Bloggerwave Inc.(fka BLGW)

[downsideup]

Too early, even, to say...

Not too early to say what the impact of anyone suing them would be, given that is pretty well defined in the situation. So, that there isn't really a benefit available from doing it, pretty well defines that it isn't likely it is going to happen.

Obviously, its not a good thing to have the problems they have had... the question that leaves is, as before with the similar accounting issue in the share count, what the real impact of the problems has been, and what the impact of having the problems be revealed, addressed, and corrected will be.

Until we see the end results, it will be hard to know which aspects of that in the situation, and in the effort, to value more...

They've already changed internal accountants, and now, they're obviously going to change the auditor to one that is solidly on the right side of the issues with the PCOAB, etc. Each of those changes made, or being required, is obviously "good" after the fact... so, the questions you're left with a need to address are ones about why those problems existed in the first place, what the impact of the problems has been, what it is now, and what that means about the "foundation" in the near term, and about the future, as they work to move past this.

They've not shown any tendency on the part of the management to avoid problems or shy away from "doing the right thing" in solving them. I think that makes the questions about how and why they have the problems being revealed... more interesting. They're not atypical problems for the shallow end of the market, and... atypically, in my experience... they've established the right vectors in dealing with them. Are they legacy issues of problems in the shell they started with ? Or, still current relationships in the sources of the problems ? Are there any surviving relationships between that history and the current history ?

I think the key elements in parsing the meaning and nature of the risk... are forward elements that have a lot more to do with the impact on and relationship with (and, to) the financing than with other aspects.

A first look shows me that there may be some timelines that are an issue... as the charts show the timelines in relation to share price reaction to the news... well prior to the publication of the news.

The financing agreements contain language that controls the need to inform the financiers in a timely manner. We see the date on which filings were provided.

One obvious impact of the event will be a solid test of and proof of the nature of the financiers intent...

I don't accept that their choosing not to seek representation on the board, or provide direction to management, is in any way a valid dodge of the fiduciary responsibilities that apply in the case a large percentage holder with significant access to inside information.

So, the most interesting questions raised, to me, are not going to be those tied to the "specifics" in the accounting history or in the changes made to address corrections, rather than those tied to "what we see in management's response" and "what we see in the financier's response" to having the issues arise.

First, timing...

A Feb 22 notice date, and the trading patterns after...

http://www.sec.gov/Archives/edgar/data/1446727/000114420411007680/v209009_ex10-1.htm
Section 6.6. Notice of Certain Events Affecting Registration;

On Feb 25 we see some pretty large sales... before the news was out ? The SEC filing was not made until Mar 11, but when did they notify "investor" under the terms of the financing agreement ? Differences between when investors are informed seems it is a potential problem.

Also, Section 4.30 Sarbanes-Oxley; Internal Accounting Controls

"The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and procedures to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms."

Did the disclosure controls and procedures work properly and work get done within the time periods specified ? And, did they also meet their requirements under the financing agreements ? And, what it the significance of the differnecs between the two, in relation to what we see happening in the market, in trading patterns, with a quick look at a chart ?

Then, a second issue is that it appears the problems noted may technically violate the terms of their financing agreements:

Section 4.5. SEC Documents; Financial Statements As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

Section 4.6. No Misstatement or Omission. Each part of the Registration Statement, when such part became or becomes effective, and the Prospectus, on the date of filing thereof with the SEC and at each Advance Notice Date and Closing Date, conformed or will conform in all material respects with the requirements of the Securities Act and the rules and regulations promulgated thereunder; each part of the Registration Statement, when such part became or becomes effective, did not or will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and the Prospectus, on the date of filing thereof with the SEC and at each Advance Notice Date and Share Issuance Date, did not or will not include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; except that the foregoing shall not apply to statements or omissions in any such document made in reliance on information furnished in writing to the Company by the Investor expressly stating that such information is intended for use in the Registration Statement, the Prospectus, or any amendment or supplement thereto.

It appears that is a "potential" problem, but, it isn't really that straightforward, as it will be conditioned by three factors. One being whether or not the nature of company awareness of the problems and their response to the problems are ones that demonstrate good faith effort. Another being how the company response to the issues are handled by the company and the SEC in their interaction. If they solve the problems... that should be good enough for everyone else, too. And, the third is a function of "what did the financiers know, and when did they know it." If their DD showed the problems existed so that they knew of them ahead of time... that awareness will modify the meaning of their entering any agreement... and if they didn't have DD that revealed the problems... that would modify reasonable expectation of awareness. We can't know what the financiers knew unless they tell us and provide proofs, so, we'll have to observe and judge their behavior to have a basis for forming any opinion about their relationship to the issue, and the impact on the company that might result.

As long as the company "fixes" it properly... and as long as the financiers are honest in their representations about the nature of their interest, and in meeting their fiducairy responsibilities, while not engaging in insider trading, etc., all of those risks should be obviated fairly quickly.

Then, whether it is a problem or not will likely hinge on the outcome of the result in hiring a new auditor. If the new auditor finds problems the prior auditor missed... and if that could possibly show that they knowingly violated the agreements in terms of it having them not "make the statements therein, in the light of the circumstances under which they were made, not misleading" ?

Their finances aren't likely that complex... so, it shouldn't take all that much time. If the new auditor finds no issues, it is probably not a big deal, other than in terms of the cost and time taken in fixing it, the annoyance of having it be necessary, and in terms of the impact of having a SECOND blackeye imposed by problems in the accounting function.

As the agreement covers "internal controls" and not audit quality or opinion outside of that inherent in regulatory requirements... if they
fix the issue with the SEC without a qualified auditor showing there were "internal" failures... they're probably fine.

The prior errors in the share count were clearly "internal" accounting errors that were made apparent during the process of the DD effort undertaken by the financiers... and we see the result... so, were there to be another set of accounting failures found upon re-audit, that would appear to put them in breach of the requirement to maintain proper control over their internal accounting, only in the same degree as in which that problem was already known.

Otherwise, while clearly NOT a good thing that they'd hired (?)accountants who weren't qualified... the impact will be determined by the outcome... so, have to see what happens when they hire an auditor in good standing with the PCOAB, and get a clean bill of health on the accounting and corrections to the filings already submitted... or not.

Clearly will also need to see how the "investor" deals with the issues...

Need to consider the timeliness of making the information public, relative to the timeliness of providing information to the "investor" under the terms of their agreement... Were WE as timely informed as possible, or within the limits of the rules ?

It is a second hit taken by an inexperienced management, in the same area...

Third, there is still the commitment requirement and potential interactions that might occur there:

"The Company shall send an Advance Notice to Investor at least once every month equaling the Maximum Advance Amount."

"the Company acknowledges and agrees that upon receipt of an Advance Notice, the Investor may sell shares that it is unconditionally obligated to purchase under such Advance Notice prior to taking possession of such shares."

So, as far as market impact, the timing issues will matter... immediately, perhaps, in terms of the number of shares in the market that are a product of the first "advance notice" and those that are coming from other sources. How many shares ? Looks like they've a lot of shares sold already... I still have to do the math to figure out how many at what price, etc., are probable, to determine remaining risk. Then, timing issues in providing subsequent "advance notices" will be a question, not just for market timing and share price, but also in terms of timing re their ability to remain in compliance with the agreements, while looking at their potential to find alternative financing that enables them to opt out of the current deal.

Looks to me like the market had already largely discounted the risks tied to this issue... and that the market reaction to awareness of it largely preceded the news being made public... with the shares reaching "chart support" at the point where the news was released.

I find that interesting... and it suggests other questions that might be asked...

Beyond the obvious in market impact and what you see on a chart... for me, the primary issues are still more ones of what sort of plans the management has for enabling progress and moving the business forward.

There will be an impact in terms of this being a "distraction".

Given recent proofs in performance, I still care far more about the "plans" for the addressing future markets than I care to worry about management not addressing these sorts of problems properly.

There ARE things apparent that will require some additional effort in DD... need to dig deeper to find out more about the origins of the problems we see being revealed...

Need to parse the nature of the risks inherent in each of management's interest and intent, and the financiers interest and intent...

I'll want to see "what the plans are" in relation to "what the financing is"...

Need to see that they're on a fast track to growing revenues and enabling enough cash flow that they can avoid digging holes in financing. They've clearly enough got that potential to grow, and there is reason to watch, closely, given what you see in "a tight rein" on spending... but, still need to see evidence they DO have plans that show they recognize and can properly address that potential in the opportunity...