Backblaze Defends Data Reliability Amid Accounting Claims
Background: Allegations by Morpheus Research
On April 24, short‐seller Morpheus Research published an extensive report accusing San Mateo–based cloud storage provider Backblaze of engaging in “sham accounting” and “brazen insider dumping.” The report draws heavily on lawsuits filed last October by former Backblaze executives Huey Hall and James Kisner, who served as the company’s head of finance and vice president of investor relations respectively. According to Morpheus Research, Hall and Kisner claim that Backblaze’s founders implemented an aggressive Rule 10b5-1 trading plan in April 2022—despite warnings from capital markets consultants that the plan could breach fiduciary duties—leading to daily sales of up to 10,000 shares and driving the stock down 76 percent by November 2022.
- Hall’s lawsuit alleges pressure to certify inaccurate financial statements, including disputed entries in Fixed Assets and Capitalized R&D.
- Kisner’s filing claims that Backblaze submitted inflated cash‐flow forecasts to external auditors.
- Since going public in November 2021 with a $100 million raise, Backblaze has reported quarterly losses, an 80 percent increase in outstanding shares, and a 71 percent drop in share price.
Backblaze’s Technical Architecture and Data Integrity Measures
Beyond the headlines, Backblaze’s cloud backup platform is built on a highly durable and distributed storage architecture. Key technical highlights include:
- Reed‐Solomon erasure coding: Shards data across 20+ drives to sustain multiple simultaneous disk or node failures.
- Multi‐region replication: Redundant copies in three geographically separated data centers, ensuring “eleven nines” of durability.
- Encryption and security: AES‐256 at rest, TLS 1.2/1.3 in transit, optional customer‐managed keys via HSM integration.
- S3‐compatible B2 API: Enables third‐party integrations and immutable “Object Lock” for ransomware protection.
In its May 5 Form 8-K filing, Backblaze disclosed that B2 Cloud Storage bookings grew 15 percent year‐over‐year in Q1 2025, underscoring continued enterprise adoption despite market volatility.
Financial Performance and Audit Insights
While Morpheus Research highlights cumulative net losses—$59.7 million in 2023 and $48.5 million in Q4 2024—Backblaze emphasizes improving unit economics. According to the company’s latest SEC filing:
- Gross margin expanded to 75 percent in Q1 2025, up from 72 percent a year ago.
- Annual recurring revenue (ARR) exceeded $200 million, driven by backblaze business initiatives and strategic pricing adjustments.
- Capital expenditures on next-generation storage servers dropped 5 percent through higher HDD density and lower per-drive cost.
Independent audits by Grant Thornton LLP for fiscal 2024 found no material misstatements in Backblaze’s consolidated financials, a point Backblaze’s VP of marketing Patrick Thomas stresses as evidence against the short‐seller claims.
Expert Opinions and Regulatory Perspectives
Industry analysts largely view the allegations as a short‐term stock manipulation tactic. Gartner storage analyst Maria Sanchez notes, “Backblaze’s platform remains technically sound. Share price fluctuations are more reflective of broader tech market sentiment than underlying service quality.”
The U.S. Securities and Exchange Commission has not opened a formal inquiry, and no regulatory agency has flagged material compliance issues. Nevertheless, investor relations teams across the sector are closely monitoring legal developments.
Implications for Customers and Industry Partners
How-To Geek and other publications raised alarms that a sudden Backblaze shutdown could leave customers without access to critical backups. To mitigate risk, experts reiterate the 3-2-1 backup rule:
- Three total copies of data
- Two different media types (cloud, local disk, tape)
- One offsite copy
Major systems integrators like Datto and Acronis confirm that multicloud strategies—combining Backblaze B2 with AWS S3 or Azure Blob Storage—remain common practice to balance cost and redundancy.
Looking Ahead: Q1 2025 Earnings and Strategic Roadmap
Backblaze will report Q1 2025 results on May 7. Investor guidance suggests modest revenue growth of 8–10 percent year-over-year and continued improvement in free cash flow. The company is also piloting a 5-year hardware refresh cycle leveraging 20TB+ SMR drives to push storage density above 2PB per rack.
Whether Morpheus Research’s report gains traction or fades, Backblaze’s focus on expanding global regions, enhancing security controls, and optimizing TCO will shape its ability to retain customers and win new enterprise contracts.