KIT Digital Inc. Will Declare Chapter 11, New Company Called Piksel Launching With Former Assets and New Funding

[Updated: I have edited the title and post to reflect that KIT Digital Inc. will be filing for chapter 11, but hasn't officially done so yet.]

There’s been a lot of speculation about what would eventually happen with KIT Digital and finally, we now know some details on what will take place with KIT’s assets, their employees and what KIT’s new management team plans to do moving forward. Late this afternoon, KIT filed an 8-K and I had the chance to speak to KIT’s management team earlier in the day to get more details on what they have just announced. It’s a complex deal, there are a lot of moving parts and additional pieces of information aren’t being released for a few weeks, details that we need to evaluate the true value of KIT’s business going forward. These additional details will come out over time, but for now, here’s what the company is disclosing.

KIT Digital Inc., the parent holding company of the assets, has filed will file for chapter 11 bankruptcy. While some might see this as bad news, it was a move KIT had to make. Doing this allows KIT not to have to go back and worry about trying to restate earnings for the past three years and allows them to start fresh. KIT has also announced that three of the five largest shareholders will be buying back the core assets from KIT Digital Inc. and investing new money into what will become a new company, named Piksel. This is being done as a “backstop” transaction, which means the three major shareholders agree to purchase all the remaining, unsubscribed securities from KIT Digital Inc. and guaranteeing that all of the newly issued shares will be purchased, allowing the company to fulfill its fundraising requirements, as well as provide enough cash to cover any liabilities. The core assets being acquired come from five companies inside KIT and consist of Ioko 365, Polymedia, Multicast Media, Megahertz Broadcast Systems and Kewego.

KIT is not saying how much the top three shareholders¬†(Prescott Group Capital Management, JEC Capital Partners, and Ratio Capital Partners) are investing in the new entity, or what percentage of shares they own, but will do so during the bankruptcy process. Current shareholders will be able to buy warrants in the new entity and invest in Piksel, but any stock they have in KIT won’t be converted to the new company. So KIT stock is now officially worth zero. One of the key details KIT is not yet disclosing is revenue for the company. Management said they will soon announce new financial details for KIT for the past six months, which we’ll then be able to use to see what value KIT’s management placed on the business and the assets they acquired. Without that, it’s hard to know what value KIT currently has, since we don’t know revenue, bookings, customer count etc. but once those details come out, a fair market value of the company can be realized.

Once of the reasons KIT’s board of directors is taking this path is because they feel that certain assets at KIT Digital are worth more than what anyone was willing to pay. They didn’t disclose what offers they had received from others, but felt all of them were too low. It’s hard to know the real value since we don’t yet know what Piksel’s focus will be, what products and services they will offer and how big the markets are they are selling into, but one has to imagine KIT was only offered pennies on the dollar for certain assets. No one is going to pay fair market value for anything from KIT when the company, technology and financials were in such disarray, so this new approach makes a lot of sense.

Over the past six months, KIT’s management team has streamlined the company, closed 17 office locations and cut their headcount from over 1,400 down to 800. While KIT’s management would not guarantee any more layoffs, they did say they aren’t announcing any layoffs with today’s news and believe the workforce they currently have in place is the right size for what they want to focus on within Piksel.

Because KIT’s independent committee, which was hired to find the best value for KIT, has agreed upon this being the best deal for the company, it also means that KIT’s former CEO won’t be able to make a bid for the company and try to influence shareholders, which he had been doing in the past. So KIT should be able to move through the chapter 11 process quickly, relaunch the new company, get their new brand into the market and put KIT Digital behind them. The company isn’t yet ready to showcase their new branding or website, but will do so in the coming weeks. When I asked if KIT’s current CEO Peter Heiland would become the new CEO of Piksel, management told me they had not yet decided who the best fit would be for the CEO role of the new company. The impression I got from them is that they want the best CEO they can get for the company and have not yet decided on who that will be.

While most shareholders won’t be happy with today’s news, they are all good steps that needed to be taken for the company to distance itself from the mess that was KIT Digital. It’s good for the company, employees, their customers and the industry and in order for KIT to move forward, they needed to get rid of the tarnished brand that is KIT Digital. Many of KIT’s former management is responsible for running the company into the ground, mishandling money and treating employees like crap, so the faster KIT’s new management got away from that mess, the better.

This is a step in the right direction for the company and it will be interesting to learn how much money the top shareholders have invested in the new entity and what they have valued it at, once those details are released. Hopefully it is onward and upward from here for Piksel.

Updated 10:14pm: While I wrote that KIT’s shares no longer have any value, due to the chapter 11 announcement, that could change once KIT gets through the chapter 11 process. Only current KIT shareholders are going to be able to invest in the new company and those who don’t want to make that investment, are probably going to be able to sell their shares to those who want to invest in Piksel. So if the revenue numbers KIT gives out end up being good, there may be interest from the secondary market to buy KIT shares. Hard to know what the value of those shares will be, until we have more info, but current KIT investors might get something for the shares they currently own.

  • Desider

    Funny, but I’d have guessed the ill-advised Hyro acquisition (with poisonous revised share offering) and the heavy payouts & bad sales offering for the interim CEO counted in part to the current team, post-Tuzman.

    As the 2 biggest investors are represented on the board (one is CEO), I’m sure this favors them, but not sure how we conclude current management was any better than previous, or whether smaller shareholders will see anything useful. No Tuzman fan here, but his public predictions of what current management is doing appear spot on. Why all the good-will for the new guys?

  • Pankrac

    I am just missing any comment to the huge dilution for the funny price as is written in the SEC Filling:

    “Contemporaneously with execution of this Term Sheet, the Plan Sponsor Group will execute and deliver a binding commitment to purchase, pro rata based on their respective commitments, for the aggregate sum of $25 million , shares of Class B Common Stock to be issued pursuant to the Plan, which upon issuance will represent 89.29% of the total number of shares of Class A Common Stock and Class B Common Stock outstanding.”

    In my view, there is nothing positive for the small shareholders and I see no difference between Tuzman and current management.