Backblaze denies 'sham accounting' claims as short sellers circle

Cloud storage biz says 'baseless allegations' are attempts by analysts to profit

Cloud storage and backup provider Backblaze has denied accusations made by financial analysts of "sham accounting" and "insider dumping," as well as claims it inflated cash flow forecasts to hide its real performance.

Backblaze is perhaps best known to Reg readers for its quarterly hard drive statistics, tracking the health and performance of the large number of storage devices filling out its datacenters.

But it is the company's financial health and performance that Morpheus Research is focusing on, and the analysts have published a long list of allegations against it.

Backblaze strongly denies all the allegations, and claims instead that Morpheus is attempting to manipulate its stock price for financial gain. The firm admits to holding short positions in Backblaze shares.

The claims are largely based on lawsuits filed by two former senior employees, VP of Investor Relations James Kisner and Senior Director of Financial Planning & Analysis Huey Hall [PDF], who originally made accusations of accounting fraud and inflated projections.

According to the report – and allegations contained in the Kisner complaint – the founders of Backblaze embarked on an aggressive trading spree to sell off shares shortly after the company went public on the stock market, supposedly disregarding advice that this would exert downward pressure on the value of its shares.

Morpheus alleges in its report that in order to keep its stock price up, Backblaze pressured employees to certify "inaccurate" financial statements, citing the same claims in the Hall lawsuit, filed in the Superior Court of San Mateo County late last year. Former Backblaze staffer Hall is quoted as saying he refused to sign off on the company's financial reports on at least three occasions.

One of these supposedly included the 2022 annual report, as Hall alleged in his suit from last year, because there were "misstatements regarding the Fixed Assets, Capitalized R&D, Cash Flow statements, and Equity accounting."

Meanwhile, Kisner alleged in his complaint that Backblaze's CFO sent "highly inflated cash flow forecasts to auditors" in 2023, so the business could pass the "going concern" opinion provided by auditors.

Morpheus claims: "Throughout our investigation, we found Backblaze's track record reveals a management team lacking in transparency..."

Its report concludes that Backblaze is "the archetype of a failed growth business," and claims it has "never turned a profit, nor delivered value for its original IPO investors."

In a statement sent to The Register, Backblaze told us it is "aware of the baseless allegations being circulated by a short seller firm."

"The report is inaccurate and misleading, based largely on litigation of the same nature, and a clear attempt by short sellers to manipulate our stock price for financial gain," the company asserted.

"However, it does not change the facts: we have already conducted independent third party reviews that found no wrongdoing or issues with Backblaze's public financial results; our storage cloud continues to deliver reliable, high-performance services that Backblaze customers rely on; and we remain fully focused on driving innovation and creating long-term value for our customers, employees, and investors."

To back up its position, Backblaze shared with us a research note posted by Lake Street Capital regarding the claims.

This disagrees with Morpheus's view of the company and its allegations of accounting malpractice.

"The report seems overly dependent on statements made in separate lawsuits from two former employees. We understand claims made in the legal actions have been investigated by the Backblaze board and found to be unsubstantiated," Lake Street says, adding: "We view the share pullback as a good buying opportunity."

Neither one of the lawsuits has a trial date set; both have case management conferences scheduled for September 3, San Mateo County court records confirm.

In February, Backblaze reported revenue of $33.8 million for its fourth quarter ended December 31, 2024, an increase of 18 percent year-on-year. However, this led to a net loss of $14.4 million, compared to a loss of $12.2 million for the same period in 2023. ®