Note the author of this piece is SHORT EROS: This is a follow up to our original story published last September in which we cautioned investors about Eros International stock. The stock is down approximately 20% since then and we believe it will continue going down.
As our previous story indicated, many shorts had felt the stock of Eros International ($EROS) was overvalued and that the company might need to raise capital. On the other hand, some bulls we spoke with inferred from management’s comments that no capital raise was imminent.
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On November 22, 2017 Eros issued its quarterly earnings release which included the following quote (italics added for emphasis):
“With over $113 million of cash on our balance sheet and a reduction in short-term borrowings, our balance sheet remains strong and we are well capitalized for future growth. “
Many EROS bulls we spoke with believed this quote was further evidence that the company wouldn’t raise capital anytime soon. So, imagine their surprise when two weeks later on December 4, 2017, EROS filed an offering for $122 million of convertible notes and warrants to purchase up to 2.0 million shares. Eros has an equity market cap of approximately $670 million, so we consider this offering to be rather substantial.
Considering how the stock is trading, many investors are to be displeased with this offering and the terms of the offering which to us appear to be rather expensive. We feel the interest rate is rather high and we are surprised the company issued warrants as part of the offering. However, what seems most shocking about the offering is the feature which some have called “potentially toxic” that states the company may pay off the note by issuing shares at a price that would be a discount to its price at the time of payment. Under this scenario, note holders may have the incentive to drive down the stock price because the lower the stock price at the time of payment, the more shares these investors would receive. The terms of the note are complicated and we encourage investors to do their own due diligence.
We believe the note offering raises additional potential concerns about the credibility of management (which many people have criticized as a result of the numerous related party transactions) and the valuation/liquidity of the entire company. Furthermore it seems the rumors of an EROS buyout (which began to surface soon after EROS originally filed its shelf offering and which we believe contributed to a large short squeeze) are unfounded. We believe this stock will continue to trade down.