Investing.com -- On Thursday, cloud storage company Backblaze (NASDAQ:BLZE) saw its shares plummet 8.3% following a scathing short report from Morpheus Research. The report detailed a series of alleged financial missteps and questionable practices since the company’s initial public offering (IPO) in November 2021. Morpheus Research has disclosed taking a short position in BLZE and has raised serious concerns about the company’s financial health and transparency.
Since its IPO, Backblaze has consistently reported quarterly losses, totaling a cumulative net loss of $181.3 million. The stock has fallen 71% from its IPO price, recently reaching an all-time low of $3.50. Share dilution has been significant, with the share count increasing by roughly 80%, exacerbated by $28.6 million in stock-based compensation awarded in 2024 alone.
In October 2024, two former senior executives filed whistleblower lawsuits accusing Backblaze of accounting fraud, inflating cash flow forecasts, whistleblower retaliation, and pressuring employees to certify inaccurate financials. One of the executives, James Kisner, alleged that the company manipulated forecasts to avoid a "going concern" ruling and claimed that a secret internal investigation was conducted without disclosure to shareholders.
Further allegations include aggressive insider selling, where founders sold over 1.28 million shares post-IPO lockup expiry. Backblaze’s General Counsel had warned that the insider trading plan could severely impact the stock’s value. Additionally, CEO Gleb Budman sold $1.6 million in stock allegedly while possessing material non-public information, just before a 26% stock drop.
The report also highlights questionable accounting practices, including financial manipulations and inflated forecasts to pass audit thresholds. It suggests that improper R&D capitalization was significantly higher than the peer average and that reversing certain capitalization practices could increase losses by $9.8 million for 2024.
Governance issues have arisen, with the company ceasing to answer retail investor questions after Q2 2024 and failing to disclose whistleblower lawsuits in its 10-K filings. The reliability of Backblaze’s financial metrics has been called into question, particularly after redefining its "Adjusted Free Cash Flow" metric.
On the market front, Backblaze’s positioning as an "AI storage" company has been criticized by former executives, including the former CTO, as misleading. Competitor Wasabi has reportedly been onboarding AI clients who left Backblaze, with Wasabi executives claiming superiority in branding, growth, and market credibility.
Morpheus Research concluded that Backblaze represents "the archetype of a failed growth business," casting doubt on the company’s path to cash flow positivity and the reliability of its guidance. The report’s legal and ethical implications include multiple executives refusing to sign SEC documents due to alleged accounting misstatements and claims of misrepresented internal control weaknesses in financial filings.
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