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The Sham Accounting Scandal: Backblaze Responds to Claims of Financial Irregularities

Backblaze has been accused of engaging in "sham accounting" practices that could put its customers' backups at risk. The company responded to allegations by calling them "baseless." But what does it all mean, and what are the implications for Backblaze's reputation and financial stability? Read more to find out.

Last week, a short seller published a report detailing allegations about Backblaze's financials, claiming that the cloud storage and backup solution provider engaged in "sham accounting" practices that could put its customers' backups at risk. The claims largely stem from two lawsuits filed against Backblaze by former employees Huey Hall and James Kisner in October.

According to the report, Morpheus Research accused Backblaze's founders of participating in an aggressive trading plan to sell 10,000 shares a day, along with other potential sales from early employee holders, against "all external capital markets advice." The plan allegedly started in April 2022, after the IPO lockup period expired and despite advisor warnings, including one from a capital markets consultant that such a trading plan likely breached Backblaze's fiduciary duties.

The short seller also noted that Hall accused Backblaze of pressuring workers to certify "inaccurate" financial statements and refused to approve certain financial reports because he believed they included "misstatements regarding the Fixed Assets, Capitalized R&D, Cash Flow statements, and Equity accounting." Similarly, Kisner accused Backblaze of sending "highly inflated cash flow forecasts to auditors."

Morpheus Research also pointed out that Backblaze has reported losses every quarter since its IPO in November 2021, its outstanding share count has grown by 80 percent, and its share price has declined by 71 percent. The report concluded that if Morpheus' reporting was accurate, Backblaze doesn't appear to be heading toward profitability.

Following the release of the report, Backblaze shares fell 8.3 percent. The company responded to the allegations by calling the claims "baseless" and claiming that independent, third-party reviews have found no wrongdoing or issues with its public financial results.

"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," said Patrick Thomas, Backblaze's VP of marketing. "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."

Backblaze will announce its Q1 2025 results on May 7. Regardless of what lies ahead for the company's finances and litigation, commitment to the 3-2-1 backup rule remains prudent.

The allegations raised concerns about the potential impact on customers who rely on Backblaze for data backup. As How-To Geek reported, "Backblaze backups might be in trouble," if Morpheus' reporting was accurate. The publication noted that if Backblaze suddenly shuts down, customers might lose access to existing backups.

In response to the allegations, Backblaze emphasized its commitment to providing reliable and high-performance services to its customers. The company also highlighted its focus on driving innovation and creating long-term value for its stakeholders.

As the situation continues to unfold, it remains to be seen how the allegations will impact Backblaze's reputation and financial stability. One thing is certain, however: the incident highlights the importance of transparency and accountability in the tech industry.