C3.ai sent its stock plummeting after a short-seller alleged accounting issues

There was a dramatic drop in C3.ai Inc. stock after short seller Kerrisdale Capital alleged that the enterprise software developer was having "serious accounting and disclosure issues."

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Sahm Adrangi, Kerrisdale's Chief Investment Officer, wrote in a letter to Deloitte & Touche LLP, C3.ai’s auditor, that the company employed "highly aggressive accounting practices to inflate its income statement metrics to meet sell-side analyst estimates for revenue and certain profit metrics while concealing significant deterioration in its underlying operations," which led to significant deterioration in the company's underlying operations. 

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C3.ai, a Redwood City, California-based company, posted a 27% drop in its share price to $24.65 on Tuesday morning in New York. The stock price of the company has more than doubled in the last 12 months, as the company has benefited from a recent spike in investor interest in artificial intelligence. C3.ai shares have been shorted by Kerrisdale, the company announced.

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To boost margins, Kerrisdale wrote in the letter, the company accounts for costs associated with the production of bespoke software as research and development rather than cost-of-revenue to avoid falling below cost-of-revenue. C3.ai uses this accounting method among others to present itself as a software-as-a-service company with high margins instead of a consulting company with lower margins, according to the letter it sent to potential investors. Moreover, Kerrisdale issued a warning regarding an increase in unbilled receivables from one of the company's customers, Baker Hughes Co.

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The C3.ai company described the letter as a "highly creative and transparent attempt" by the firm to diminish the price of the stock. "It appears that they do not fully understand US GAAP accounting practices and principles as demonstrated by the claim that C3.ai's financial disclosures regarding Baker Hughes are somehow inaccurate," a spokesperson for the company said, referring to generally accepted accounting practices. Moreover, the spokesperson added that C3.ai's independent audit firm had previously reviewed the accounting disclosures and financial statements referred to in the letter. There was no response from Deloitte or Baker Hughes to a request for comment.

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The US Justice Department is investigating nearly 30 short-selling firms with potential trading abuses, including Kerrisdale Capital. Adrangi said earlier this year that the firm has not been contacted by any government agencies regarding the investigations into the firm.

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Tom Siebel, the industry veteran who founded and led the eponymous customer relations management company C3.ai, which was acquired by Oracle Corp. in 2006, led C3.ai to become a leader in the Artificial Intelligence industry. Four people have held the position of chief financial officer since the beginning of 2019, as cited in the letter, which points out the "significant turnover" in the position.