Item 7. Management’s Discussion and Analysis of Financial Condition and Result of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included in “Part II — Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties, as described under the heading, “Special Note Regarding Forward-Looking Statements” in “Part I — Item 1A. Risk Factors.” You should review the disclosure under the heading, “Risk Factors” for a discussion of important factors that could cause our actual results to differ materially from those described or implied in these forward-looking statements contained in the following discussion and analysis and elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Unless the context otherwise requires, all references in this report to “Backblaze,” the “Company,” “we,” our,” “us,” or similar terms refer to Backblaze, Inc. and its consolidated subsidiaries.
A discussion and analysis of our financial condition and results of operations for the year ended December 31, 2025 compared to the year ended December 31, 2024 is presented below. A discussion regarding our financial condition and results of operations for the year ended December 31, 2024 compared to the year ended December 31, 2023 can be found under Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2024 , filed with the SEC on March 11, 2025.
Overview
We are a high-performance cloud storage platform for data-intensive use cases in the artificial intelligence (“AI”) era and across a broad range of modern cloud workloads, designed to help customers address complex storage needs by reducing the barriers of lock-in, complexity, and cost. Our mission is to make customers succeed by solving their toughest data storage challenges. We aim to achieve this mission through our purpose-built, web-scale software infrastructure, which is essential to the global data center and compute infrastructure buildout.
We provide cloud services through a purpose-built, web-scale software infrastructure built on commodity hardware. We believe that by offering a cloud storage solution optimized for price-to-performance at scale, engineered for efficiency, and priced predictably, we substantially reduce the cost, complexity and frustration of storing, using, and protecting data, and we empower customers to focus on their core business operations. Customers use us to support their AI workflows, help ensure the cyber-resilience of their organizations, streamline their media workflows, and enable a variety of other data-focused application and information technology (“IT”) needs. Through our blog and culture of transparency, we have built a community of millions of readers and brand advocates. Our direct sales activities, channel and technology partners, and referrals from our community of brand advocates, combined with our highly efficient and self-serve customer acquisition model have allowed us to attract over 500,000 customers as of December 31, 2025, and our direct sales activities have historically supported us in acquiring larger customers, including leading neocloud platforms via our Powered by Backblaze program. As we move up-market, we expect our direct sales activities to increasingly contribute to the acquisition of customers like these. Our customers use our Backblaze Storage Cloud platform across more than 175 countries to store and protect their data with an aggregate of approximately 5 billion gigabytes of data storage under management.
Our Backblaze Storage Cloud provides a platform that is the foundation for our B2 Cloud Storage Infrastructure-as-a-Service (“IaaS”) offering, our B2 Overdrive high-performance IaaS offering, our Powered by Backblaze white label IaaS offering, and our Computer Backup Software-as-a-Service (“SaaS”) offering. B2 Cloud Storage enables customers to store data, developers to build applications, and partners to expand their use cases. The amount of data stored in this cloud service can scale up and down as needed primarily on a pay-as-you-go basis or can be paid for on a capacity or committed contract basis for greater predictability. B2 Overdrive is built on the foundation of B2 Cloud Storage. It enables AI and data-driven workloads with up to 1Tbps throughput, unlimited free egress, and private networking support. Powered by Backblaze is also built on the foundation of B2 Cloud Storage. It enables neocloud and application platforms to bolster existing products or expand their product offerings with cloud storage via the Backblaze Partner API and custom domains (CNAME) technology. Computer Backup automatically backs up data from laptops and desktops for businesses and individuals. This cloud backup service offers easily understood primarily flat-rate pricing to continuously back up a virtually unlimited amount of data.
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We focus on specialized storage and an open cloud ecosystem that integrates with a broad range of partners. Ongoing investment in our technology platform and related features has driven customer, community, and product milestones. Starting in the second half of 2024, we initiated a go-to-market transformation that is actively moving the company up-market, which has been evidenced by the signing of multiple deals with total contract values over $1.0 million each and revenue growth for B2 Cloud Storage of 26% for the year ended December 31, 2025 compared to 2024.
Product Updates
To support our up-market expansion and evolving customer needs, we recently launched B2 Overdrive, our premium-priced, ultra high-throughput performance cloud storage solution, designed to meet the demands of data-intensive workloads including AI and machine-learning training, large-scale analytics, high-performance computing, and media processing. We also introduced a suite of enterprise cyber security features including AI-powered anomaly alerts, mandatory multifactor authentication, bucket access logging, and Enterprise Web Console which streamlines role-based administrative control in complex environments to help with cybersecurity and account management. These launches expand our addressable market among enterprise and AI-driven customers and lay the groundwork for further innovation to drive differentiated value for these customers.
Financial Developments
Banking Relationship and Line of Credit
On June 4, 2025, we entered into a credit agreement with Citizens Bank, N.A., establishing a senior secured revolving credit facility with a total borrowing capacity of up to $20.0 million to be used for general corporate purposes and working capital needs. As of December 31, 2025, the Company had no outstanding borrowings under this facility.
2025 Restructuring and Transformation Plan
In November 2025, we initiated a restructuring and transformation plan designed primarily to improve efficiency and enhance the performance of our sales and marketing functions to support our go-to-market initiatives (the “2025 Restructuring and Transformation Plan”). The 2025 Restructuring and Transformation Plan includes the reallocation of resources, the redesign of sales and marketing strategies and processes, and other corporate actions. During the year ended December 31, 2025, we incurred charges of approximately $2.5 million, including employee termination expenses, an impairment charge related to our exit from our corporate headquarters facility, and other transformation costs. We expect to incur additional charges of approximately $4.7 million to $7.5 million through the first quarter of 2027, at which time the 2025 Restructuring Plan is expected to be completed. These charges include estimated employee termination expenses of approximately $0.8 million to $1.2 million, and other business transformation costs.
Share Repurchase Program
In August 2025, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $10.0 million of our Class A common stock through August 1, 2026. The program is intended to offset dilution resulting from stock-based compensation. Repurchases are to be funded from the proceeds of employee stock option exercises and from employee contributions under the 2021 Employee Stock Purchase Plan.
Our Business Model
Our solutions are designed to serve a wide range of customers from individuals and small businesses to large enterprises across all industries. Our solutions appeal to customers with a desire for easy-to-use and cost-effective solutions while also delivering reliability and performance. Our business model is supported by a highly efficient cloud storage platform built on proprietary software and commodity hardware, which enables us to deliver predictable pricing and attractive price-to-performance at scale. Our two primary cloud services are B2 Cloud Storage and Computer Backup, which together enable customers to store, use, and protect their data across a broad variety of use cases.
• B2 Cloud Storage enables customers to store and manage data for use cases ranging from backup and archive to application storage, ransomware protection, and AI/ML workloads. B2 Cloud Storage operates as an IaaS model, allowing customers to scale usage dynamically on a pay-as-you-go basis or purchase capacity or committed contracts for greater predictability. In addition to our standard B2 Cloud Storage offering, we provide B2 Overdrive, a premium high-performance storage option designed for data-intensive and AI-driven workloads that
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require high sustained throughput and low latency. Developers and partners can embed our storage into their applications, while enterprise customers use B2 Cloud Storage to support large-scale, data-intensive workflows.
• Computer Backup is designed to provide virtually unlimited backup for businesses and individuals in a SaaS subscription model using primarily flat-rate pricing. Customers use Computer Backup to automatically and continuously back up data from desktops, laptops, and external drives, with data recoverable at any time through our Backblaze Storage Cloud.
We believe our pricing is simple and transparent, with fees and terms that are generally shared publicly on our website. Our revenue is primarily recurring and supported by a land-and-expand model that encourages customers to increase usage of our platform over time as their data needs grow. Additionally, we expand revenue per customer through cross-sell, upsell, and use case expansion opportunities, which include the following:
• Cross-Sell: Customers that adopt one product may expand to another as their use cases evolve, such as Computer Backup customers adding B2 Cloud Storage to enable broader data management.
• 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 greater administrative management for an additional cost. B2 Cloud Storage offers Snapshots that allow customers to create moment-in-time versions of their data, and also allows customers to retain data in multiple geographic regions, both of which provide additional flexibility and value. Additionally, customers receive email and chat support for free, but can also opt for enhanced support tiers for an additional cost, which provide dedicated customer support contacts and 24/7 response.
• Use Case Expansion: Customers often begin using our products for a single need and expand over time. For example, a media company using B2 Cloud Storage for asset storage may later use it as an origin store for content distribution. Another example would be a business that adopts B2 Cloud Storage for backup and archive purposes, which decides to also enable Object Lock for ransomware protection. Use case expansion enables the opportunity to deepen our relationship with our customers and increase revenue.
For prospective customers interested in B2 Cloud Storage, we offer a free tier and a simple, intuitive sign-up process, allowing them to quickly on-board and start using our solutions. Once prospective customers grow beyond the free storage limit, they have the flexibility to only pay for what they need and pay as they go, without any lock-in or long-term commitments. This is delivered via a consumption-based model, and we charge a fixed price per month per gigabyte of data stored on our platform. Customers may purchase our B2 Cloud Storage on a capacity or committed contract basis for greater predictability.
For prospective customers interested in Computer Backup, we offer a free 14 -day trial and automatically start to back up all their files securely to our Backblaze Storage Cloud. Prospective customers can then choose to sign up on a per computer basis. The service is delivered via a SaaS model where revenue is recognized ratably over the subscription term. Subscriptions are offered to customers on a monthly, annual, or biennial basis, providing customers flexibility to choose their commitment lengths. We generally charge a flat rate for this solution and provide virtually unlimited backup capabilities to customers.
Our go-to-market model includes multiple selling motions: a product-led growth self-service model that enables fast onboarding for smaller customers, a direct sales organization focused on enterprise accounts, and a partner ecosystem that extends our reach through channel partners, managed service providers, and technology integrations, including our white-label Powered By Backblaze program. Our Powered By Backblaze program enables third-party platform providers to integrate and resell Backblaze’s cloud storage as a part of their product offering. We continue to expand the contribution of our direct and partner-driven sales activities as we move further upmarket.
Our product-led growth self-service motion remains a core component of our go-to-market model. Prospective customers find us through multiple channels, including our website, partners, and brand advocates, which together have fostered a strong and engaged community. Our blog, which reaches millions of readers annually, contributes significantly to advocacy and referral activity within that community. Our content and community engagement efforts are designed to educate and attract new users, while our free trial and simple sign up process help convert these users into paying customers.
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Factors Affecting Our Performance
We believe that the future growth and performance of our business will depend on several factors, including the following:
Scale Sales Efforts
We are optimizing our direct sales organization to focus on larger enterprise customers and strategic accounts. In addition, our sales team works closely with our channel, alliance, and managed service provider partners to promote adoption of our Backblaze Storage Cloud solutions. We continue to strengthen relationships with these partners, which are intended to help us reach new and existing markets and broaden our customer base.
Enhance Marketing and Demand Generation
We are investing in targeted marketing initiatives designed to increase brand awareness, generate demand, and convert new customers. Our acquisition efforts are supported by our blog content, case studies, social sharing, earned media, and self-serve sign-up model. We also attend and sponsor industry events and are launching digital advertising campaigns to further extend our reach.
We are focused on improving the efficiency of these efforts by optimizing the conversion rate of visitors to customers. Our refined acquisition mix emphasizes account-based marketing strategies to prioritize high-value prospects and reduce reliance on promotional or lower-margin license types. This disciplined approach is designed not only to acquire new customers efficiently but also to cultivate long-term relationships that turn customers into brand advocates, partners, and sources of referrals.
Expansion Within Existing Customers
Our future success will depend in part on our ability to increase usage and adoption of our solutions with existing customers. We are focused on expanding revenue within our current customer base through the introduction of new features and use cases, the continued enhancement of our Customer Success programs, and the natural growth of customer data stored on our platform.
We have developed a range of add-on services, such as Enterprise Control and multi-region selection, that provide additional functionality and generate incremental revenue beyond our core offerings. Customers are also broadening their use of Backblaze for complementary workloads, including media storage, hybrid cloud support, and analytics repositories.
To support this expansion, we are strengthening our Customer Success organization with new leadership and targeted initiatives designed to help customers realize the full value of our platform. We believe these initiatives will help promote higher engagement, stronger retention, and greater data utilization over time. As customers continue to generate, store, and analyze growing volumes of data, our platform naturally becomes more embedded in their operations, creating sustained opportunities for revenue expansion.
Continued Platform Investment and New Product Launches
We are committed to continued investment in capital and research and development activities to meet the performance requirements of modern enterprise and AI workloads. In April 2025, we launched B2 Overdrive, a premium priced high-performance cloud storage solution for data-intensive workloads such as AI and machine-learning training, high-performance computing, large-scale analytics, and media processing. In May 2025, we introduced the Enterprise Web Console for B2 Cloud Storage, which streamlines role-based administration in complex enterprise environments. These launches represent ongoing steps in our up-market, go-to-market transformation and are expected to broaden our addressable market, deepen cross-sell and upsell potential, and position us to capture incremental growth in enterprise and AI-driven customers. We expect capital expenditures to fluctuate in the near term, with an increase anticipated in early 2026 to support ongoing platform development, future product launches, and our up-market strategy.
International Expansion
Whil e our sales and marketing efforts have primarily focused on the United States, our existing customer base spans more th an 175 countries, with 28% of our total revenue originating outside of the United States for the year ended December 31, 2025. We believe international expansion may represent a meaningful opportunity. We may invest in our operations
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internationally to reach new customers by expanding into targeted key geographies where we believe there are opportunities for significant return on investment. In January 2025, for example, we entered into an agreement with a leading hybrid cloud solutions provider in Canada to extend our market reach in this region. This agreement resulted in the launch of a new data center region in Canada in January 2025.
Key Business Metrics
We monitor the key business metrics set forth below to help us evaluate our business and growth trends, establish budgets, measure the effectiveness of our sales and marketing investments, and assess operational efficiencies. The calculation of the key metrics discussed are calculated under the same method for B2 Cloud Storage, Computer Backup, and total Company. The below metrics may differ from other similarly titled metrics used by other companies, securities analysts or investors.
December 31,
B2 Cloud Storage
Net revenue retention rate
Gross customer retention rate
Annual recurring revenue (in millions)
Number of customers
Annual average revenue per user
Computer Backup
Net revenue retention rate
Gross customer retention rate
Annual recurring revenue (in millions)
Number of customers
Annual average revenue per user
Total Company
Net revenue retention rate
Gross customer retention rate
Annual recurring revenue (in millions)
Number of customers (1)
Annual average revenue per user
(1) The number of customers for each of B2 Cloud Storage and Computer Backup solutions include customers that use both our B2 Cloud Storage and Computer Backup solutions.
Net Revenue Retention Rate
We believe the growth in the use of our platform by our existing customers is an important measure of the health of our business and our future growth prospects. We measure this growth by monitoring our overall net revenue retention rate, which measures our ability to retain and expand revenue from existing customers. Our continued focus on our customers is driving significant revenue retention, as evidenced by our overall net revenue retention rates (“NRRs”) of 105% and 116% as of December 31, 2025 and December 31, 2024, respectively. The enhancement of our B2 Cloud Storage offerings is a key contributor to this success, resulting in NRRs of 111% and 123% for the same periods. The decrease in the NRR for B2 Cloud Storage and Computer Backup was primarily driven by the impact of a price increase, which took place in October 2023, with Computer Backup also reflecting lower expansion from existing customers.
To calculate the NRR for a specific quarter, we determine the revenue recognized in that quarter from customers who generated revenue during the last month of the same quarter of the previous year. This revenue is then divided by the revenue generated from those same customers in the prior year quarter. Our overall NRR rate is calculated as the average of these quarterly rates over the past four quarters to provide a comprehensive view of revenue trends.
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Gross Customer Retention Rate
We use gross customer retention rate to measure our ability to retain our customers. Our gross customer retention rate reflects only customer losses and does not reflect the expansion or contraction of revenue we earn from our existing customers. We have maintained gross customer retention rates of approximately 90% across our revenue products as of both December 31, 2025 and December 31, 2024. We believe our high gross customer retention rates demonstrate that we provide a vital service to our customers, as the vast majority of our customers tend to continue to use our platform from one period to the next. To calculate our gross customer retention rate, we take the trailing four-quarter average of our quarterly gross customer retention rates. We calculate the quarterly gross customer retention rates 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.
Annual Recurring Revenue
We define annual recurring revenue (“ARR”) as the annualized value of all B2 Cloud Storage and Computer Backup arrangements as of the end of a period. Given the renewable nature of our business, we view ARR as an important indicator of our financial performance and operating results, and we believe it is a useful metric for internal planning and analysis. ARR is calculated by multiplying the monthly revenue from all B2 Cloud Storage and Computer Backup arrangements for the last month of a period by 12. Our ARR for each of B2 Cloud Storage and Computer Backup is calculated in the same manner as our overall ARR based on the revenue from our B2 Cloud Storage and Computer Backup solutions, respectively. See Notes 2 and 3 to our consolidated financial statements included in this Annual Report on Form 10-K for more information on revenue from B2 Cloud Storage and Computer Backup arrangements.
ARR does not have a standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and is not intended to be combined with or to replace that item. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.
While ARR is not a guarantee of future revenue, we consider substantially all of our revenue as recurring in nature for the periods presented. As noted above, our gross customer retention rate has been consistent over the periods presented at approximately 90%. Although B2 Cloud Storage is generally consumption-based and paid for by customers in arrears, we recognize revenue in the month these storage services are delivered, and consider this revenue recurring as customers are charged as long as their data is stored with us. Further, during the periods presented, customers who store data with us generally increase the amount of their data stored over time, as evidenced by our B2 Cloud Storage NRR r ate of 111% as of December 31, 2025. Computer Backup (subscription-based arrangements) revenue is recognized on a straight-line basis over the contractual term of the arrangement beginning on the date that the service commences, provided that all other revenue recognition criteria have been met. See Note 2 to our consolidated financial statements for details on our revenue recognition policy. Additional limitations of ARR include the fact that consumption-based revenue is not guaranteed for future periods, although we believe that our high historic gross customer retention rate is indicative of ARR, and the fact that our subscription terms can be on a monthly basis, although the significant majority of our customers have subscription terms of one year or longer during the periods presented above.
Changes to recurring revenue may result from the expansion of our offerings to our existing customers, as well as new customer acquisition and the timing of customer renewals. Our ARR increased by $18.7 million for B2 Cloud Storage as of December 31, 2025 compared to December 31, 2024, representing 27% growth. ARR for Computer Backup experienced a slight decline of $1.0 million compared to the prior year, but continues to serve as a stable source of recurring revenue, supported by multi-year subscription commitments and increased demand from business environments.
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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, including end-user customers that purchase through a reseller. This population makes up substantially all of our user base.
Annual Average Revenue Per User
We define annual average revenue per user (“Annual ARPU”) as the annualized value for the average revenue per customer. Annual ARPU is calculated by dividing our revenue for the last month of a period by the total number of customers as of the last day of the same period, and then multiplying the resulting quotient by 12. Our ARR per user for B2 Cloud Storage and Computer Backup is calculated in the same manner based on the revenue and number of customers from our B2 Cloud Storage and Computer Backup solutions, respectively.
Our Annual ARPU increased for B2 Cloud Storage and Computer Backup by 16% and 3% , respectively, for the year ended December 31, 2025 compared to the year ended December 31, 2024, primarily due to increased storage and our focus on adding larger customers.
Key Components of Results of Operations
Revenue
We generate revenue primarily from our B2 Cloud Storage and Computer Backup cloud services offered on our platform. Our platform is offered to customers primarily through two pricing models: a consumption- or committed-contract basis for B2 Cloud Storage, and a subscription-based arrangement for Computer Backup. Our subscription arrangements generally range in duration from one month to five years, for which we bill our customers up front for the entire period.
Consumption-based arrangements are generally recognized based on fees charged for customer usage of our platform, with fees recorded as revenue in the period in which the consumption occurs. For our subscription arrangements, we provide our cloud services evenly over the contractual period, for which revenue is recognized on a straight-line basis over the contract term beginning on the date that the service is made available to the customer.
During the third quarter of 2023, we announced pricing increases across our Computer Backup and B2 Cloud Storage products, which became effective in October 2023. We realized a favorable impact to total revenue across our products, and did not experience a significant change in costs as a result of the increase. We have not experienced a material impact on customer retention as a result of this price increase through December 31, 2025.
Cost of Revenue and Gross Margin
Cost of revenue consists of our expenses in providing our platform and cloud services to our customers. These expenses include operating our data center spaces, network and bandwidth costs, and depreciation of our equipment and finance leased equipment in data center spaces. Personnel-related costs associated with customer support and maintaining service availability, including salaries, benefits, bonuses, and stock-based compensation are also included. Cost of revenue also includes credit card processing fees, amortization of capitalized internal-use software development costs, and allocated overhead costs.
We plan to continue investing in our infrastructure to support the growth of our business. These investments include the purchase and expansion of infrastructure equipment (and related depreciation) as well as software development activities and associated amortization. Because these costs are often incurred ahead of revenue generation, delays in realizing anticipated revenue or fluctuations in the timing of revenue could adversely affect our gross margin from period to period.
During the second quarter of 2025, we completed a study on the useful lives of our property and equipment, resulting in an extension of the useful life of our infrastructure equipment. This update resulted in a reduction in depreciation expense of approximately $5.2 million for the year ended December 31, 2025 and is anticipated to result in further reduction of approximately $2.8 million for the year ending December 31, 2026.
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Operating Expenses
The most significant components of our operating expenses are personnel costs, which consist of salaries, benefits, bonuses, and stock-based compensation. We expect our operating expenses, excluding depreciation, amortization, restructuring charges, and stock-based compensation expenses, to remain relatively flat in 2026 compared to 2025, as efficiencies from our restructuring activities in 2025 offset increased investments in research and development and other growth-related costs. However, sales and marketing expenses may increase in absolute dollars as we invest in marketing initiatives to support business growth.
Research and Development
Research and development expenses consist primarily of our investments in personnel, infrastructure engineering, technology tooling and computational resources (including AI), as well as an allocation of certain facility and IT-related expenses. We capitalize the portion of our software development costs that meets the criteria for capitalization.
We expect our investments in research and development to increase in absolute dollars for the foreseeable future as we continue to add new features to our platform, integrate advanced technologies such as AI into our development lifecycle, further enhancing our cloud service offerings, and increase the functionality of our existing features. Our research and development expenses may fluctuate as a percentage of total revenue from period to period due to the timing and extent of these expenses.
Sales and Marketing
Sales and marketing expenses include the cost of personnel focused on developing and executing selling and marketing activities. Sales and marketing expenses also include program investments related to advertising, demand generation, brand awareness activities, sales commissions paid to our employees, and an allocation of our general overhead expenses.
Sales and marketing expenses also reflect ongoing investments in sales initiatives, including supplementing our self-serve model with a direct sales approach, expanding our partner ecosystem, building our lead generation and brand awareness, and sponsoring marketing events.
In addition, as part of our ongoing go-to-market transformation, we expect sales and marketing expenses to increase as we continue to invest in key initiatives, including a programmatic overhaul of our developer experience focused specifically on the tooling and documentation that serves developers using or building with AI, the launch of Flamethrower, a startup program designed to provide early-stage companies with product credits, technical support, and ecosystem partnerships to drive early adoption and long-term customer growth.
General and Administrative
General and administrative expenses consist primarily of personnel costs for our accounting, finance, legal, 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. While we expect general and administrative expenses to increase in absolute dollars as our business scales, we anticipate that these costs will decline as a percentage of revenue over time.
Investment Income
Investment income consists primarily of interest earned on our cash, cash equivalents and investments in marketable securities.
Interest Expense
Interest expense consists primarily of interest related to our finance lease agreements, interest on the outstanding balance of our debt facility, and the amortization of debt issuance costs.
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Incom e Tax Provision
Provision for income taxes consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance against our U.S. deferred tax assets because we have concluded that it is more likely than not that our deferred tax assets will not be realized.
Results of Operations
The following table sets forth our consolidated statements of operations and comprehensive loss data for the periods indicated:
For the Years Ended
December 31,
(in thousands)
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Investment income
Interest expense
Loss before provision for income taxes
Income tax provision
Net loss and comprehensive loss
The following table sets forth our consolidated statements of operations and comprehensive loss data expressed as a percentage of revenue for the periods indicated: (1)
For the Years Ended
December 31,
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Investment income
Interest expense
Loss before provision for income taxes
Income tax provision
Net loss
(1) Totals may not sum due to rounding.
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The following table includes stock-based compensation, depreciation and amortization, and restructuring charges as they are included in the results of operations:
For the Years Ended
December 31,
(in thousands)
Stock-based compensation (1)
Cost of revenue
Research and development
Sales and marketing
General and administrative
Total stock-based compensation
Depreciation and amortization (2)
Cost of revenue
Research and development
Sales and marketing
General and administrative
Total depreciation and amortization
Restructuring charges
Cost of revenue
Research and development
Sales and marketing
General and administrative
Total restructuring charges
(1) $2.5 million of stock-based compensation incurred during the year ended December 31, 2024 is classified as restructuring charges in the table above, including $0.3 million related to cost of revenue , $0.9 million related to research and development costs, $1.2 million related to sales and marketing costs, and $0.1 million related to general and administrative costs. $0.1 million of stock-based compensation incurred during the year ended December 31, 2023, which were related to sales and marketing and general and administrative costs, is classified as restructuring charges in the table above. A nominal amount of stock-based compensation incurred during the year ended December 31, 2025 is classified as restructuring charges in the table above. For further information on our restructuring plan, s ee Note 16 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(2) $0.1 million of depreciation and amortization expense recorded to cost of revenue for the year ended December 31, 2025 is classified as restructuring charges in the table above, as these charges were incurred as part of our 2025 Restructuring and Transformation Plan.
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Comparison of the Years Ended December 31, 2025 and 2024
Revenue
For the Years Ended December 31,
Change
(in thousands, except percentages)
B2 Cloud Storage revenue
Computer Backup revenue
Total revenue
Total revenue increased by $18.2 million, or 14%, for the year ended December 31, 2025.
Primary factors influencing the $16.6 million increase in B2 Cloud Storage revenue include the following:
• a $10.1 million increase in sales to new customers; and
• a $6.5 million increase driven by higher storage usage as a result of upselling and organic growth by existing customers.
Primary factors influencing the $1.6 million increase in Computer Backup revenue include the following:
• a $4.5 million increase due to price increases that went into effect in October 2023;
• a $0.7 million increase driven by increased utilization by existing customers; and
• a $3.6 million decrease from a decline in license counts.
Cost of Revenue and Gross Margin
For the Years Ended December 31,
Change
(in thousands, except percentages)
Cost of revenue
Gross margin
Cost of Revenue
Primary factors influencing the $1.2 million, or 2%, decrease in cost of revenue for the year ended December 31, 2025 include the following:
• a $6.0 million decrease in depreciation expense primarily due to the extension of the useful life of our infrastructure equipment;
• a $1.5 million decrease in personnel-related costs resulting from lower headcount following our recent restructuring and ongoing efficiency initiatives;
• a $3.4 million increase in amortization expense related to capitalized investments in platform enhancements and new software features; and
• a $2.9 million increase primarily reflecting incremental rent and facility costs associated with expanding our data center footprint to support increased storage capacity.
Gross Margin
Gross margin was 61% for the year ended December 31, 2025 compared to 54% for the year ended December 31, 2024. The increase in our gross margin was primarily driven by higher revenue and lower fixed costs, including reduced depreciation expense resulting from the extension of the useful life of our infrastructure equipment, effective April 1, 2025, which increased gross margin by approximately 4%. In addition, improved economies of scale related to personnel supporting cost of sales contributed to the increase. These benefits were partially offset by higher variable costs associated with the expansion of our data center spaces.
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Operating Expenses
For the Years Ended December 31,
Change
(in thousands, except percentages)
Research and development
Sales and marketing
General and administrative
Primary factors influencing the change in operating expe nses for the year ended December 31, 2025 include the following:
Research and Development
• an increase of $3.0 million in personnel-related costs driven by a $5.1 million increase due to lower capitalization of internally developed software resulting from the timing and level of qualifying development activities, partially offset by a $2.1 million decrease, primarily related to lower headcount following our recent restructuring and ongoing efficiency initiatives;
• an increase of $0.8 million in stock-based compensation expense, including a $1.4 million increase related to lower capitalization of internally developed software resulting from changes in project timing and scope, partially offset by a $0.9 million decrease from severance costs incurred under the 2024 Restructuring Plan; and
• an increase of $0.2 million due to the impairment of certain internally developed software assets.
Sales an d Marketing
• decreases of $2.8 million and $2.2 million in personnel-related expenses and stock-based compensation, respectively, primarily related to a reduction in headcount following our recent restructuring and ongoing efficiency initiatives;
• a decrease of $1.7 million in workforce reduction costs incurred under the 2024 Restructuring Plan, the majority of which related to stock-based compensation; and
• a decrease of $0.3 million in advertising and marketing costs, including a $0.8 million decrease in baseline operating spend, partially offset by a $0.5 million increase to support our go-to-market transformation initiatives.
General and Administrative
• a decrease of $1.1 million related to personnel-related costs resulting from lower headcount following our recent restructuring and ongoing efficiency initiatives;
• a decrease of $0.5 million primarily attributable to reduced non-personnel operating expenses as a result of continued efficiency initiatives;
• an increase of $0.8 million in stock-based compensation expense primarily related to the timing of award grants;
• an increase of $0.4 million due to higher foreign exchange losses; and
• and increase of $0.3 million related to litigation settlement costs.
Investment Income
For the Years Ended December 31,
Change
(in thousands, except percentages)
Investment income
Investment income increased by $0.5 million for the year ended December 31, 2025. The increase was primarily d ue to the investment of additional cash raised in the Follow-On Offering of $37.4 million. For further information on our Follow-On Offering see Note 1 to our consolidated financial statements located elsewhere in this Annual report on Form 10-K.
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Interest Expense
For the Years Ended December 31,
Change
(in thousands, except percentages)
Interest expense
Interest expense increased by $0.2 million the year ended December 31, 2025 due to the following:
• an increase of $0.5 million due to an increased volume of finance leases; and
• a decrease of $0.3 million due to lower average debt outstanding during the year ended December 31, 2025 compared to the prior year.
Income Tax Provision
Our provision for income taxes was immaterial for the years ended December 31, 2025 and 2024.
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 (“GAAP”), we provide investors with non-GAAP financial measures including adjusted gross profit (and margin), adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”), adjusted EBITDA margin, each as defined below. These measures are presented for supplemental informational purposes only, have limitations as analytical tools and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of these measures as tools for comparison. Because of these limitations, when evaluating our performance, you should consider each of these non-GAAP financial measures alongside other financial performance measures, including the most directly comparable financial measure calculated in accordance with GAAP and our other GAAP results. A reconciliation of each of our non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with GAAP is set forth below.
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Adjusted Gross Profit and Adjusted Gross Margin
We believe adjusted gross profit (and margin), when taken together with our GAAP financial results, provides a meaningful assessment of our performance, and is useful to us for evaluating our ongoing operations and for internal planning and forecasting purposes.
We define adjusted gross profit as gross profit, excluding stock-based compensation expense, depreciation and amortization and restructuring charges within cost of revenue. We define adjusted gross margin as a percentage of adjusted gross profit to revenue. We exclude stock-based compensation, which is a non-cash item, and restructuring charges because we do not consider it indicative of our core operating performance. We exclude depreciation expense of our property and equipment and amortization expense of capitalized internal-use software because these may not reflect current or future cash spending levels to support our business. We believe adjusted gross profit (and margin) provides consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations.
The following table presents a reconciliation of gross profit, the most directly comparable financial measure stated in accordance with GAAP, to adjusted gross profit (and margin), for each of the periods presented:
For the Years Ended
December 31,
(in thousands, except percentages)
Gross profit
Adjustments:
Stock-based compensation (1)
Depreciation and amortization (2)
Restructuring charges
Adjusted gross profit
Gross margin
Adjusted gross margin
(1) $0.3 million of stock-based compensation expense for the year ended December 31, 2024 is classified as restructuring charges in the table above, as these charges were incurred as part of our 2024 Restructuring Plan. See Note 16 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding our restructuring plans and associated charges.
(2) $0.1 million of depreciation and amortization expense for the year ended December 31, 2025 is classified as restructuring charges in the table above, as these charges were incurred as part of our 2025 Restructuring and Transformation Plan.
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Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net loss adjusted to exclude depreciation and amortization, stock-based compensation, interest expense, investment income, income tax provision, realized and unrealized gains and losses on foreign currency transactions, and certain non-recurring and infrequent items, including impairment of long-lived assets, restructuring charges, legal settlement costs, and other similar charges. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenues for the period. We use Adjusted EBITDA and Adjusted EBITDA Margin to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that Adjusted EBITDA and Adjusted EBITDA Margin, when taken together with our GAAP financial results, provide meaningful supplemental information regarding our operating performance by excluding certain items that may not be indicative of our business, results of operations, or outlook. We consider Adjusted EBITDA and Adjusted EBITDA Margin to be important measures because they help illustrate underlying trends in our business and our historical operating performance on a more consistent basis.
Our calculation of Adjusted EBITDA may differ from the calculations of Adjusted EBITDA by other companies and therefore comparability may be limited. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results. The following table presents a reconciliation of net loss, the most directly comparable financial measure stated in accordance with GAAP, to Adjusted EBITDA for each of the periods presented.
For the Years Ended December 31,
(in thousands, except percentages)
Net loss and comprehensive loss
Adjustments:
Depreciation and amortization (1)
Stock-based compensation (2)
Interest expense and investment income, net
Income tax provision
Foreign exchange loss
Litigation settlement costs
Impairment loss on long-lived assets (3)
Restructuring charges
Adjusted EBITDA
Net loss and comprehensive loss margin
Adjusted EBITDA Margin
(1) $0.1 million of depreciation and amortization expense for the year ended December 31, 2025 is classified as restructuring charges in the table above, as these charges were incurred as part of our 2025 Restructuring and Transformation Plan.
(2) A nominal amount, $2.5 million, and $0.1 million, of stock-based compensation expense for the years ended December 31, 2025 , 2024 and 2023, are classified as restructuring charges in the table above, as these charges were incurred under our restructuring plans.
(3) $1.0 million and $0.9 million of impairment loss on right-of-use assets for the years ended December 31, 2025 and 2024, respectively, are classified as restructuring charges in the table above, as these charges were incurred as part of our restructuring plans.
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Liquidity and Capital Resources
General
Since inception, we have financed operations primarily through payments received from our customers and, in later periods from the net proceeds from our public offerings. As of December 31, 2025 and 2024 , our principal sources of liquidity were cash, cash equivalents, and marketable securities of $51.4 million and $54.9 million, respectively.
We believe that our existing cash, cash equivalents, and marketable securities, 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. Our material cash requirements include contractual and other obligations under our credit facility, finance and operating lease agreements, and purchase commitments as discussed below. Our future capital requirements will depend on many factors, including our total revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the potential expansion of our data center spaces, the price at which we are able to purchase or lease infrastructure equipment, the impact of inflation on interest rates, the introduction of platform enhancements, and the continuing market adoption of our platform. In the future, we may enter into arrangements to acquire or invest in complementary businesses, products, and technologies. To support our up-market transformation, we expect to increase our capital expenditures, continue leveraging finance lease agreements for infrastructure investments and, when strategic opportunities arise, we may supplement our revolving credit facility with additional equity or debt funding to accelerate enterprise-focused growth. In the event that we require additional financing, we may not be to raise such financing on terms acceptable to us or at all. If we are to raise additional capital or generate cash flows necessary to expand our operations and invest in continued , we may not be to compete , which would our business, results of operations, and financial condition.
We maintain cash deposits in the United States, in Federal Deposit Insurance Corporation insured banks. 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.
Debt
On June 4, 2025, we entered into a credit agreement (the “Credit Agreement”) with Citizens Bank, N.A. (the “Lender”), establishing a senior secured revolving credit facility with a total borrowing capacity of up to $20.0 million (the “Revolving Credit Facility”) to be used for general corporate purposes and working capital needs. The Revolving Credit Facility allows for borrowings, repayments, and re-borrowings up to the total capacity, subject to compliance with the terms of the Credit Agreement. The Revolving Credit Facility includes a sub-limit of up to $3.0 million for the issuance of letters of credit. The Credit Agreement is scheduled to mature on June 4, 2027, at which point all obligations become due. The Credit Agreement includes an option that allows us to extend the maturity date by one year, subject to certain conditions.
Borrowings under the facility bear interest at a variable rate, at our discretion, equal to either (a) the average Secured Overnight Financing Rate (“SOFR”) plus 3.25% or (b) a base rate, as defined in the Credit Agreement, plus 2.25%. Additionally, the Credit Agreement requires the payment of a commitment fee of 0.35% on the unused portion of the Revolving Credit Facility, and a letter of credit availability fee of 0.125% on outstanding letters of credit.
Our ability to pay interest on or to refinance our indebtedness depends on our future performance, working capital levels and capital structure, which are subject to general economic, financial, competitive, legislative, regulatory and other factors which may be beyond our control. There can be no assurance that we will generate sufficient cash flow from our operations or that future financings will be available on acceptable terms or in amounts sufficient to enable us to service or refinance our indebtedness or to make necessary capital expenditures.
As of December 31, 2025, we had no outstanding borrowings under the Revolving Credit Facility. As of December 31, 2025, no letters of credit were outstanding and $20.0 million was available for borrowing under the Revolving Credit Facility.
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Debt Covenants under the Credit Agreement
The Credit Agreement contains customary restrictive financial and operating covenants, including limitations on our ability to incur additional indebtedness, pay dividends, make certain investments, sell assets, and engage in other specified transactions. In August 2025, in connection with the establishment of a new share repurchase program (as discussed further below), we amended the Credit Agreement to permit share repurchases of up to $10.0 million, thereby excluding such repurchases from the covenant restrictions. The Credit Agreement also requires us to comply with the following financial covenants on a quarterly basis: (i) a minimum liquidity of $10.0 million held on deposit with the Lender, over which we retain control and consider as cash and cash equivalents, (ii) a minimum consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) (as defined below) threshold, and (iii) a maximum total leverage ratio of 2.75 to 1.00, which is calculated based on consolidated EBITDA.
The Credit Agreement defines consolidated EBITDA on a trailing four fiscal quarter basis and includes specified adjustments and exclusions. As a result, EBITDA as defined under the Credit Agreement may differ materially from Adjusted EBITDA as presented elsewhere in this report. For example, the calculation of EBITDA under the Credit Agreement includes exceptions and caps related to adjustments for (i) restructuring and other strategic initiatives, (ii) legal settlements, (iii) completed acquisitions, and (iv) all other non-cash and non-specified non-recurring charges. As of December 31, 2025, we were in compliance with the covenants under the Credit Agreement. Failure to comply with these covenants could limit the Company’s ability to access additional borrowings under the Revolving Credit Facility or could result in the acceleration of repayments of amounts outstanding under the facility.
Commitments
Finance Leases
We enter into finance lease arrangements to obtain hard drives and related equipment for our data center operations. S ee Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for our future minimum commitments related to our finance leases. The weighted average discount rate for finance leases was 12.6% as of December 31, 2025.
Operating Leases
We lease data center spaces and office space under non-cancelable operating leases with various expiration dates. See Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further information on our future minimum commitments on our operating leases. The weighted average discount rate for operating leases was 6.9% as of December 31, 2025.
In June 2025, we amended an existing lease for a data center facility to (i) extend the non-cancellable term of the original lease and (ii) expand into additional infrastructure designed to support multiple-storage offerings. This expansion is expected to commence in the second quarter of 2026 and includes a non-cancellable lease term of approximately seven years. The original lease term was also extended to align with this period.
Purchase Commitments
In addition, we have purchase commitments that relate mainly to infrastructure agreements used to facilitate our operations. As of December 31, 2025, there are $2.5 million, $2.2 million, and $0.8 million payable for these commitments for the years ending December 31, 2026, 2027, and 2028, respectively.
Share Repurchase Program
In August 2025, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $10.0 million of our Class A common stock through August 1, 2026. The program is intended to offset dilution resulting from stock-based compensation. Repurchases are to be funded from the proceeds of employee stock option exercises and from employee contributions under the 2021 Employee Stock Purchase Plan.
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Repurchases may be made from time to time in open market transactions, pursuant to Rule 10b5-1 trading plans, or through other means, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The timing, number of shares repurchased, and prices paid for the shares under this program will depend on general business and market conditions as well as corporate and regulatory limitations, prevailing stock prices, and other considerations. The share repurchase program may be suspended, modified, or discontinued at any time and does not obligate us to acquire any amount of Class A common stock.
During the year ended December 31, 2025, we repurchased a total of 256,549 shares of our Class A common stock for $2.0 million. As of December 31, 2025, approximately $8.0 million remained available for repurchases under the program.
Cash Flows
The following table shows a summary of our cash flows for the periods presente d:
For the Years Ended
December 31,
(in thousands)
Net cash provided by (used in) operating activities
Net cash (used in) provided by investing activities
Net cash (used in) provided by financing activities
Operating Activities
Our largest source of operating cash is payments received from our customers. Our primary uses of cash from operating activities are for personnel-related expenses, sales and marketing expenses, infrastructure expenses, and overhead expenses.
For the year ended December 31, 2025, cash provided by operating activities was $23.5 million, which resulted from a net loss of $25.6 million, adjusted for non-cash charges of $58.5 million and net cash outflow of $9.3 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $26.4 million for stock-based compensation expense, $25.6 million for depreciation and amortization expense, noncash lease expense on operating leases of $4.9 million, and a $1.0 million impairment loss on right-of-use assets primarily related to our restructuring activities. The net cash outflow from changes in operating assets and liabilities was primarily due to a $4.5 million decrease in operating lease liabilities reflecting the timing of lease payments, a $2.7 million increase in other assets primarily related to employee sales commissions, a $1.7 million increase in accounts receivable driven by higher revenue from enterprise customers and the timing of billings and related collections, and a $1.5 million increase in prepaid expenses and other current assets primarily due to higher unbilled revenue.
For the year ended December 31, 2024, cash used in operating activities was $12.5 million, which resulted from a net loss of $48.5 million, adjusted for non-cash charges of $60.8 million and a net cash inflow of $0.2 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $28.3 million for depreciation and amortization expense, $28.6 million for stock-based compensation expense, noncash lease expense of $2.7 million, and $0.9 million related to loss on impairment of right-of-use assets. The net cash inflow from changes in operating assets and liabilities was primarily the result of a $5.5 million increase of deferred revenue, which increased due to our growing sales and to timing of collections from our customers and a $0.9 million increase in accrued expenses and other current liabilities. The cash inflows were largely offset by payments of operating lease liabilities of $2.6 million, an increase of $1.3 million in other assets, and an increase in accounts receivable of $1.0 million due to timing of collections. Prepaid expenses and other current assets increased $0.7 million and accounts payable decreased $0.5 million. Cash provided by operations increased during the year ended December 31, 2024, as compared to the same period in 2023 primarily due to our growing customer base, increased storage from new and existing customers and the price increase that began to take effect in October 2023, partially offset by increased expenditures related to managing and operating our co-location facilities, and increased spending in support of our expanded research and development and sales and marketing spending to support business growth.
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Investing Activities
Cash used in investing activities during the year ended December 31, 2025 was $25.3 million, resulting primarily from the following activity:
• Purchases of marketable securities of $39.5 million;
• Cash payments of $7.6 million related to the development of internal-use software for adding new features and enhanced functionality to our platform;
• Cash payments of $4.7 million related to capital expenditures in support of infrastructure deployments to support our growing business; and
• Proceeds of $26.3 million from the maturity of our marketable securities.
Cash used in investing activities during the year ended December 31, 2024 was $6.1 million, resulting primarily from the following activity:
• Purchases of marketable securities of $38.1 million;
• Cash payments of $12.5 million related to the development of internal-use software for adding new features and enhanced functionality to our platform;
• Cash payments of $1.7 million related to capital expenditures in support of infrastructure deployments to support our growing business;
• Proceeds of $45.7 million from the maturity of our marketable securities; and
• Proceeds of $0.5 million from the disposition of certain hard drives.
Financing Activities
Cash used in financing activities for the year ended December 31, 2025 was $14.8 million, resulting primarily from the following activity:
• Principal payments on our finance lease agreements and lease financing obligations of $18.2 million related to hard drives and other infrastructure equipment used in our data center spaces;
• $2.0 million related to repurchases of our Class A common stock;
• $1.9 million related to payments on taxes for net share settlements of vested equity awards, resulting in a retirement of related equity awards;
• $0.6 million related to payments of debt issuance costs;
• $5.3 million in proceeds from the exercise of employee stock options; and
• $2.6 million in proceeds from our ESPP.
Cash provided by financing activities for the year ended December 30, 2024 was $22.8 million, resulting primarily from the following activity:
• $37.4 million of net proceeds from the Follow-On Offering;
• $7.5 million in proceeds from the exercise of employee stock options;
• $2.8 million in proceeds from our ESPP;
• $0.6 million in proceeds from our RCA debt facility prior to its termination. See Note 12 to our consolidated financial statements located elsewhere in this Annual Report on Form 10-K for additional information ;
• Principal payments on our finance lease agreements and lease financing obligations of $19.5 million related to hard drives and other infrastructure equipment used in our data center spaces;
• $4.7 million related to the repayment, in full, of the RCA debt facility;
• $0.9 million related to repayment of principal on financed insurance premiums; and
• $0.4 million related to payments of offering costs in connection with our Follow-On Offering.
Contractual Obligations and Commitments
Our commitments are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. Operating lease commitments relate primarily to our rental of office space and data center spaces. Our finance lease commitments relate primarily to our infrastructure equipment. Purchase commitments
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relate mainly to infrastructure agreements and subscription arrangements used to facilitate our operations. For more information, see Note 10 and Note 11 to our consolidated financial statements located elsewhere in this Annual Report on Form 10-K.
Critical Accounting Estimates
Our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We evaluate our estimates and judgments on an ongoing basis, based on historical experience, current trends, and other factors that we believe are reasonable under the circumstances. Actual results could differ materially from these estimates, and such differences could have a material impact on our financial condition, results of operations, and cash flows.
While our significant accounting policies are described in Note 2 to our consolidated financial statements, we believe the following accounting estimates involve the most significant judgments and assumptions used in the preparation of our consolidated financial statements and therefore represent our critical accounting estimates.
Useful Lives of Long-Lived Assets
Our long-lived assets primarily consist of data center equipment, servers, networking equipment, capitalized internal-use software, and certain right-of-use assets related to our lease arrangements. These assets are recorded at cost and depreciated or amortized on a straight-line basis over their estimated useful lives.
Determining the appropriate useful lives of our long-lived assets requires significant judgment and is based on our expectations regarding the period over which the assets will provide economic benefit. Factors considered in establishing useful lives include historical asset performance, technological changes, expected usage patterns, and anticipated maintenance or replacement cycles. We review useful lives periodically and may revise them when warranted by changes in circumstances or new information.
Changes in estimated useful lives affect the timing of depreciation and amortization expense recognized in future periods. Because depreciation is primarily included in cost of revenue, revisions to useful lives would impact future gross margin and operating results on a prospective basis.
During the second quarter of 2025, we completed a study on the useful lives of our property and equipment, resulting in an extension of the useful life of our infrastructure equipment. This update resulted in a reduction in depreciation expense of approximately $5.2 million for the year ended December 31, 2025 and is anticipated to result in further reduction of approximately $2.8 million for the year ending December 31, 2026.
Capitalization of Internal-Use Software
We capitalize certain costs related to the development of internal-use software that supports our Backblaze Storage Cloud platform and related products. Capitalized costs primarily consist of personnel-related costs, including salaries, benefits, and stock-based compensation, incurred during the application development stage of software projects. Capitalization begins when the preliminary project stage is complete and it is probable that the software will be completed and used for its intended purpose, and ceases when the software is substantially complete and ready for its intended use.
Significant judgment is required in determining whether a software project qualifies for capitalization, determining when capitalization should begin and end, and identifying and measuring the costs that qualify for capitalization. We also estimate the expected useful lives of capitalized internal-use software and amortize these costs on a straight-line basis over the period in which the software is expected to provide economic benefit. Changes in our estimates related to project scope, expected functionality, qualifying costs, or useful lives could materially affect the amount of costs capitalized, the timing of expense recognition, and our results of operations.
Capitalized internal-use software represents a significant asset on our consolidated balance sheets, and amortization of these costs is included primarily in cost of revenue. If our assumptions regarding capitalization eligibility, project completion, or useful lives were to change, our operating results and gross margin could be materially impacted.
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A hypothetical 10% increase or decrease in the amount of project costs capitalized for the year ended December 31, 2025 would have resulted in a corresponding decrease or increase of approximately $1.0 million in operating expenses for the period.
Recent Accounting Pronouncements
See the sections titled “Basis of Presentation and Summary of Significant Accounting Policies—Accounting Pronouncements Recently A dopted” and “Basis of Presentation and Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” in N ote 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business Startups (JOBS) Act. For so long as we continue to be an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation. The JOBS Act also provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards applicable to public companies. This provision allows an emerging growth company to delay the adoption of some accounting standards unless and until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of new or revised accounting standards and, as a result, we will adopt such standards on the dates applicable to private companies until we cease to be an emerging growth company on December 31, 2026, which is the last day of the fiscal year following the fifth anniversary of our initial public offering. Accordingly, our consolidated financial statements may not be comparable to those of public companies that comply with new or revised accounting pronouncements as of the public company dates.
