Eros International Plc

This is the Data Room for our Eros International Plc coverage. These documents have informed our analysis of Eros. These include regulatory filings, other public data, and the record of the Securities and Exchange Commission. Eros’s divided responsibility audit has created gaps in their financial reporting leading to a public controversy and allegations that it has allowed the management to overstate assets and earnings.

No. Date Documents
24 August 12, 2016

Investors should compare the revenue representations EROS International Plc [NYSE Trading Symbol: EROS, $18.05] made during their Investor Day on October 13, 2015 to those the company just filed in their year-end audited results.

In the infamous clip below, investors can observe Jyoti Deshpande’s, EROS’s CEO’s, response to being questioned about the reported growth of sales in the United Arab Emirates (UAE). Since 2012, sales in the UAE increased by 1,550.8% to $103 million in 2015. These sales rivaled that of India, which is obviously the largest for EROS’s product. A spreadsheet analysis of these figures is available here.

This unparalleled growth left investors with numerous concerns, which caused EROS’s stock price to drop from a high of 39.01 on August 14, 2015 to a low of 6.84 on November 13, 2015.

EROS’s latest 20-F filing suddenly shows that UAE sales dropped by 40.69% to $62 million.

Why do the UAE Sales vary so much year to year? Why was there a sudden drop in UAE sales after such unprecedented growth?

EROS leaves these questions unanswered, but these are not the only questions investors that should raise investors’ concerns.  In a separate report, asensio.com reveals serious problems with EROS’s claims to have achieved positive Free Cash, lowered its account receivables from operating cash flow and reduced debt. All these questions add weight to EROS worst-case scenario.

23 August 12, 2016

On July 26, 2016, EROS International Plc. [NYSE Trading Symbol: EROS, $17.87] released its Form 20-F for Fiscal 2016. Prior to this release, EROS reported its unaudited Fiscal Year 2016 results, and highlighted three facts:

  • EROS generated positive Free Cash Flow of $21.8 million
  • EROS reduced its trade receivables from $198,066 million to $169,413 million
  • EROS reduced net debt 19.8% from $161.0 million to $129.1 million

asensio.com’s analysis addresses the meaning behind these statements. It can be accessed here.

EROS headlined their Fiscal 2016 results with “Eros International Plc Reports Free Cash Flow Positive Fiscal Year 2016 Results.” This usually indicates healthy company growth, and is meant to appease their investors. EROS justified their cash flow positive status by proclaiming that this was a result of an increase in their operating cash flows. However, EROS was only able to do this by factoring $39.03 million dollars of accounts receivables, which went into their operating cash flow. Footnote 19 of EROS’s Form 20-F for Fiscal 2016 states:

“The Company factored accounts receivable amounting to $39,026,000 (2015:$Nil) as of March 31, 2016. The cash proceeds from these arrangements are reflected as operating activities.”

When reflecting this figure into their stated positive Free Cash Flow of $21.8 million, as shown by Table I of the attached spreadsheet, if EROS had not factored their receivables, they would have reported a negative free cash flow of $16.2 million. The headline for their press release is false, and could potentially mislead their investors.

EROS’s factored receivables won over investors on another front. In Fiscal 2015, EROS was criticized for their large amount of accounts receivables, and promised to bring them down to around $160 million, which they only missed slightly. While the $29 million reduction in receivables seems like good news for investors, Table II. shows that if EROS had not factored their accounts receivables, they would have an increase of $10.4 million since Fiscal 2015. EROS used the “factoring” tactic to overshadow an overall increase in their receivables from the year before.

EROS’s final proclamation of reduced “net debt” served to be a key highlight in Fiscal 2016, as the company calculates net debt as short and long-term borrowings minus cash and cash equivalents. EROS reduced their net debt by more than $30 million. However, just as Table III. shows, their reduction of net debt isn’t the entire story. EROS’s trade payables increased by $31.9 million, negating their debt reduction.

Upon analysis, it seems that the same highlights that were deemed attractive to investors turned out to be a confirmation of EROS’s worst-case scenario.

22 July 20, 2016

Activist Insight, a worldwide information source for global investing, interviewed Manuel P. Asensio, asensio.com’s founder on July 14th, 2016 about the public controversy surrounding EROS International Plc’s [NYSE Trading Symbol: EROS, $17.92] financial reporting and stock market valuation.

The interviewer, Paolo Frediani, works as financial journalist there. Prior, Paolo worked as the Press Officer for the Prime Minister of Italy, and has done extensive journalism work with positions at La Repubblica and CNBC. 

You can find the article by clicking here.

About Activist Insight:

Since 2012, Activist Insight has provided its diverse range of clients with the most comprehensive information on shareholder activism worldwide. Regularly quoted in the financial press, Activist Insight is the trusted source for data in this ever-evolving space. Activist Insight offers two great products: Activist Insight Online and Activist Insight Monthly online magazine, and counts many of the world’s leading investment banks, law firms, shareholder communications firms and institutional investors as its clients.

For more on Activist Insight, visit http://www.activistinsight.com/default.aspx

21 July 18, 2016

On May 28, 2015, EROS International Plc. [NYSE Trading Symbol: EROS, $18.16] abruptly announced that Andrew Heffernan, its Chief Financial Officer, was “taking a leave of absence.”  The length of his leave was undisclosed.  In the same announcement, EROS announced the appointment of Prem Parameswaran, a well-known investment banker, as its new CFO.

On August 7, 2015, Prem faced his first challenge. The SEC served notice on him that EROS had failed to have Heffernan and Deshpande file their personal certifications, failing to attest that EROS’s Annual Reports filed with the SEC on Form 20-F for 2014 and 2015 “did not contain any untrue statement of a material fact or omit to state a material fact.

Andrew Heffernan had served as an external auditor with Grant Thornton UK from 2001-2006.  Heffernan started working at EROS in 2006. Grant Thornton UK served as EROS’s auditor from 2011-2012. Thus, he was involved in EROS’s IPO on the London Stock Exchange in 2006, the IPO of its Indian subsidiary National Stock Exchange of India in 2010, and the US IPO in 2013.  He was responsible for the production of 2014 and 2015 annual reports that he failed to certify. His reasons for not signing remain unknown to the investor public due to his conveniently timed exit.

There is reason to suspect that Heffernan could have concerns about making a personal certification.  Heffernan’s departure may have been convenient. Not only was he previously employed by EROS’s former auditor, but according to an article published by Spotlight Research, he has been reported as having been involved in Rana Productions, an entity that conducted business with EROS and a number of UK Companies with ties to EROS.  In Prem, EROS found an individual with plausible deniability willing to provide the required certification.

Not surprisingly, the SEC instructed Prem to amend the filings, in order to comply with Sarbanes-Oakley Act of 2002. The SEC asks:

“In responding to our comments, please provide a written statement from the company acknowledging that:

  1. the company is responsible for the adequacy and accuracy of the disclosure in the filing;
  2. staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and
  3. the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.”

Prem had only been CFO for 2 months and 11 days. Nonetheless, Prem responded with a letter to the SEC and filed two amended Form 20-F’s containing both his and Deshpande’s certifications. Either Prem was the wunderkind CFO he was touted to be or he was the rubber stamp that EROS needed after Heffernan’s failure. Again, Prem had been on the job for just 71 days when he signed his two certifications.   Did he truly conduct the necessary due diligence?  Is it prudent for investors to rely on Prem’s certifications covering a mostly intangible asset base totaling $1.1 billion? Do investors know enough about Prem’s process to make a judgment that his certifications are meaningful?  And because Prem’s made such sudden certifications in 2015, is he suddenly going to refuse to sign the 2016 certifications?

Using a straightforward comparison between industry information and EROS’s financial statements, Spotlight Research and asensio.com published articles questioning the validity of Eros’s reported financial results and its management’s integrity. To this date EROS leaves 10 issues unexplained:

  1. Its undisclosed “Divided Responsibility Audit
  2. Its changed description in its internal review
  3. Its 1,550% sales increase in the United Arab Emirates while revenues in India decreased 3.6% and revenues for all customer locations excluding the UAE decreased 9.9%.
  4. Andrew Heffernan’s role in EROS’s “special purpose entities” and related party transactions
  5. Its EROSNow paid subscribers controversy
  6. Its disproportionately large “Film Content” and “Accounts Receivables” balances versus the syndication market for Indian films
  7. Its failure to file Andrew Heffernan’s required Compliance Certification
  8. Prem’s willingness to file an ill-informed Compliance Certification to the SEC
  9. Its market position versus competitors such as SONY Corporation [NYSE Trading Symbol: SNE, $30.20], VIACOM Inc. [NASDAQ Trading Symbol: VIAB, $44.84], STAR TV India, a subsidiary of Twenty-First Century Fox, Inc. [NASDAQ Trading Symbol: FOX, $28.72], and Zee Entertainment Enterprises Limited [NSE Trading Symbol: ZEEL, INR 462.45]
  10. The Company’s January 7, 2017 maturity date to repay $125 million in bank debt

asensio.com has repeatedly contacted Grant Thornton International, Grant Thornton India, EROS’s  investor relations executives, and their public relations agents and EROS’s legal counsel, Kasowitz, Benson, Torres & Friedman. They have refused to comment on any of these pressing issues. If Prem has the answers to EROS’s puzzling financial disclosures, he has kept them to himself.

Given the slew of questions about EROS’s financial disclosures, investors would be wise not to count on Prem’s certification one way or the other.

20 June 28, 2016

New York, NY.  asensio.com today released copies of its letters to Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”) and Foley and Lardner LLP (“Foley”) concerning Eros International Plc.’s [NYSE Trading Symbol: EROS, $13.99] financial reporting controversy.

The letter to Skadden pertains to changes EROS has made to reports on Skadden’s role in its internal review. The letter to Foley replies to Grant Thornton India LLP’s comments on Eros’s multi-level “divided responsibility” audit and requests information on EROS’s reported United Arab Emirates (“UAE”) revenues.

A report titled “EROS: Suggested Investor Questions on UAE Financial Reporting” that includes a spreadsheet analysis of Eros’s professed UAE’s revenues is available by clicking here.

About asensio.com:

asensio.com has been publishing investigative research concerning short investments since June 4, 1996.  asensio.com’s reporting strives to provide the most accurate facts and analysis available concerning the companies that are the subjects of our research.  It is the first website exclusively devoted to the idea that contrarian investment news and research should be available to the public to enhance the market’s price discovery process. For over two decades, asensio.com’s research has intersected with many major market events and significant regulatory upheavals. The National Bureau of Economic Research [“NBER”], the nation’s leading non-profit economic research organization, published a behavioural finance article finding Manuel P. Asensio to be the Pioneer of “information producers as arbitrageurs.”

Any inquiries and requests for information can be sent to info@asensio.com

19 June 7, 2016

Eros’s Major Subsidiaries and their Auditors as of March 2015

18 June 7, 2016

Eros Corporate Structure Chart & Lulla Family Tree

17 April 12, 2016

PCAOB Release No. 2016-002 Specifically Addresses “Divided Responsibility” Audits

16 March 21, 2016

Eros Announces the Completion of their Internal Review

15 November 2, 2015

Eros reinforces positive business fundamentals and announcement of Skadden’s engagement

14 October 13, 2015

Eros CEO’s UAE Receivables Response at the Investor Day

13 August 7, 2015

EIML Annual Report 2014-15

12 July 8, 2015

Eros 2015 20-F SEC Filing

11 June 30, 2015

Walker Chandiok & Co. LLP’s PCAOB Form 2 Filing 

10 June 28, 2015

Grant Thornton India LLP’s PCAOB Form 2 Filing

9 June 25, 2015

Grant Thornton UK LLP’s PCAOB  Form 2 Filing

8 September 2, 2014

EIML Annual Report 2013-14

7 November 12, 2013

Eros International Plc NYSE IPO Prospectus

6 July 12, 2013

Eros International Plc Annual Report 2012

5 June 13, 2013

Eros International Plc Annual Report 2013

4 May 31, 2012

Eros International Plc Annual Report 2011

3 September 23, 2010

Eros International Media Limited (“EIML”) IPO Prospectus

2 September 23, 2010

Eros International Media Limited IPO Prospectus

1 August 17, 2007

Eros International Plc 2007 Annual Report