Shareholders of C3.ai (NYSE: AI) sued a short seller for releasing a letter that allegedly contained false and deceptive statements for the purpose of manipulating and driving down the price of the stock.
Kerrisdale Capital Management shared last Tuesday the letter it wrote auditing firm Deloitte & Touche, in which the investment management firm aimed to bring about the “highly aggressive accounting” that C3.ai used to inflate its income statement. The letter was part of a larger short report issued by the firm.
The complainants, represented by Elizabeth Coffey, now allege that the published letter by “activist short sellers” Kerrisdale, “had the effect specifically intended by the defendants” to drive down the price of the common shares in C3.ai by over one-quarter of their value, resulting in a loss to its market capitalization in an amount in excess of $1 billion.
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Coffey is said to have purchased 5.33426 shares in C3.ai back on March 6 at approximately $28.12 per share, or a total of $150.00. After the Kerrisdale letter was released, Coffey sold her shares the next day at “approximately $23.56 per share, or a total of $125.70, for a loss of $24.30.”
One of the points Kerrisdale highlighted in its letter is the questionable ballooning of C3.ai’s receivables, adding that total accounts receivable has more than doubled while quarterly revenue has declined.
“This has led to a cumulative negative cash flow statement entry of -$76m owing to changes in accounts receivable over the past four quarters,” the investment firm noted. “Given C3.ai generated last-twelve months revenue of just $267m, this cash flow discrepancy due to growing receivables accounted for over a quarter of revenue, a material sum.”
The firm explained that the surge in receivables is a result of growth in “unbilled receivables,” growing from less than $10 million in each quarter prior to April 2022 to $88 million in the most recent quarter. This is said to be primarily driven by one client – Baker Hughes.
Kerrisdale also questioned how C3.ai reported $56 million of related party subscription revenue over the past nine months tied to Baker Hughes but no corresponding cost of revenue was recorded, pushing up the company’s gross margins.
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“Why does C3.ai want to inflate its gross margin? We believe it does so because it regularly pretends to be a software-as-a-service company instead of the services-intensive consulting business that we believe it really is,” Kerrisdale alleged.
The investment firm also tried to clarify that the software company is inflating its gross margins by recording its cost of revenues under research and development expenses.
C3.ai CEO Tom Siebel commented that the reports only goal was stock manipulation, citing the report contained “not a word of truth.”
“It was a very creative, very successful attempt at what appears to be successful stock price manipulation,” Siebel said.
The company’s shares fell as much as 38% on the two days following Kerrisdale’s report, erasing most of the quick gains generated by a spike in price at the start of the month.
Kerrisdale made $100 million to $200 million on the short position, according to Siebel. “I mean the guy succeeded, sometimes crime pays,” Siebel said, adding that the short-seller was one of the firms under investigation by regulators.
The US Justice Department is investigating approximately 30 short-selling businesses for suspected trading violations, including Kerrisdale. Kerrisdale Chief Investment Officer Sahm Adrangi stated earlier this year that no government authorities had approached the company regarding inquiries.
Adrangi claimed Siebel’s profit figure is incorrect, but he failed to disclose any gain or loss on the short position.
C3.ai said in a statement that unbilled receivables are a “straightforward accounting matter that has been fully disclosed,” and that Kerrisdale’s assertion that the Baker Hughes deal gross margin is over 99% is incorrect and has never been published.
Siebel also said that more than 80% of C3.ai’s revenue comes from software subscriptions rather than consulting, and unbilled receivables are widespread among peers ranging from Salesforce Inc. to International Business Machines.
Information for this briefing was found via Bloomberg and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
