I am also doing an image backup of the server locally and in the cloud, so its backing up the physical database files as well (not a correct SQL backup of course). Probably no way to exclude those from the image based backup (I guess I would not want to if I had to restore the server from the image) since I am doing a SQL based backup as well?

The database is running in Simple Recovery. Also, I had selected "Copy-Only" for the backups I ran to date.
I will re-create the backup job and use the hybrid method.

Thanks.