(Bloomberg) — C3.ai Inc. fell the most ever after short-seller Kerrisdale Capital alleged “serious accounting and disclosure issues” at the enterprise software developer.
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The company used “highly aggressive accounting to inflate its income statement metrics in order to meet sell-side analyst estimates for revenue and certain profit metrics, and to conceal significant deterioration in its underlying operations,” Kerrisdale Chief Investment Officer Sahm Adrangi wrote in a letter to Deloitte & Touche LLP, C3.ai’s auditor.
Shares of Redwood City, California-based C3.ai fell as much as 27% to $24.65 on Tuesday in New York. The company has benefited from a recent spike in investor interest in artificial intelligence, and its stock has more than doubled this year. Kerrisdale said it is short shares of C3.ai.
The company accounts for costs related to the production of bespoke software as research and development rather than cost-of-revenue in order to boost margins, Kerrisdale wrote in the letter. This is among the accounting practices C3.ai uses to present itself as being in the high-margin, software-as-a-service business rather than one based on lower-margin consulting, according to the letter. Kerrisdale also flagged concerns around a jump in unbilled receivables from one customer, Baker Hughes Co.
In a statement, C3.ai called the letter a “highly creative and transparent attempt” to diminish the stock price. “Their allegation that C3.ai’s financial disclosures regarding Baker Hughes are somehow incorrect manifests a fundamental misunderstanding of US GAAP accounting practices and principles,” a spokesperson said, referring to generally accepted accounting principles. The spokesperson added that the accounting disclosures and financial statements referenced in the letter have been reviewed by C3.ai’s independent audit firm. Baker Hughes and Deloitte didn’t respond to a request for comment.
Kerrisdale Capital is one of nearly 30 short-selling firms being probed by the US Justice Department over potential trading abuses. Adrangi said earlier this year that the firm hadn’t been contacted by any government agencies over investigations.
C3.ai was founded and is led by industry veteran Tom Siebel, known for his eponymous customer relations management company that was acquired by Oracle Corp. in 2006. The letter calls out “significant turnover” among chief financial officers, as four people have held the role since 2019.
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