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.
