Shares of C3.ai Inc. plunged in their biggest daily decline on record Tuesday after a short seller publicly accused the software company of accounting and disclosure irregularities.
The artificial-intelligence company’s stock
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slumped 26% after Kerrisdale Capital Management — which has publicly disclosed that it’s betting that C3 shares will fall in value — said it sent a letter directly to C3.ai’s auditor, Deloitte, to highlight its charge of accounting and disclosure issues.
Kerrisdale alleges that C3.ai uses accounting methods that have the effect of inflating its income statement, which it says is intended to meet sell-side analyst estimates for revenue and profit, while “concealing significant deterioration in its underlying operations,” writes Sahm Adrangi, chief investment officer at Kerrisdale Capital Management, in the letter.
In an interview, Adrangi asserts “atypical” accounting around unbilled receivables over the past year — grew from less than $10 million in each quarter prior to April 2022 to $88 million in C3’s most recent quarter. One particular customer, Baker Hughes Co.
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now accounts for 91% of the total unbilled receivables yet actual revenue from Baker Hughes has been stagnant, according to Adrangi. He said he came to that conclusion through quarterly earnings transcripts, filings, and comments at public conferences by C3.
A C3 spokesperson offered the following response:
“The Kerrisdale Letter appears to be a highly creative and transparent attempt by a self-acclaimed short seller to short the stock, publish an inflammatory letter to move the stock price downward, then cover the short and pocket the profits. Without comment on the legality of stock manipulation nor the innuendo replete in the letter, we will note that their allegation that C3 AI’s financial disclosures regarding Baker Hughes are somehow incorrect manifests a fundamental misunderstanding of U.S. GAAP accounting practices and principles.”
Additionally, C3.ai issued a scathing letter to Kerrisdale Capital on Wednesday, in which it pointed out that “Contrary to Kerrisdale’s assertion, unbilled receivables and contract assets are quite common in the software industry.”
Deloitte wasn’t immediately available for comment.
Baker Hughes was immediately available for comment.
Kerrisdale alleges C3’s financial statement does not reflect underlying business fundamentals and instead is used “as a tool to fool market participants by painting a false portrait of a company’s profit and loss.”
“The accounting disclosures and financial statement referenced in the letter have been reviewed by our independent audit firm for which we have an unqualified opinion; and are complete and correct,” said the C3 statement.
C3.ai, which helps players in the energy, financial services and defense markets build AI applications, raised $651 million in an initial public offering in December 2020. Shares have more than doubled so far this year amid a wave of interest in AI applications following the debut of ChatGPT, a chatbot developed by OpenAI and being integrated into products from OpenAI investors Microsoft Corp.
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Last month, Kerrisdale Capital claimed in a report that C3.ai “has risen from the ashes of its busted IPO based on the misconception that its self-proclaimed ‘AI leadership’ somehow positions it to benefit from Silicon Valley’s current tech theme du jour: generative AI as represented by media obsession ChatGPT.”
Shares of C3.ai have skyrocketed 123% so far this year. The broader S&P 500
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is up nearly 7% in 2023.
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