I would like to add something with regard to my discussions with the CEO of BDE. When I brought up the issues of the convertibles, first he said that all had been converted (the remaining $250,000 or about 50k shares converted since June 25). And looking at the filings, it appears that all of these converted shares are being held (they weren't shorted before that).
Second, he mentioned that that the $6 mill credit line was "an insurance policy" in case they did not come up with the financing through other means (and the private placements raised $4.5 mill in cash). At this time they see no need for this credit line.
Third, he asked me if I was aware of the difference between 'look forward' debentures and 'look back' debentures. The distinction was new to me. He said that 'look forward' debentures were usually used by inexperienced management. In these, you get the money now, but the holder of the debenture is allowed to convert into shares at some time in the future. Since the number of shares that you get increases with a decreasing price of the share, the owner of the debenture is encouraged to short the stock - and then convert once the stock price is low.
However, the proposed BDE debentures were of the 'look back' variety. The conversion price of the debentures was to be determined at the time that BDE draws on the credit (a discount to the stock price averaged over the previous two weeks). This debenture is much riskier to the debenture holder but provides little reason to short the stock, since a lower price in the future will not increase the number of shares that one will get for the cash.
As it states in the filing, BDE has the option
"to sell to the investor up to $6,000,000 worth of shares of our common
stock at a discount to the then-prevailing market price of our common stock."
If the price of the stock were undervalued, BDE could decide it was simply not a good time to cash in on the credit line.
So even if these debentures had been used, it is not likely to result in shorting by the debenture holder. Overall, I was quite impressed that management seemed to be very aware of what they were doing.
However, although this fact is stated in the S-3 and although it is likely they will never be used, many of those reading the filings will likely see the term "convertible debenture" - and decide to short without going further. So I suspect that after every jump, we will attract a new group of unsuspecting shorts, that will then cover on the next move up, etc. This is the sort of thing that drives up overpriced internet stocks, and we aren't even overpriced yet.
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