KIT Digital Earnings Down for Q1

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With earnings season in full swing, KIT Digital (KITD) announced its Q1 2012 results on Monday. Falling in line with previous preliminary guidance, Q1 revenue numbers were $59 million, which bested year-over-year Q1 2011 numbers ($34.5 million) but fell $11 million short of last quarter's $70 million revenue.

The company registered an operating loss (in non-GAAP numbers) of $8 million for the quarter, slightly worse than the year-over-year numbers from Q1 2011 (a non-GAAP operating loss of $7.1 million) and over $24.5 million lower than last quarter (Q4 2011 showed a non-GAAP operating income of $16.5 million).

"We have thus far taken definitive steps to support our operating plan and improve financial controls," said Barak Bar-Cohen, who became KIT Digital's chief executive officer in April. "This includes raising capital to support our updated operational plan and global commercial strategy."

One additional reason KIT is looking to shore up its capital is noted in the company's earnings press release: "Cash and cash equivalents at March 31, 2012 totaled $26.1 million, compared to $45.7 million on December 31, 2011."

KIT attributes the decrease to four factors: first, it says that it had cash requirements for the business during Q1 2011 that were in line with previous quarters. Second, it says that it experienced higher than usual legal, accounting and audit costs associated with corporate development activity.

In addition, as KIT describes itself in the post-acquisition phase, the company says it had increased cash requirements around post-consolidation integration costs. Yet the biggest use of cash in Q1 2011 "was primarily attributable to one-time residual payments of consideration for acquisitions closed in Q4 2010."

To that end, KIT also filed an 8-K form, alongside its 10Q quarterly earnings report, where the company stated the intent to open a private placement on May 15, 2012, and close it by May 16, 2012. In that single day, KIT expected to raise an additional "$29.19 million in gross proceeds, before deducting placement agents' fees and other estimated offering expenses . . . After deducting the fees of the placement agent and other estimated offering expenses, the net proceeds to the Company from the Offering will be approximately $28.2 million."

The $28.2 million in net proceeds will be used, according to Bar-Cohen, to "support the updated operating plan and global commerce strategy" with a net dilutive result of 7,000,000 of common stock shares being sold on May 16, 2012, and additional warrants to purchase 5,250,000 of common stock shares being sold on the same date. The warrants will mature within six months, exercisable at $5.00 per share as an exercise price.

"If our stock price does not recover in the near term," the 10-Q for Q1 notes, "this may result in an interim test of impairment of our goodwill."

With earnings news coming out on May 15 after the close of trading, the company actually saw a rise in its share price at Wednesday's opening bell: KITD closed at $4.17 per share on May 15, opened on May 16 at $4.29 per share and then rose to a daily high of $4.65 within the first hour of trading. The rest of the day, however, the stock trended downward to close at $3.99 per share, over 4% lower than at its open, on share volumes of 2.3 million, more than 50% higher than the average trading day.

So what's in store for KIT in the next quarter? It's hard to say, but with costs and expenses rising on everything from accounting and legal to interest expense (the latter category went up 156% year over year, according to the 10-Q, based on shares issued in May 2011) the company had no choice but to shore up cash reserves.

"Management anticipates that it has enough cash reserves and cash flows," the 10-Q states, "from its operating activities, with the addition of the capital expected from the closing of our May 15, 2012 agreement below, to be sufficient to fund its operations, anticipated capital expenditures and debt repayment obligations for at least the next 12 months."

In addition, the company hopes to refinance its debt covenant on a secured notes facility, but warns it may not be possible. KITD remedied its default of March 31, 2012, just a few days before the earnings announcement (on May 11).

"As of March 31, 2012, we were in default of a debt covenant on all of our secured notes payable which states that we must maintain at least 75% of the dollar value of worldwide cash with one or more banks located in the United States," the 10-Q states. "As of May 11, 2012, we again complied with the covenant and the lender has not asserted any rights it might have with respect to our non-compliance during that period. We anticipate refinancing this facility but cannot provide assurance as to our success in doing so or the timing thereof."

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