquired company; • cultural challenges associated with integrating employees from the acquired company into our organization; • integration of the acquired company’s accounting, management information, human resources, and other administrative systems; • the need to implement or improve controls, procedures, and policies at a business that prior to the acquisition may have lacked effective controls, procedures, and policies; • liability for activities of the acquired company prior to our acquisition of them, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities; • unanticipated write-offs or charges; and • litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders, or other third parties.
The risks we face in connection with acquisitions include: • diversion of management time and focus from operating our business to addressing acquisition integration challenges; • coordination of research and development, operational, and sales and marketing functions; • retention of key employees from the acquired company; • cultural challenges associated with integrating employees from the acquired company into our organization; • integration of the acquired company’s accounting, management information, human resources, and other administrative systems; • the need to implement or improve controls, procedures, and policies at a business that prior to the acquisition may have lacked effective controls, procedures, and policies; • liability for activities of the acquired company prior to our acquisition of them, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities; • unanticipated write-offs or charges; and 18 Table of Contents • litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders, or other third parties.
You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the accompanying notes, included elsewhere in this Annual Report on Form 10-K.
You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes, included elsewhere in this Annual Report on Form 10-K.
The preparation of financial statements in conformity with United States Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes appearing elsewhere in this Annual Report on Form 10-K.
The preparation of consolidated financial statements in conformity with United States Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes appearing elsewhere in this Annual Report on Form 10-K.
We have identified material weaknesses in our internal controls over financial reporting, and if we are not able to effectively remediate our outstanding material weaknesses or are otherwise unable to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or timely file our periodic reports.
We have identified material weaknesses in our internal controls over financial reporting, and if we are not able to effectively remediate our material weaknesses or are otherwise unable to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or timely file our periodic reports.
To the extent we target other types of customers or customers with different needs, we may face greater demand for certain service enhancements or features that we do not currently offer, or additional performance, availability, durability, and security requirements.
To the extent we target other types of customers or customers with different or specific needs, we may face greater demand for certain service enhancements or features that we do not currently offer, or additional performance, availability, durability, and security requirements.
Any failure of our cloud services to operate effectively and on a timely basis with network platforms and technologies could reduce the demand for our cloud services, result in customer dissatisfaction and adversely affect our business.
In addition, any failure of our cloud services to operate effectively and on a timely basis with network platforms and technologies could reduce the demand for our cloud services, result in customer dissatisfaction and adversely affect our business.
We are an emerging growth company, and for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including: not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, as amended (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 non-binding advisory vote on executive compensation and 17 Table of Contents stockholder approval of any golden parachute payments not previously approved.
We are an emerging growth company, and for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including: not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, as amended (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 non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, these agreements do not prevent our competitors or others from independently developing the same or similar technologies and processes, which may allow them to provide a service similar or superior to ours, which could harm our competitive position. Our use of “open-source” software could negatively affect our ability to sell our cloud services and subject us to possible litigation.
Further, these actions do not prevent our competitors or others from independently developing the same or similar technologies and processes, which may allow them to provide a service similar or superior to ours, which could harm our competitive position. Our use of “open-source” software could negatively affect our ability to sell our cloud services and subject us to possible litigation.
Even if we are successful, we cannot assure you that these relationships will result in increased customer usage of our cloud services or increased revenue. 19 Table of Contents Our business is exposed to risks associated with online payment processing methods. Many of our customers pay for our cloud services and products using credit cards.
Even if we are successful, we cannot assure you that these relationships will result in increased customer usage of our cloud services or increased revenue. 21 Table of Contents Our business is exposed to risks associated with online payment processing methods. Many of our customers pay for our cloud services and products using credit cards.
Our ability to maintain the number of visitors directed to our website is not entirely within our control. If search engine companies modify their search algorithms in a manner that reduces the prominence of our listing, or if our competitors’ search engine optimization efforts are more successful than ours, fewer potential customers may click through to our website.
O ur ability to maintain the number of visitors directed to our website is not entirely within our control. If search engine companies modify their search algorithms in a manner that reduces the prominence of our listing, or if our competitors’ search engine optimization efforts are more successful than ours, fewer potential customers may click through to our website.
We expect it will be more difficult and expensive to attract and retain mid-market organization customers than other customers because mid-market organizations are more frequently 15 Table of Contents forced to curtail or cease operations due to the sale or failure of their business; can be more difficult to identify and may require more expensive, targeted sales campaigns; and generally have lesser amounts of data to store than larger organizations, thus requiring us to successfully sell to and support more mid-market organizations for meaningful revenue impact.
We expect it will be more difficult and expensive to attract and retain mid-market organization customers than other customers because mid-market organizations are more frequently forced to curtail or cease operations due to the sale or failure of their business; can be more difficult to identify and may require more expensive, targeted sales campaigns; and generally have lesser amounts of data to store than larger organizations, thus requiring us to successfully sell to and support more mid-market organizations for meaningful revenue impact.
Risks Related to Reliance on Infrastructure and Third Parties We rely on third-party vendors and suppliers, including data center and hard drive providers, which may have limited sources of supply, and this reliance exposes us to potential supply and service disruptions that could harm our business.
Infrastructure and Third Parties We rely on third-party vendors and suppliers, including data center and hard drive providers, which may have limited sources of supply, and this reliance exposes us to potential supply and service disruptions that could harm our business.
For example, in December 2021, an industry-wide zero-day vulnerability was discovered in the Apache Log4j logging library commonly used by many companies throughout the world that could enable attackers to take control of vulnerable servers.
For example, in December 2021, an industry-wide zero-day vulnerability was discovered in the Apache Log4j logging library commonly used by many companies throughout the world that could permit attackers to take control of vulnerable servers.
This bankruptcy matter was resolved without disruption to our normal operations, but future bankruptcies or similar events affecting our third-party hosted data center providers could result in disruptions to our Company, access to customer data may become unavailable or customer data could be lost, and it may take a significant period of time to achieve full resumption of our cloud services.
This bankruptcy matter was resolved without disruption 8 Table of Contents to our normal operations, but future bankruptcies or similar events affecting our third-party hosted data center providers could result in disruptions to our Company, access to customer data may become unavailable or customer data could be lost, and it may take a significant period of time to achieve full resumption of our cloud services.
For example, in addition to the risks from sanctions and other restrictions discussed elsewhere in these Risk Factors in connection with the Russian attack on Ukraine that began in February 2022, in order to help the people of Ukraine facing a humanitarian crisis, while it is subject to change, we are currently waiving charges for our services for customers based in 12 Table of Contents Ukraine.
For example, in addition to the risks from sanctions and other restrictions discussed elsewhere in these Risk Factors in connection with the Russian attack on Ukraine that began in February 2022, in order to help the people of Ukraine facing a humanitarian crisis, while it is subject to change, we are currently waiving charges for our services for customers based in Ukraine.
Factors that could cause fluctuations in the market price of our Class A common stock include the following: • price and volume fluctuations in the overall stock market from time to time; • volatility in the market prices and trading volumes of technology stocks; • changes in operating performance and stock market valuations of other technology companies generally or those in our industry in particular; • sales of shares of our Class A common stock by us or our stockholders; • failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow us, or our failure to meet these estimates or the expectations of investors; • the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections; • announcements by us or our competitors of new products or services; • the public’s reaction to our press releases, other public announcements, and filings with the SEC; • rumors and market speculation involving us or other companies in our industry; • actual or anticipated changes in our operating results or fluctuations in our operating results; • actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally; 26 Table of Contents • litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors; • developments or disputes concerning our intellectual property or other proprietary rights; • announced or completed acquisitions of businesses or technologies by us or our competitors; • new laws or regulations or new interpretations of existing laws or regulations applicable to our business; • changes in accounting standards, policies, guidelines, interpretations, or principles; • outbreaks of war or other hostilities; • any significant change in our management; • the impact of the COVID-19 or similar pandemic; and • general economic conditions and slow or negative growth of our markets.
Factors that could cause fluctuations in the market price of our Class A common stock include the following: • price and volume fluctuations in the overall stock market from time to time; • volatility in the market prices and trading volumes of technology stocks; • changes in operating performance and stock market valuations of other technology companies generally or those in our industry in particular; • sales of shares of our Class A common stock by us or our stockholders; • failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow us, or our failure to meet these estimates or the expectations of investors; • the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections; • announcements by us or our competitors of new products or services; • the public’s reaction to our press releases, other public announcements, and filings with the SEC; • rumors and market speculation involving us or other companies in our industry; • actual or anticipated changes in our operating results or fluctuations in our operating results; • actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally; • litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors; • developments or disputes concerning our intellectual property or other proprietary rights; • announced or completed acquisitions of businesses or technologies by us or our competitors; • new laws or regulations or new interpretations of existing laws or regulations applicable to our business; • changes in accounting standards, policies, guidelines, interpretations, or principles; • outbreaks of war or other hostilities; • any significant change in our management; • a return of pandemic conditions; and • general economic conditions and slow or negative growth of our markets.
As a result, our revenue could be reduced as a result of any general or industry decline in demand for cloud-based storage solutions, particularly given that we would not have meaningful revenue from other market sectors to offset any temporary or longer-term downturn in demand for cloud-based storage solutions. Adverse economic conditions may adversely impact our revenue and profitability.
As a result, our revenue could be reduced as a result of any general or industry decline in demand for cloud-based storage solutions, particularly given that we would not have meaningful revenue from other market sectors to offset any temporary or longer-term downturn in demand for cloud-based storage solutions. 17 Table of Contents Adverse economic conditions may adversely impact our revenue and profitability.
The successful promotion of our brand and our ability to maintain our reputation will depend on a number of factors, including our performance and the reliability of our cloud services; our advertising and marketing efforts, including our blog and social media presence, which have been important to building and maintaining our brand and reputation; our ability to continue to develop high-quality features and cloud services; and our ability to successfully differentiate our 8 Table of Contents cloud services from competitive products and services.
The successful promotion of our brand and our ability to maintain our reputation will depend on a number of factors, including our performance and the reliability of our cloud services; our advertising and marketing efforts, including our blog and social media presence, which have been important to building and maintaining our brand and reputation; our ability to continue to develop high-quality features and cloud services; and our ability to successfully differentiate our cloud services from competitive products and services.
We generally recognize revenue from customers of our subscription agreements related to data backup services ratably over the terms of their subscription agreements, a majority of which are one or two-year agreements. Accordingly, the corresponding revenue we report in each quarter from such arrangements is the result of subscription agreements entered 21 Table of Contents into during previous quarters.
We generally recognize revenue from customers of our subscription agreements related to data backup services ratably over the terms of their subscription agreements, a majority of which are one or two-year agreements. Accordingly, the corresponding revenue we report in each quarter from such arrangements is the result of subscription agreements entered into during previous quarters.
Although we do not have a significant number of customers located in those regions, such actions will have some impact on our business. It is difficult to predict how long the conflict may last, how the conflict could escalate, and how the sanctions may evolve, which could cause a greater adverse impact on our business and operations.
Although we do not have a significant number of customers located in those regions, such actions have had some immaterial impact on our business. It is difficult to predict how long the conflict may last, how the conflict could escalate, and how the sanctions may evolve, which could cause a greater adverse impact on our business and operations.
If our platform is unavailable when users attempt to access it, or if it does not load as quickly as they expect, or if data is lost, users may not use our platform as often in the future, or at all.
If our platform is unavailable when users attempt to access it, or if it does not perform as quickly as they expect, or if data is lost, users may not use our platform as often in the future, or at all.
All of our employees, including our senior management, are employed on an at-will basis.
Substantially all of our employees, including our senior management, are employed on an at-will basis.
Significant increases in the 9 Table of Contents pricing of one or more of our advertising channels would increase our advertising and marketing costs or cause us to choose less expensive and perhaps less effective channels. We may also need to expand into channels with significantly higher costs, which could adversely affect our operating results.
Significant increases in the pricing of one or more of our advertising channels would increase our advertising and marketing costs or cause us to choose less expensive and perhaps less effective channels. We may also need to expand into channels with significantly higher costs, which could adversely affect our operating results.
If we fail to maintain our company culture, our business and competitive position may be harmed. As we expand our operations outside the United States, we may be subject to increased business, regulatory and economic risks that could impact our results of operations. In 2022, we derived approximately 28% of our total revenue from customers outside of the United States.
If we fail to maintain our company culture, our business and competitive position may be harmed. As we expand our operations outside the United States, we may be subject to increased business, regulatory and economic risks that could impact our results of operations. In 2023, we derived approximately 28% of our revenue from customers outside of the United States.
If our guidance is not accurate or varies from actual results due to our inability to meet our assumptions or the impact on our financial performance that could occur as a result of various risks and uncertainties, the market value of our Class A common stock could decline significantly.
If our guidance is 28 Table of Contents not accurate or varies from actual results due to our inability to meet our assumptions or the impact on our financial performance that could occur as a result of various risks and uncertainties, the market value of our Class A common stock could decline significantly.
Competition for executive officers, software developers, sales personnel, operational personnel, and other key employees in our industry is intense. In particular, we compete with many other companies for software developers with high levels of experience in designing, developing, and managing cloud-based software, as well as for skilled sales and operations professionals.
Competition for executive officers, software developers, sales personnel, operational personnel, and other key employees in our industry is intense. In particular, we compete with many other companies for software developers with high levels of experience in designing, 14 Table of Contents developing, and managing cloud-based software, as well as for skilled sales and operations professionals.
Accordingly, our ability to utilize the aforementioned carryforwards may be limited. Changes in tax laws could materially affect our financial condition, results of operations and cash flows. On August 16, 2022, the Inflation Reduction Act of 2022 (the IRA) was signed into law.
Accordingly, our ability to utilize the aforementioned carryforwards may be limited. 24 Table of Contents Changes in tax laws could materially affect our financial condition, results of operations and cash flows. On August 16, 2022, the Inflation Reduction Act of 2022 (the IRA) was signed into law.
Although we take measures to protect sensitive information from unauthorized access or disclosure, third parties may be able to circumvent our security by deploying viruses, worms, and other malicious software programs that are designed to attack or attempt to infiltrate our systems and networks, including distributed denial of service (DDoS) or phishing attacks, that can undermine the availability and performance of our systems and cloud services, fraudulently steal data, or otherwise cause damage to our reputation.
Although we take measures to protect our systems and sensitive information from unauthorized access or disclosure, third parties may be able to circumvent our security by deploying viruses, worms, and other malicious software programs that are designed to attack or attempt to infiltrate our systems and networks, including distributed denial of service (DDoS) or phishing attacks, that can undermine the availability and performance of our systems and cloud services, resulting in the blocking of our services by ISPs or governments, fraudulently steal data, or otherwise cause damage to our reputation.
Furthermore, future enhancements may increase our research and development expenses and infrastructure costs, which could adversely impact our pricing advantage, undermine our ease of use, make it more difficult to attract and retain customers, and harm our results of operations.
Furthermore, future enhancements, features or offerings may increase our research and development expenses and infrastructure costs, which could adversely impact our pricing advantage, undermine our ease of use, make it more difficult to attract and retain customers, and harm our results of operations.
Any defects in, or unavailability of, our software that cause interruptions to the availability of our cloud services or that otherwise impact our business could, among other things: • require us to issue refunds or credits to our customers or expose us to claims for damages, • cause us to lose existing customers and make it more difficult to attract new customers, 10 Table of Contents • divert our development resources or require us to make extensive changes to our cloud services or software, • harm our reputation and brand, and • negatively impact our results of operations.
Any defects in, or unavailability of, our software or hardware failures that cause interruptions to the availability of our cloud services or that otherwise impact our business could, among other things: • require us to issue refunds or credits to our customers or expose us to claims for damages, • cause us to lose existing customers and make it more difficult to attract new customers, • divert our development resources or require us to make extensive changes to our cloud services or software, • harm our reputation and brand, and • negatively impact our results of operations.
In the event that we become subject to such claims, we could be subject to significant damages, enjoined from the sale of our solutions that contained the open-source software, and required to comply with onerous conditions.
In the event that we become 26 Table of Contents subject to such claims, we could be subject to significant damages, enjoined from the sale of our solutions that contained the open-source software, and required to comply with onerous conditions.
We seek to protect these trade secrets and other proprietary technology, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, outside contractors, consultants, advisors, and other third parties. We also enter into confidentiality and invention assignment agreements with our employees and consultants.
We seek to protect these trade secrets and other proprietary technology, in part, by internal controls and policies as well as entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, outside contractors, consultants, advisors, and other third parties. We also enter into confidentiality and invention assignment agreements with our employees and consultants.
Our efforts to comply with the complex matrix of data privacy laws around the world subjects us to increasing costs to review and comply with such laws, including updating our policies, procedures, and business practices to address such evolving privacy laws.
Our efforts to comply with the complex matrix of data privacy 16 Table of Contents laws around the world subjects us to increasing costs to review and comply with such laws, including updating our policies, procedures, and business practices to address such evolving privacy laws.
Factors that may cause fluctuations in our quarterly results of operations include, without limitation: • our ability to attract new customers; • the amount of customer churn; • fluctuations in the amount of data customers store with us; • the amount and timing of operating expenses and equipment purchases related to the maintenance and expansion of our business; • interruptions or loss of service of our offerings; • the timing and success of new product feature and service introductions by us or our competitors; • our ability to retain and increase revenue from customers; • changes in the competitive dynamics of our industry, including consolidation among competitors; • security breaches of our systems; • our involvement in litigation, or the threat thereof; • the length of the sales cycle; • outbreaks of war or other hostilities, such as the Russia-Ukraine hostilities; • inflation in the United States, which has recently hit a four decade high, and other regions; • the impact of COVID-19 or other pandemics on our business or that of our customers and partners; • the timing of expenses and receipt of perceived benefits related to any acquisitions; • changes in laws and regulations that impact our business; and • general economic and market conditions.
Factors that may cause fluctuations in our quarterly results of operations include, without limitation: • our ability to attract new customers; • the amount of customer churn; • fluctuations in the amount of data customers store with us; • the amount and timing of operating expenses and equipment purchases related to the maintenance and expansion of our business; • interruptions or loss of service of our offerings; • the timing and success of new product feature and service introductions by us or our competitors; • our ability to retain and increase revenue from customers; • changes in deferred revenue balances; • changes in or timing of cash flows; • changes in the competitive dynamics of our industry, including consolidation among competitors; 13 Table of Contents • security breaches of our systems; • our involvement in litigation, or the threat thereof; • the length of the sales cycle; • outbreaks of war or other hostilities, such as the Russia-Ukraine and Israel-Hamas hostilities; • inflation in the United States, which has recently hit a four decade high, and other regions; • the impact of pandemics on our business or that of our customers and partners; • the timing of expenses and receipt of perceived benefits related to any acquisitions; • changes in laws and regulations that impact our business; and • general economic and market conditions.
Among other things, our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws include provisions: • creating a classified Board of Directors whose members serve staggered three-year terms; • authorizing “blank check” preferred stock, which could be issued by our Board of Directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock; • limiting the liability of, and providing indemnification to, our directors and officers; • limiting the ability of our stockholders to call and bring business before special meetings; 25 Table of Contents • requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our Board of Directors; • controlling the procedures for the conduct and scheduling of Board of Directors and stockholder meetings; and • authorizing two classes of common stock, as discussed above.
Among other things, our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws include provisions: • creating a classified Board of Directors whose members serve staggered three-year terms; • authorizing “blank check” preferred stock, which could be issued by our Board of Directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock; • limiting the liability of, and providing indemnification to, our directors and officers; • limiting the ability of our stockholders to call and bring business before special meetings; • requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our Board of Directors; and • controlling the procedures for the conduct and scheduling of Board of Directors and stockholder meetings.
If we become more exposed to currency fluctuations and are unable to successfully hedge against the risks associated with currency fluctuations, our results of operations could be materially and adversely affected.
If we become more exposed to currency fluctuations and are unable to successfully 19 Table of Contents hedge against the risks associated with currency fluctuations, our results of operations could be materially and adversely affected.
Growth in our international operations will subject us to new risks and may increase risks that we currently face, including risks associated with: • higher costs of doing business internationally, including increased infrastructure, accounting, travel, and legal compliance costs; • providing our platform, building out the necessary infrastructure and operating our business across a significant distance, in different languages and among different cultures, including the potential need to modify our platform and features to ensure that they are culturally appropriate and relevant in different countries; • compliance with applicable international laws and regulations, including laws and regulations with respect to privacy, data protection, consumer protection, and unsolicited email, and the risk of penalties to our users and individual members of management or employees if our practices are deemed to be out of compliance, and additional laws and regulations in the United States that are applicable to international operations; • recruiting and retaining talented and capable employees outside the United States, and maintaining our company culture across all of our offices; • management of an employee base in jurisdictions that may not give us the same employment and retention flexibility as does the United States; • operating in jurisdictions that do not protect intellectual property rights to the same extent as does the United States; • compliance by us and our business partners with anti-corruption laws, anti-bribery, anti-money laundering, and similar laws; import and export control laws; tariffs and trade barriers; economic sanctions; and other regulatory limitations on our ability to provide our cloud services in international markets; • foreign exchange controls that might require significant lead time in setting up operations in certain geographic territories; • restrictions that might prevent us from repatriating cash earned outside the United States; • double taxation of our international earnings and potentially adverse tax consequences due to changes in the income and other tax laws of the United States or the international jurisdictions in which we operate; and • political and economic instability in various jurisdictions.
Growth in our international operations will subject us to new risks and may increase risks that we currently face, including risks associated with: • higher costs of doing business internationally, including increased energy, infrastructure, accounting, travel, and legal compliance costs; • providing our platform, building out the necessary infrastructure and operating our business across a significant distance, in different languages and among different cultures, including the potential need to modify our platform and features to ensure that they are culturally appropriate and relevant in different countries; • compliance with applicable international laws and regulations, including laws and regulations with respect to privacy, data protection, consumer protection, and unsolicited email, and the risk of penalties to our users and individual members of management or employees if our practices are deemed to be out of compliance, and additional laws and regulations in the United States that are applicable to international operations; • recruiting and retaining talented and capable employees outside the United States, and maintaining our company culture across all of our offices; 15 Table of Contents • management of an employee base in jurisdictions that may not give us the same employment and retention flexibility as does the United States; • operating in jurisdictions that do not protect intellectual property rights to the same extent as does the United States; • compliance by us and our business partners with anti-corruption laws, anti-bribery, anti-money laundering, and similar laws; import and export control laws; tariffs and trade barriers; economic sanctions; and other regulatory limitations on our ability to provide our cloud services in international markets; • foreign exchange controls that might require significant lead time in setting up operations in certain geographic territories; • restrictions that might prevent us from repatriating cash earned outside the United States; • increased tax complexity, including being subject to regular review and audit by both United States federal and state and foreign tax authorities; • taxing authorities of the United States or foreign jurisdictions in which we operate may challenge our methodologies for valuing intercompany arrangements; • double taxation of our international earnings and potentially adverse tax consequences due to changes in the income and other tax laws of the United States or the international jurisdictions in which we operate; and • political and economic instability in various jurisdictions.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited. As of December 31, 2022 we had net operating loss carryforwards for U.S. federal income tax purposes of $63.4 million available to offset future U.S. federal taxable income.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited. As of December 31, 2023 we had net operating loss carryforwards for U.S. federal income tax purposes of $91.4 million available to offset future U.S. federal taxable income.
We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will sustain profitability. 7 Table of Contents The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results would be harmed.
We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will sustain profitability. The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results would be harmed.
Our future financial performance also depends in part on our ability to continue to increase revenue from our customers through additional paid products, such as Extended Version History and multi-region selection. Our customers’ decision whether to opt for additional paid products is driven by a number of factors.
Our future financial performance also depends in part on our ability to continue to increase revenue from our customers through additional paid products, such as Enterprise Control and multi-region selection. Our customers’ decision whether to opt for additional paid products is driven by a number of factors.
Many of our customers can terminate their use of our cloud services at will with little-to-no advance notice. Even though some of our customers enter into longer-term agreements of up to two years, they generally have no obligation to renew their subscriptions or increase usage.
Many of our customers can terminate their use of our cloud services at will with little-to-no advance notice. Even though some of our customers enter into longer-term multi-year agreements, they generally have no obligation to renew their subscriptions or increase usage.
The confidentiality agreements on which we rely to protect certain technologies may be breached, may not be adequate to protect our confidential information, trade secrets, and proprietary technologies and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, trade secrets or proprietary technology.
The confidentiality agreements on which we rely to protect certain technologies may be breached, and these and other actions that we take may not be adequate to protect our confidential information, trade secrets, and proprietary technologies and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, trade secrets or proprietary technology.
At this time, we have not completed a study to assess whether such an ownership change has occurred, or whether there have been multiple ownership changes since our formation. We may experience ownership changes in the future as a result of subsequent changes in our stock ownership, some of which may be outside our control.
At this time, we have not finalized a study through December 31, 2023 to assess whether such an ownership change has occurred, or whether there have been multiple ownership changes since our formation. We may experience ownership changes in the future as a result of subsequent changes in our stock ownership, some of which may be outside our control.
Furthermore, we could be required to pay substantial monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a party’s intellectual property rights.
Furthermore, we could be required to pay substantial monetary damages, including treble damages and attorneys’ fees if we are found to have 25 Table of Contents willfully infringed a party’s intellectual property rights.
However, our current controls and any new controls that we develop may not be adequate, and weaknesses in our disclosure controls may be discovered in the future. Additionally, we have identified material weaknesses in our internal controls over financial reporting, and additional such weaknesses may be discovered in the future.
However, our current controls and any new controls that we develop may not be adequate, and weaknesses in our disclosure controls 23 Table of Contents may be discovered in the future. Additionally, we have identified material weaknesses in our internal controls over financial reporting, and such weaknesses may be discovered in the future.
Specifically, our Amended and Restated Certificate of Incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum provision for: (i) any derivative action or proceeding brought on behalf of us; (ii) any action asserting a claim of breach of a fiduciary duty; (iii) any action arising pursuant to any provision of the DGCL, our Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws (as either may be amended from time to time); (iv) any action to interpret, apply, enforce, or determine the validity of our Amended and Restated Certificate of Incorporation or our Amended and Restated Bylaws; (v) any action asserting a claim against us that is governed by the internal affairs doctrine; or (vi) any action asserting an “internal corporate claim” as defined in the DGCL.
Specifically, our Amended and Restated Certificate of Incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum provision for: (i) any derivative action or proceeding brought on behalf of us; (ii) any action asserting a claim of breach of a fiduciary duty; (iii) any action arising pursuant to any provision of the DGCL, our Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws (as either may be amended from time to time); (iv) any action to interpret, apply, enforce, or determine the validity of our Amended and Restated Certificate of Incorporation or our Amended and Restated Bylaws; (v) any action asserting a claim against us that is governed by the internal affairs doctrine; or (vi) any action asserting an “internal corporate claim” as defined in the DGCL. 29 Table of Contents These exclusive forum provisions would not apply to suits brought to enforce a duty or liability created by the Exchange Act.
Royalty or licensing agreements may be unavailable on terms acceptable to us, or at all. If we cannot develop or license technology for any allegedly infringing aspect of our business, we could be forced to limit our cloud services and may be unable to compete effectively.
Royalty or licensing agreements may be unavailable on terms acceptable to us, or at all. If we cannot develop or license technology for any allegedly infringing aspect of our business, we could be forced to limit our cloud services and may be unable to compete effectively. Any of these events could have a material adverse effect on our business.
Current or future supply chain interruptions that could be exacerbated by global political tensions, such as the Russia-Ukraine war, or tensions between Taiwan and China, particularly if those tensions escalate into an armed conflict, that could disrupt the global supply chain and result in the implementation of trade barriers, including boycotts or the use of economic sanctions and export control restrictions, any of which could negatively impact our ability to acquire hard drives and semiconductors.
Current or future supply chain interruptions that could be exacerbated by global political tensions, such as the Russia-Ukraine and Israel-Hamas hostilities, or tensions between Taiwan and China, particularly if those tensions escalate into an armed conflict or directly or indirectly involve other countries, including the United States, that could disrupt the global supply chain and result in the implementation of trade barriers, including boycotts or the use of economic sanctions and export control restrictions, any of which could negatively impact our ability to acquire hard drives and semiconductors.
For example, our facilities as well as the data centers that we use are vulnerable to damage or interruption from human error, intentional bad acts, earthquakes, floods, fires, war or other military conflict, including the conflict between Russia and Ukraine, terrorist attacks, cybersecurity attacks or the risk of potential cybersecurity attacks, power losses, hardware failures, systems failures, telecommunications failures, and similar events, any of which could disrupt our service, destroy user content, or prevent us from being able to continuously back up or record changes in our users’ content.
For example, our facilities as well as the data centers that we use are vulnerable to damage or interruption from human error, intentional bad acts, extreme weather, earthquakes, floods, fires, war or other military conflict, including the conflicts between Russia-Ukraine and Israel-Hamas, which may further escalate and could directly or indirectly involve other countries, including the United States, terrorist attacks, cybersecurity attacks or the risk of potential cybersecurity attacks, power losses, hardware failures, systems failures, telecommunications failures, and similar events, any of which could disrupt our service, destroy user content, or prevent us from being able to continuously back up or record changes in our users’ content.
These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition, and results of operations.
These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition, and results of operations. Item 1B. Unresolved Staff Comments None.
Under Sections 382 and 383 of the Code, if a corporation undergoes an “ownership change,” our ability to use pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset post-change income may be limited. Similar rules may apply under state tax laws.
Under Sections 382 and 383 of the Code, if a corporation undergoes an “ownership change,” our ability to use pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset post-change income may be limited. Similar rules may apply under state tax laws. We have performed a Section 382 analysis through December 31, 2022.
For example, starting in April 2020, we began to acquire additional hard drives and related infrastructure through finance lease agreements in order to minimize the impact of potential supply chain disruptions due to the COVID-19 pandemic.
For example, for a limited period of time starting in April 2020, we acquired additional hard drives and related infrastructure through finance lease agreements in order to minimize the impact of potential supply chain disruptions due to the COVID-19 pandemic.
If we are unable to provide enhancements and new features for our existing services or new services that achieve market acceptance or that keep pace with rapid technological developments, our business could be adversely affected.
Our industry is marked by rapid technological developments and new and enhanced applications and cloud services. If we are unable to provide enhancements and new features for our existing services or new services that achieve market acceptance or that keep pace with rapid technological developments, our business could be adversely affected.
We may also expand our international operations, which may include hiring employees, building out technical infrastructure, and 13 Table of Contents opening offices in foreign jurisdictions. Any new markets or countries into which we attempt to market and sell our cloud services may not be receptive.
We may also expand our international operations, which may include the establishment of foreign subsidiaries, the opening and expansion of data centers, hiring employees, building out technical infrastructure, and opening offices in foreign jurisdictions. Any new markets or countries into which we attempt to market and sell our cloud services may not be receptive.
These risks include, among others: • We have a history of cumulative losses, and we do not expect to be profitable for the foreseeable future. • The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results would be harmed. • Any significant disruption in our service or loss, or delay in availability, of our customers’ data, could damage our reputation and harm our business and operating results. • If we are unable to maintain our brand and reputation, our business, results of operations, and financial condition may be adversely affected. • If our information technology systems, including the data of our customers stored in our systems, are breached or subject to cybersecurity attacks, our reputation and business may be harmed. • If we are unable to attract and retain customers on a cost-effective basis, our revenue and operating results would be adversely affected. • If we are unable to provide successful enhancements, new features, and modifications to our cloud services, our business could be adversely affected. • Material defects or errors in our software could negatively impact our business, harm our reputation, result in significant costs to us, and negatively impact our ability to sell our cloud services. • We rely on third-party vendors and suppliers, including data center and hard drive providers, which may have limited sources of supply, and this reliance exposes us to potential supply and service disruptions that could harm our business. • Our business depends, in part, on the success of our strategic relationships with third parties. • We have identified material weaknesses in our internal controls over financial reporting, and the failure to achieve and maintain effective internal controls over financial reporting could harm our business and negatively impact the value of our Class A common stock. • The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of our IPO, including our executive officers, employees, and directors and their affiliates, which limits your ability to influence the outcome of important transactions, including a change in control.
These risks include, among others: • We have a history of cumulative losses, and we do not expect to be profitable for the foreseeable future. • The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results would be harmed. • Any significant disruption in our service or loss, or delay in availability, of our customers’ data, could damage our reputation and harm our business and operating results. • If we are unable to maintain our brand and reputation, our business, results of operations, and financial condition may be adversely affected. • If our information technology systems, including the data of our customers stored in our systems, are breached or subject to cybersecurity attacks, our reputation and business may be harmed. • If we are unable to attract and retain customers on a cost-effective basis, our revenue and operating results would be adversely affected. • If we are unable to provide successful enhancements, new features, and modifications to our cloud services, our business could be adversely affected. • Material defects or errors in our software could negatively impact our business, harm our reputation, result in significant costs to us, and negatively impact our ability to sell our cloud services. • We rely on third-party vendors and suppliers, including data center and hard drive providers, which may have limited sources of supply, and this reliance exposes us to potential supply and service disruptions that could harm our business. • Our business depends, in part, on the success of our strategic relationships with third parties. • We have identified material weaknesses in our internal controls over financial reporting, and the failure to achieve and maintain effective internal controls over financial reporting could harm our business and negatively impact the value of our Class A common stock. 7 Table of Contents Risks Related to Our Business and Our Industry We have a history of cumulative losses, and we do not expect to be profitable for the foreseeable future.
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 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, we use City National Bank, a subsidiary of RBC, for our banking needs.
Also, as of December 31, 2022, we had net operating loss carryforwards for state income tax purposes of $33.5 million available to offset future state taxable income. If not utilized, both the federal and state tax credit carryforwards will begin to expire in 2034.
Also, as of December 31, 2023, we had net operating loss carryforwards for state income tax purposes of $66.0 million available to offset future state taxable income. If not utilized, the federal and state tax credit carryforwards will begin to expire in 2027.
If we fail to effectively manage our growth, our business would be harmed. We have recently experienced, and continue to experience, a period of rapid growth. For example, our headcount grew from 188 employees as of December 31, 2020, to 270 employees as of December 31, 2021 and to 393 employees as of December 31, 2022 .
If we fail to effectively manage our growth, our business would be harmed. We have recently experienced, and continu e to experience, a period of rapid growth. For example, our headcount grew from 188 employees as of December 31, 2020, to 381 employees as of December 31, 2023.
In addition, the stock market has recently experienced disruption and elements of a bear market, including with respect to technology stocks, due to high inflation, various economic headwinds and other factors.
In addition, the stock market has recently experienced significant volatility, including with respect to technology stocks, due to high inflation, various economic headwinds and other factors.
Moreover, we cannot assure you that any such efforts will be successful or justify the additional investments in a timely manner, or at all. 11 Table of Contents The material stored using our cloud services may subject us to negative publicity, legal liability, and harm our business.
These increased demands and challenges may also be for the benefit of a limited number of customers. Moreover, we cannot assure you that any such efforts will be successful or justify the additional investments in a timely manner, or at all. The material stored using our cloud services may subject us to negative publicity, legal liability, and harm our business.
Our brand promotion activities may not be successful or yield increased revenue. The promotion of our brand may require us to make substantial expenditures, particularly as our markets become more competitive and we expand into new markets or offer additional features. Expenditures intended to maintain and enhance our brand may not be cost-effective or effective at all.
Our brand promotion activities may not be successful or yield increased revenue. The promotion of our brand may require us to make substantial expenditures, particularly if our markets become more competitive and we expand into new markets or offer new products or services, or additional features.
These programs, including any expansion of existing programs and new programs to promote our cloud services, may not be successful or provide a reasonable return on investment within a desired timeframe.
Our sales and marketing investments intended to accelerate the scaling of our business including any expansion of existing programs and new programs to promote our cloud services, may not be successful or provide a reasonable return on investment within a desired timeframe.
Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Risks Related to Ownership of Our Class A Common Stock Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our headcount needs may also fluctuate on a quarterly and annual basis and we may seek to “right size” our workforce from time to time due to changing business needs and other conditions, and it may be difficult to effectively manage our workforce on a timely basis in response to such changes.
Our headcount needs may also fluctuate on a quarterly and annual basis and we may seek, and have sought by way of the recent restructuring measures, to “right size” our 11 Table of Contents workforce from time to time due to changing business needs and other conditions, and it may be difficult to effectively manage our workforce on a timely basis in response to such changes.
It cannot be predicted whether, when, in what form or with what effective dates tax laws, regulations and rulings may be enacted, promulgated or issued, which could result in an increase in our or our shareholders’ tax liability or require changes in the manner in which we operate in order to minimize or mitigate any adverse effects of changes in tax law. 22 Table of Contents If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.
It cannot be predicted whether, when, in what form or with what effective dates tax laws, regulations and rulings may be enacted, promulgated or issued, which could result in an increase in our or our shareholders’ tax liability or require changes in the manner in which we operate in order to minimize or mitigate any adverse effects of changes in tax law.
In addition, many of our competitors have established marketing and distribution relationships with channel partners, consultants, system integrators, and resellers. Our competitors may also be able to respond more quickly and effectively to new or changing opportunities, technologies, standards, or customer requirements.
In addition, many of our competitors have established marketing and distribution relationships with channel partners, consultants, system integrators, and resellers. Our competitors may also be able to respond more quickly and effectively to new or changing opportunities, technologies, standards, or customer requirements, including offering multiple types of storage solutions with various price points, feature sets and performance levels.
Importantly, this summary does not address all of the risks that we face. Our ability to execute our business strategy is subject to numerous risks, as more fully described in the section titled “Risk Factors” immediately following this summary.
Our ability to execute our business strategy is subject to numerous risks, as more fully described in the section titled “Risk Factors” immediately following this summary.
In addition, because we offer our Computer Backup cloud service at a fixed price, the amount of data our customers back up affects our costs and gross margins.
In addition, because we offer our Computer Backup cloud service at a fixed price, the amount of data our customers back up affects our costs and gross margins. Subject to certain limitations, we also offer free egress for our B2 Cloud Storage customers.
The COVID-19 pandemic as well as fluctuating demands in the cryptocurrency mining markets also have impacted, and could continue to impact, our ability to source components in a timely and cost-effective manner from third-party suppliers.
Various events, including a pandemic or fluctuating demands in the cryptocurrency mining markets have impacted, and could impact in the future, our ability to source components in a timely and cost-effective manner from third-party suppliers.
If we cannot successfully retain our existing customers and add new customers consistent with historical rates, including maintaining or growing the amount of data that our customers store with us, our revenue and ability to grow may be adversely affected.
If we cannot successfully retain our existing customers and add new customers consistent with historical rates, including maintaining or growing the amount of data that our customers store with us, our revenue and ability to grow may be adversely affected. 12 Table of Contents To the extent we target different types of customers, we may face increased demands and challenges that adversely impact our business and operations.
The market price of our Class A common stock could be subject to wide fluctuations in response to various factors, including those listed in this Annual Report on Form 10-K, some of which are beyond our control and may not be related to our operating performance.
The market price of our Class A common stock could be subject to wide fluctuations in response to various factors, including those listed in this Annual Report on Form 10-K, some of which are beyond our control and may not be related to our operating performance. 27 Table of Contents Fluctuations in the price of our Class A common stock could cause you to lose all or part of your investment because you may be unable to sell your shares at or above the price you paid.
In addition, our business utilizes information technology systems of our partners and vendors, who are also subject to similar cybersecurity risks that could adversely impact the security of our systems and business. We may have little or no control over how cybersecurity attacks on our partners or vendors are addressed.
In addition, our business utilizes information technology systems of our partners and vendors, who are also subject to similar cybersecurity risks that could adversely impact the security of our systems and business.
If we raise additional funds through the issuance of equity, equity-linked, or debt securities, those securities may have rights, preferences, or privileges senior to the rights of our Class A common stock, and our existing stockholders may experience dilution.
We cannot guarantee that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-linked, or debt securities, those securities may have rights, preferences, or privileges senior to the rights of our Class A common stock, and our existing stockholders may experience dilution.
The Russian-Ukraine conflict has also caused oil prices to rise and increased the risk of disruption to the supply chain for oil, which could result in higher energy costs for our business and data centers, which could negatively impact our results of operations.
The Russian-Ukraine conflict has also caused oil prices to rise and increased the risk of disruption to the supply chain for oil, and the Israel-Hamas conflict may cause similar effects, particularly if those tensions escalate into a wider Middle East conflict, which could result in higher energy costs for our business and data centers, which could negatively impact our results of operations.
Any such sales also could cause the market price of our Class A common stock to fall and make it more difficult for you to sell shares of our Class A common stock. 27 Table of Contents If securities or industry analysts do not publish or cease publishing research or reports about us, our business, our market, or our competitors, or if they adversely change their recommendations regarding our Class A common stock, the market price of our Class A common stock and trading volume could decline.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business, our market, or our competitors, or if they adversely change their recommendations regarding our Class A common stock, the market price of our Class A common stock and trading volume could decline.
We depend on a limited number of third-party data centers and other providers to safely house our equipment and provide sufficient power, bandwidth, and other infrastructure needs to support our operations and cloud services. We also rely on key components for our platform, including hard drives and semiconductors, which come from limited sources of supply.
We depend on a limited number of third-party data centers and other providers to safely house our equipment and provide sufficient power, bandwidth, and other infrastructure needs to support our operations and cloud services.
If a court were to find any of the exclusive forum provisions of our Amended and Restated Certificate of Incorporation to be inapplicable to or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business. 28 Table of Contents The requirements of being a public company, particularly after we are no longer an “emerging growth company”, may strain our resources, require us to incur substantial costs and will require substantial management attention.
If a court were to find any of the exclusive forum provisions of our Amended and Restated Certificate of Incorporation to be inapplicable to or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.
Although we do not have a significant number of customers located in those regions, such actions will have some impact our business. It is also difficult to predict how long the conflict may last, how the conflict could escalate, and how the sanctions may evolve, which could cause a greater adverse impact on our business and operations than we expect.
It is also difficult to predict how long the conflict may last, how the conflict could escalate, and how the sanctions may evolve, which could cause a greater adverse impact on our business and operations than we expect.
In addition, we rely on hardware purchased or leased and software licensed from third parties to offer our cloud services.
In addition, we rely on hardware purchased or leased and software licensed from third parties to offer our cloud services. Hardware is susceptible to failures over time and may require increased maintenance effort and costs.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties Our corporate headquarters is located in San Mateo, California and consists of approximately 35,000 square feet of space under lease agreemen ts, the first of which expires in 2023 and includes options for renewal.
Biggest changeItem 2. Properties Our corporate headquarters is located in San Mateo, California and consists of approximately 24,000 square feet of space under a lease agreemen t which expires in 2029. We also lease space in multiple data centers located domestically in California, Arizona and Virginia, and one data center located internationally in Amsterdam, in the Netherlands.
We expect to add facilities as we grow our employee base, our Backblaze Storage Cloud platform and expand geographically, and may also elect to consolidate the locations of the data centers we use as well as other operation centers from time to time to address our needs.
We lease all of our facilities and do not own any real property. We expect to add facilities as we grow our employee base, our Backblaze Storage Cloud platform and expand geographically, and may also elect to consolidate the locations of the data centers we use as well as other operation centers from time to time to address our needs.
Removed
We also lease space in multiple data centers located domestically in California, Arizona and Virginia, and one data center located internationally in Amsterdam, in the Netherlands. We lease all of our facilities and do not own any real property.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeRegardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. 29 Table of Contents Item 4. Mine Safety Disclosures Not applicable. 30 Table of Contents Part II
Biggest changeRegardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. Item 4. Mine Safety Disclosures Not applicable. 32 Table of Contents Part II

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures 30 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 31 Item 6. Reserved 31 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 32 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 49 Item 8.
Biggest changeItem 4. Mine Safety Disclosures 32 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 33 Item 6. Reserved 33 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 34 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 52 Item 8.
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Financial Statements and Supplementary Data 51 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 84 Item 9A. Controls and Procedures 85

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeWe currently intend to retain all available funds and any future earnings for the operation and expansion of our business. Accordingly, we do not anticipate declaring or paying dividends in the foreseeable future.
Biggest changeWe currently intend to retain all available funds and any future earnings for the operation and expansion of our business. Additionally, our ability to pay dividends is limited by restrictions on our ability to pay dividends or make distributions under the terms of our credit facility. Accordingly, we do not anticipate declaring or paying dividends in the foreseeable future.
Issuer Repurchases of Securities None. Use of Proceeds In November 2021, we completed our initial public offering (“IPO”), in which we issued and sold an aggregate of 7,187,500 shares of our Class A common stock at a public offering price of $16.00 per share, which resulted in gross proceeds of $115.0 million.
Recent Sales of Unregistered Securities Not applicable. Issuer Repurchases of Securities None. Use of Proceeds In November 2021, we completed our initial public offering (“IPO”), in which we issued and sold an aggregate of 7,187,500 shares of our Class A common stock at a public offering price of $16.00 per share, which resulted in gross proceeds of $115.0 million.
The payment of any future dividends will be at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in any debt agreements, and other factors that our Board of Directors may deem relevant. Recent Sales of Unregistered Securities Not applicable.
The payment of any future dividends will be at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in our current credit facility and any future debt agreements, and other factors that our Board of Directors may deem relevant.
Holders of Record As of February 28, 2023 , there were 18 sto ckholders of record of our Class A common stock and 40 stockholders of record of our Class B common stock.
Holders of Record As of February 29, 2024 , there were 20 sto ckholders of record of our Class A common stock.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeWe 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. 39 Table of Contents Results of Operations The following table sets forth our statements of operations data for the periods indicated: For the Years Ended December 31, 2022 2021 (in thousands) Revenue $ 85,155 $ 67,479 Cost of revenue (1) 41,292 33,138 Gross profit 43,863 34,341 Operating expenses: Research and development (1) 33,107 20,536 Sales and marketing (1) 35,399 19,698 General and administrative (1) 23,470 12,901 Total operating expenses 91,976 53,135 Loss from operations (48,113) (18,794) Investment income 965 Interest expense (4,289) (3,677) Gain on extinguishment of debt — 2,299 Realized loss on SAFE — (1,436) Loss before provision for income taxes (51,437) (21,608) Income tax (benefit) provision (39) 96 Net loss $ (51,398) $ (21,704) __________________ (1) Includes stock-based compensation expense as follows: For the Years Ended December 31, 2022 2021 (in thousands) Cost of revenue $ 1,267 $ 509 Research and development 6,698 2,129 Sales and marketing 5,360 1,652 General and administrative 3,724 1,339 Total stock-based compensation expense $ 17,049 $ 5,629 40 Table of Contents The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated: For the Years Ended December 31, 2022 2021 Revenue 100 % 100 % Cost of revenue 48 49 Gross profit 52 51 Operating expenses: Research and development 39 30 Sales and marketing 42 29 General and administrative 28 19 Total operating expenses 108 78 Loss from operations (57) (27) Investment income 1 — Interest expense (5) (5) Gain on extinguishment of debt — 3 Realized loss on SAFE — (2) Loss before provision for income taxes (60) (32) Income tax (benefit) provision — — Net loss (60) % (32) % Comparison of the Years Ended December 31, 2022 and 2021 Revenue For the Years Ended December 31, 2022 2021 Change % Change (in thousands, except percentages) B2 Cloud Storage revenue $ 33,041 $ 22,632 $ 10,409 46 % Computer Backup revenue 51,431 44,117 7,314 17 % Physical Media revenue 683 730 (47) (6) % Total revenue $ 85,155 $ 67,479 $ 17,676 26 % Total revenue increased by $17.7 million, or 26%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.
Biggest changeWe maintain a full valuation allowance against our U.S. deferred tax assets because we have concluded that it is more likely than not that our deferred tax assets will not be realized. 41 Table of Contents Results of Operations The following table sets forth our consolidated statements of operations data for the periods indicated: For the Years Ended December 31, 2023 2022 (in thousands) Revenue $ 102,019 $ 85,155 Cost of revenue (1) 52,162 41,292 Gross profit 49,857 43,863 Operating expenses: Research and development (1) 39,527 33,107 Sales and marketing (1) 41,270 35,399 General and administrative (1) 26,965 23,470 Total operating expenses 107,762 91,976 Loss from operations (57,905) (48,113) Investment income 1,984 965 Interest expense (3,792) (4,289) Loss before provision for income taxes (59,713) (51,437) Income tax benefit — (39) Net loss $ (59,713) $ (51,398) __________________ (1) Includes stock-based compensation expense as follows: For the Years Ended December 31, 2023 2022 (in thousands) Cost of revenue $ 1,986 $ 1,267 Research and development 9,218 6,698 Sales and marketing 8,801 5,360 General and administrative 5,172 3,724 Total stock-based compensation expense $ 25,177 $ 17,049 The consolidated statement of operations for the year ended December 31, 2023 includes additional expense of $0.9 million recorded in the fourth quarter to increase stock based compensation expense under our employee stock purchase plan (“ESPP”). 42 Table of Contents The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated: For the Years Ended December 31, 2023 2022 Revenue 100 % 100 % Cost of revenue 51 48 Gross profit 49 52 Operating expenses: Research and development 39 39 Sales and marketing 40 42 General and administrative 26 28 Total operating expenses 106 108 Loss from operations (57) (57) Investment income 2 1 Interest expense (4) (5) Loss before provision for income taxes (59) (60) Income tax (benefit) provision — — Net loss (59) % (60) % Comparison of the Years Ended December 31, 2023 and 2022 Revenue For the Years Ended December 31, 2023 2022 Change % Change (in thousands, except percentages) B2 Cloud Storage revenue $ 46,427 $ 33,202 $ 13,225 40 % Computer Backup revenue 55,592 51,953 3,639 7 % Total revenue (1) $ 102,019 $ 85,155 $ 16,864 20 % ________________ (1) For the periods presented, Physical Media revenue has been consolidated into B2 Cloud Storage or Computer Backup revenue based on the underlying offering from which it originates.
Investing Activities Cash used in investing activities during the year ended December 31, 2022 was $73.9 million , resulting primarily from the purchase of short-term maturity investments of $145.9 million , capital expenditures of $7.3 million in support of infrastructure deployments to support our growing business, and $8.6 million related to the development of software for adding new features and enhanced functionality to our platform, offset in part by $88.0 million from the maturity of our short-term investments.
Cash used in investing activities during the year ended December 31, 2022 was $73.9 million , resulting primarily from the purchase of short-term maturity investments of $145.9 million , capital expenditures of $7.3 million in support of infrastructure deployments to support our growing business, and $8.6 million related to the development of software for adding new features and enhanced functionality to our platform, offset in part by $88.0 million from the maturity of our short-term investments.
Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview We are a leading storage cloud platform, providing businesses and consumers cloud services to store, use, and protect their data in an easy and affordable manner.
Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview We are a leading specialized storage cloud platform, providing businesses and consumers cloud services to store, use, and protect their data in an easy and affordable manner.
Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. For further information, see Note 2 to our financial statements included elsewhere in this Annual Report on Form 10-K.
Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. For further information, see Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Non-GAAP Financial Measures To supplement our financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP, we provide investors with non-GAAP financial measures including adjusted gross margin and adjusted EBITDA, each as defined below.
Non-GAAP Financial Measures To supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP, we provide investors with non-GAAP financial measures including adjusted gross margin and adjusted EBITDA, each as defined below.
Although B2 Cloud Storage is paid for by customers in arrears, we recognize revenue in the month these storage services are delivered, and consider this revenue recurring as customers are charged as long as their data is stored with us.
Although most B2 Cloud Storage is paid for by customers in arrears, we recognize revenue in the month these storage services are delivered, and consider this revenue recurring as customers are charged as long as their data is stored with us.
As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Interest Expense Interest expense consists primarily of interest related to our finance lease agreements and interest on the outstanding balance of our existing credit facility. Investment Income Investment income consists primarily of interest earned on our cash and investments.
Investment Income Investment income consists primarily of interest earned on our cash balances and investments. Interest Expense Interest expense consists primarily of interest related to our finance lease agreements and interest on the outstanding balance of our existing credit facility.
Further, during the periods presented, customers who store data with us generally increase the amount of their data stored over time, as evidenced by our B2 Cloud Storage net revenue retention rate of 122% as of December 31, 2022. Fees from B2 Cloud Storage (consumption-based arrangements) are recognized as services are delivered.
Further, during the periods presented, customers who store data with us generally increase the amount of their data stored over time, as evidenced by our B2 Cloud Storage net revenue retention rate of 122% as of December 31, 2023. Fees from B2 Cloud Storage (consumption-based arrangements) are recognized as services are delivered.
As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense. Capitalized Internal-Use Software, Net We capitalize qualifying software development costs related to new features and enhancements to the functionality of our platform and related products, as well as implementation.
As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense. Capitalized Internal-Use Software, Net We capitalize qualifying software development costs related to new features and enhancements to the functionality of our platform and related products.
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 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.
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.
Cash used in financing activities was primarily due to principal payments on our finance lease agreements and lease financing obligations of $16.5 million related to hard drives and other infrastructure equipment used in our co-location facilities and $0.7 million related to payments made for offering costs that are deferred, offset in part by $4.3 million in proceeds from the exercise of employee stock options, $4.3 million in proceeds from our credit facility, and $2.5 million in proceeds from our employee stock purchase plan.
Cash used in financing activities was primarily due to principal payments on our finance lease agreements and lease financing obligations of $16.5 million related to hard drives and other infrastructure equipment used in our co-location facilities and $0.7 million related to payments made for offering costs that are deferred, offset in part by $4.3 million in proceeds from the exercise of employee stock options, $4.3 million in proceeds from our credit facility, and $2.5 million in proceeds from our ESPP.
In support of our platform, we also derive revenue from products offered to our customers for the ability to securely restore data using a USB drive (USB Restore) and for migrating large data sets to our platform using our proprietary Fireball device. Revenue from USB Restore is recognized as our products are delivered to our customers.
In support of our platform, we also derive revenue from products offered to our customers for the ability to securely restore data using a USB drive (“USB Restore”) and for migrating large data sets to our platform using our proprietary Fireball device. Revenue from USB Restore is recognized as our products are delivered to our customers.
Our future capital requirements will depend on many factors, including our total revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the price at which we are able to purchase or lease infrastructure equipment, the introduction of platform enhancements, and the continuing market adoption of our platform.
Our future capital requirements will depend on many factors, including our total revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the potential expansion of our data centers, the price at which we are able to purchase or lease infrastructure equipment, the introduction of platform enhancements, and the continuing market adoption of our platform.
See Notes to our financial statements included elsewhere in this Annual Report on Form 10-K for more information on revenue from B2 Cloud Storage and Computer Backup arrangements. ARR does not have a standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies.
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.
Our research and development expenses may fluctuate as a percentage of total revenue from period to period due to the timing and extent of these expenses. Sales and Marketing Sales and marketing expenses consist primarily of personnel costs.
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.
We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s payment history; however, as approximately 96% and 98% of our revenue was generated from customers paying via credit card during the years ended December 31, 2022 and 2021, respectively, the risk of non-payment is reduced. 2.
We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s payment history; however, as approximately 92% and 96% of our revenue was generated from customers paying via credit card during the years ended December 31, 2023 and 2022, respectively, the risk of non-payment is reduced. 2.
We recognize compensation cost for awards on a straight-line basis over the requisite service period, which is generally the four-year vesting period. Share-based compensation includes restricted stock units, stock option grants and stock purchase rights under the Employee Stock Purchase Plan (ESPP).
We recognize compensation cost for awards on a straight-line basis over the requisite service period, which is up to a four-year vesting period. Share-based compensation includes restricted stock units, stock option grants and stock purchase rights under the Employee Stock Purchase Plan (ESPP).
We believe that our existing cash, cash equivalents, and short-term investments, together with cash provided by operations and our revolving credit facility, will be sufficient to support our working capital and capital expenditure requirements for at least the next 12 months.
We believe that our existing cash, cash equivalents, and short-term investments, together with cash provide d by operations and our revolving credit facility, will be sufficient to support our working capital and capital expenditure requirements for at least the next 12 months.
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.
Number of Customers 39 Table of Contents We define a customer at the end of any period as a distinct account, as identified by a unique account identifier, that has paid for our cloud services, which makes up substantially all of our user base.
Sales and marketing expenses also include expenditures related to advertising, marketing, our brand awareness activities, commissions paid to marketing partners, and an allocation of our general overhead expenses.
Sales and marketing expenses also include investments related to advertising, marketing, our brand awareness activities, commissions paid to marketing partners, and an allocation of our general overhead expenses.
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 80% of our total revenue in 2022 coming from self-serve customers.
Our content is intended to encourage organic, inbound traffic that we believe serves as our greatest source of advocates and referrals. Our free trial and self-serve sign-up processes help convert our blog readers and referrals from our brand advocates into customers, with approximately 76% of our total revenue in 2023 coming from self-serve customers.
Income Tax (Benefit) Provision Provision for income taxes consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business.
Incom e Tax (Benefit) Provision Provision for income taxes consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business.
Through our blog and culture of transparency, we have built a community of millions of readers and brand advocates. Referrals from our community of brand advocates, combined with our highly efficient and primarily self-serve customer acquisition model and an ecosystem of thousands of partners, have allowed us to attract more than 500,000 customers as of December 31, 2022.
Through our blog and culture of transparency, we have built a community of millions of readers and brand advocates. Referrals from our community of brand advocates, combined with our highly efficient and primarily self-serve customer acquisition model and an ecosystem of thousands of partners, have allowed us to attra ct more than 500,000 customers as of December 31, 2023.
If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. 48 Table of Contents We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis.
If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis.
Revenue is recognized when control of the services is transferred to the customers, in an amount that reflects the consideration that we expect to receive in exchange for those services. Performance obligations are satisfied over time as the customer simultaneously receives and consumes the benefits as the entity performs.
Recognize revenue when or as we satisfy a performance obligation . Revenue is recognized when control of the services is transferred to the customers, in an amount that reflects the consideration that we expect to receive in exchange for those services. Performance obligations are satisfied over time as the customer simultaneously receives and consumes the benefits as the entity performs.
We have developed add-on services, such as Extended Version History 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 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.
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.
These measures are presented for 45 Table of Contents supplemental informational purposes only, have limitations as analytical tools and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP.
Prospective customers find us through a variety of channels including our website, partners, and brand advocates. We have fostered community engagement with content we share on our blog, which includes millions of readers viewing the content we shared in 2022 alone.
Prospective customers find us through a variety of channels including our website, partners, and brand advocates. We have fostered community engagement with content we share on our blog, which includes millions of readers viewing the content we sha red in 2023 alone.
Physical Media revenue was approximately 1% of our total revenue for the years ended December 31, 2022 and 2021. Our monthly subscription arrangements do not provide customers with refund rights. One- and two-year subscription arrangements are eligible for a full refund for up to 30 days after subscribing.
Physical Media revenue was approximately less than 1% of our total revenue for the years ended December 31, 2023 and 2022. Our monthly subscription arrangements do not provide customers with refund rights. One to five-year subscription arrangements are eligible for a full refund for up to 30 days after subscribing.
We derive our revenue primarily from fees earned from customers accessing these offerings through our platform, paid monthly in arrears for consumption-based arrangements for B2 Cloud Storage, or charged upfront for subscription-based arrangements for Backblaze Computer Backup.
Revenue Recognition The Backblaze Storage Cloud provides the core platform for our B2 Cloud Storage and Computer Backup offerings. We derive our revenue primarily from fees earned from customers accessing these offerings through our platform, paid monthly in arrears for consumption-based arrangements for B2 Cloud Storage, or charged upfront for subscription-based arrangements for Backblaze Computer Backup.
We also recognize revenue from products offered to our customers for the ability to securely restore data using a USB drive (USB Restore) and for migrating large data sets to our platform using our proprietary Fireball device. We refer to these products as our Physical Media revenue.
We also recognize revenue from products offered to our customers for the ability to securely restore data using a USB drive (“USB Restore”) and for migrating large data sets to our platform using our proprie tary Fireball device. We refer to these products as our Physical Media revenue.
We intend to leverage this model as an efficient approach to attract new customers, turning them into brand advocates, partners, and more referrals. Furthermore, we plan to continue to build and scale our paid lead generation and outbound sales motion to increasingly grow in the mid-market. We also plan to continue to build our ecosystem of partners.
We also will continue investing in optimizing the conversion rate of visitors to customers. We intend to leverage this model as an efficient approach to attract new customers, turning them into brand advocates, partners, and more referrals. Furthermore, we plan to continue to build and scale our paid lead generation and outbound sales motion to increasingly grow in the mid-market.
We 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.
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.
Computer Backup (subscription-based arrangements) revenue is recognized on a straight-line basis over the contractual term of the arrangement beginning on the date that the service commences, provided that all other revenue recognition criteria have been met. See Notes to the financial statements for details on our revenue recognition policy.
Computer Backup and B2 Cloud Storage (subscription-based arrangements) revenue is recognized on a straight-line basis over the contractual term of the arrangement beginning on the date that the service commences, provided that all other revenue recognition criteria have been met. See Note 2 to the consolidated financial statements for details on our revenue recognition policy.
Investment Income For the Years Ended December 31, 2022 2021 Change % Change (in thousands, except percentages) Investment income $ 965 $ — $ 965 — % Investment income increased by $1.0 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 .
Investment Income For the Years Ended December 31, 2023 2022 Change % Change (in thousands, except percentages) Investment income $ 1,984 $ 965 $ 1,019 106 % Investment income increased by $1.0 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 .
For Physical Media revenue, we offer a full refund to our customers restoring data using USB drives, if the drives are returned to us within 30 days of receipt. We recognize revenue net of our estimate of expected customer cancellations and returns.
For Physical Media revenue, we offer a full refund to our customers restoring data using USB drives, if the drives are returned to us within 30 days of receipt. We recognize revenue net of our estimate of expected customer cancellations and returns. These estimates involve inherent uncertainties and use of management’s judgment.
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 Average Revenue Per User We define annual average revenue per user (“Annual ARPU”) as the annualized value for the average revenue per customer.
International Expansion While our sales and marketing efforts have primarily focused on the United States, our existing customer base spans more than 175 countries, with 28% of our total revenue originating outside of the United States for the year ended December 31, 2022.
International Expansion Whil e our sales and marketing efforts have primarily focused on the United States, our existing customer base spans more than 175 co untries, with approximately 28% of our total revenue originating outside of the United States for the year ended December 31, 2023.
We define adjusted EBITDA as net loss adjusted to exclude depreciation and amortization, stock-based compensation, interest expense, investment income, income tax provision, realized loss on SAFE, SAFE holder settlement, and gain on extinguishment of debt. We use adjusted EBITDA to evaluate our ongoing operations and for internal planning and forecasting purposes.
We define adjusted EBITDA as net loss adjusted to exclude depreciation and amortization, stock-based compensation, interest expense, investment income, income tax provision, SAFE holder settlement, and other non-recurring charges. We use adjusted EBITDA to evaluate our ongoing operations and for internal planning and forecasting purposes.
The net cash inflow from changes in operating assets and liabilities was primarily the result of a $5.5 million increase in deferred revenue, which increased due to our growing customer base and timing of collections from our customers, in addition to a $1.3 million increase in accrued expenses and other current liabilities, which increased due to timing of payment of our expenses, offset by $3.9 million decrease in prepaid and other current assets.
The net cash outflow from changes in operating assets and liabilities was primarily the result of a $2.5 million decrease in operating lease liabilities, a $1.4 million decrease in accrued expenses and other current liabilities, which decreased primarily due to our accrued compensation and due to timing of payment of our expenses, a $0.4 million increase in other assets, a $0.4 million increase in prepaid and other current assets and a $0.3 million decrease in accounts payable, offset in part by a $4.5 million increase of deferred revenue, which increased due to our growing customer base and upfront collections from our customers.
The following table shows a summary of our cash flows for the periods presented: For the Years Ended December 31, 2022 2021 (in thousands) Net cash (used in) provided by operating activities $ (13,781) $ 3,520 Net cash used in investing activities (73,854) (11,190) Net cash (used in) provided by financing activities (6,212) 106,606 Operating Activities Our largest source of operating cash is payments received from our customers.
The following table shows a summary of our cash flows for the periods presented: For the Years Ended December 31, 2023 2022 (in thousands) Net cash used in operating activities $ (7,350) $ (13,781) Net cash provided by (used in) investing activities 21,657 (73,854) Net cash used in financing activities (8,842) (6,212) Operating Activities Our largest source of operating cash is payments received from our customers.
If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, results of operations, and financial condition. In October 2021, we entered into a revolving credit agreement with City National Bank.
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.
Operating Expenses The most significant components of our operating expenses are personnel costs, which consist of salaries, benefits, bonuses, and stock-based compensation. We also incur other non-personnel costs related to our general overhead expenses. We expect that our operating expenses will increase in absolute dollars as we grow our business.
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.
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. Gross Customer Retention Rate We use gross customer retention rate to measure our ability to retain our customers.
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.
We provide services to our customers under subscription-based arrangements of one month, one year and two years, which automatically renew at the end of the respective term.
We provide services to our customers under subscription-based arrangements of one month, one year, and two years, which automatically renew at the end of the respective term. We also provide a B2 Cloud Storage subscription-based offering for which arrangements range from one to five years.
We capitalize the portion of our software development costs that meets the criteria for capitalization. 38 Table of Contents We expect our research and development expenses to increase in absolute dollars for the foreseeable future as we continue to focus our research and development efforts on adding new features to our platform, improving our cloud service offerings, and increasing the functionality of our existing features.
We expect our investment in research and development expenses to increase in absolute dollars for the foreseeable future as we continue to focus our research and development investments on adding new features to our platform, improving our cloud service offerings, and increasing the functionality of our existing features.
Scale Sales-Assisted Efforts We believe an increasingly important complement to our self-serve customer acquisition model is our targeted inside Sales team that is focused on a low-touch “sales-assisted” model that supports our larger customers if the need arises. This team focuses on inbound inquiries, outbound prospecting targeting specific use cases, and volume expansion of our self-serve customers.
Scale Sales Efforts We believe an increasingly important customer acquisition model is our targeted sales team that is focused on larger customers and channel sales. The sales motion focuses on inbound inquiries, outbound prospecting targeting specific use cases, and volume expansion of our self-serve customers.
Variable consideration, which contains estimates made by us, is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue recognized under the contract will not occur. Certain fees that are considered consideration payable to a customer are accounted for as a reduction of the transaction price. 4.
Variable consideration, which contains estimates made by us, is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue 50 Table of Contents recognized under the contract will not occur.
Sales and Marketing Sales and marketing expense increased by $15.7 million, or 80%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.
Sales and Marketing Sales and marketing expense increased by $5.9 million, or 17%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.
General and Administrative General and administrative expense increased by $10.6 million, or 82%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.
General and Administrative General and administrative expense increased by $3.5 million, or 15%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.
Our consumption-based arrangements do not have a contractual term and are billed monthly in arrears. Consumption-based revenue is variable and is related to fees charged for our customers’ use of our platform and is recognized as revenue in the period in which the consumption occurs.
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.
The increase was primarily attributable to an increase of $4.4 million related to managing and 41 Table of Contents op erating our co-location facilities, and an incr ease of $3.8 million for depreciation of our infrastructure equipment, which resulted from purchasing additional hard drives and related infrastructure in order to support the growth of our business.
The increase was primarily attributa ble to an increase of $6.0 million related to managing and operating our co-location facilities, and an increase of $4.9 million for depreciation of our infrastructure equipment, which resulted from purchasing additional hard drives and related infrastructure in order to support the growth of our business.
For grants made after our IPO, we use our publicly traded Class A common stock price to determine the fair value of our Class A common stock. Fluctuations in our Class A common stock price may have a significant impact on the amount of stock-based compensation recognized.
For grants made after our IPO, we use our publicly traded Class A common stock price to determine the fair value of our Class A common stock. The amount of stock-based compensation recognized is mainly determined by headcount and the fair value of our Class A common stock.
We believe adjusted gross margin provides consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this metric eliminates the effects of depreciation and amortization. 43 Table of Contents The following table presents a reconciliation of gross profit, the most directly comparable financial measure stated in accordance with GAAP, to adjusted gross profit, for each of the periods presented: For the Years Ended December 31, 2022 2021 (in thousands, except percentages) Gross profit $ 43,863 $ 34,341 Adjustments: Stock-based compensation 1,267 509 Depreciation and amortization 19,487 15,684 Adjusted gross profit $ 64,617 $ 50,534 Gross margin 52 % 51 % Adjusted gross margin 76 % 75 % Adjusted EBITDA Our management uses adjusted EBITDA to assess our operating performance.
The following table presents a reconciliation of gross profit, the most directly comparable financial measure stated in accordance with GAAP, to adjusted gross profit, for each of the periods presented: For the Years Ended December 31, 2023 2022 (in thousands, except percentages) Gross profit $ 49,857 $ 43,863 Adjustments: Stock-based compensation 1,986 1,267 Depreciation and amortization 24,330 19,487 Adjusted gross profit $ 76,173 $ 64,617 Gross margin 49 % 52 % Adjusted gross margin 75 % 76 % Adjusted EBITDA Our management uses adjusted EBITDA to assess our operating performance.
On a routine basis, we plan to focus resources on optimizing the efficiency of our data storage. In some scenarios, we may choose to pass on potential cost savings to the customer, but in other scenarios we may choose to reinvest cost savings back into infrastructure and design.
In some scenarios, we may choose to pass on potential cost savings to the customer, but in other scenarios we may choose to reinvest cost savings back into infrastructure and design.
The increase in sales and marketing expense was primarily attributable to an increase of $7.7 million in personnel-related expenses as a result of increased headcount, $3.7 million related to stock-based compensation, $2.4 million due to increased advertising expenses related primarily to our B2 Cloud Storage offering, and $1.5 million in overhead and general expenses.
The increase in sales and marketing expense was primarily attributable to an increase of $3.4 million related to stock-based compensation, $2.7 million in personnel-related expenses as a result of increased headcount, $1.0 million related to restructuring charges, $0.5 million in fees for consultants and contractors, and $0.1 44 Table of Contents million in overhead and general expenses, partially offset by $2.1 million decreased advertising expenses related primarily to our B2 Cloud Storage offering as we continue to focus marketing expenditures on high return initiatives.
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. 36 Table of Contents 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.
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.
Research and Development Research and development expenses consist primarily of personnel costs, consultant fees, costs related to technical operations, subscription services for use by our research and development organization and an allocation of our general overhead expenses.
We expect that our operating expenses will increase in absolute dollars as we grow our business. 40 Table of Contents Research and Development Research and development expenses consist primarily of our investment in personnel costs, consultant fees, costs related to technical operations, subscription services for use by our research and development organization and an allocation of our general overhead expenses.
We believe we provide simple pricing for usage of our cloud services and increase revenue per customer through our customers’ natural data growth. Additionally, we provide customers with additional value through cross-sell, upsell, and use case expansion that can result in additional revenue per customer.
Additionally, we provide customers with additional value through cross-sell, upsell, and use case expansion that can result in additional revenue per customer.
Adopting additional products expands usage of our platform. • Upsell: Customers can choose to use various features and services for additional fees, such as Extended Version History, Snapshots, cloud replication, and enhanced support tiers.
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.
The preparation of financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by management.
We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by management.
For the year ended December 31, 2021, cash provided by operating activities was $3.5 million, which resulted from a net loss of $21.7 million, adjusted for non-cash charges of $22.0 million and a net cash inflow of $3.2 million from changes in operating assets and liabilities.
For the year ended December 31, 2023, cash used in operating activities was $7.4 million, which resulted from a net loss of $59.7 million, adjusted for non-cash charges of $52.8 million and a net cash outflow of $0.4 million from changes in 48 Table of Contents operating assets and liabilities.
Allocate the transaction price to performance obligations in the contract . We determine the relative standalone selling price for performance obligations based on the price we sell a good or service for separately. 5. Recognize revenue when or as we satisfy a performance obligation .
Certain fees that are considered consideration payable to a customer are accounted for as a reduction of the transaction price. 4. Allocate the transaction price to performance obligations in the contract . We determine the relative standalone selling price for performance obligations based on the price we sell a good or service for separately. 5.
Operating Expenses For the Years Ended December 31, 2022 2021 Change % Change (in thousands, except percentages) Research and development $ 33,107 $ 20,536 $ 12,571 61 % Sales and marketing 35,399 19,698 15,701 80 % General and administrative 23,470 12,901 10,569 82 % Research and Development Research and development expense increased by $12.6 million, or 61%, f or the year ended December 31, 2022 compared to the year ended December 31, 2021.
Operating Expenses For the Years Ended December 31, 2023 2022 Change % Change (in thousands, except percentages) Research and development $ 39,527 $ 33,107 $ 6,420 19 % Sales and marketing 41,270 35,399 5,871 17 % General and administrative 26,965 23,470 3,495 15 % Research and Development Research and development expense increased by $6.4 million, or 19%, f or the year ended December 31, 2023 compared to the year ended December 31, 2022.
These estimates involve inherent uncertainties and use of management’s judgment. 47 Table of Contents As we provide our offerings as a hosted service, we do not provide customers the contractual right to take possession of the software at any time, do not incur set up costs, nor charge an installation fee to new customers.
As we provide our offerings as a hosted service, we do not provide customers the contractual right to take possession of the software at any time, do not incur set up costs, nor charge an installation fee to new customers. We determine revenue recognition through the following five steps, which include inherent estimates: 1. Identify the contract with a customer.
In the future, we may enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required or choose to seek additional equity or debt financing. 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.
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.
In addition, the disruption and 45 Table of Contents uncertainty impacting the banking industry may result in reduced access to capital, increased costs of capital, and reduced opportunities to invest with investment grade securities, which could also lower investment yields and investment income. Any such impact could have a material adverse effect upon our liquidity and business.
In addition, the disruption and uncertainty impacting the banking industry from failures of other banks resulted in some reduced access to capital, increased costs of capital, and reduced opportunities to invest with investment grade securities, which may have also resulted in lower investment yields and investment income.
The increase was primarily attributable to $2.5 million in personnel-related expenses as a result of increased headcount, $2.4 million related to stock-based compensation expense, $1.8 million related to insurance, $1.8 million in overhead and general expenses, $1.5 million for settlement with our SAFE holders in exchange for a full release of all claims related to the SAFE transaction, which was entered into in February 2023, (the SAFE holder settlement), $0.9 million in professional fees for accounting and tax services, $0.4 million of other legal fees, partially offset by a $1.0 million decrease in indirect tax expenses.
The increase was primarily attributable to $1.3 million in personnel-related expenses as a result of increased headcount, $1.5 million related to stock-based compensation expense, $0.9 million related to indirect tax liability write-offs due to non-recurring settlement of VAT liabilities during 2022, $0.7 million in overhead and general expenses due to subscriptions to support our increasing employee population, $0.4 million in professional fees for accounting and tax services, $0.3 million related to restructuring charges, partially offset by a $1.1 million decrease in legal expenses, of which $1.5 million was related to a 2022 SAFE holder settlement that did not recur in 2023, and $0.3 million for insurance expenses.
Capitalized costs are amortized over the estimated useful life of the software, which is five years, on a straight-line basis, which represents the manner in which the expected benefit will be derived. We determine the useful lives of identifiable project assets after considering the specific facts and circumstances related to each project.
The costs consist of personnel costs (including related benefits and stock-based compensation) that are incurred during the application development stage. We review capitalization criteria for each project individually. Capitalized costs are amortized over the estimated useful life of the software, which is five years, on a straight-line basis, which represents the manner in which the expected benefit will be derived.
Income Tax Provision For the Years Ended December 31, 2022 2021 Change % Change (in thousands, except percentages) Income tax (benefit) provision $ (39) $ 96 $ (135) (141) % Our provision for income taxes decreased by $0.1 million , or 141% for the year ended December 31, 2022 compared to the year ended December 31, 2021.
Income Tax Benefit For the Years Ended December 31, 2023 2022 Change % Change (in thousands, except percentages) Income tax benefit $ — $ (39) $ 39 (100) % Our benefit for income taxes was relatively flat for the year ended December 31, 2023, compared to the same period in 2022.
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. Critical Accounting Policies and Estimates Our financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP.
Our finance lease commitments relate primarily to our infrastructure equipment. Purchase commitments 49 Table of Contents relate mainly to infrastructure agreements and subscription arrangements used to facilitate our operations. For more information, see Note 10 to our consolidated financial statements located elsewhere in this Annual Report on Form 10-K.
Cash used in operations increased during the year ended December 31, 2022, as compared to the same period in 2021 primarily due to increased spending in support of our expanded research and development and sales and marketing spending to support business growth.
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.
We believe that focusing on storage use cases and promoting an open ecosystem allows us to integrate well with a broad range of partners. We have consistently invested in our technology platform and highly efficient content-driven and primarily self-serve go-to-market strategy, allowing us to achieve customer, community, and product milestones.
We have consistently invested in our technology platform and highly efficient content-driven and self-serve, sales, and channel go-to-market strategy, allowing us to achieve customer, community, and product milestones.
We plan to continue investing in sales and marketing by, among other things, selectively increasing our sales and marketing headcount, optimizing our self-serve model, strengthening our partner ecosystem, driving our go-to-market strategies, and building our lead generation and brand awareness. As a result, we expect our investment in sales and marketing to increase in absolute dollars for the foreseeable future.
We plan to continue investing in sales and marketing by increasing our sales and marketing headcount, supplementing our self-serve model with a direct sales approach, expanding our partner ecosystem, driving our go-to-market strategies, building our lead generation and brand awareness, and sponsoring additional marketing events.
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.
We also plan to grow our Customer Success initiatives to ensure customers avail themselves of the full benefits of our platform, thus resulting in increased adoption. As these 36 Table of Contents customers continue to generate, store, and back up data, their use of our platform increases, creating natural opportunities for revenue expansion.
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 our general and administrative expenses to increase in absolute dollars as our business grows.
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.
Cash used in investing activities during the year ended December 31, 2021 was $11.2 million, resulting primarily from capital expenditures of $7.6 million in support of infrastructure deployments to support our growing business, and $3.6 million related to the development of software mainly for adding new features and enhanced functionality to our platform. 46 Table of Contents Financing Activities Cash used in financing activities for the year ended December 31, 2022 was $6.2 million.
Investing Activities Cash provided by investing activities during the year ended December 31, 2023 was $21.7 million, resulting primarily from $67.9 million from the maturity of our short-term investments and $0.4 million proceeds from the disposal of property and equipment, offset in part by the purchase of short-term maturity investments of $26.4 million, $14.7 million related to the development of software for adding new features and enhanced functionality to our platform and capital expenditures of $5.5 million in support of infrastructure deployments to support our growing business.
In addition to our self-serve selling motion, we have a sales-assisted selling motion to identify opportunities to increase business with existing customers and to assist larger customers in adopting our services. Our sales-assisted selling motion helps customers that, in 2022, generally were much larger in terms of average revenue per customer than our self-serve customers.
Our sales-assisted selling motion helps customers that, in 2023, generally were much larger in terms of average revenue per customer than our self-serve customers. Substantially all of our revenue is recurring in nature. We employ a land-and-expand model that seeks to drive additional revenue from existing customers.
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.
Our calculation of adjusted EBITDA may differ from the calculations of adjusted EBITDA by other companies and therefore comparability may be limited.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeForeign Currency Exchange Rate Risk Our sales are currently denominated in the U.S. dollar and we have minimal foreign currency risk related to our revenue. In addition, most of our operating expenses are denominated in the U.S. dollar, resulting in minimal foreign currency risks. The volatility of exchange rates depends on many factors that we cannot accurately forecast.
Biggest changeI n addition, most of our operating expenses are denominated in the U.S. dollar, resulting in minimal foreign currency risks. The volatility of exchange rates depends on many factors that we cannot accurately forecast.
At this time we do not, but we may in the future, enter into derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the impact hedging activities could have on our results of operations. 50 Table of Contents
At this time we do not, but we may in the future, enter into derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the impact hedging activities could have on our results of operations. 52 Table of Contents
Interest Rate Risk Our exposure to interest rate risk primarily relates to our finance lease arrangements and lease financing obligations for obtaining hard drives and related equipment for our data center operations, which may be impacted by interest rate changes for any future agreements we enter in to.
Interest Rate Risk Our exposure to interest rate risk primarily relates to our finance lease arrangements and lease financing obligations for obtaining hard drives and related equipment for our data center operations, which may be impacted by interest rate changes for any future agreements we enter in to, and our credit facility with City National Bank.
We also earn interest income generated by cash, cash equivalents and short-term investments held at City National Bank. At December 31, 2022, we had cash and cash equivalents and short-term investments balances of $6.7 million and $58.7 million, respectively. Interest-earning instruments carry a degree of interest rate risk.
We also earn interest income generated by cash, cash equivalents and short-term investments held at City National Bank. As of December 31, 2023, we had cash and cash equivalents and short-term investments balances of $12.5 million and $16.8 million, respectively. Interest-earning instruments carry a degree of interest rate risk.
As amended, our credit facility with City National Bank is at a variable interest rate tied, at our discretion, to the SOFR or to the Prime Rate announced by City National Bank, provided such rate is greater than 3.0%.
Further, our credit facility with City National Bank, which was initially entered into during October 2021, as amended, is at a variable interest rate tied, at our discretion, to SOFR or to the prime rate most recently announced by City National Bank, assuming such rate is greater than 3.0%.
As such, we generally do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure, and intend to hold all investments to their respective maturities.
The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. As such, we gen erally do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure, and intend to hold all investments to their respective maturities.
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The primary objective of our investment activities is to preserve principal while maximizing income without 49 Table of Contents significantly increasing risk.
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Foreign Currency Exchange Rate Risk Our reporting currency and the functional currency of our wholly owned foreign subsidiary is the U.S. dollar. Our sales are currently denominated in the U.S. dollar and we have minimal foreign currency risk related to our revenue.

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