Insiders Detail Accounting Irregularities At KIT Digital, Rumors Of A Possible SEC Fraud Investigation
[Updated Dec. 27 2017: Former KIT Digital CEO found guilty of manipulating shares]
[Updated Sept. 8 2015: Former KIT Digital CEO and CFO Arrested: Charged With Accounting Fraud]
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.