e.Digital Corporation (fka EDIG)

[Cassandra]

hotrod: Did you really expect to get a straight answer to your question on the Agora board?

http://www.agoracom.com/nonmemforum/msgreview.asp?id=317201&refid=0&orig=317201

It seems most of that crowd doesn't have a clue about how the financings work or (if they do) prefer that others remain ignorant about them.

Kudos to you for wanting to understand the facts of the matter. This also helps you understand why the PPS responds the way it does.

Most of what longtooth said in the posts MH linked to in #msg-2444343 is true, although he made a couple of false assumptions. It is easier to simply explain how it does work than to correct LT's explanation.

First of all, it's important to understand that the financiers are legally allowed to short sell stock for which they are considered to have an "offsetting long position." The number of shares to which the preferred convertible shares plus warrants can be converted to at any given time is defined as an "offsetting long position" (this is covered shorting and not naked shorting).

The holders of the Series D and E convertibles are different, therefore they will be competing with each other to pre-sell (short) their conversion shares. List of holders in #msg-1991340

The conversion price for the Series D shares is currently $0.19 (can go lower) and the conversion price for the Series E shares is the lower of $0.45 or 85% of the average volume adjusted share price over the last 10 trading days with the conversion price of the Series D shares as the floor. If the conversion price on the Series D shares drops, so does the floor on the Series E shares.

The current incentives for each are different. The holders of the series D CP shares make more money the higher the PPS. They can pre-sell (short) their shares at whatever they can get and then convert at 0.19 to close their short position. If they can short at 0.35, the have locked in a profit of .16 per share. However, if the share price drops below 0.19 it is not profitable for them to continue to presell/short, unless e.Digital sells some shelf shares for less than 0.19, which will reduce the conversion price.

The Series E CP holders make more money the lower the PPS. This is because the convertibles are for a fixed dollar amount of shares, not a fixed number of shares. The lower the PPS, the more shares they get upon conversion, some close the short position while others can be shorted again.

e.Digital apparently tried to mediate the conflicting incentives the Series E holders have by prohibiting a conversion price on the Series E CP shares to no lower than the Series D shares (currently 0.19). IMO the goal is to have them sell into the market more gradually than they otherwise would to keep the price above the low 20 cent range. One or both sets of CP holder may also hire promoters to pump the PPS while they are selling.

Without this clause, the Series E shareholders would likely dump their shares as fast as they could, much like the Series C CP holders did in late 2000/early 2001 (causing the PPS to go from about $4 down to the low $1 range).

However, if the PPS does not hold up, e.Digital can lower the conversion price for both the series D and E holders by selling shelf shares below 0.19.

Clearly you don't want to take my word for it, but feel free to ask questions, challenge what I have stated or read the S-3 and 8-K to verify.

I realize it's complicated and only those who take to the time to ponder it are likely to understand it. IMO it's more productive than the endless speculation on agora.

More education here: http://www.taylorstock.com/page7.html