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Ebix’s independent auditor resigns over “significant unusual transactions” in gift cards biz

On February 19, Ebix’s independent auditor RSM resigned as the company’s public accounting firm as a “result of being unable, despite repeated inquiries, to obtain sufficient appropriate audit evidence that would allow it to evaluate the business purpose of significant unusual transactions [in Ebix’s gift cards business] that occurred in the fourth quarter of 2020”.

Following this announcement, NASDAQ-listed Ebix’s stock crashed, falling from $50.74 per share on February 19 to around $24 by February 22. Share price fell as much as 27% during after-hours trading on February 19 and continued to drop as much as 40% on February 22. Ebix is a software company that supplies insurance, financial, health and e-learning business with software and e-commerce services.

RSM also said it had identified a “material weakness” related to Ebix’s failure to design and implement controls “over the gift or prepaid card revenue transaction cycle sufficient to prevent or detect a material misstatement”. The company and the auditor also disagreed over the accounting treated of $30 million that had been transferred to a trust account of Ebix’s outside counsel in December 2020.

The gift cards business of EbixCash has been a huge growth driver for Ebix, showing a 95% quarterly growth in Q3FY21.

After its stock fell, Ebix is now attempting to downplay the news, noting that its unaudited results for Q4 2020 includes revenue greater than $220 million. The unaudited gift card business generated in excess of $130 million of revenues in Q4 (95% QoQ growth) and (unaudited) operating income of $1 million for Q4 and $1.4 million in full year 2020. The company said this growth was driven by gift card business revenue and increased use of digital money in India during the COVID-19, plus the company’s push to promote the sector. Further, in a statement on February 22, Ebix denied any wrongdoing; it said the the $30 million amount was earmarked for a new software industry acquisition in the US.  “The treatment of the cash amount is a balance sheet classification determination and has no impact on the operating cash flow of the Company,” Ebix said.

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In the statement, Ebix said it “intends to move as quickly as possible to replace RSM and to complete its 2020 financial audit.” “The Company believes that the accounting for its gift card business is consistent with GAAP requirements. The Company will communicate with its public shareholders as appropriate,” Ebix said.

Ebix said its public listing for its India subsidiary EbixCash would is targeted towards the end of 2021, in consultation with investment bankers. In June 2020,Yatra terminated a pending merger agreement with the company and filed a suit seeking “substantial damages” for Ebix’s alleged breach of deal terms.

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