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It cracks me up that Cassandra throws out the words "Death Spiral", "Toxic", and "Floorless" when discussing the convertible shares E-Digital has issued. Those words are good for the shock value, but that is all.
In reality, E-Digital probably had no other choice than to raise money using this vehicle. Here is my theory of why this happened:
When the previous S-3 for shelf shares application was issued, the registration took longer than expected, and E-Digital management was convinced that there would be enough shares to get through the period of time required for profitability. When the retail and e-tail operations became costly, and capital had to be raised, they were out of shelf shares, and in order to cover the losses, had to take out short terms loans to cover these losses.
Again E-Digital management was convinced that the O-1000 and IFE and F-10 would bring them to profitability quickly, and therefore there was no need for new shelf shares. But the revenues from these products now took much longer than expected, and more capital was required, so they needed another short term solution.
Obtaining a short term loan was probably out of the question, since anyone making this loan would be subordinate to the first loan, and nobody was willing to be put in that position. The only way to raise capital quickly would be to issue the Series D convertibles, which allow the financers to have a garunteed return in all possible cases. Again the E-Digital management only issued enough Series D shares to get them through the time required for what they were convinced would be profitability, and would no longer require any more capital.
Again, delays in projects, and higher than expected costs put them in another situation where they required more capital. Since an S-3 registration is time consuming, and they still had the original outstanding loan, they had no other choice than to issue the Series E convertibles. These convertibles also garunteed the investors a return no matter the future share price. E-Digital management probably considers this enough capital to carry them through the period necessary before profitability.
Now it is likely that new shares will be registered with an S-3, both to cover the convertibles, and possibly to have shares on hand if more capital is required.
The current situation could have been avoided by either registering sufficient shares in the previous S-3 to cover the period of time where the company was losing money, or to at least have registered a new S-3 when the $750,000 loan was made, so that new capital would be available in time to pay off this loan. Of course nobody could predict that it would have taken this long to become profitable.
Hopefully the previous poor capital planning is now behind us, and the company will register enough shares for any unseen future difficult situations.
Of course this is all just my theory of what may have happened, and it is always much easier being a Monday morning quarterback.
So true Sentinel. Even though I do not like the convertible financing, it is water under the bridge. I do believe the best buying op will be after the S-3 registration when the share price is under pressure, and before the financers cover the short position.
As unpleasant as it may be, I do think the timing of the S-3 will have to wait until the financers of the convertible shares have been able to create a sufficient short position to protect their investment. The announcement of the S-3 registration probably will put pressure on the share price, allowing them to cover their short position at a lower price. When announcements of new OEMs and Airlines is made, and the share price rises, they will be able to cash in on a higher price with the warrants. It is a no-lose situation for the convertible investors, and that is why they invested 1.2 million dollars. When E-Digital becomes profitible, it will be nice that this type of financing will no longer be necessary.
Cassandra I think everyone agrees that financing with convertible shares is an expensive way to raise funds. But since that is water under the bridge we can all hope that a registration of 20 - 30 million shares will cover the convertibles, and get them through the next year without either borrowing or issuing more convertibles. I think we will see the S-3 fairly soon, or at least after the financers have been able to short enough shares and give permission to E-Digital to announce the S-3.
Cassandra I do not agree. I still think they can get away with only registering 20 million new shares with the S-3. They can wait until next year to register the next round. E-Digital needs to be sensitive about doing a large registration, as this would possibly scare off current and future investors.
20 million shares is my guess for the S-3. They will need to cover the requirements of the Series-D and Series-E, plus have some on hand.
Very interesting jtdiii. Thank you for the report. I think we all certainly wish you had not said "S-3 Filing", but we probably all expected it.
I still do not understand how they compute the "burn" rate. I noticed that from the last quarter financial statement, that they were losing a little over $250,000 a month. If there were no costs associated with selling 2000 IFE units, and each unit brought in over $310 in profit, I assume this would help them get closer to break even.
In my opinion it would be better to have APS market the player to other industries, and have E-Digital simply manufacture, refurbish, and collect the hefty margins. The E-Digital team does not seem to have an effective sales team. From listening to the SHM broadcast I wouldnt want any of the presenters on my sales force. I have heard better speaking skills from a computer generated monotone speech synthesizer.
Boyer has commented that APS "owns" the design of the digeplayer, and also made a comment about patents. This may not preclude E-Digital from marketing the device to other industries, but could require the involvement of APS.
They will need to have enough O-1000s on hand to handle warranty returns that cannot be repaired. One possibility since they are getting out of retail is to void all warranties and save a nice chunk of money.
Expectations for this quarters earnings should be realistic and consider the cost of halting retail sales of players. They are going to honor the warranty period for players already sold, so they will have to keep some retail staff to process these. They will also need to take a charge for liquidating existing inventories. I also expect they will not layoff the retail staff at this time since it is so close to christmas. Include the possibility that there will not be significant shipment of the F-10 this quarter, the resulting quarterly report may be a disappointment.
Ooops. Did you get this information from a reliable source that has actually witnessed the startup screen from the Gateway player? Im sure everyone would really like to confirm that this is true.
I wonder when they decided not to go to CES2004. The booths are expensive, have to be paid in June, and there is no refund. It would be a shame to have paid for a booth and now not use it at all. At the very least they could display products at the booth and hire reps to show them off.
Anyone know why E-Digital is not listed as an exhibitor at the Consumer Electronics Show in January? Isnt this where they were going to show the new products?
The financers would be crazy not to short. If you read that agreement, there is no way they can lose if they do short. The worst case scenario for them is that the stock stays around 50 cents. They win if the stock goes low. They win of the stock goes high. They win even if it stays the same with the 8% dividend.
They had to acquire financing of some sort in order to keep operations going, at least according to the accelerating losses as shown in the last quarterly statement. It is unfortunate that they used this method to do so, since the financers will profit handsomely at the expense of sharholders. I would have much rather seen the executive officers taking stock options in lieu of salaries, layoffs of all but essential employees, and downsizing of rented office space.
I disagree Cassandra. Shorting the millions of shares that the financers can now short is going to take a long time with these low trading volumes. In fact they may have already started shorting last week just after the agreement was made. There is no advantage for them to wait until February.
Considering that according to the last quarters financial statement they are losing a little over $250,000 a month, this financing should allow them to finance operations for almost 5 months. This assumes that they dont have some unexpected large expenses in the short term. I would be disappointed if this money is used to provide bonuses to executive staff however.
In reading the details of this financing scheme, it does not present itself as a "floorless" convertible. It seems that the floor is at 19 cents, and the owners of the convertible will only short the stock until it hits that point. The floor can only change if the company sells stock for less than 19 cents.
What I dont understand is why the company would go to the extreme of this fairly complicated transaction as opposed to simply selling stock on the open market. This was an expensive way to go considering finders fees, dividends, and probably expensive legal fees. Hopefully they will fully explain the reasons at the sharholder meeting.
Mary Im afraid you are likely correct that the Gateway product will have very little if any revenue for E-Digital. There is no mention of what portions of the product have E-Digital technology, and with the bargain price, any profits will likely be reserved for Gateway and the OEM.
Since this is not the first time that E-Digital has sold convertible shares to friendly investors, shareholders are not reacting negatively. Everyone knew that fund raising was required after the larger than expected loss was seen in the last quarterly statement. For the few lucky people who got in on that financing deal it is a no lose situation. They will recover their investments and make profits in multiple ways.
Entertainment companies are extremely uncomfortable allowing content to be stored on digital media that could be tampered with. Until the security of the encryption has been proven, it is unlikely that you will see the same content you would find on other IFE systems. Given time we may see popular movies still in the theatre on the DigEplayer. Until then it will be the same movies found on the sale rack at Target.
Do we know if there is any designation of E-Digital on the Gateway DMP-X20. Is there a placard on the back , or does it say E-Digital when it is powered up? I am really curious if there will be some side-effect publicity.
You make a good point about the high cost of introducing new technologies. Investors have to be patient to see the revenue results of the IFE device, and the royalty income from the core licensing. I just had a different impression of what these numbers were going to be from the shareholder letter and webcast. We may have to wait until the next quarters results are presented before we know how successful the new endeavors turn out to be.
It is not easy to decipher, but I noticed that the loss for the quarter was 725,739, compared to a loss of 1,234,973 for the half year. Since the quarter loss is more than half the six month loss, I assume the losses are increasing.
Disappointing to see that losses have actually increased from the previous quarter. At one time there was discussion from E-Digital management about a break-even quarter very soon. Has there been any recent mention of this?
The answer is no.
Revenue of 1.3 million for a quarter is the revenue at some single Starbucks locations. Of course the Baristas behind the counter are not making 6 figure incomes like E-Digital management.
I would expect a company with the current market cap of E-Digital to have orders of magnitude higher revenue.
That makes sense. In that case I can understand APS claiming the design, and the patents.
The contractual agreement between APS and E-Digital obviously granted APS the ability to claim design and patent rights to the IFE player. The only thing worse would be for APS to have the exclusive rights. This really is a shame, and a little disappointing.
APS is claiming credit for the design of the IFE player. I am now curious what involvement E-Digital had in the design. Maybe they simply supplied some consulting on the project.
I could be wrong, but there is a difference between a Line of Credit, and a Letter of Credit. A line of credit allows you to borrow money at any time. A letter of Credit only takes effect when you fail to pay vendors.
I find it a little hard to accept the change in accounting firms as simply a cost cutting effort. If that is the case they should make public the letter from E&Y, it would clear up all the confusion.
OT: DaBoss, you would make a great Investor Relations VP for E-Digital. You should apply for Roberts job.
doni,
No, it is not that simple. FPGAs are Gate Array devices that allow you to configure Look-Up-Tables and the behavior of registers within the device. A Look-Up-Table can represent any logical function, and a register is used to store the result of that logical operation. The SRAM cells which are re-loadable at anytime configure the specific logical function and how the register will store data. This is the method used by XILINX and ALTERA, but not ACTEL, which are configured only once with an anti-fuse technology.
Woody Norris in the NEWs!
http://www.nytimes.com/2003/03/23/magazine/23SOUND.html
CDR, I am thinking it is quite unlikely they will come close to being revenue neutral this quarter, since they still do not have any O-1000 players available for sale, and the quarter is almost over. Your best bet is to wait one more quarter, after they have product, and see what happens, unless of course you have a large position at risk here, then it is a more difficult decision.
Yahoo is reporting that the share price hit 17 cents today, does that match the 52 week low? Does that technically signal selling pressure when the volume is up hitting that low?
How can we find out how many shares of E-Digital are currently being shorted? Is there some public information on this?
Very disturbing to see the competition. I guess time to market is the key. Oh well.
Wow, JimC is certainly is a confident shareholder with deep pockets. Maybe there is an exciting announcement coming before CES.