Backblaze: A Loss-Making Data Storage Business Mired in Lawsuits, Sham Accounting, and Brazen Insider Dumping
Summary
- Backblaze (NASDAQ:BLZE) is a $250 million cloud storage and backup solution provider based in California that operates through two business segments: B2 Cloud Storage allowing “customers to store data” and “developers to build applications,” and Computer Backup that “automatically backs up data” from devices for “virtually unlimited” storage.
- Since its November 2021 IPO, Backblaze has reported losses every quarter, its outstanding share count has grown by 80%, and its share price has declined by 71%.
- In October 2024, two former senior employees filed suit against Backblaze, alleging accounting fraud, inflated projections, and whistleblower retaliation. One lawsuit was filed by Backblaze’s former Vice President (“VP”) of Investor Relations, James Kisner, while the other was filed by former Senior Director of Financial Planning & Analysis (“FP&A”), Huey Hall.
- As soon as Backblaze’s IPO lock-up expired in April 2022, its founders engaged 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” related to the downward pressure that these sales would put on Backblaze’s thinly-traded shares, according to the complaints from the 2 former senior employees.
- A capital markets consultant warned Backblaze management that the trading plan was “likely breaching its fiduciary duties,” while Backblaze’s VP of Investors Relations warned that the plan could have a “meaningful negative impact on the business,” according to one of the lawsuits. The founders proceeded anyway, driving the stock down to $3.82 by the end of November 2022— 76% lower than its IPO price.
- 4 months into selling his shares, Backblaze co-founder & CTO Brian Wilson wrote in an internal email, “if BLZE goes straight down to zero, each day I sold was beyond totally justified and I won’t regret it” shortly before resigning amidst continued share sales, according to Backblaze’s former VP of Investor Relations.
- To keep its stock price afloat, Backblaze pressured employees to certify "inaccurate" financial statements, according to former Director of FP&A Hall.
- Backblaze’s former Senior Director of FP&A, Huey Hall, claims he refused to sign off on the company’s financial reports on “at least three separate written occasions,” including its 2022 annual report, because he knew there were “misstatements regarding the Fixed Assets, Capitalized R&D, Cash Flow statements, and Equity accounting,” per his lawsuit.
- The claims of inaccurate financials were corroborated by Backblaze’s former VP of Investor Relations, James Kisner, in his complaint. According to Kisner, in 2023 Backblaze’s CFO sent “highly inflated cash flow forecasts to auditors” so that Backblaze could “pass the ‘going concern’ opinion provided by auditors.”
- Kisner alerted the board to the allegedly “fraudulent” forecast, which resulted in an internal investigation that was never disclosed to shareholders. His lawsuit states: “Kisner reasonably believes that the fraudulent, inflated cash flow forecasts if presented to BDO and the SEC would be a violation of law.” Certain founders continued selling shares when these allegations were made, and while the internal investigation allegedly took place.
- Against the backdrop of this alleged financial manipulation, multiple senior leaders from Backblaze resigned and concocted a plan to “obscure the sales” of their shares by waiting 61 days from resignation to avoid having to file their sales publicly, per Kisner, the former VP of Investor Relations. Backblaze’s General Counsel, Tom MacMitchell, expressed concern that the obscured sales could have a “very dramatic impact” on Backblaze’s stock price due to the “large pent up demand to liquidate.”
- Backblaze CEO Gleb Budman has repeatedly stressed “transparency,” and in Q2 2023 he cancelled his personal trading plan in an apparent display of confidence in the business. Yet, 6 months after this announcement, he sold $1.6 million of stock while in possession of material non-public information related to the imminent resignation of Backblaze’s CFO, per the former VP of Investor Relations complaint. The stock tumbled 26% after the resignation announcement, allowing Budman to perfectly time his sale to avoid significant losses.
- Throughout our investigation, we found Backblaze’s track record reveals a management team lacking in transparency and willing to take aggressive and possibly illegal steps to create an illusion of financial performance to support their own exit liquidity.
- Improper capitalization of expenses, like software development or Research and Development (“R&D”) costs, is an age-old accounting shenanigan. When Backblaze’s former senior director of financial planning sued the company in October 2024, he claimed that Backblaze had “misstatements” related to capitalized R&D assets in its 2022 report.
- We checked Backblaze’s financial statements, and noticed that it has capitalized significant software costs equivalent to 9.8% - 14.4% of revenue every year since 2022. Backblaze’s capitalization rate of software development costs is the highest of 42 SaaS peers we reviewed, and almost 5x higher than the average of those 42 peers.
- In Q3 2024, Backblaze introduced a new metric, “adjusted free cash flow”, and claimed it would be “adjusted free cash flow” positive by Q4 2025. Yet, in less than a quarter Backblaze changed its definition, specifically backing out “settlement costs” related to litigation and excluding “restructuring costs” from the new metric.
- Backblaze fails to consistently disclose key metrics that are critical to understanding its success in moving “up market,” such as the number of customers spending more than $50,000 annually. A former Backblaze executive told us, “they were very cautious about having a duty to report that number out of concern of, is that number always going to be good? Is it always going to be growing? What happens [if] that number ever went backwards? … And how do we continue to message the move up market as successful.”
- After the exit of CFO Frank Patchel, in August 2024, one might have expected Backblaze to bring in a CFO with a track-record of turning around poorly performing companies. Instead, Backblaze’s new CFO, Marc Suidan, joined from Beachbody (NYSE: BODI), a multi-level marketing company, where he was CFO from May 2022 to August 2024. During his tenure, BeachBody missed earnings estimates in 6 out of 9 quarters and the stock fell 91%.
- Backblaze touts a differentiated solution and success with “AI” clients, yet it appears to offer a commoditized storage solution that primarily competes on cost. In January 2025, Backblaze’s former CTO stated on a public forum, “I chalk it up to companies like Backblaze wanting to be associated with the hot new thing (AI) right now. But honestly, some things just aren’t AI.”
- Backblaze is being beaten by close competitors such as Wasabi, which offers the same services. One former Backblaze executive told us: “[Backblaze] let Wasabi blow right past them. The Wasabi brand is way better known. Their growth rate is higher. Their global presence is better. Their channel presence is better … They just won and Backblaze lost.”
- Meanwhile, a current executive from Wasabi confirmed, “We have at least half a dozen customers who have left [Backblaze] and come to us in the last month and a half, all AI … the reason they went there is because of all the AI messaging [Backblaze was] doing, and then they realized that it’s actually not as true as what they’ve been saying. And now they’ve come to us.”
- Backblaze noted a large customer loss during its Q4 2024 earnings call. We interviewed a Wasabi sales executive who confirmed that they took a large customer from Backblaze, saying, “I was actually surprised when I had heard that [the customer] had come over [to Wasabi] because I knew that they were such a big partner for Backblaze.”
- Backblaze, in our view, is the archetype of a failed growth business and its latest “restructuring” will do little to resurrect the company’s woeful capital market performance or transform its undifferentiated storage offering. Its capital markets story has been kept alive by allegedly inflated cash flow forecasts, hidden internal investigations and accounting tricks, which appear to fuel exit liquidity for insiders.
- If Backblaze’s leadership truly holds transparency as one of its “most cherished values”, then management should have no issue answering the 12 questions we have included at the bottom of this report.
Initial Disclosure: After extensive research, we believe the evidence justifies a short position in shares of Backblaze (NASDAQ: BLZE). Morpheus Research holds short positions in BLZE, and Morpheus Research may profit from short positions held by others. This report represents our opinion, and we encourage all readers to do their own due diligence. Please see our full disclaimer at the bottom of the report.
Background: $250 Million Cloud Storage And Backup Solution Provider, Based In California
Backblaze, Inc. (NASDAQ:BLZE) is a cloud storage and data backup company headquartered in San Mateo, California. The company was founded in 2007 by CEO Gleb Budman along with six other co-founders. It went public via IPO on November 11, 2021, raising approximately $100 million.
Backblaze operates through two business segments: B2 Cloud Storage, an infrastructure-as-a-service (“IaaS”) enabling “customers to store data” and “developers to build applications,” and Computer Backup, a “software-as-a-service” (“SaaS”) that “automatically backs up data” from devices for “virtually unlimited” storage, per its most recent 10-K. [1]
Since Backblaze launched B2 Cloud Storage in 2015, the company states that it costs a fraction of the price of industry leaders like Amazon Web Services (“AWS”), while “delivering more value to customers.”
Since 2021, Backblaze’s B2 Cloud Storage segment revenue growth has outpaced its legacy Computer Backup segment. In Q4 2024, the company announced that its B2 Cloud Storage segment generated $17.1 million in revenue, surpassing its Computer Backup revenue of $16.7 million.
Historically, Backblaze’s customer base has been individual consumers and small businesses, according to its most recent prospectus.
Bull Case: Backblaze Has New Executive Leadership Focused On Enterprise Sales And Aggressive Cost Cutting, Projecting Cash Flow Breakeven By Q4 2025 Backblaze Positions Itself As A Beneficiary Of Accelerating AI Tailwinds For Cloud Storage
On Backblaze’s Q4 2024 earnings call, CEO Gleb Budman made it clear that B2 Cloud Storage was key to the company’s future growth prospects:
"B2 Cloud Storage, our fastest-growing solution, is now over 50% of the business in Q4 and adjusted EBITDA margin came in at 14%, doubling over the same period last year … As we look to the next few years, we are focused on becoming a Rule of 40 company, delivering both growth and profitability and continuing to build the leading storage cloud for the Cloud 2.0 era."
As part of these new financial goals, the company is transforming its go-to-market strategy and will target larger business customers, per its Q3 2024 earnings call. On the cost side, Backblaze reduced its workforce by 12% in July 2024 and is focusing on cost-saving initiatives as discussed on the same earnings call.
Backblaze has made changes in leadership, hiring a Chief Revenue Officer, Jason Wakeam as part of its go-to-market transformation and a new Chief Financial Officer, Marc Suidan. Investors believe that Backblaze is now ready to recover the ground lost after its IPO as it positions itself as a beneficiary of accelerating AI tailwinds, reporting a 65% increase in AI customers year-over-year, per a March 2025 investor presentation.
Fundamentals: Since IPO, Backblaze Has Reported Losses Every Quarter While Diluting Shareholders By ~80%
Since Backblaze went public in November 2021, the company has not reported a single profitable quarter. Backblaze has made cumulative losses of $181.3 million over the last 4 years, and in its most recent quarter, Q4 2024, the company again reported a $14.4 million net loss. [1, 2]
Further, since Backblaze’s November 2021 IPO, the company has rapidly diluted its shareholders, with shares outstanding nearly doubling from 30.3 million in November 2021 to an estimated 54.3 million as of Q1 2025.
The primary driver of this dilution is Backblaze’s stock-based compensation program, which amounted to ~$28.6 million worth of shares being granted in 2024 alone, equivalent to ~11.4% of Backblaze’s current market cap.
Part I: In October 2024, Two Former Senior Employees Filed Suit Against Backblaze, Alleging Accounting Fraud, Inflated Projections, And Whistleblower Retaliation
In October 2024, two lawsuits were filed against Backblaze in California by James Kisner, the company’s former Vice President (“VP”) of Investor Relations, and Huey Hall, its former Head of Finance. [1, 2]
The two suits were filed on the same day, and allege that after Backblaze’s November 2021 IPO, its founders engaged in an aggressive plan to dump a “very significant” amount of stock against the advice of senior employees and a capital markets advisor.
Senior employees were pressured to inflate Backblaze’s financial results to create more exit liquidity for the founding team as they executed this trading plan, according to the former employees’ complaints.
As Soon As Backblaze’s IPO Lock-Up Expired In April 2022, Its Founders Engaged In An Aggressive Trading Plan To Sell 10,000 Shares A Day, Along With Other Potential Sales From Early Employee Holders, Per Backblaze’s Former VP Of Investor Relations
A Capital Markets Consultant Warned Backblaze That The Plan Was “Likely Breaching Its Fiduciary Duties” While Backblaze’s VP Of Investor Relations Warned That The Plan Could Have A “Meaningful Negative Impact On The Business”
The Founders Proceeded Anyway, Driving The Stock Down To $3.82 By The End Of November 2022, 76% Lower Than Its IPO Price
After completing its IPO, Backblaze’s 5 founders, including current CEO Gleb Budman, wanted to sell a significant amount of stock as soon as its lock-up expired through a 10b5-1 trading plan, per a lawsuit brought by Backblaze’s former VP of Investor Relations James Kisner.[1]
These five founders include Gleb Budman, CEO and Chairperson of the Board; Brian Wilson, former Chief Technology Officer and Director; Tim Nufire, Chief Cloud Officer and Director; Casey Jones, VP Design; and Kwok Hang Ng, Web Architect. In addition, the complaint alleged that several other early employees were looking to sell 2,000 shares per day. (Pg. 7) ↩︎
Multiple senior advisors, including VP James Kisner, General Counsel Tom MacMitchell, CFO Frank Patchel, and an external capital markets advisor, warned against the plan due to the downward pressure it would put on the thinly-traded stock, per James Kisner’s complaint. [Pg. 7]
The lawsuit filed by Backblaze’s former Senior Director of Financial Planning & Analysis (“FP&A”) Huey Hall echoed Kisner’s claims about the founders’ aggressive trading plan.
Hall’s complaint states that Backblaze founders “ignored all external capital markets advice” and “continued selling as much Backblaze stock as their 10b5-1 plans would allow.”
Backblaze publicly disclosed this plan on April 13, 2022, stating in a press release:
“Sales of 2,000 shares of Class A common stock each trading day under these automatic 10b5-1 trading plans by each founder are scheduled to begin upon the release of the IPO lock-up provisions on May 10, 2022…”
Over a 6-month period, from Backblaze’s lock-up expiry on May 10th, 2022 to November 10th, 2022, the 5 founders disposed of 1.28 million shares, per Bloomberg — representing ~9% of the entire total volume traded during that period.[1]
From May 10, 2022 until November 10, 2022, Backblaze’s stock traded 14,749,582 shares, according to Bloomberg. On several trading days, these insider sales accounted for over 20% of the stock’s daily trading volume. For example, on July 6th 2022, 10,000 sales made up 27% of the volume on that day, per Bloomberg. These sales made up over 20% of the stock’s trading volume on July 8, 2022, July 11, 2022, July 14, 2022 and July 21, 2022. ↩︎
Almost 1 year after its IPO, on November 22, 2022, Backblaze’s stock price reached $3.82, 76% lower than its IPO price.
Backblaze’s former VP of Investor Relations, James Kisner, described this selloff in his complaint against the company:
“Unfortunately, Backblaze’s founders prioritized their own personal ‘liquidity’ over honesty. By heavily selling a thinly traded stock, the founders put strong downward pressure on its stock price...” [Pg. 2]
4 Months Into Dumping His Shares, Co-Founder & Chief Technology Officer Brian Wilson Wrote In An Internal Email, “If BLZE Goes Straight Down To Zero, Each Day I Sold Was BEYOND Totally Justified And I Won’t Regret It”
Shortly Before Resigning Amidst Continued Share Sales, According To Backblaze’s Former VP Of Investor Relations
Supporting the claims of the two whistleblowers, Backblaze co-founder and Chief Technology Officer (“CTO”) Brian Wilson made it abundantly clear in an internal email that he was completely justified in his sell off, per Kisner’s complaint.
Wilson resigned as CTO 6 weeks after sending this email, and appears to have continued selling shares, per Bloomberg and company filings.[1]
To Keep Its Stock Price Afloat, Backblaze Pressured Employees To Certify "Inaccurate" Financial Statements, According To Former Senior Finance Employee Hall
Hall, Backblaze’s former Senior Director of FP&A, states in his complaint against the company that during 2022 and 2023, he was pressured on multiple occasions to certify “overly optimistic financials” to keep Backblaze’s stock afloat.
“To keep its stock afloat, Backblaze pressured Hall to certify overly optimistic financials ... Throughout 2022 and 2023, Hall expressed his doubts regarding the accuracy of Backblaze’s financial disclosures to the SEC. On at least three separate written occasions, Hall refused to certify inaccurate financials, and Backblaze punished Hall each time he refused.” [Pgs. 1-2]
Hall claims he was unable to sign off on Backblaze’s financial reports, including its 2022 annual report, due to misstatements, which he highlighted to the company’s SEC reporting manager, Byron Tan.
“On March 13, 2023, Backblaze’s SEC Reporting Manager Byron Tan (“Tan”) requests Hall review and certify the draft 10-K for the 2022 fiscal year … Hall refuses to certify the 2022 10-K because he knows there are misstatements regarding the Fixed Assets, Capitalized R&D, Cash Flow statements, and Equity accounting.” [Pgs. 5-6]
Each time Hall refused to sign off on the company’s SEC reports, Backblaze’s Corporate Controller Waleed Kazmi would sign off on them instead, according to Hall’s lawsuit.
“Every time Hall refused to certify Backblaze’s inaccurate financials disclosures to the SEC – Quarterly 10-Qs & Annual 10-Ks – Backblaze’s Corporate Controller Waleed Kazmi (“Kazmi”) signed them instead.” [Pgs. 5-6]
Waleed Kazmi is still employed by Backblaze today as its Vice President and Corporate Controller, according to his LinkedIn profile.
Huey Hall’s Claims Of Inaccurate Financials Were Corroborated By Backblaze’s VP Of Investor Relations, James Kisner
In 2023 Backblaze’s CFO Sent “Highly Inflated Cash Flow Forecasts To Auditors” So The Company Could Pass Its Going Concern Opinion, According To Kisner
Kisner Alerted The Board To The Allegedly “Fraudulent” Forecast, Which Resulted In An Internal Investigation That Was Never Disclosed To Shareholders Amidst Continued Share Sales From Executives
Huey Hall’s claims of inaccurate financials were corroborated by Backblaze’s former VP of Investor Relations, James Kisner, in his lawsuit against the company, where Kisner claims that Backblaze inflated its cash flow projections to avoid a “going concern” opinion from its auditor, BDO. [Pg. 2]
Specifically, Kisner claims that in May 2023, he discovered that Backblaze’s cash flow forecasts were inflated by ~$10 million.
Kisner further claims he alerted the board to the “fraudulent” and “inflated” cash flow projections and that Backblaze hired an outside firm hired to conduct an investigation into the matter. [Pg. 11]
The investigation resulted in the identification of a “material weakness” in internal controls, according to Kisner.
“In addition, an outside law firm’s investigation validated Kisner’s complaints that Backblaze’s cash flow forecasting process was highly deficient, leading to Backblaze, at the behest of auditors, to disclose a new material weakness in Backblaze’s internal controls in the company’s Q3 2023 10-Q and 2024 10K.” [Pg. 3]
The investigation was never disclosed to shareholders, per our extensive review of the company’s earnings call transcripts as well as quarterly and annual reports to the SEC.
The material weakness related to the going concern assessment was disclosed to shareholders, but Backblaze incorrectly characterized the material weakness in its Q3 2023 report, attributing it to “incorrect assumptions” and “computational errors” rather than the allegedly “fraudulent” numbers from its CFO, Frank Patchel, per Kisner’s lawsuit.[1]
While Kisner references the “2024 10K” in his complaint, we believe he meant the 2023 10-K. The 2024 10-K was released in March 2024, 5 months after he filed his complaint. The 2023 10-K discloses a material weakness around the company’s going concern assessment. ↩︎
Against The Backdrop Of Alleged Financial Manipulation, Multiple Backblaze Founders “Retired” And Concocted A Plan To “Obscure The Sales” Of Their Shares, Per Former VP of Investor Relations, Kisner
The Founders Agreed To Wait 61 Days From Resignation To Convert Their Class B Stock So That They Would Not Have To Report The Sales Publicly, Which Backblaze’s General Counsel Advised Could Have A “Very Dramatic Impact” On The Share Price, According To Kisner
In February 2023, CEO Gleb Budman announced that some of Backblaze’s founders and early employees would be transitioning out of the company.
“We started the company 16 years ago, and it has now been over a year since the company went public, and over the past few years we have built out a great executive team. Recently, as one might naturally expect some of the founders and early employees of Backblaze have begun a smooth transition out of the company, each of them remains a part of the Backblaze family.”
While Budman did not name the departing executives, several of them were revealed in James Kisner’s lawsuit against Backblaze, where Kisner claims that Backblaze concocted a plan to obfuscate the stock sales of the departing executives from shareholders.
Backblaze’s General Counsel Tom MacMitchell had serious concerns about this plan, and wrote an email to the founders expressing concerns about how the obfuscated stock sales could “crush” Backblaze’s stock price, per Kisner’s lawsuit:
“FYI, I am concerned that [founder] Tim [Nufire]’s plan to sell a very significant amount of stock at first opportunity could have a very dramatic impact on the stock, particularly if he goes through the open market. And that is just Tim, never mind any other Founders, employees, etc. that wish to do something similar around the same time.
Given the significant amount of stock held by insiders and employees, and a large pent up demand to liquidate, I hope we do not crush our stock price.” [Pg. 9]
Approximately 66 days after this email was sent, amidst continued selling from insiders, Backblaze shares hit an all-time low of $3.50 in intraday trading on June 27, 2023.
Backblaze’s CEO Gleb Budman Has Repeatedly Stressed “Transparency,” And In Q2 2023, He Cancelled His Personal Trading Plan In An Apparent Display Of Confidence In The Business
6 Months After This Announcement, He Sold $1.6 Million Of Stock While In Possession Of Material Non-Public Information Related To The Imminent Resignation Of Backblaze’s CFO, Per Kisner’s Complaint
The Stock Dropped 26% After The CFO Resignation Announcement, Allowing Budman To Perfectly Time His Sale To Avoid Significant Losses
Backblaze first began taking questions from non-institutional retail investors in early 2022. These questions have often been focused on when Backblaze will be profitable, and why insiders are selling so many shares.
During the company’s Q1 2022 earnings call, a non-institutional investor asked why Backblaze’s founders were selling so many shares when the share price was already “suffering tremendously.”
In response, CEO Budman stated that the founders instituted the 10b5-1 trading plan specifically to avoid the appearance of trying to “time the market.”
During Backblaze’s Q2 2023 earnings call, after continued questions about management’s stock sales, Budman announced that he would be cancelling his trading plan in an apparent display of confidence in the business.
“The elimination of the company's dual class share structure provides all shareholders equal voting rights and underscores Backblaze's commitment to good corporate governance and being a shareholder-friendly company. And second, I'd like to share a personal update with respect to my selling of Backblaze shares, which is that I have canceled my 10b5-1 trading plan.”
Despite this show of confidence, Budman dumped $1.6 million worth of stock in February 2024 while in possession of knowledge related to CFO Frank Patchel’s imminent retirement, according to Kisner’s complaint.
The CFO’s retirement had not yet been announced to shareholders, according to Kisner’s lawsuit.
Budman’s SEC filings confirm Kisner's allegations that Budman sold $1.6 million worth of stock before the announcement of Backblaze’s CFO departure.
While Budman claimed that he wanted to avoid any appearance of trying to “time the market,” he appears to have done so nearly perfectly, as Backblaze’s shares crashed by as much as 26% intraday following the announcement and have continued to slide ever since.[1]
The stock closed at $9.91 on May 8th, 2024 and made an intraday low of $7.30 during the next trading day per Bloomberg. ↩︎
Part II: Accounting Games, Disclosure Issues & A New CFO Hired From A Multi-Level Marketing Company
Throughout our investigation, we found Backblaze’s track record reveals a management team lacking in transparency and willing to create an illusion of financial performance to support its own exit liquidity.
Backblaze Is Stuffing Its Balance Sheet With “Internal-Use Software Development Costs” Through Excessive Capitalization, Making Pre-Tax Losses Appear Smaller, According To Its Financial Statements
Each Year Since 2022, Backblaze Has Capitalized Software Costs Equivalent To 9.8% - 14.4% Of Revenue
This Is The Highest Capitalization Of 42 Software Peers We Reviewed, And Almost 5x Higher Than The Peer Average In The “Enterprise SaaS” Space
Improper capitalization of expenses, like software development or Research and Development (“R&D”) costs, is an age-old accounting shenanigan linked to some of history’s notorious accounting scandals, such as WorldCom.
Instead of expensing costs in the current period, companies may capitalize them under certain conditions, creating a balance sheet asset and recognizing them over a period of time. This has the effect of boosting near term profitability, or for a loss-making business, reducing the magnitude of losses.
Despite being in the business since 2007 and having 2 existing product offerings from which it generates all of its revenue, Backblaze continuously stuffs its balance sheet with “internal-use software development costs”. These costs are purportedly “related to new features and enhancements to the functionality of its platform and related products,” per its 10-K.
In 2022, with Backblaze’s stock price plummeting during the year to a low of $3.82 in November, the company more than doubled its capitalization of internal-use software costs from 5.4% of revenue in 2021 to 10.1% of revenue in 2022. [Pgs. 54, 56]
This has remained elevated with capitalized software costs reaching 14.4% of revenue in 2023 and 9.8% of revenue in 2024.
We compared this to 42 explicit disclosures around software capitalization from peers in the “Enterprise SaaS” space, defined by AlphaSense, a financial intelligence platform.
As a percentage of revenue in 2024, Backblaze had the highest capitalization of software costs, and was ~5x higher than the average of the peer set of 2.1%. (See Appendix A for the full peer set).[1]
Other industry studies also confirm that Backblaze’s capitalization of software costs is significantly higher than industry norms. For example, a 2020 report by Armanino, an accounting and business consulting firm, found that software development capitalization as a % of revenue was 3.7% for SaaS companies with up to $209 million in revenue. ↩︎
We asked a former executive at closest peer Wasabi, an American cloud storage provider that competes with Backblaze, how they approached capitalization of internal development costs. The former executive insisted that they “don’t capitalize that” and confirmed that no costs related to software development were capitalized.
In 2024, with appropriate capitalization, Backblaze’s loss would have been 20% higher, from a $48.5 million loss before tax to a $58.3 million loss before tax, per our calculations.[1]
Loss before provision for income tax was $48.525 million in 2024. Capitalized internal-use software costs was $12.5 million vs. $2.7 million if capitalizing inline with peers at 2.1%. ↩︎
This excessive capitalization may be related to what whistleblower Hall outlined in his lawsuit against Backblaze when he stated that he could not sign off on the company’s financial reports due to “misstatements” in “Capitalized R&D.” [Pgs. 5-6]
All told, we believe Backblaze has resorted to aggressive accounting to inflate the results of an already loss-making business. Capitalization games seldom last forever and now set the company up for increasingly larger amortization expenses in the future.
In Q3 2024, Backblaze Introduced A New Term, “Adjusted Free Cash Flow,” And Claimed It Would Be “Adjusted Free Cash Flow” Positive By Q4 2025
Reality Check: In Less Than A Quarter, Backblaze Changed The Definition Of Adjusted Free Cash Flow, Specifically Backing Out “Settlement Costs” Related To Litigation And Excluding “Restructuring Costs” From The New Metric
Investors and regulators have long been cautious of non-GAAP and “adjusted” metrics used by companies. While companies may provide useful additional information through these metrics, in the wrong circumstances, they can also convey misleading information about the state of a business.
Backblaze has used adjusted EBITDA as one of its key profitability metrics since its November 2021 IPO. In Q3 2024, Backblaze introduced another adjusted non-GAAP metric called “adjusted free cash flow,” telling investors it would turn adjusted free cash flow positive by Q4 2025, per its earnings call. [1, 2]
After just one quarter of using this metric, Backblaze decided to change the definition of this adjusted free cash flow metric in Q4 2024 to specifically exclude restructuring and legal settlement costs, per its earnings releases. [1, 2]
We believe that if Backblaze anticipates significant legal settlement costs, presumably from the aforementioned lawsuits it has failed to disclose to investors, then it should also disclose a contingent liability for those settlement costs.
In short, the fact that Backblaze seemingly has no issues changing a guided metric just a quarter after announcing it renders Backblaze’s guidance meaningless in our view.
Despite Repeated Assurances Of “Transparency” And Being “Shareholder Friendly,” Backblaze Management Has Continued To Dump Stock While Withholding Material Departures, Legal Proceedings, And Accounting Issues From Shareholders
Further, The Company No Longer Accepts Questions From Retail Investors And In Its Most Recent Quarter Refused To Disclose A Key Metric Around Large Deals
Backblaze claims that a “spirit of transparency … is integral” to the company and that it is a “shareholder-friendly company,” yet the company failed to disclose material allegations of accounting irregularities by its senior employees, the internal investigation into these allegations, and the termination of these senior employees (detailed in Part I).
Most notably, it failed to disclose the lawsuits brought by these employees against Backblaze in October 2024 in its latest annual report.
To add to this opacity, after taking questions from retail investors for 9 quarters in a row from May 2022 to May 2024, Backblaze suddenly and inexplicably stopped taking questions from retail investors on its Q2 2024 earnings call.
We’ve listed some of the questions asked by retail investors below:
- Q2 2022: “It is troubling to see so many members of the management team selling, especially at this dramatically diminished price. Can you speak to this more and why investors shouldn't be alarmed by this trend?”
- Q4 2022: “At what point does the company expect to pivot to profitability?”
- Q1 2023: “What's your plan to get the stock back on track? What are your plans to increase shareholder value?”
- Q2 2023: “What is management's plan to become a more profitable company?”
- Q3 2023: “Gleb, how do you plan to compete with the massive cloud companies such as Microsoft, Amazon and Alphabet?”
- Q1 2024: “Will there be any plans this year to pioneer any revolutionary strategies that will put Backblaze ahead of its competitors?”
Backblaze now appears to field only soft-ball questions from 7 sell side analysts, all of whom are positive on the stock, rather than more difficult and blunt questions from retail investors.[1]
7 analysts cover the stock per Bloomberg’s “ANR” function; all 7 have a buy rating. On Backblaze’s Q4 earnings call, only sell-side analysts covering the stock were disclosed as participants to the call. ↩︎
Adding to management’s growing opacity, in Q4 2024, Backblaze said it would not disclose the number of customers spending more than $50,000 annually – a critical metric related to the company’s stated plan to focus on larger enterprise customers.[1]
Analyst: “I was wondering if you could share potentially a growth rate of customers with over $50,000 in ARR for the year. I think you had shared like a number related to that in Q2.”
CFO: “We didn’t disclose it this quarter. But what I would say is the momentum on that front has been really good.”
Originally, Backblaze CEO Budman had said the company would not disclose the metric every quarter because it might not be “meaningful” and could be “variable,” yet when asked about the disclosure a former Backblaze executive told us:
“So they [Backblaze management] were very cautious about having a duty to report that number out of concern of, is that number always going to be good? Is it always going to be growing? What happens [if] that number ever went backwards? Ever went backwards.
And so there's, you know, just a general sense of not wanting to get into kind of ongoing obligatory disclosures unless you're confident that it's a positive. So there was caution around that. And how do we continue to message the move up market as successful.”
In short, rather than adopt greater transparency and provide shareholders with an important ongoing metric to measure Backblaze’s performance in larger client deals, Backblaze’s management appears to only want to deliver a one-sided narrative to investors, per the former executive.
In August 2024, Backblaze Hired A New CFO, Marc Suidan, Who Joined From Beachbody, A Multi-Level Marketing Company, Where He Was CFO Since May 2022By The End Of His Tenure At Beachbody, The Stock Had Dropped 91%
After the exit of CFO Frank Patchel and the allegations leveled by former employees, one might have expected Backblaze to bring in a CFO with a successful track-record in turning around poorly performing companies.
Instead they hired Marc Suidan who joined from Beachbody (NYSE: BODI) - a publicly traded health and fitness company where he was CFO between May 2022 and August 2024 when the company was operating as a “multi-level marketing” company.[1]
Multi level marketing (MLM) companies can be controversial, per the Office of Financial Readiness, a US government agency. Commentators have noted a fine line between MLMs and pyramid schemes.(1) ↩︎
During Suidan’s first year at Beachbody as CFO, the auditors identified new material weaknesses in information technology controls, specifically relating to the preparation of financial statements as well as the lack of effective controls over “over its impairment analyses for goodwill and long-lived assets,” per Beachbody’s 2022 10-K.
Suidan writes on his Linkedin page that he developed a “strategic renewal plan” and various cost reduction strategies while at the company.
It appears that none of these business strategies helped Beachbody turnaround, with its stock plummeting ~91% during his tenure.
Beachbody reported 6 earnings misses in the 9 quarters Suidan was with the company, including a 405% miss on EPS in Q4 2023, per Bloomberg.[1]
Bloomberg function “ERN”, with measure “EPS, GAAP” ↩︎
A former Backblaze executive also told us they had expressed skepticism over the CFO’s background:
“I saw his resume like, wait a minute, this is like a public accounting guy with, you know, an M&A background who spent one year at a failed public company that basically crashed and burned. Are we sure this is our guy?”
Part III: Backblaze’s Product Offers Little To No Differentiation Or Advantages For The AI Market, And Is Rapidly Losing Relevancy Relative To Peers, Forcing Backblaze To Compete On Price
The storage industry is dominated by well resourced “hyperscalers” – large tech companies like Amazon, Microsoft and Google that make up over 60% of the market, per Synergy Research Group.
In this fiercely competitive environment, rather than trying to find value-add for clients in hot markets such as AI infrastructure, former employees and competitors told us that Backblaze was almost exclusively competing on price.
Backblaze Has Touted A Differentiated Offering And Success With AI Clients, Yet It Appears To Be Selling Low-Cost Commoditized Storage
“I Chalk It Up To Companies Like Backblaze Wanting To Be Associated With The Hot New Thing (AI) Right Now. But Honestly, Some Things Just Aren't AI.” – Backblaze Founder And Former CTO
Backblaze is hoping to target larger customers in the enterprise market, but former employees and competitors say it has little to no edge outside of selling a low-cost product.
A former Backblaze sales leader told us:
“[At] my previous company, a lot of the conversations were around, how can we do value-based selling? So how do we talk about the value of things? But when it came to Backblaze and the enterprise or mid-market sales teams at Backblaze, there was just no room for that ... you are always competing against, with pricing, essentially.”
Meanwhile, a former senior leader from direct competitor Storj told us that Backblaze brings little to the table in terms of differentiated performance, and had little to offer the market in AI.
“Listen, there's $2.2 trillion being spent in net new infrastructure spend over the next three years on AI alone. If you don't have a story to tap into that, you're going to completely miss that opportunity. And they [Backblaze] didn't have the story."
When queried by users on Reddit about one of Backblaze’s alleged AI deals for “training data,” former Backblaze Chief Technology Officer and engineer, Brian Wilson, responded:[1]
The quote referenced in the Reddit post comes from the customer Decart, mentioned in Backblaze’s Q3 earnings call and press release. Decart is an AI platform for generative AI per its website. ↩︎
“Ha! I received the same [customer success] email ... I chalk it up to companies like Backblaze wanting to be associated with the hot new thing (AI) right now. But honestly, some things just aren't AI.
I'm a programmer, and if we released an ’if-then-else’ statement in a product in 2025 it would be marketed as ’full self autonomous AI’ but it's all completely a crock of utter marketing drivel ... The company they are referring to probably backs up their AI training data to Backblaze B2.”
Backblaze Is Outflanked By Closest Peer Wasabi And Larger Hyperscalers, Per Former Backblaze Employees
Former Backblaze Executive: “[Backblaze] Let Wasabi Blow Right Past Them. The Wasabi Brand Is Way Better Known. Their Growth Rate Is Higher. Their Global Presence Is Better. Their Channel Presence Is Better … They Just Won and Backblaze Lost."
Current Wasabi Executive: “We Have At Least Half A Dozen Customers Who Have Left [Backblaze] And Come To Us In The Last Month And A Half, All AI.”
While the cloud storage business has predominantly become consolidated in the large hyperscalers, Backblaze has also been outflanked by new entrants to the business, such as private peer Wasabi, a cloud storage company founded in 2017.
Since 2022, Wasabi has reported 60-70% revenue growth, per Industry publications Blocks and Files.We asked a former Backblaze executive for their opinion on the rise of players like Wasabi:
“[Backblaze] let Wasabi blow right past them. The Wasabi brand is way better known. Their growth rate is higher. Their global presence is better. Their channel presence is better … They just won and Backblaze lost."
Further highlighting issues with Backblaze’s channel program, the former Backblaze executive said:
“Wasabi was killing us in the channel … Backblaze [had a] lame ass channel program and Wasabi [had a] killer channel program."
We spoke to another former sales employee at Backblaze, who specifically said Backblaze’s channel strategy was losing out to Wasabi.
“When Gleb’s up there and talking about the channel and this, like Gleb has no idea which is, it's just interesting … Wasabi is just eating their lunch.”
We also interviewed an executive from Wasabi, who told us that they are rapidly taking business from Backblaze.
“We have at least half a dozen customers who have left [Backblaze] and come to us in the last month and a half, all AI … The reason they went there is because of all the AI messaging [Backblaze was] doing, and then they realized that it’s actually not as true as what they’ve been saying. And now they’ve come to us.”
While they were not able to disclose the name of the customer, they gave us a specific example of a publicly disclosed AI client leaving Backblaze.
“Another one that Backblaze publicly announced, they actually left them and came to us … This customer comes to us saying, well, [Backblaze’s ecosystem] is terrible. And that's why we want to work with you”
In Q4 2024, Backblaze CFO Suidan noted “we did have a larger customer loss in Q1”, on the company’s earnings call. The company did not name the client, but a sales executive from Wasabi confirmed that they recently took a large surveillance customer from Backblaze.
“I was actually surprised when I had heard that [the customer] had come over [to Wasabi] because I knew that they were such a big partner for Backblaze.”
Conclusion
Backblaze, in our view, is the archetype of a failed growth business. During its lifetime as a public company, Backblaze has never turned a profit, nor delivered value for its original IPO investors. All the while, key insiders have cashed out millions by selling large quantities of stock in a thinly traded market despite advice against it, per testimony from former executives in undisclosed litigation.
Management continues to insist that it has an “innovative and disruptive solution” in what appears to us to be a competitive and commoditized storage business, dominated by deep-pocketed tech companies and smaller, faster-growing peers.
After its woeful capital market performance and undifferentiated storage offering, Backblaze’s response has simply been to double-down, believing that throwing money at new sales staff and chasing bigger customers can solve its issues.
To keep its capital markets story alive, Backblaze has fed its auditor fraudulent projections, hidden internal investigations from shareholders, and engaged in accounting tricks to inflate profitability metrics, per allegations in lawsuits and our own research.
As with many beleaguered tech companies, investors may hang on with the hope of a buy-out, but in reality, we believe Backblaze has no back-up plan and its reported numbers deserve major scrutiny.
Questions for Management
Backblaze states on its website that “transparency is one of our most cherished values—if not the most important value of our business.” If this truly is the case, we believe Backblaze’s management team will have no issue responding to our 12 questions below:
1) Backblaze is facing two lawsuits from former senior employees, including the company’s former VP of Investor Relations and Senior Director of FP&A. The lawsuits make extremely serious allegations of accounting and insider trading improprieties. Why has Backblaze not disclosed these lawsuits to shareholders?
2) According to lawsuits from former employees, Backblaze founders implemented an aggressive 10b5-1 trading plan after the IPO that went against the advice of Backblaze’s General Counsel, CFO, VP of Investor Relations, and a third-party capital markets advisor. Is it true that these individuals warned against the trading plan due to the risk of “crushing” Backblaze’s stock price? If so, why did you disregard the warnings of key advisors?
3) A former employee claimed that co-founder Brian Wilson wrote an email to management stating that if the stock goes to zero, he would feel “beyond” justified regarding his share sales. Why would a Backblaze co-founder feel “justified” for sending the stock to zero?
4) These former employees claim that CEO Gleb Budman sold $1.6 million in stock while in possession of knowledge related to the CFO’s imminent resignation, which had not yet been announced to shareholders. If true, this allowed Budman to avoid substantial losses. Was Gleb Budman aware of Frank Patchel’s imminent retirement when he sold $1.6 million in stock?
5) A former employee claimed that he brought evidence of inflated cash flow forecasts to the board of directors that resulted in an internal investigation. Is this true? If so, which firm conducted the investigation and why was this not disclosed to shareholders?
6) When did this investigation begin and end, and what were its findings? Did the founders continue to sell shares during this investigation?
7) Another former employee alleged there were misstatements in Backblaze’s 2022 10-K related to fixed assets, capitalized R&D, cash flow, and equity accounting. What has management done to investigate these claims?
8) Backblaze’s definition of “Adjusted Free Cash Flow” changed in Q4 2024 to exclude costs related to legal settlements, even though Backblaze has not disclosed any ongoing litigation, or a provision for costs related to litigation. Since Backblaze is facing two lawsuits from former employees, what contingent provision has Backblaze established for potential settlements and other legal costs?
9) Retail investors have been asking pointed questions to management since Backblaze’s IPO. In Q2 2024, Backblaze suddenly stopped taking questions from retail investors. Why?
10) As a percentage of revenue, Backblaze capitalizes more internal-use software costs than 42 SaaS peers, and is ~5x higher than the average capitalization rate of these peers. This significantly boosts reported net income. How does management justify this accounting treatment?
11) Backblaze hired a new CFO, whose last company, Beachbody, missed earnings estimates 6 out of 9 quarters during his tenure, whose share price declined by 91% over the same time period, and the company is now facing risk of continuing as a going concern. Why did Backblaze choose to hire him?12) A Wasabi executive told us they had “half a dozen” AI customers leave Backblaze and come to Wasabi in the last month and a half. Why did they leave? Will Backblaze share metrics around customer additions and losses? Will Backblaze also share the number of customers deemed “AI customers” and how that number has changed over time?
Disclosure: We are short shares of Backblaze (NASDAQ: BLZE)
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Appendix A
We reviewed capitalization of internal-use/software development of 42 peers in the “Enterprise-SAAS” space as defined by Alpha Sense. In the rare case where FY 2024 financials were not available we used the previous year.