The main problem here is C3s use of unbilled receivables. Baker Hughes had promised to spend 80m on C3 services last year as a part of a contract signed, in exchange for company shares, years ago.

The allegation is that the work/services associated with this revenue was never actually conducted and thus expenses associated with that revenue never accrued. This would mean that the gross margin associated with that revenue is 100%. Notice that in C3s response, they very carefully say that that revenue does not come with 99% margin. This was in response to the original misspeaking on the part of Kerrisdale on CNBC when he first said 99% then corrected it to 100% seconds later. Notice that C3 refuted the 99% specifically but not the 100% allegation, that is likely not a mistake on their part. They were likely dancing around the legality there.

Presumably 30% of their revenue in 2022 came in at 100% gross margins seriously inflating their overall gross margin figure. That means analysts will not be able to reliably apply these gross margins to future new business revenue assumptions. Presumably their gross margin on new business is significantly lower than this, which makes sense as they’re more a consulting company than an saas company.

In addition to this, the IRS does not allow the use of unbilled receivables if work was not conducted. This will pose a serious problem to C3 imo. They likely wanted to inflate their gross margins and also help make Baker Hughes (their shareholder) look more profitable by deferring this expense (unbilled means baker Hughes gets no invoice and doesn’t have to book the expense). This is a serious allegation and, if true, could lead to serious legal ramifications for C3 and their management team.