Insiders Detail Accounting Irregularities At KIT Digital, Rumors Of A Possible SEC Fraud Investigation

Industry vendor KIT digital has had a lot of problems of late, but it looks as if it is about to get worse. Over the past few weeks, multiple sources have detailed for me the lack of controls KIT had in place to properly account for their financials. Some suggested to me that KIT went as so far as making up revenue that didn’t exist, with one person telling me they thought that up to $80M in reported revenue wasn’t real. Other sources tell me that they believe enough fraud will be uncovered that the Federal government is likely to take up an investigation and presumably, prosecutions, on some of KIT’s executives.

I think it is important for me to point out that I don’t have access to KIT’s books and can’t verify on paper the details I have been given, but some of the information comes from employees who were inside KIT’s finance department at the time and had direct knowledge of what was taking place. In addition, several law firms have filed securities class action lawsuits that appear to coincide with the information I have been given and they also have some of the specific details I have been told, from their sources as well.

While the SEC did not return my request for more details on what they may be looking into with regards to KIT, the company is no stranger to the SEC. Their former CEO is being investigated for insider trades, the company delayed the release of its 10-Q and in November, KIT announced they would have to restate earnings for the past three years. The company told shareholders to, “no longer rely upon the Company’s previously issued financial statements” stating that the irregularities stemmed from, “revenue related to certain perpetual software license agreements entered into by the prior management team in 2010 and 2011.” While that’s a fancy way to say that KIT didn’t account for revenue properly, insiders tell me the simpler explanation is that KIT simply made up revenue that did not exist and counted revenue from contracts that were cancelled or expired.

It’s important to note that on March 30th 2012, in a regulatory filing KIT disclosed that their current accounting firm at the time, Grant Thornton, noted a “material weakness” in the company’s internal controls over financial reporting saying that, “KIT digital and Subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2011.” And between KIT reporting Q4 results and filing their 2011 10-K, $2.14M in cash disappeared that the company could not account for.

While these accounting problems could simply be attributed to incompetence and negligence, insiders tell me that some of it was deliberate, with the intent to change KIT’s numbers, which would then make it a fraud. One of the most revealing details is that some of KIT’s senior management purposely kept employees from installing company wide business accounting software inside the company, in particular, a solution from NetSuite. Two former employees told me that some of KIT’s executives instructed them that they needed to be able to “massage the numbers each quarter” and have “more control over the numbers we show”. Instead of using a company wide program that would manage KIT’s financials, each office would deliver Excel documents to KIT’s headquarters, which would then have to manually combine the numbers from at least ten different spreadsheets.

Multiple people also told me of KIT making what some employees called offshore accounts to people that KIT management would tell them to send money to, without any kind of invoicing or tracking of what was being paid. Others told me that some of those who got these transfers were actual KIT employees, which the company described as “commission” checks, even though the revenue they were getting paid for was from customers who had not paid their bills or contracts that had long expired. Whether or not these payments were illegal I don’t know, but it clearly shows a pattern of financial abuse at KIT and lack of control over accounting. And it raises a lot of questions when cash has disappeared and wire transfers are being done, from offshore accounts, with no record keeping.

While KIT recently said that a large part of the confusion around KIT’s financials is around how they accounted for revenue generated from professional services, versus SaaS platform license fees, many say KIT constantly bent the rules to try to get away with as much as possible. Others also told me that one of the reasons KIT fired their original accounting firm was because they would not agree with how KIT was recognizing revenue. Some have also told me that when questioned by others about accounting irregularities that they said KIT’s accounting firm would not approve, select KIT executives told them that they had a good working relationship with their outside accounting firm and they would let them do what they wanted.

If you think about all the red flags at KIT, it’s really amazing just how many there have been, yet a lot of investors still wanted to believe the story, which is their own fault. KIT has misguided their revenue, taken good will write-offs, missed or delayed multiple SEC filings, restructured their board and management multiple times, delayed putting out public news for days, fired two accounting firms, defaulted on a debt covenant, had cash disappear and acquired more than ten companies. This company had screamed warning for a long time.

None of the financial problems with KIT’s business really comes as any surprise to me as every time I would look at KIT’s technology it didn’t work as advertised. I would get conflicting information from the company and even when they would walk me through demos personally, stuff would not work. Talking to some of KIT’s customers they would tell me they were never moved to any KIT platform, were still running on legacy systems from companies KIT acquired, like Multicast Media and theFeedroom, even though KIT was telling everyone that all these systems had been integrated into one platform. Remember the VX-one platform? You don’t hear about that anymore.

On one of my calls with various members of KIT’s management and product team, KIT’s CEO Kaleil Isaza Tuzman gave me names of customers who were using their platform, only to be corrected by another employee on the phone who said that wasn’t accurate. This type of behavior was common at KIT. The company excelled in trying to get away with as much as possible, until someone noticed and questioned them about it. KIT used logos of customers who they didn’t have contracts with on the customer page of their website, made up their own terminology to describe things and skated around simple, direct questions.

Whenever I questioned KIT’s CEO about things that didn’t make sense, I would get responses that was full of marketing language or told that it was “complicated” and I would not be able to understand it since I was not an accountant. Once I was also told that since KIT was an International company and I was based in the U.S., I could not understand how things were done overseas. There was nothing transparent about KIT or the way they did business and that example Kaleil Isaza Tuzman set was something that others followed. They had a pattern of denying, deflecting and trying to confuse the person with a drawn out, generic, high-level marketing response, something that should have raised a lot of red flags.

While many don’t want to talk about it openly, KIT has always been a black eye on this industry and a bad representation of the industry. The sooner they disappear, the better. With their cash reserves running out and employees being let go, 300 employees four months ago and 90 more employees last month, KIT’s time is about up. No one will put more money into the company and it will go under, it’s just a matter of when and how. Some have suggested that KIT can sell off their technology in pieces or sell the company outright, but KIT’s management has been saying this would happen for more than two years with no results. Multiple firms I have spoken with who buy distressed companies and then sell off the pieces have told me they have looked at KIT and didn’t find anything worth buying.

With most of this well-known and these details being easy to come by, I don’t know why anyone ever wanted to invest in KIT. When you put money into a company, you’re not really putting faith into the company itself, but rather the executives that are running it. The fact KIT raised so much money shows that there are still plenty of people out there who can be wowed by a presentation and fooled by people who present well and stir people’s emotions, and greed, for quick money. With KIT’s stock now practically worthless, trading at $0.45 when less than a year ago it was at $12.65 a share, a lot of people have lost a lot of money. But in this instance, no one should feel sorry for any investor, as the warning signs have always been there. And for the Wall Street firms that put big money into KIT and gave them lots of financing, they should not be trusted. They didn’t do the type of fact checking and intelligence gathering they should have.

When KIT’s stock was high, I would get lots of emails from investors telling me how stupid I was not to like KIT, why it was worth more than Brightcove’s market cap and many were angry at me for not wanting to believe the hype. Some even started to get hostile and threatening with me when I first started pointing out problems with KIT, back in 2008, in a back-and-forth exchange I had with Kaleil Isaza Tuzman in the comments section of this Gigaom post. While some investors probably think I like what happened to KIT, I don’t. Nothing good comes from having a company in our industry that makes others look bad, that makes people lose their money or that doesn’t deliver what was promised to customers. But the problem is, those investors didn’t do their homework. They didn’t talk to KIT customers, didn’t get demos of KIT’s products, didn’t ask the right questions or check the facts. The warning signs with KIT have been there since 2008 and even before that when it was ROO Media. If anything good comes from this I hope it’s that investors will learn not be so blindly trusting of people and do better due diligence.

Whether all of these problems result in KIT’s numbers being false and being a fraud case is too early to know. KIT may not announce the re-statement of financials for many more months or even a year from now, so the story on KIT will have a few more chapters. But whatever the results, the company is dead, it’s running out of cash and it won’t be around much longer.

I want to wrap up this piece by making a very important statement. This post is not a reflection of everyone who has even worked at KIT. The company has had a lot of employees and executives over the years, some of them my friends, and I believe that the vast majority of them had the desire to work for a professional company and were not involved in a lot of the negative actions that have taken place. It’s a shame that some executives, board members and investors ruined their opportunity for long-term job success and made a bad name for the company, but it should not be a reflection of the employees that were not involved. Those are the people who have lost out in what has happened and hopefully, they get opportunities with professional vendors who won’t hold it against them for working at KIT.

If I can assist anyone who is looking for a new job, please reach out to me and I will see if I can help. Also, if any current or former employees want to talk to me about what went on at KIT, I’d like to hear from you. As with this post, none of my sources will be named and I’m also not naming the executives they worked with.

Disclaimer: I have never bought, sold or traded a single share of stock, in any public company. While I am willing to do media interviews about this story, I will not disclose any sources or detail by name which KIT executives were mentioned to me by my sources.

  • http://twitter.com/Streamingguy Streamingguy

    Having worked in the business for 14 years and been associated with many of the people and companies that Kit has acquired or hired here in the U.S., I find your summation of Kit Digital’s current situation as overly critical. My experience is only with the U.S. arm of Kit, but my understanding is that their have delivered a solid service to a major U.S. telco in a multi-million dollar engagement. Some of the people they have hired I have worked with and are very talented individuals – included an officer who is still listed on their site. I also think the Kit vision was admireable and some of the companies they purchased (KickApps, Ioko) were leaders in their space. If they do collapse then there will be some significant assets and some talented individuals on the market.

    • http://twitter.com/DanRayburn Dan Rayburn

      Hi Streamingguy,

      It really does not matter if KIT has delivered a solid service to a major U.S. tocleo or not. That’s not the heart of the dispute, it’s KIT’s financials that are being called into question. Yes, some of the products worked for some customers and for others it didn’t. But that’s not what anyone really cares about at this point as KIT is nearly out of money and anyone using them will have to move to another provider anyway.

      I don’t disagree that they have some talented people at the company, I said that same thing in my post.

      You mention that “Kit’s vision was admireable”, but what does that mean? They acquired companies, laid off most of the employees and then ran those companies into the ground. Nothing “admireable” about that. Your definition of “significant assets” is probably very different than those who would actually spend the money to buy the assets. In deals like this, the assets usually go for pennies on the dollar. To most, that would not be defined as “significant”.

    • zzNexus7

      The president told me, directly and openly , (as he told investors), that the strategy is to buy “distressed” companies. KickApps might have been the only exception to that rule.
      Having been there and experienced first hand, at many of their locations worldwide, I actually think that Dan has been very constrained in this article. When you talk to most people who were directly affected – employees, investors, and customers – pulsing blue veins pop out on foreheads.

      Yes, certainly there were customers for whom systems worked, but as Dan points out, the majority were those on the legacy systems of acquired companies. The bait-and-switch shenanigans during the sales cycle were laughable – bits and pieces of several different products (even those that had been sunsetted) were shown, in the attempt to make the prospect believe that KIT could meet their needs.

      Very sad that management teams are able to make millions for themselves with such a model. I for one hope that this is fully investigated and that the charismatic and slippery execs are unable to cast their spells this time around.

  • Smarterthanyou

    You are clearly an idiot writing about things you have heard from disgruntled employees. This is why blogs are dangerous. They appear to contain valid (factual) information and yours simply does not. “I was told” or “multiple people said” are not facts. More so, the people talking have a motive to destroy. Your company clearly has motive to destroy competition against ones who pay you ad revenue.

    Audit firms aren’t fired because they don’t agree with the executives. Audit firms are fired because they did not do their job. Go back, do some real research and write an accurate story. Keep in mind, KIT is a GLOBAL company. The issues within KIT are not all related to North America. I feel confident none of your sources even know what is going on outside their four walls, much less in Asia Pacific or Europe.

    • http://twitter.com/DanRayburn Dan Rayburn

      It’s hard for me to respond to your comments since they are not valid.

      The simply fact that KIT needs to restate earnings for 3 years means there is a problem. The company has not maintained effective internal control over financial reporting, which is a fact. The company has lost money, fact. The company defaulted on a debt covenant, fact.

      There is nothing to dispute. The facts are clear, the evidence is clear, the only thing to wait to see is what happens as a result of all of this. You can imply or try and twist the truth, but you can’t argue with facts.

      My sources come from multiple locations, including those outside the U.S. and not just from those who worked in the Atlanta location.

    • http://twitter.com/DanRayburn Dan Rayburn

      Here’s one better. From KIT’s 12/18/12 8-K:

      “The investigation concluded that the Company improperly recognized revenue in 2010 and 2011 for perpetual software licenses where delivery of software and/or required software customization was not completed prior to recognition of revenue; license payments had not been made on several of the licenses; and/or the companies involved in the transactions and the circumstances of certain payments made by these companies were questionable.”

      “The timing and circumstances of these transactions also raised questions as to whether certain of the transactions were designed to assist the Company in reporting earnings consistent with analysts’ expectations.”

      Try and argue with those facts.

    • MAF

      “You are clearly an idiot writing about things you have heard from disgruntled employees.” LOL – WATCH OUT – you’ll be fired soon too, I bet….

      “Keep in mind, KIT is a GLOBAL company” – So that’s what Kit likes: Big Names and buzz phrases – Being a “global” Company means …just nothing!

  • Ida Tarbell

    Your intention may have been to take down Kit Digital and it’s former CEO, but you have done an excellent job of taking Dan Rayburn down with them. Your histrionic tone in both the post and in your comments to other posters is so completely unprofessional as to leave your credibility as a journalist in tatters. It’s even more bizarre in that you chose Streaming Media, a trade publication focused on technology, not stock transactions, as your platform. Someone at Kit may have done bad things to you in the past, but throwing this very public hissy fit makes you look rather unbalanced.

    • http://twitter.com/DanRayburn Dan Rayburn

      I would suggest that if you want to leave a comment on my blog, you don’t do it from withing KIT Digital’s network, as your IP addres is visable.

      I like to try and reply to the comments on my blog, but I really can’t have a discussion with someone who is so irrational.

  • Jerry Spence

    Twitter tells me you are “recognized by many as the voice for the streaming & online video industry” – well, I hope not given the state of the article above. You mention you don’t have access to the books – do tell – have you any connection to any of the current management or employees either? Do you have any information pertaining to the state of the company post delisting from NASDAQ or post Kaleil exit? Do you understand why Kaleil and co are no longer part of the exec team? Do you know which execs the SEC are investigating? Do you understand why the current management [post Kaleil exit] would actively seek to restate the finances of the company rather than just continuing along the current trajectory? Do you know if the company is currently profitable or still running at a loss? Please do correct me if I’m wrong, but I suspect the answers to these are mainly no. For sure KIT has issues, but you are making a horrible confusion of past and present management. Perhaps that doesn’t matter to you or the markets, but with hatchet jobs like these doing the rounds I would agree with your summation that there is no hope for KIT.

    • http://twitter.com/DanRayburn Dan Rayburn

      “have you any connection to any of the current management or employees either?”

      Yes, I made that clear in the piece. I said the “information comes from employees who were inside KIT’s finance department at the time”. Other sources I can’t talk about or metion as it would put them in jeopardy with KIT.

      This piece is all about what “past” management has done. That’s why it’s written past tense and says what “was taking place”, what KIT “had” done. It does not say this is what KIT is currently doing. And when I reference Kaleil as CEO, clearly that is past tense.

      I think it’s very clear that I am talking about what took place at KIT, not what is taking place now.

      • The Logician

        I’m having an awfully tough time understanding your purpose in writing this piece.

        You state “I think it’s very clear that I am talking about what took place at KIT, not what is taking place now.”

        The company is now in the hands of activist shareholders who booted out Kaleil sometime last spring and staged a palace coup and installed one of their own as interim CEO this past summer.

        Yet in your article you proclaim “KIT has always been a black eye on this industry and a bad
        representation of the industry. The sooner they disappear, the better.”

        This would seem to indicate, that despite your claim that you are not talking about “what is talking place now,” you indeed view current management with the same contempt as prior management.

        Otherwise, it seems you would be cheering the new management on and hoping they are able to clean up the mess left by prior management, so that a company that, by your own admission, has employees who are your friends does not go under.

        I must say I agree with others that this is one of the more unprofessional stories I have ever read in a trade publication. At times it reads like something one finds scrawled on a piece of cardboard next to a homeless person on the tube, rather than the blog of a prominent industry magazine.

        Perhaps it’s time for Streaming Media’s editors to consider letting Mr. Rayburn take a recuperative vacation.

        • http://twitter.com/DanRayburn Dan Rayburn

          KIT’s prior management destroyed this company. They used up all the cash and current management is simply trying to sell the company and get something for it. The current interm CEO owns 8% of KIT or more, and he wants to get something back. He’s not trying to “save” KIT, because KIT can’t be saved.

          KIT has no money left. I don’t why some think a company can survive with no money. Some employees checks were bouncing last month. They are done. I even heard Peter put money into the company in December just to make payroll. KIT is out of money and options and will try to sell it for whatever anyone will offer, if they can even get an offer.

          As to the comment of”cheering on” current management, KIT’s interm CEO is from JEC Capital who invested in KIT. So what kind of due dilligence did they do before they invested in the company? Clearly they didn’t do a good job and were sucked into the hype as well, so why should they be trusted? All they want to do is try to get their money back, they are looking out for themselves.

          As to your comment about the editors, StreamingMedia.com does not own, operate, host or moderate my blog. The text on the bottom says “The views expressed by Dan Rayburn are his own” and StreamingMedia.com is not involved in the blog other than being allowed to syndicate the content.

  • BetweenFlights

    Toss another one in the “seriously psycho and totally unprofessional” pile.

    At IBC 2012, KIT won the Innovation Award for an XBox app they built for Channel 4. It’s a very cool app and pretty breakthrough.

    Last week at CES, they were hosting the 2nd Screen Summit.

    That doesn’t sound like a company that’s about to go out of business or a “black eye on this industry” (your words, mate)

    Whatever their ex-CEO did to piss you off must have been pretty bad, but I think it’s time you get over it. A nice three month sabbatical at a spa might be just the ticket.

    • http://twitter.com/DanRayburn Dan Rayburn

      So your argument as to why KIT won’t go under is they they “won an award”?

      You need to look at KIT’s financials. They don’t have a lot of money left, they are burning through cash, are not cash flow positive, layed off nearly 400 people, have closed offices and are slashing costs as fast as they can. Why do you think they are doing all of this? The money is running out.

      Do you think anyone is going to give KIT more money when no one knows what KIT’s numbers are since the company has to restate three years of earnings? I don’t get the denial by some folks like yourself to still want to believe in something that has already been destroyed, with the facts to prove it.

  • http://twitter.com/duncanburbidge duncan burbidge

    There’s something odd about a lot of the preceeding comments. They’re anonymous, they’re personal/angry and they don’t really attempt to address the facts laid out. The only point made is that there’s some confusion whether the original post was dealing solely with the past or commenting on the present. I think that doesn’t really detract from a well-researched and informed discussion piece.

    There’s bound to be some excellent technology coming out of KIT and some of the previously-acquired (and excellent) companies were cut free just in time (Kick Apps, utd. by). They’re glad they left.

    Perhaps someone can give more information on the rebranding of various localised KITs and/or how KIT Digital Content Solutions Inc works?

  • ExKIT

    Actually, as a former executive of KIT I can 100% corroborate Dan’s piece and he received absolutely no information from me; my name and IPR was used along with several other heavyweights to legitimise their 2010 IPO and shortly thereafter I was thrown by the wayside by Tuzman, Campion and other cronies who shall remain nameless. It was apparent to me then (As an insider) and even more now that I was unwittingly part of a cynical Ponsi scheme designed to play the investors for all they were worth. Every company that I reviewed during my short tenure was a miserable failure with little or no legacy architecture of note, and may of their headline customers were on the cusp of throwing in the towel as the service provided ‘did not do what it said on the tin’.

  • MAF

    When Kit was buying Nunet in Germany, Nunet was the world leader in MobileTV. Then Kit managed in two years only that Nunet had to close down, because they just cared for absolutely NOTHING. We even had no boss at the office for 1 1/2 years, and we even had nothing at all to work for more than one year, just sitting at the office doing nearly nothing. I am sure that Kit was just a “creation” to earn money with their stock papers. There is really not a lot of substance to this company. There is no real plan, no good idea. They were just buying a lot of companys with big “names” as customers, then they mismanaged etc…They were always promising a lot of things, but really NOTHING happened. I can recommend everyone at KIT to leave this company as fast as you can and before you will be kicked out by them or your company place will be closed down. Fortunately they had to pay us compensation for loss of office ( because of we had a worker’s council here and the german employment law is very good). I am sure, KIT will soon be history.

  • T_T23

    The company need further downsizing (maybe to the extent of only 50-100 employees), focus on some clients (perferably the important ones) and re-start from scratch, if you already loss a lot of money (100s of thousands) no point in selling to recoup a few thousands at this PPS. Their IDP/product can’t be that bad if they won awards, and have blue chip clients.

  • Copernicus

    Quit living in the past. If anyone should know the importance of looking forward rather than behind, I would think it would be an expert in a technological field. KIT Digital is hiring right now (http://www.kitd.com/company/careers/). Additionally, “According to Zacks Investment Research, based on 1 analysts’ forecasts, the consensus EPS forecast for the quarter is $-0.22. The reported EPS for the same quarter last year was $0.09″ (http://www.nasdaq.com/earnings/report/kitd#ixzz2NS6N4RV6). It’s quite obvious the only thing you’re looking forward to is KIT’s demise. Whatever KIT did to you was under old leadership. And obviously it was the old leadership that let people go, because KIT is hiring right now. Who wouldn’t be a little disgruntled after getting dumped? How about doing ALL of your research, and maybe a little bit of fact checking. “Dan Rayburn is EVP for StreamingMedia.com and is recognized by many as the voice for the streaming and online video industry.” This is taken from your website. That phrase is about as objectively and semantically vague as “a global company.” I’ll do some research. Haivision is KIT’s competitor. They’re also a PLATINUM sponsor of your business (http://www.streamingmedia.com/Readers/Subscriber.aspx?Redirect=http://www.streamingmedia.com/PDF/SMWhitepaper.aspx?IssueID=3422). Of course, I could be delusional or irrational…