Replies to post #74083 on e.Digital Corporation (fka EDIG)

[friendlyfred]

I believe that only refers to the "commitment shares" and not the rest. Imo if edig sells them 10 million shares for 1.2 million dollars, they ( fusion ) can sell those shares at market for whatever percentage premium they will realize.

[Cassandra]

Tenderloin, Unfortunately Fusion can dump plenty.

Your quote of the 8-K documents shows 2 issues that seem to give shareholders confidence that may be unfounded.

First, because the initial purchase shares are unregistered they can't be re-sold and second, Fusion agrees not to short, sell or transfer the 3.5 million Commitment Shares for 25 months.

Neither of these is what they seem on the surface. I'll address them in two different posts.

First, although the shares are unregistered at this time, e.Digital is required to file a registration statement within 10 days of 1/2/2007 (see the "Registration Rights Agreement").

When the registration is declared effective, all of the shares will be registered and able to be resold (including the 3.5 mil shares). Fusion is so serious about this that they won't even give e.Digital the other $250K until this registration statement is filed.

2. REGISTRATION.

a. Mandatory Registration. The Company shall within ten (10) Business Days from the date hereof file with the SEC the Registration Statement. The Registration Statement shall register only the Registrable Securities and no other securities of the Company. The Investor and its counsel shall have a reasonable opportunity to review and comment upon such registration statement or amendment to such registration statement and any related prospectus prior to its filing with the SEC. ...

So they want the securities registered for resale ASAP. Additionally, they want only the securities for their deal registered immediately, but the registration can't include currently reserved but unregistered securities owed to the former 12% note holders (who have all now converted) and shares to be used for paying the monthly installment payments on the Davric note or for Davric/Polis to convert the loan to shares.

Fusion is free to sell its purchase shares any time after the registration is effective and it looks like they want to be able to unload their purchase before the others, who apparently will have to wait for a future registration so they can sell to recoup the money they loaned to the company.

The stringent requirements for quick registration (and several other registration requirements in the Registration Rights Agreement) certainly don't look like they are buying for a long term hold, but more to having a priority position to sell.

[Cassandra]

The second issue addresses Fusion's agreement not to transfer or sell the 3.5 million "Commitment Shares" for 25 months nor to short or hedge as those terms are defined in the agreement. This means that unless the agreement is cancelled earlier, they will have to hold the 3.5 million shares long for two years.

However, you have to read how they are define these terms to fully comprehend what the agreement does and does not prohibit:

(d) Limitation on Short Sales and Hedging Transactions. The Buyer agrees that beginning on the date of this Agreement and ending on the date of termination of this Agreement as provided in Section 11(k), the Buyer and its agents, representatives and affiliates shall not in any manner whatsoever enter into or effect, directly or indirectly, any (i) "short sale" (as such term is defined in Section 242.200 of Regulation SHO of the 1934 Act) of the Common Stock or (ii) hedging transaction, which establishes a net short position with respect to the Common Stock.

In other words, they agree not to naked short or ever have a net short position.

However, they there is nothing in the agreement that prohibits them from "shorting against the box" (i.e. short selling against their long position - no need to borrow shares that must be returned in 3 days).

This means that they can enter short sales against their long position in the 3.5 million Commitment Shares (plus any purchase shares held long) without establishing a prohibited "net short position." This is a popular and legal hedge strategy with many sophisticated stock investors.

It is my recollection that this kind of covered short position has 30 day to be closed. Therefore, to lock in profits from the short sales, they can buy shares at the reduced price to close their short position (rather than sell their long shares).

As long as they hold the shares long, they can do this over and over and over again.

Keep in mind that they received the 3.5 million Commitment Shares for free. They lose nothing to hold them long, but can use them for covered shorting as often as they want. It's brilliant and extremely shrewd.

Lastly, they will play the game only as long as they think they can profit. They won't want to kill the goose that lays golden eggs as long as those eggs are golden. But if they see substantial doubt of profit, they have more than enough tools to get out of having to buy more shares.