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Heard on the Street
May 2, 2012, 6:41 p.m. ET
Investors Need First Aid KIT
By ROLFE WINKLER
Kaleil Isaza Tuzman created quite a mess at KIT Digital KITD -4.52% that his successor, Barak Bar-Cohen, may have a tough time cleaning up. Among Mr. Bar-Cohen's first big moves may be to backtrack on the financial promises Mr. Tuzman made to shareholders.
"You won't hear me reiterate guidance," Mr. Bar-Cohen, KIT's new chief executive, told The Wall Street Journal on Tuesday. He said he plans to reset the bar on financial results he believes the company can achieve in the future.
Mr. Tuzman was the star of "Startup.com," a documentary that followed the rise and fall of one of his previous ventures. At KIT, he acquired 19 companies in an effort to create an online video technology powerhouse. Since 2009, KIT has raised $268 million via stock sales to help fund the deals. The company enjoyed positive stock recommendations from some Wall Street analysts whose firms also sponsored those stock sales. But KIT didn't properly integrate the acquisitions or put the necessary corporate structure in place to handle its own growth.
In its latest annual financial filing, KIT's auditor said the company is short of accounting personnel to review its transactions, citing a material weakness in internal controls. Indeed, KIT filed the document late due to questions about the valuation of past acquisitions.
KIT has also had trouble tracking cash in the bank. When it reported fourth-quarter results, KIT said it had $47.8 million of cash as of Dec. 31. Two weeks later, in the annual filing, it said the figure was $45.7 million. And cash may take a further hit. The company is in violation of a debt covenant that says it must keep 75% of its cash in the U.S. To comply, it may have to repatriate cash, incurring taxes.
Mr. Tuzman is himself facing scrutiny from the SEC over stock trades from June 2010. It sent subpoenas to Mr. Tuzman and the company in February.
On March 18, one of KIT's independent directors resigned from the board over disagreements regarding the company's direction. Three other directors resigned from the board four days later, and Mr. Tuzman stepped down as CEO the day after that. Still the company's top shareholder, Mr. Tuzman remained board chairman until he resigned on April 11.
Mr. Bar-Cohen would like to "Control-alt-delete the past." He is presently determining which parts of KIT's business must be shuttered, recruiting accounting staff and new board members as well as trying to sign up new customers. But the "Kaleil factor," as he describes it, could take a while to leave behind.
Write to Rolfe Winkler at rolfe.winkler@wsj.com
