Backblaze: Challenges and Allegations

Overview

• Company: Backblaze (NASDAQ:BLZE)
• Industry: Cloud storage and backup solutions
• Founded: 2007
• IPO: November 2021
• Headquarters: San Mateo, California
• Segments: B2 Cloud Storage and Computer Backup
• Market Cap: $250 million

Financial Performance and Stock

• Losses: Reported quarterly losses since IPO
• Share Price Decline: 71% decrease since IPO
• Share Dilution: 80% increase in outstanding shares
• Revenue Segments: B2 Cloud Storage surpassed Computer Backup in Q4 2024 with $17.1 million vs. $16.7 million

Legal and Ethical Allegations

Lawsuits (October 2024)

• Plaintiffs: James Kisner (former VP of Investor Relations) and Huey Hall (former Senior Director of FP&A)
• Allegations:
  • Accounting fraud
  • Inflated financial projections
  • Whistleblower retaliation
• Insider Trading: Founders implemented an aggressive stock sale plan post-IPO lock-up in April 2022

Financial Misconduct

• False Financial Statements: Employees pressured to certify inaccurate financials
• Accounting Irregularities: Issues with Fixed Assets, Capitalized R&D, Cash Flow, and Equity accounting
• Inflated Cash Flow Forecasts: Alleged to avoid a going concern opinion

Insider Trading Concerns

• Gleb Budman (CEO): Sold $1.6 million of stock while holding material non-public information
• Brian Wilson (Co-founder & CTO): Sold significant shares; resigned amidst controversy

Capitalization Practices

• Software Development Costs: Backblaze capitalizes internal software costs at a rate 5x higher than peers
• Impact: Creates an illusion of reduced losses through high capitalization rates

Competitive Position

• Market Competition:
  • Losing ground to competitors like Wasabi
  • Limited differentiation in products
  • Primarily competes on cost
• AI Market: Claims of success with AI clients questioned by industry experts

Leadership Changes

• New CFO: Marc Suidan, formerly of Beachbody, which struggled under his financial leadership

Transparency Issues

• Lack of Disclosure: Fails to inform shareholders of critical legal and internal matters
• Retail Investor Engagement: Stopped answering questions from retail investors in 2024

Conclusion

• Overall View: Backblaze is seen as a failed growth business with ongoing financial and ethical challenges.

Questions for Management

1. Why has Backblaze not disclosed ongoing lawsuits?
2. Why did founders proceed with a stock sale plan against advisor warnings?
3. What actions have been taken in response to alleged financial misstatements?
4. Justification for high capitalization rates?
5. Metrics on customer retention, especially in AI segment?

Disclaimer: This summary captures key issues surrounding Backblaze as highlighted in the detailed report by Morpheus Research. Please consult original material and additional resources for comprehensive understanding.