10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

  Washington, D.C. 20549

Form 10-Q

(Mark One)

x         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commissionfile number 001-34437

KIT digital, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	11-3447894
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

26 West 17th Street, 2nd Floor, New York, New York	10011
(Address of Principal Executive Offices)	(Zip Code)

+1 (212) 661-4111

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated Filer  o	Accelerated filer  x
Non-accelerated filer  o	Smaller reporting company  o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

As of November 8, 2011, there were 46,156,204 shares of the issuer’s common stock outstanding.

KIT digital, Inc.

TABLE OF CONTENTS

		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets - As of September 30, 2011 (unaudited) and December 31, 2010	2
	Consolidated Statements of Operations and Comprehensive Loss - For the three and nine months ended September 30, 2011 and 2010 (unaudited)	3
	Consolidated Statements of Stockholders’ Equity - For the nine months ended September 30, 2011 (unaudited)	4
	Consolidated Statements of Cash Flows - For the nine months ended September 30, 2011 and 2010 (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Removed and Reserved	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
SIGNATURES		31

1

PART I - FINANCIAL INFORMATION

 Item 1.  Financial Statements  

KIT DIGITAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Share Data)

	September 30, 2011			December 31, 2010 (A)
	(Unaudited)
Assets:
Current assets:
Cash and cash equivalents	$	60,047		$	141,233
Restricted cash		595			2,000
Investment		1,709			1,050
Accounts receivable, net		66,069			29,349
Unbilled revenue		12,174			537
Inventory, net		449			301
Loan receivable, current portion		3,641			2,486
Other current assets		12,797			5,104
Total current assets		157,481			182,060
Property and equipment, net		10,841			5,987
Loan receivable, net of current		6,328			8,361
Deferred tax assets		448			-
Intangible assets, net		35,489			13,248
Goodwill		244,781			89,004
Total assets	$	455,368		$	298,660
Liabilities and Stockholders' Equity:
Current liabilities:
Capital lease and other obligations, current portion	$	504		$	608
Secured notes payable, net of debt discount, current portion		5,035			1,709
Accounts payable		17,857			12,740
Accrued expenses		12,752			6,411
Deferred revenue		4,439			4,223
Income tax payable		4,457			858
Deferred tax liability		11,454			682
Acquisition liabilities, current portion		8,359			2,115
Derivative liability		565			6,096
Other current liabilities		12,478			2,887
Total current liabilities		77,900			38,329
Capital lease and other obligations, net of current		266			175
Secured notes payable, net of current		13,658			4,127
Acquisition liabilities, net of current		11,977			10,405
Total liabilities		103,801			53,036
Stockholders' Equity:
Common stock, $0.0001 par value: authorized 80,000,000 shares; issued and outstanding 46,156,204 and 33,196,952, respectively		5			3
Additional paid-in capital		510,518			375,578
Accumulated deficit		(156,719	)		(129,203	)
Accumulated other comprehensive loss		(2,237	)		(754	)
Total stockholders' equity		351,567			245,624
Total liabilities and stockholders' equity	$	455,368		$	298,660

(A) - Reference is made to the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2010, filed with the U.S. Securities and Exchange Commission on August 3, 2011.

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.

2

KIT DIGITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Revenue	$	62,276		$	27,746		$	144,914		$	68,165
Variable and direct third party costs:
Cost of goods and services (exclusive of depreciation shown separately below)		10,210			11,472			33,300			22,190
Hosting, delivery and reporting		3,058			671			6,655			3,035
Content costs		142			262			580			746
Direct third party creative production costs		655			1,074			1,337			2,620
Total variable and direct third party costs		14,065			13,479			41,872			28,591
Gross profit		48,211			14,267			103,042			39,574
General and administrative expenses:
Compensation, travel and associated costs (including non-cash stock-based compensation of $5,546, $1,273, $11,957 and $2,910, respectively)		33,740			7,359			68,198			21,545
Legal, accounting, audit and other professional service fees		736			425			2,251			1,645
Office, marketing and other corporate costs		5,009			3,341			13,635			7,718
Merger and acquisition and investor relations expenses		498			1,306			16,664			3,411
Depreciation and amortization		3,015			2,407			8,624			6,110
Restructuring charges		-			(93	)		3,352			3,481
Integration expenses		2,624			4,535			21,022			10,834
Total general and administrative expenses		45,622			19,280			133,746			54,744
Income (loss) from operations		2,589			(5,013	)		(30,704	)		(15,170	)
Interest income		34			5			175			33
Interest expense		(682	)		(223	)		(1,342	)		(563	)
Amortization of deferred financing costs and debt discount		(104	)		(19	)		(198	)		(33	)
Derivative income (expense)		628			(1,451	)		3,670			(10,526	)
Other (expense) income		1,535			(1,263	)		1,009			(475	)
Net income (loss) before income taxes		4,000			(7,964	)		(27,390	)		(26,734	)
Income tax benefit (expense)		788			(10	)		(126	)		(24	)
Net income (loss) available to common shareholders	$	4,788		$	(7,974	)	$	(27,516	)	$	(26,758	)
Basic and diluted net income (loss) per common share	$	0.11		$	(0.34	)	$	(0.74	)	$	(1.37	)
Basic weighted average common shares outstanding		42,553,768			23,355,298			36,978,752			19,581,084
Diluted weighted average common shares outstanding		43,434,416			23,355,298			36,978,752			19,581,084
Comprehensive income (loss):
Net income (loss)	$	4,788		$	(7,974	)	$	(27,516	)	$	(26,758	)
Foreign currency translation		(1,416	)		3,022			(1,492	)		971
Change in unrealized gain (loss) on investments, net		(46	)		75			9			91
Comprehensive income (loss):	$	3,326		$	(4,877	)	$	(28,999	)	$	(25,696	)

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. 

3

KIT DIGITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in Thousands, Except Share Data)

(Unaudited)

	Common Stock		Common Stock Par Value		Additional Paid-in Capital
Balance – December 31, 2010		33,196,952	$	3	$	375,578
Issue of stock in public offering		3,680,000		1		32,104
Issue of stock for exercise of stock options		182,622		—		1,366
Issue of stock for exercise of warrants		485,630		—		4,860
Issue of stock for acquisitions		8,398,648		1		84,121
Debt discount on notes		—		—		1,081
Issue of stock for services		186,929		—		2,213
Issue of warrants for services		—		—		1,697
Stock-based compensation		25,423		—		7,498
Foreign currency translation adjustment		—		—		—
Fair market value adjustment for available for sale securities		—		—		—
Net loss		—		—		—
Balance – September 30, 2011		46,156,204	$	5	$	510,518

	Accumulated (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance – December 31, 2010	$	(129,203	)	$	(754	)	$	245,624
Issue of stock in public offering		—			—			32,105
Issue of stock for exercise of stock options		—			—			1,366
Issue of stock for exercise of warrants		—			—			4,860
Issue of stock for acquisitions		—			—			84,122
Debt discount on notes		—			—			1,081
Issue of stock for services		—			—			2,213
Issue of warrants for services		—			—			1,697
Stock-based compensation		—			—			7,498
Foreign currency translation adjustment					(1,492	)		(1,492	)
Fair market value adjustment for available for sale securities		—			9			9
Net loss		(27,516	)		—			(27,516	)
Balance – September 30, 2011	$	(156,719	)	$	(2,237	)	$	351,567

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.

4

KIT DIGITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

	Nine months ended  September 30,
	2011			2010
Operating Activities:
Net loss	$	(27,516	)	$	(26,758	)
Adjustments to reconcile net loss to net cash used by operating activities:
Provision for doubtful accounts		223			358
Depreciation		3,646			3,243
Amortization of intangible assets		4,860			2,867
Amortization of deferred financing costs and debt discount		196			33
Loss on disposal of property and equipment		-			111
Derivative expense (income)		(3,670	)		10,526
Less: merger and acquisition expenses		6,738			1,387
Non-cash stock based compensation		11,957			2,909
Non-cash warrants for services		1,697			840
Non-cash stock for services		267			412
Changes in assets and liabilities:
Accounts receivable		(10,952	)		(13,926	)
Unbilled revenue		(720	)		930
Inventory		(152	)		(579	)
Other assets		(3,473	)		(716	)
Accounts payable		1,390			2,268
Accrued expenses		333			(1,084	)
Income tax payable		(853	)		(9	)
Other liabilities		(4,248	)		(280	)
Total adjustments		7,239			9,290
Net cash used by operating activities - forward		(20,277	)		(17,468	)
Investing Activities:
Cash paid into restricted cash		3,518			(2,035	)
Cash paid into investment		(307	)		(700	)
Cash paid in acquisitions		(122,210	)		(26,338	)
Cash received in acquisitions		16,860			6,581
Receipt of payment on notes receivable		877			-
Proceeds from sale of equipment		162			-
Merger and acquisition expenses		(6,738	)		(1,387	)
Purchase of equipment		(3,869	)		(1,272	)
Purchase of software		(1,900	)		-
Net cash used by investing activities - forward	$	(113,607	)	$	(25,151	)

5

KIT DIGITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Amounts in Thousands)

(Unaudited)

	Nine months ended  September 30,
	2011			2010
Net cash used by operating activities -  forwarded	$	(20,277	)	$	(17,468	)
Net cash used by investing activities - forwarded		(113,607	)		(25,151	)
Financing Activities:
Proceeds from public offering, net		32,105			106,615
Proceeds from exercise of stock options		1,366			74
Proceeds from exercise of warrants		2,999			3,030
Payments for warrant buybacks		-			(24,054	)
Bank overdraft and other obligations		-			209
Proceeds from issuance of secured notes		15,000			5,762
Payments of secured notes		(1,254	)		(1,020	)
Repayments of notes payable		-			(4,500	)
Payment on capital leases		(360	)		(794	)
Net cash provided by financing activities		49,856			85,322
Effect of exchange rate changes on cash		2,842			558
Net increase (decrease) in cash and cash equivalents		(81,186	)		43,261
Cash and cash equivalents - beginning of period		141,233			6,791
Cash and cash equivalents - end of period	$	60,047		$	50,052
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes		739		$	-
Interest		1,342		$	563
Non-cash investing and financing activities:
Non-cash issuances of stock for acquisitions (8,398,648 and 2,460,959 shares issued, respectively)		84,122		$	25,964

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.

6

KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

(1) Nature of Business and Nature of Presentation

KIT digital, Inc. (“we,” “us,” “our,” the “Company” or “KIT digital”), through our operating subsidiaries, provide enterprise clients an end-to-end technology platform for managing Internet Protocol (“IP”)-based video assets across browser environments, mobile and tablet devices and connected television sets. We also offer creative interface design, marketing services, content transformation services, systems integration and broadcast engineering services to complement our KIT Platform software. Our revenues are comprised primarily of software-as-a-service (“SaaS”) license and usage fees, enterprise software license, maintenance and usage fees, and professional services fees.

The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information. These financial statements include the accounts of KIT digital and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying financial statements.

Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed or omitted in these interim financial statements. Accordingly, the unaudited consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in KIT digital’s annual report on Form 10-K for the year ended December 31, 2010, filed with the U.S. Securities and Exchange Commission.

The results of operations presented in this quarterly report on Form 10-Q are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited consolidated financial statements include all adjustments and accruals, consisting only of normal recurring adjustments, that are necessary for a fair statement of the results of all interim periods reported herein.

(2) Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (FASB) issued a new accounting standard update which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. We will adopt this standard in the first quarter of 2012 and we do not expect the adoption will have a material impact on our financial statements and disclosures.

In June 2011, the FASB issued a new accounting standard which eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. We will adopt this standard in the first quarter of 2012.

In September 2011, the FASB issued a revised accounting standard, which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This guidance is effective for interim and annual financial periods beginning after December 15, 2011, although early adoption is permitted. We are reviewing the impact of early adoption of this update.

(3) Net income (loss) per share

Basic net income per share is computed using the weighted average number of common shares outstanding during the applicable period. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common stock. Potential common stock consists of shares issuable pursuant to stock options, warrants and restricted stock units (“RSUs”).

7

KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

The following table sets forth the components used in the computation of basic and diluted net income per common share (in thousands, except share and per share data):

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2011		2010			2011			2010
Numerator:
Net income (loss)	$	4,788	$	(7,974	)	$	(27,516	)	$	(26,758	)
Denominator:
Denominator for basic net income (loss) per common share		42,553,768		23,355,298			36,978,752			19,581,084
Effect of dilutive securities:
Stock options		611,918		-			-			-
Warrants		149,221		-			-			-
RSUs		119,509		-			-			-
Denominator for diluted net income (loss) per common share		43,434,416		23,355,298			36,978,752			19,581,084
Basic net income (loss) per common share	$	0.11	$	(0.34	)	$	(0.74	)	$	(1.37	)
Diluted net income (loss) per common share	$	0.11	$	(0.34	)	$	(0.74	)	$	(1.37	)

Outstanding options to acquire an aggregate of 3,173,295 shares of common stock for the three months ended September 30, 2011 were excluded from the calculation of diluted earnings per share because the exercise prices of these stock options were greater than the average market price of the Company’s common stock during the respective period. As a result, the effect of including these options would be anti-dilutive. Similarly, outstanding warrants to acquire an aggregate of 512,439 shares of common stock for the three months ended September 30, 2011 were excluded from the calculation of diluted earnings per share because the exercise prices of the warrants were greater than the average market price of the Company's common stock during the respective period. Additionally, 1,569,741 common stock issuable in respect of outstanding time and performance-based RSUs were excluded from the computation of diluted net income per share for the three ended September 30, 2011 because the time or performance conditions had not been met as of those dates.

8

KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

(4) Cash and Cash Equivalents

We consider all highly liquid investments with original maturities of ninety days or less when purchased to be cash and cash equivalents. As of September 30, 2011 and December 31, 2010, the Company had $2,095 and $2,068, respectively, of cash equivalents in an account that pays interest at LIBOR plus 150 basis points. This account is guaranteed and backed by liquid collateral instruments, and can be redeemed with 14 days prior written notice.

(5) Fair Value of Financial Instruments

Fair value is the amount that would be received upon sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy which prioritizes the types of inputs to valuation techniques that companies may use to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1). The next highest priority is given to inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly (Level 2). The lowest priority is given to unobservable inputs in which there is little or no market data available and which require the reporting entity to develop its own assumptions (Level 3).

The assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy are Investments and Derivative Liabilities. Investments are measured using net asset value as a practical expedient (Level 2). See Note 14 for fair value hierarchy on the Derivative Liabilities.

(6) Accounts Receivable

Trade accounts receivable are stated net of allowances for doubtful accounts. Specific customer provisions are made when a review of significant outstanding amounts, customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made at differing amounts, based upon the balance and age of the receivable and the Company’s historical collection experience. Trade accounts are charged off against the allowance for doubtful accounts or expense when it is probable the accounts will not be recovered. The allowance for doubtful accounts as of September 30, 2011 and December 31, 2010 was $2,970 and $1,023, respectively.

(7) Concentration of Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. We place our cash and cash equivalents with high credit quality institutions to limit credit exposure, and from time to time, obtain collateral for our accounts where feasible and we deem prudent. As of September 30, 2011, we held cash and cash equivalents of $14,819 in financial institutions outside of the United States. We believe no significant concentration of credit risk exists with respect to these balances. The amount held in foreign currencies as of September 30, 2011 and December 30, 2010 was $9,267 and $8,617, respectively. The amount of cash in excess of FDIC insured amounts as of September 30, 2011 and December 31, 2010, was $57,947 and $139,185, respectively.

9

KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

Concentrations of credit risk with respect to trade accounts receivable are limited due to the nature of our customers who are dispersed across many industries and geographic regions. As of September 30, 2011, no customer accounted for 10% or more of our trade accounts receivable. As of December 31, 2010, one customer accounted for 11% of our trade accounts receivable. As of September 30, 2011 and 2010, no customer accounted for 10% or more of the year to date revenue. As of September 30, 2011, we held accounts receivable of $55,449 outside of the United States. We routinely assess the financial strength of customers and, based upon factors concerning credit risk, establish an allowance for doubtful accounts. Management believes that accounts receivable credit risk exposure beyond such allowance is limited.

(8) Inventory

Inventory is valued at the lower of cost (first-in, first-out method) or market and is comprised of finished goods. On a quarterly basis, we review inventory quantities on hand and analyze the provision for excess and obsolete inventory based primarily on product age in inventory and our estimated sales forecast, which is based on sales history and anticipated future demand. As of September 30, 2011 and December 31, 2010, our reserves for excess and obsolete inventory were $140 and $145, respectively.

(9) Goodwill and Intangible Assets

The change in the carrying amount of goodwill is as follows:

	Goodwill
Balance as of December 31, 2010	$	89,004
Acquisitions		155,777
Balance as of September 30, 2011	$	244,781

Intangible assets include the following:

	September 30, 2011
	Weighted Average Remaining Amortization Period (Years)		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets with determinable lives:
Software		4.25	$	12,447	$	(5,370	)	$	7,077
Customer list		5.5		36,507		(8,275	)		28,232
Trademarks		4.5		133		(60	)		73
Other		1.25		376		(269	)		107
Total			$	49,463	$	(13,974	)	$	35,489

10

KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

	December 31, 2010
		Weighted Average Remaining Amortization Period (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets with determinable lives:
Software		3.25	$	6,747	$	(4,057	)	$	2,690
Customer list		5.5		15,106		(4,944	)		10,162
Trademarks		4.5		133		(35	)		98
Other		1.5		376		(78	)		298
Total			$	22,362	$	(9,114	)	$	13,248

Amortization expense on intangible assets for the three months ended September 30, 2011 and 2010 were $1,815 and $1,348 respectively. Amortization expense on intangible assets for the nine months ended September 30, 2011 and 2010 were $4,860 and $2,865 respectively.

Estimated future annual amortization expense as of September 30, 2011 is as follows:

	Software		Customer List		Trademarks		Other		Total
2011	$	456	$	1,420	$	3	$	50	$	1,929
2012		1,826		5,546		17		33		7,422
2013		1,624		5,426		17		24		7,091
2014		1,338		5,400		17		-		6,755
2015		1,090		5,259		17		-		6,366
Thereafter		743		5,181		2		-		5,926
Totals	$	7,077	$	28,232	$	73	$	107	$	35,489

(10) Acquisitions

Brickbox Acquisition

On September 21, 2010, we acquired Brickbox Digital Media s.r.o., a Czech company engaged in providing digital video asset management solutions, and its international subsidiaries (“Brickbox”), in exchange for 339,476 shares of our common stock valued at a share price of $11.00 with a discount of $731 due to the restriction on the sale of these shares for 1 year for a total value of $3,003 and approximately $7,600 in cash at the time of acquisition. Additionally, the cost includes a fair value for contingent consideration of $3,023 which will is based on 10 percent of revenue and meeting earnings targets over a four-year period after closing, which is included in the Balance Sheet in “Acquisition liability, net of current”. We have allocated the aggregate cost of the acquisition to Brickbox’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill. On May 22, 2011, we signed an amendment to the securities purchase agreement to issue 265,262 shares valued at $3,053 for the full settlement of the contingent acquisition liabilities of Brickbox.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	4,241
Property and equipment		1,126
Intangible assets – customer list		2,900
Intangible assets – noncompete		100
Goodwill		8,940
Total assets acquired		17,307
Deferred tax liability		(654	)
Current liabilities and assumed debt		(3,027	)
Net assets acquired	$	13,626

The results of operations of Brickbox have been included in the Consolidated Statements of Operations since September 21, 2010. Revenue and net income after acquisition are not provided as it is impracticable to distinguish due to the integration of sales, delivery and overhead into our overall regional and global operations.

11

KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

KickApps Acquisition

On January 28, 2011, we acquired KickApps Corporation, a Delaware corporation (“KickApps”) and provider of solutions that enable the creation and management of next generation video-based Web experiences, in exchange for $4,027 in cash and 3,010,296 shares of our common stock valued at a price of $13.55 (with a discount of $11,981 due to the restriction on the sale of these shares), for a total of $28,808. We are holding 528,507 shares of the merger consideration in escrow for a period not to exceed 15 months following the merger to cover any warranty claims related to undisclosed commercial or tax liabilities or litigation. All of our common stock issued in exchange for KickApps is subject to contractual restrictions on transfer, with 60% of such stock being released from this restriction on the first anniversary of the merger and the balance on the second anniversary of the merger. We have allocated the aggregate cost of the acquisition to KickApps’ net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	2,023
Property and equipment		1,326
Intangible assets –developed software		500
Intangible assets – customer list		2,500
Goodwill		30,296
Total assets acquired		36,645
Deferred tax liability		(1,050	)
Current liabilities		(2,760	)
Net assets acquired	$	32,835

 The results of operations of KickApps for the period from January 29, 2011 to September 30, 2011 have been included in the Consolidated Statements of Operations. Revenue and net income after acquisition are not provided as it is impracticable to distinguish due to the integration of sales, delivery and overhead into our overall regional and global operations.

Kyte Acquisition

On January 25, 2011, we acquired decentraltv Corporation, a Delaware corporation doing business as Kyte (“Kyte”), a cloud-based publishing platform that enables companies to deliver live and on-demand video experiences to websites, mobile devices and connected TVs, in exchange for $3,605 in cash and 189,348 shares of our common stock at a price of $13.91 (with a discount of $265 due to the restriction on the sale of these shares for 6 months), for a total of $2,369. Additionally, the cost included contingent consideration of $1,000 to be paid on the one-year anniversary of the acquisition in cash and stock to former Kyte stockholders if specified financial milestones are achieved by that business, which is included in the Balance Sheet in “Acquisition Liability, net of current.” We are holding 56,803 shares of the consideration in escrow for a period of one year to secure certain indemnification obligations. We have allocated the aggregate cost of the acquisition to Kyte’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	131
Property and equipment		71
Intangible assets – developed software		400
Intangible assets – customer list		1,000
Goodwill		5,294
Total assets acquired		7,562
Deferred tax liability		(490	)
Current liabilities		(98	)
Net assets acquired	$	6,974

 The results of operations of Kyte for the period from January 26, 2011 to September 30, 2011 have been included in the Consolidated Statements of Operations. Revenue and net income after acquisition are not provided as it is impracticable to distinguish due to the integration of sales, delivery and overhead into our overall regional and global operations.

12

KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

Kewego Acquisition

On January 26, 2011, we acquired Kewego S.A., a société anonyme organized under the laws of France (“Kewego”), a provider of professional IP-based, multi-screen video asset management solutions for IP connected devices, including PCs, mobile phones, iPads, connected TVs and gaming consoles, in exchange for $11,965 in cash and 1,411,704 shares of our common stock valued at a price of $14.36 (with a discount of $4,320 due to the restriction on the sale of these shares for 1 year), for a total of $15,952. We have allocated the aggregate cost of the acquisition to Kewego’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	10,064
Property and equipment		388
Intangible assets – developed software		500
Intangible assets – customer list		2,000
Goodwill		21,950
Total assets acquired		34,902
Deferred tax liability		(775	)
Current liabilities		(6,210	)
Net assets acquired	$	27,917

The results of operations of Kewego for the period from January 27, 2011 to September 30, 2011 have been included in the Consolidated Statements of Operations. Revenue and net income after acquisition are not provided as it is impracticable to distinguish due to the integration of sales, delivery and overhead into our overall regional and global operations.

WWB Acquisition

On February 21, 2011, we acquired the assets of Worldwide Broadcast Systems Inc. (“WWB”), a United States-based company engaged in providing broadcast video systems integration to customers in South and Central America, in exchange for $1,900 in cash and 23,514 shares of our common stock valued at a price of $13.25 (with a discount of $33 due to the restriction on the sale of these shares for 6 months), for a total of $279. Additionally, the cost includes a fair value for contingent consideration of $4,505, which will be based on a percentage of revenue over a three-year period after closing, which is included in the Balance Sheet in “Acquisition Liability, net of current.”.We have allocated the aggregate cost of the acquisition to WWB’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	89
Goodwill		6,595
Total assets acquired		6,684
Current liabilities		-
Net assets acquired	$	6,684

 The results of operations of WWB for the period from February 22, 2011 to September 30, 2011 have been included in the Consolidated Statements of Operations. Revenue and net income after acquisition are not provided as it is impracticable to distinguish due to the integration of sales, delivery and overhead into our overall regional and global operations.

13

KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

ioko Acquisition

On May 2, 2011, we acquired ioko365 Ltd. ("ioko") a private company incorporated in England and Wales with principal offices in San Diego, California and London, England and York, England. ioko provides end-to-end managed cloud-based platform solutions for multi-screen video delivery over connected Internet Protocol ("IP") devices to tier-one telecommunications, cable, media and entertainment companies around the world. Total consideration was $74,478 in cash and 1,509,804 of our common stock valued at a price of $10.88 (with a discount of $3,750 due to the restriction on the sale of these shares) for a total value of $12,676. In addition, the cost includes a fair value of contingent consideration of $3,362 based on meeting revenue and earnings targets during the twelve month periods ending March 31, 2012 and March 31, 2013. We are holding $9,000 of the cash and 232,378 shares of the merger consideration in escrow for a period not to exceed 18 months following the merger. Included in this agreement is an employee incentive plan for a total potential payment of our common stock of $7,500 upon meeting specified performance targets during the twelve month periods ending March 31, 2012 and March 31, 2013 and the six month period ended September 30, 2013. We have allocated the aggregate cost of the acquisition to ioko’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	36,271
Property and equipment		1,983
Intangible assets – customer list		10,000
Goodwill		59,050
Total assets acquired		107,304
Deferred tax liability		(2,500	)
Current liabilities and assumed debt		(14,288	)
Net assets acquired	$	90,516

The results of operations of ioko for the period from May 2, 2011 to September 30, 2011 have been included in the Consolidated Statements of Operations. Revenue and net income after acquisition are not provided as it is impracticable to distinguish due to the integration of sales, delivery and overhead into our overall regional and global operations. 

14

KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

Polymedia Acquisition

On May 17, 2011 we acquired Polymedia S.P.A. (“Polymedia”) a company incorporated in Italy with its principal office in Milan. Polymedia was the IP video platform-provisioning subsidiary of TXT e-solutions, a public company listed on the Italian Stock Exchange. Total consideration was $24,283 in cash and 1,178,381 of our common stock valued at a price of $11.89 (with a discount of $864 due to the restriction on the sale of the shares in escrow) for a total of $13,146. In addition, the cost includes a fair value of contingent consideration of $4,240 based on meeting specified revenue and gross margin targets during the 12-month periods ending May 31, 2012 and May 31, 2013.We are holding 354,286 shares of the merger consideration in escrow for a period of up to 12 months following the closing date. We have allocated the aggregate cost of the acquisition to Polymedia’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	11,649
Property and equipment		1,068
Intangible assets – customer list		6,000
Goodwill		31,523
Total assets acquired		50,240
Deferred tax liability		(1,884	)
Current liabilities and assumed debt		(6,687	)
Net assets acquired	$	41,669

The results of operations of Polymedia for the period from May 17, 2011 to September 30, 2011 have been included in the Consolidated Statement of Operations. Revenue and net income after acquisition are not provided as it is impracticable to distinguish due to the integration of sales, delivery and overhead into our overall regional and global operations.

Peerset Acquisition

On June 9, 2011, we acquired the assets of Peerset, Inc. (“Peerset”), a Canadian based company engaged in developing technology to provide content recommendation services, in exchange for 10,611 shares of our common stock valued at a price of $11.71 for a total of $124 and cash of $1,375. The Peerset acquisition was primarily a purchase of intellectual property and a dedicated research and development team related to content recommendation technology, and the company was generating virtually no reported revenue at the time of purchase. We have allocated the aggregate cost of the acquisition to Peerset’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	-
Intangible assets – developed software		400
Goodwill		1,099
Total assets acquired		1,499
Current liabilities		-
Net assets acquired	$	1,499

15

KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

Selected unaudited pro forma combined results of operations for the nine months ended September 30, 2010, assuming the Multicast, Benchmark, Brickbox, Accela, Megahertz, Kyte, Kewego, Kickapps, WWB, ioko, and Polymedia acquisitions occurred on January 1, 2010 using actual unaudited figures from each entity prior to acquisition, are presented as follows:

Total revenue	$	158,277
Net loss	$	(35,079	)

Selected unaudited pro forma combined results of operations for the nine months ended September 30, 2011, assuming the Kyte, Kewego, Kickapps, WWB, ioko, and Polymedia acquisitions occurred on January 1, 2011 using actual unaudited figures from each entity prior to acquisition, are presented as follows:

Total revenue	$	180,197
Net loss	$	(23,701	)

(11) Loan Receivable

	September 30, 2011			December 31, 2010
Dec 2010 Loan receivable on sale of subsidiary	$	9,969		$	10,847
Less current		(3,641	)		(2,486	)
Loan receivable, net of current	$	6,328		$	8,361

In December 2010, we lent $10,847 in gross proceeds in relation to the sale of subsidiary. It matures on January 28, 2015. Commencing on February 28, 2011, payments are due in forty-eight equal consecutive payments of $226. The loan is secured by accounts receivable, cash and other receivables.

(12) Secured Notes Payable

	September 30, 2011			December 31, 2010
April 2010 secured note payable for $5,000	$	3,809		$	4,858
June 2010 secured note payable for $1,000		823			978
May 2011 secured note payable for $15,000		14,061			-
		18,693			5,836
Less current		(5,035	)		(1,709	)
Secured notes payable, net of current		13,658			4,127

In May 2011, we received $15,000 in gross proceeds from the issuance of a note to a third party investor, as called for in the negotiated structure of our acquisition of ioko, as a means of financing the additional accounts receivable acquired. Interest is payable monthly in advance at 13.6% per year and matures on July 1, 2014.  We paid total interest only of $187 for May and June 2011 and agreed to pay interest only of $122 per month for the next seven months. Commencing on February 1, 2012, payments for principal and interest are due in thirty equal consecutive payments of $561. A final balloon payment of $1,149 will be due and payable upon maturity. The note is secured by the Company’s property, including accounts receivable and inventory.  In conjunction with the borrowing, we issued to the lender a warrant entitling it to purchase, for $13.29 per share, 141,083 shares of our common stock with a seven year life through May 15, 2018. A debt discount of $1,081 was recorded related to these warrants and is being amortized over the term of the loan.

In June 2010, we received $1,000 in gross proceeds from the issuance of a note to a third party investor. Interest is payable monthly in advance at 12.7% per year and matures on September 1, 2013. We paid interest only of $5 for June 2010 and agreed to pay interest only of $8 for the next nine months. Commencing on April 1, 2011 payments for principal and interest are due in thirty equal consecutive payments of $38. A final balloon payment of $108 will be due and payable upon maturity. The note is secured by the Company’s property, including accounts receivable and inventory. In conjunction with the borrowing, we issued to the lender a warrant entitling it to purchase, for $13.76 per share, 8,480 shares of our common stock with a five year life through June 14, 2015. A debt discount of $27 was recorded related to these warrants and is being amortized over the term of the loan.

In April 2010, we received $5,000 in gross proceeds from the issuance of a note to a third party investor. Interest is payable monthly in advance at 12.7% per year and matures on July 1, 2013. We paid interest only of $22 for April 2010 and agreed to pay interest only of $42 for the next nine months. Commencing on February 1, 2011, payments for principal and interest are due in thirty equal consecutive payments of $188. A final balloon payment of $538 will be due and payable upon maturity. The note is secured by the Company’s property, including accounts receivable and inventory. In conjunction with the borrowing, we issued to the lender a warrant entitling it to purchase, for $14.24 per share, 40,976 shares of our common stock with a five year life through April 15, 2015. A debt discount of $183 was recorded related to these warrants and is being amortized over the term of the loan.

16

KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

(13) Acquisition Liabilities

	September 30, 2011		December 31, 2010
Acquisition liabilities, current portion
Benchmark	$	1,608	$	2,115
Kyte		1,000		-
WWB		1,126		-
ioko		1,798		-
Polymedia		2,827		-
	$	8,359	$	2,115
Acquisition liabilities, net of current
Benchmark	$	5,621	$	7,382
Brickbox		-		3,023
WWB		3,379		-
ioko		1,563		-
Polymedia		1,414		-
	$	11,977	$	10,405

The fair value of the acquisition-related contingent consideration for Benchmark included above was $8,378 on the acquisition date of May 14, 2010. As of March 31, 2011, the fair value of the acquisition-related contingent consideration for the first anniversary on May 15, 2011 for Benchmark increased by $2,873 based on changes in management’s estimates and other factors that occurred during the three months ended March 31, 2011. As of June 30, 2011, the fair value of the acquisition-related contingent consideration for the first anniversary on May 15, 2011 for Benchmark increased by an additional $2,148 based on the actual earn-out provisions which has been agreed and finalized. As of June 30, 2011, the fair value of the acquisition-related contingent consideration for the second anniversary on May 15, 2012 for Benchmark increased by $3,208 based on changes in management’s estimates and other factors that occurred during the three months ended June 30, 2011. The increase in the liabilities were recorded as a charge to earnings and is included in the “Merger and acquisition and investor relations expenses” line item in the Consolidated Statements of Operations. Also in the three months ended June 30, 2011, the working capital liability was agreed and paid for $357 with the difference of $762 recorded as an offset to the “Merger and acquisition and investor relations expenses” line item in the Consolidated Statements of Operations.

Pursuant to the Benchmark Stock Purchase Agreement on May 14, 2010, following the 12-month anniversary of the closing, we agreed to pay the seller in the form of shares of our common stock $0.60 for every $1.00 of recognized revenue generated by Benchmark during the 12-month period following the closing, less the purchase price paid at closing.  The price per share of our common stock issuable following the first anniversary of the closing was calculated based on the weighted average price of our common stock for the 30 trading days immediately preceding the first anniversary. Pursuant to an amendment to the Stock Purchase Agreement dated August 2, 2011, the parties agreed to accelerate half of the payment which would otherwise be payable to the seller with respect to the 12 months ending May 15, 2012 (based on financial results ending May 15, 2011), and extended a portion of the balance of the 2012 payment until May 15, 2013.  In accordance with the Benchmark Stock Purchase Agreement and the amendment, we issued 816,592 shares of our common stock to the seller for the first anniversary payment. On August 4, 2011, we issued 816,592 shares of our common stock valued at $7,905 in satisfaction of $9,378 of the earn-out provision. The difference of $1,473 was recorded as other income in the Consolidated Statements of Operations due to the change in value of the shares upon issuance

In July 2011, we paid the $1,375 in relation to the Peerset Acquisition liability.

On May 22, 2011, we signed an amendment to the securities purchase agreement to issue 265,262 shares valued at $3,053 for the full settlement of the Brickbox contingent acquisition liabilities estimate of $3,023, with the difference booked to expense in the three months ended June 30, 2011.

(14) Derivative Liabilities

In June 2008, the Financial Accounting Standards Board issued a new accounting standard. Under this standard, instruments which contain full ratchet anti-dilution provisions will no longer be considered indexed to a company’s own stock for purposes of determining whether it meets the first part of the scope exception. The adoption required us to (1) evaluate our instrument’s contingent exercise provisions and (2) evaluate the instrument’s settlement provisions. Based upon applying this approach to instruments within the scope of the consensus, we have determined that certain of our warrants which were classified in stockholders’ equity on December 31, 2008, no longer meet the definition of Indexed to a Company’s Own Stock provided in the Consensus. Accordingly, effective on January 1, 2009, we were required to reclassify those warrants, at their fair value, into liabilities. The accounting standard requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value over the period reported in the statement of operations. The difference between the amount the warrants were originally recorded in the financial statements and the fair value of the instruments on January 1, 2009 was considered a cumulative effect of a change in accounting principle and required an adjustment to the opening balance of retained earnings and a reduction in additional paid-in capital in the amount of $8,498 and $24,235, respectively. The derivative liability as of January 1, 2009 was $15,737. The common shares indexed to the derivative financial instruments used in the calculation of the fair value and recorded as liabilities at January 1, 2009, December 31, 2009, December 31, 2010 and September 30, 2011 were 5,806,230, 4,794,400, 679,400 and 251,021, respectively. The number of shares for the determination of liability have been computed based on the effective exercise price used in the valuation. The actual number of common shares indexed to the warrants at January 1, 2009, December 31, 2009, December 31, 2010 and September 30, 2011 were 2,886,038, 4,794,400, 679,400 and 251,021, respectively.

17

KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments.

Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimate and assumption changes. Under the terms of the new accounting standard, increases in the trading price of the company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the company’s common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.

The following table summarizes the components of derivative liabilities as of September 30, 2011, December 31, 2010 and the re-measurement date, January 1, 2009:

	September 30,  2011			December 31,  2010			Re-measurement date January 1,  2009
Fair value of warrants with anti-dilution provisions	$	(565	)	$	(6,096	)	$	(15,736	)
Significant assumptions (or ranges):
Trading market values  (1)	$	8.40		$	16.04			5.25
Term (years)		1.61		2.35			$	4.35 to 5.00
Volatility   (1)		54.44	%		57.73	%		101.98	%
Risk-free rate   (2)		0.25	%		0.61	%		1.55	%
Effective Exercise price  (3)	$	7.00		$	7.00		$	5.92

Fair value hierarchy:

(1) Level 1 inputs are quoted prices in active markets for identical assets and liabilities, or derived there from. Our trading market values and the volatilities that are calculated thereupon are level 1 inputs.

(2) Level 2 inputs are inputs other than quoted prices that are observable. We use the current published yields for zero-coupon US Treasury Securities, with terms nearest the remaining term of the warrants for our risk free rate.

(3) Level 3 inputs are unobservable inputs. Inputs for which any parts are level 3 inputs are classified as level 3 in their entirety. The remaining term used equals the remaining contractual term as our best estimate of the expected term and the effective exercise price which is based on the stated exercise price adjusted for anti-dilution provisions.

The effects on our income (expense) associated with changes in the fair values of our derivative financial instruments for the three months ended September 30, 2011 and 2010 was $628 and $(1,451), respectively. Included in the $1,451 expense for the three months ended September 30, 2010 is a gain on settlement of $55 related to the repurchase of warrants. The effects on our income (expense) associated with changes in the fair values of our derivative financial instruments for the nine months ended September 30, 2011 and 2010 was $3,670 and $(10,526), respectively. Included in the $(10,526) expense for the nine months ended September 30, 2010 is a loss on settlement of $2,961 related to the repurchase of warrants.

18

KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

On March 7, 2010, our board of directors approved the repurchase of certain outstanding warrants with exercise prices below the then-current market price from certain warrant holders (who had acquired the warrants in May 2008 private placement financings), including KIT Media, an entity controlled by Kaleil Isaza Tuzman, our Chairman and Chief Executive Officer and Wellington Management Company (“Wellington”), an entity with greater than a 10% holding in KIT digital’s outstanding common stock at the time of the transaction. KIT Media and Wellington were at the time considered related parties of the Company. The terms of the warrant repurchase were identical for KIT Media and Wellington, and the negotiation of such terms was led by Wellington. The Company offered to purchase and cancel these warrants at 133% of the intrinsic value of the warrants (but because intrinsic value was based on a 20-day trailing volume weighted average price of the underlying common stock at the time, the ultimate purchase price of the warrants ended up being below the actual intrinsic value at the date of purchase.). These warrants with anti-ratchet dilution provisions totaling 3,030,747 were cancelled effective on March 31, 2010. Total payments for the settlement of these warrants was $22,232 and a loss of $1,665 was recorded in the derivative expense in the statement of operations. These warrants were included in the warrant buyback liability as at March 31, 2010 and were paid after such date. We also repurchased and cancelled another 403,577 warrants with anti-ratchet dilution provisions during the year ended December 31, 2010, at varying prices, from parties other than KIT Media and Wellington, for $1,342.

(15) Stock-Based Compensation

In December 2010, our board of directors voted unanimously to increase the number of shares which may be issued under the 2008 Incentive Plan by 1,500,000 to an aggregate of 5,000,000 shares of common stock, subject to ratification by our stockholders. Subsequently, as a result of acquisition activity, our board of directors authorized at its meetings on March 5, 2011 and August 5, 2011 to amend and increase the number of shares which may be issued under the 2008 Incentive Plan to a new total of 9,500,000 shares. The holders of a majority of our outstanding shares of common stock approved the amendment to the 2008 Incentive Plan at the stockholders meeting held on October 21, 2011. The 2004 Stock Option Plan has reserved 342,858 shares of common stock for issuance.

Our outstanding unvested stock options have maximum contractual terms of up to five years, principally vest on a quarterly basis ratably over four years and were granted at exercise prices equal to the market price of our common stock on the date of grant. Our outstanding stock options are exercisable into shares of our common stock. We measure the cost of employee services received in exchange for an award of equity instruments, including grants of employee stock options, warrants and restricted stock awards, based on the fair value of the award at the date of grant in accordance with the modified prospective method. We use the Black-Scholes model for purposes of determining the fair value of stock options and warrants granted and recognize compensation costs ratably over the requisite service period, net of estimated forfeitures. For restricted stock awards, the grant-date fair value is the quoted market price of the stock.

For the three months ended September 30, 2011 and 2010, we recognized $5,046 and $1,273, respectively, of non-cash stock-based compensation expense in the consolidated statements of operations. For the nine months ended September 30, 2011 and 2010, we recognized $11,457 and $2,910, respectively, of non-cash stock-based compensation expense in the consolidated statements of operations. Included in the nine months ended September 30, 2011 amount of $11,457 is $4,171 accrued for compensation to be issued in stock, $1,318 for restricted stock units and restricted stock vested in 2011. Included in the nine months ended September 30, 2010 amount of $2,910 is $269 for restricted stock units and restricted stock vested in 2010. Also included in non-cash stock-based compensation are warrants to purchase 34,286 shares of common stock with an exercise price of $4.655 issued on March 30, 2008, that vest over three years from the issue date with $12 and $36 recognized in the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011, all of these warrants were vested. The intrinsic value as of September 30, 2011 of these outstanding warrants and exercisable warrants are $128.

As of September 30, 2011, there was approximately $22,932 of total unrecognized compensation cost related to unvested share-based compensation grants, which is expected to be amortized over a weighted-average period of 3.1 years.

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KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes model with the following weighted-average assumptions:

	Nine Months  Ended September 30,  2011			Nine Months  Ended September 30,  2010
Expected life (in years)		4.00			3.85
Risk-free interest rate		1.52	%		1.08	%
Volatility		79.40	%		50.69	%
Dividend yield		0			0

In 2010 and 2011, we estimated the expected term of stock options using historical exercise experience and used a forfeiture rate of 25% for employees and 0% for officers and directors

A summary of the status of stock option awards and changes during the nine months ended September 30, 2011 are presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Intrinsic Value
Outstanding at December 31, 2010		3,903,424			10.54
Granted		3,339,759			12.15
Exercised		(182,622	)		9.84
Cancelled, expired, or forfeited		(1,178,930	)		12.52
Outstanding at September 30, 2011		5,881,631			11.17		3.98	$	0
Exercisable at September 30, 2011		1,946,911			10.38		3.48	$	0

The weighted-average grant-date fair value of option awards granted during the nine months ended September 30, 2011 was $7.11.

(16) Stock Issuances

During the quarter ended March 31, 2011, we issued 4,744,467 shares of common stock. Of this amount, we issued 189,348 shares for the acquisition of Kyte, 1,411,704 shares for the acquisition of Kewego, 3,010,296 shares for the acquisition of KickApps, 23,514 shares for the acquisition of WWB, 57,251 shares for the exercise of warrants, 52,354 shares for the exercise of options with proceeds of $390.

During the quarter ended June 30, 2011, we issued 3,462,165 shares of common stock. Of this amount, we issued 1,509,804 shares for the acquisition of ioko, 1,178,381 shares for the acquisition of Polymedia, 265,262 shares for the settlement of the contingent acquisition liabilities of Brickbox, 10,611 shares for Peerset acquisition, 25,423 shares for restricted stock, 425,945 shares for the exercise of warrants with proceeds of $2,982, and 63,603 shares for the exercise of options with proceeds of $447.

On September 20, 2011, we completed an underwritten public offering of 3,200,000 shares of our common stock, pursuant to our shelf registration statement on Form S-3 (No. 333-169918), which was originally filed and declared effective in October 2010, and related prospectus supplement dated September 15, 2011. We simultaneously sold 480,000 additional shares of common stock pursuant to an underwriters’ over-allotment option. We sold these shares at a price of $9.50 per share and received $34,960 in gross proceeds and approximately $32,105 in net proceeds, after deducting underwriting discounts, commissions, legal fees and other estimated offering expenses.

During the quarter ended September 30, 2011, we issued 4,752,620 shares of common stock. Of this amount, we issued 3,680,000 shares for the public offering, 816,592 shares for the payment of the Benchmark Acquisition liability, 186,929 shares for services, 2,434 shares for the exercise of warrants with proceeds of $17 and 66,665 shares for the exercise of options with proceeds of $529.

As of September 30, 2011, the outstanding warrants (excluding the warrants included in the derivative liability of 251,021 and stock-based compensation of 34,286) were 1,361,935 with a weighted average exercise price of $24.21. As of December 31, 2010, the outstanding warrants (excluding the warrants included in the derivative liability of 679,400 and stock-based compensation of 34,286) were 781,737 with a weighted average exercise price of $39.28.

(17) Restructuring Charges

In the first quarter of 2010, management approved restructuring plans for entities acquired in the fourth quarter of 2009 which included a workforce reduction, reduction in costs related to excess and vacated facilities under non-cancelable leases and settlement of contracts. Management expects to make the remaining employee termination costs payments in 2011 and the facility closing costs and contract settlement payments into 2012. 

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KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

The following table summarizes the restructuring charges for the three and nine months ended September 30, 2011, respectively, for the plan approved in the first quarter 2010:

	Employee Termination Costs			Contract Settlements			Facility Closing Costs			Total
Balance as of December 31, 2010	$	1,212		$	13		$	518		$	1,743
Additions		-			-			34			34
Reversal		(654	)		-			-			(654	)
Cash payments		(558	)		(4	)		(229	)		(791	)
Balance as of  June 30 , 2011	$	-		$	9		$	323		$	332
Cash payments		-			(2	)		(54	)		(56	)
Balance as of  September 30, 2011	$	-		$	7		$	269		$	276

The accrued restructuring of $276 is included in accrued expenses in the consolidated balance sheets as of September 30, 2011.

In the first quarter of 2011, management approved a companywide restructuring plan which includes a workforce reduction, reduction in costs related to excess and vacated facilities under non-cancelable leases and settlement of contracts. Management expects to make payments during the remaining portion of 2011 and continuing into 2012.

The following table summarizes the restructuring charges for the three and nine months ended September 30, 2011, respectively, for the plan approved in the first quarter 2011:

	Employee Termination Costs			Contract Settlements		Facility Closing Costs		Total
Balance as of December 31, 2010	$	-		$	-	$	-	$	-
Additions		3,973			-		-		3,973
Cash payments		(1,736	)		-		-		(1,736	)
Balance as of  June 30 , 2011	$	2,237		$	-	$	-	$	2,237
Cash payments		(1,975	)		-		-		(1,975	)
Balance as of  September 30, 2011	$	262		$	-	$	-	$	262

The accrued restructuring of $262 is included in accrued expenses in the consolidated balance sheets as of September 30, 2011.

The following table summarizes the restructuring charges:

	Three months ended September 30, 2011		Three months ended September 30, 2010			Nine months ended September 30, 2011		Nine months ended September 30, 2010
Employee termination costs	$	-	$	(66	)	$	3,318	$	2,566
Contract settlements		-		-			-		67
Facility closing costs		-		(27	)		34		848
Total restructuring charges	$	-	$	(93	)	$	3,352	$	3,481

(18) Integration Expenses

The Company has recorded integration charges related to the cost overlap due to the reorganization and integration of acquisitions of $2,624 and $21,022 for the three and nine months ended September 30, 2011, respectively. Integration expenses include one‐time expenses for integrating acquired businesses together and eliminating duplication and inefficiencies. This includes rationalizing hosting and delivery infrastructure (data center consolidation, related hardware purchases, trunk T1 and T3 purchases and combinations, etc.) to merging software platforms and physical plant/office combination. These expenses include directly allocable staff time, travel and associated charges related to executing these integration initiatives. These expenses are almost without exception cash‐based.

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KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

The Company has recorded integration charges related to the redundancy in staff and consultants for the transition of technology infrastructure during reorganization due to the centralizing of resources in Prague of $4,535 and $10,834 for the three and nine months ended September 30, 2010, respectively.

(19) Segment Reporting

We have presented operating segments in the past for Digital Media Solutions and Professional Services but since Professional services represents less than 10% of total assets and total revenues and this segment continues to decrease, we are not presenting financial information for operating segments.

(20) Related Party Transactions

In December 2007, we entered into an agreement with KIT Capital, Ltd. (“KIT Capital”), a company wholly owned by Kaleil Isaza Tuzman, our Chairman and Chief Executive Officer, which includes the managerial services of Mr. Isaza Tuzman and two other junior employees. The total amount paid to KIT Capital and included in our results of operations in the nine months ended September 30, 2011 and 2010 were $259 and $330, respectively.

Effective August 31, 2011, Kaleil Isaza Tuzman, Gavin Campion and Robin Smyth entered into employment agreements with the Company, superseding their prior employment agreements with the Company or, in the case of Mr. Isaza Tuzman, the agreement that is described above. Pursuant to these employment agreements, Mr. Isaza Tuzman, Campion and Smyth have agreed to continue to devote substantially all of their professional time and attention to the Company as its Chairman and Chief Executive Officer, its President and its Chief Financial Officer, respectively. Mr. Isaza Tuzman will continue to report to the Company’s board of directors, Mr. Campion will report to Mr. Isaza Tuzman, and Mr. Smyth will report to Mr. Isaza Tuzman.

The employment agreements provide that Messrs. Isaza Tuzman, Campion and Smyth will receive a base salary at an annual rate of $315, $290, and $254 (inclusive of transportation and housing allowance), respectively, for services rendered in such positions. In addition, each executive may be entitled to receive, at the sole discretion of the Company’s board of directors or compensation committee, annual performance bonuses based on achieving targeted corporate objectives for such year in accordance with the year’s operating or incentive plan. Each of Messrs. Isaza Tuzman, Campion and Smyth are also entitled to participate in the Company’s recently-adopted performance-contingent restricted stock unit program and, concurrently with entering into the employment agreements, they received 636,000, 306,000 and 306,000 performance-contingent restricted stock units, respectively.

See Note 14, “Derivative Liabilities” for a description of warrant repurchases from KIT Media and Wellington.

(21) Income Taxes

Income taxes for the interim periods presented have been included in the accompanying financial statements on the basis of an estimated annual effective tax rate. Based upon our estimated annual effective tax rate and discrete items, our tax expense for the nine months ended September 30, 2011 was approximately $775 less a release of $160 of deferred tax liabilities relating to the Benchmark acquisition and refunds of $489 for a total of $126. Our income tax expense of $615 on our loss before taxes of $27,390 during the nine months ended September 30, 2011 was different than our statutory income tax rate due primarily to our providing for a valuation allowance on deferred tax assets in certain jurisdictions, and foreign tax for the period.

During the nine months ended September 30, 2011, we had several acquisitions and established deferred tax liabilities for Kyte, KickApps, Kewego, ioko and Polymedia for $490, $1,050, $775, $2,500, and $1,884, respectively. These were recorded as a result of the temporary differences generated by the differences between the fair value of assets and liabilities acquired (based on intangible assets).

As of September 30, 2010, we recorded a liability of $170 for the accrual of deficiency interest and penalties, which did not materially change during the nine months ended September 30, 2011. We filed U.S. federal, U.S. state, and foreign income tax returns. We are not currently under examination by any taxing authorities.

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KIT DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

(22) Subsequent Events

On October 21, 2011, we filed a certificate of amendment of our certificate of incorporation to increase the number of authorized shares of our common stock to 150,000,000 shares from 80,000,000 shares. The amendment was adopted by stockholders holding a majority of our outstanding shares of common stock at our annual meeting of stockholders held on October 21, 2011.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Amounts in Thousands, Except Share and Per Share Data)

Overview

Through our operating subsidiaries, we are in the business of providing software solutions that enable our customers to manage and distribute video content through Internet websites, mobile and tablet devices and both closed network Internet Protocol television (“IPTV”) and over-the-top (“OTT”) connected television environments. Our core video asset management software suite, marketed under the “KIT Platform”,brand (and “KIT Cosmos” and “KIT Cloud” sub-brands), includes online and mobile video players, ingestion and trans-coding for Internet and mobile connected devices, live and video-on-demand OTT and IPTV video serving, editing and content transformation, content meta-tagging, content localization and syndication, digital rights management, hosting, storage, content delivery and content syndication. We currently provide IP video solutions internationally through over 20 offices globally, including principal locations in Atlanta, Beijing, Boston, Buenos Aires, Cairo, Chennai, Cologne, Delhi, Dubai, Ely (UK), Grenoble (France), London, Madrid, Melbourne (Australia), Mumbai, New York, Paris, Prague, San Francisco, Singapore, Sydney, and Stockholm. In support of our KIT Platform deployments, we provide systems integration, broadcast engineering services, content transformation services and integrated marketing services.

Set forth below is a discussion of the financial condition and results of operations of KIT digital, Inc. and its consolidated subsidiaries (collectively, “we,” “us” or “our”), for the three and nine months ended September 30, 2011 and 2010. The following discussion should be read in conjunction with the information set forth in the consolidated financial statements and the related notes thereto appearing elsewhere in this report.

Results of Operations - Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

Revenue. Consolidated revenue increased by $34,530 from $27,746 for the three months ended September 30, 2010 to $62,276 for the three months ended September 30, 2011, an increase of 124%. This increase is primarily due to increased spending by existing customers, an increase in customers and revenue from the acquired companies not included in prior period results. In 2011, our average monthly revenue per client continues to increase, reflecting the company’s focus on higher-end opportunities in the market and large, multi-year contracts in emerging geographies. The company’s client base has increased from 1,000 customers in the beginning of 2010 to over 2,300 customers at present.

Variable and Direct Third Party Costs

Cost of Goods and Services (Exclusive of Depreciation shown separately below). These costs decreased by $1,262 from $11,472 for the three months ended September 30, 2010 to $10,210 for the three months ended September 30, 2011, a decrease of 11%. These costs represent the costs of equipment and services for the supply of digital media and IPTV solutions, services and components. The decrease is primarily due to the timing of the sale of services for the supply of digital media solutions, services and components in the three months ended September 30, 2011. These costs will increase in 2011 due to the increase in the sale of services for the supply of digital media solutions, services and components, but overall our total gross margin is expected to increase due to our overall revenue mix.

Hosting, Delivery and Reporting. These costs increased by $2,387 from $671 for the three months ended September 30, 2010 to $3,058 for the three months ended September 30, 2011, an increase of 356%. These costs increased primarily due to the increase in revenue over 2010 and the acquisition of ioko in May 2011. We expect these costs to decrease as an overall percentage of revenue through the continued consolidation of our data centers and price negotiations with our content delivery providers due to our increased size and bargaining power.

Content Costs. Content costs decreased by $120 from $262 for the three months ended September 30, 2010 to $142 for the three months ended September 30, 2011. The decrease is primarily due to the reduction of the use of content in integrated sales activity and therefore the subsequent reduction in usage and the level of minimum guarantees paid for content.

Direct Third Party Creative Production Costs. Direct third party creative production costs decreased by $419 from $1,074 for the three months ended September 30, 2010 to $655 for the three months ended September 30, 2011, a decrease of 39% attributable to a decrease in revenue requiring creative production costs.

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General and Administrative Expenses

Compensation, Travel and Associated Costs (Including Non-Cash Stock-Based Compensation). These costs increased by $26,381 from $7,359 for the three months ended September 30, 2010 to $33,740 for the three months ended September 30, 2011, an increase of 358%.  The increase was primarily due to the acquisitions in 2010 and 2011, which is offset in part by continuing cost cutting measures as we integrated the acquired businesses and some of these costs are included in integration expenses. The non-cash stock-based compensation expense increased by $4,273, from $1,273 for the three months ended September 30, 2010 to $5,546 for the three months ended September 30, 2011 primarily due to the increase in stock options granted in 2010 and 2011, $3,030 accrued for compensation to be issued in stock and $526 for restricted stock units and restricted stock vested in 2011.

Legal, Accounting, Audit and Other Professional Services Fees. These expenses increased by $311 from $425 for the three months ended September 30, 2010 to $736 for the three months ended September 30, 2011, an increase of 73%. These costs increased primarily due to increases in accounting and audit fees combined with an overall increase in these expenses from the acquisitions. We expect these absolute costs to remain materially the same but decrease as a percentage of revenue due to an overall strategy to maintain these overall costs by negotiation of consulting agreements.

Office, Marketing and Other Corporate Costs. These expenses increased by $1,668 from $3,341 for the three months ended September 30, 2010 to $5,009 for the three months ended September 30, 2011, an increase of 50%.  The increase was primarily due to the acquisitions which increased our number of offices and overall office costs. We expect these costs as a percentage of revenue to decrease in 2011 as we consolidate office space and manage our office costs through cost-cutting policies and negotiations with vendors.

Merger and Acquisition Related Expenses. Merger and acquisition related expenses decreased by $808 from $1,306 for the three months ended September 30, 2010 to $498 for the three months ended September 30, 2011, a decrease of 62%. The decrease is primarily due to the significant acquisitions in the three months ended September 30, 2010 as compared to none in the three months ended September 30, 2011. We expect these costs to continue to decrease significantly due to the completion of the acquisitions in 2010 and 2011.

Depreciation and Amortization. Depreciation and amortization expense increased by $608 from $2,407 for the three months ended September 30, 2010 to $3,015 for the three months ended September 30, 2011, an increase of 25%. The increase was primarily due to the acquisitions in 2010 and 2011. We expect these costs to remain relatively stable for the rest of 2011.

Restructuring Charges. Restructuring charges was income of $93 for the three months ended September 30, 2010. This represents a minor adjustment to the restructuring plan in the first quarter of 2010. There were no restructuring charges in the three months ended September 30, 2011.

Integration Expenses. Integration expenses decreased by $1,911 from $4,535 for the three months ended September 30, 2010 to $2,624 for the three months ended September 30, 2011. Integration expenses in 2010 consist of IT overlap, recruiting costs, relocation of headquarters, corporate rebranding activities due to acquisitions and relocations during the year.  Integration expenses in 2011 consist of cost overlap due to the integration of acquisitions. We expect these costs to be completed now as a result of the acquired businesses being fully integrated.

Interest Income.  Interest income increased by $29 from $5 for the three months ended September 30, 2010 to $34 for the three months ended September 30, 2011. This increase was primarily due to the fluctuation in the level of our cash and cash equivalents.

Interest Expense. Interest expense increased by $459 from $223 for the three months ended September 30, 2010 to $682 for the three months ended September 30, 2011, an increase of 206%. This increase was mainly due to the issuance of secured notes in April and June of 2010 and May of 2011.

Amortization of Deferred Financing Costs and Debt Discount. Amortization of deferred financing costs and debt discount was $104 for the three months ended September 30, 2011 and $19 for the three months ended September 30, 2010. These costs resulted from the issuance of secured notes payable of $5,000 in April 2010, $1,000 in June 2010 and $15,000 in May 2011.

Derivative Income (Expense). Derivative expense was $1,451 for the three months ended September 30, 2010 as compared to derivative income of $628 for the three months ended September 30, 2011. Derivative income or expense is the change in the period based on the fair value of warrants containing reset provisions.

25

Other Income/(Expense). Other income/(expense) changed by $2,798 from $1,263 in other expense for the three months ended September 30, 2010 to other income of $1,535 for the three months ended September 30, 2011, primarily due to a gain on settlement of $1,473 related to the Benchmark earn-out paid in 816,592 shares of our common stock valued at $7,905 in satisfaction of $9,378 of earn-out liability and decrease in foreign currency loss.

Net Loss Available to Common Shareholders. As a result of the factors described above, we reported net income available to common shareholders of $4,788 for the three months ended September 30, 2011 compared to a net loss available to common shareholders of $7,974 for the three months ended September 30, 2010, a increase in net income of $12,762.

Results of Operations - Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

Revenue. Consolidated revenue increased by $76,749 from $68,165 for the nine months ended September 30, 2010 to $144,914 for the nine months ended September 30, 2011, an increase of 113%. This increase is primarily due to increased spending by existing customers, an increase in customers and revenue from the acquired companies not included in prior period results. In 2011, our average monthly revenue per client will continue to increase, reflecting the company’s focus on higher-end opportunities in the market and large, multi-year contracts in emerging geographies. The company’s client base has increased from 1,000 customers in the beginning of 2010 to over 2,000 customers at present.

Variable and Direct Third Party Costs

Cost of Goods and Services (Exclusive of Depreciation shown separately below). These costs increased by $11,110 from $22,190 for the nine months ended September 30, 2010 to $33,300 for the nine months ended September 30, 2011, an increase of 50%. These costs represent the costs of equipment and services for the supply of digital media and IPTV solutions, services and components. The increase is primarily due to the acquisitions of Benchmark in May 2010, Megahertz in September 2010, Brickbox in September 2010 which provided digital video asset management solutions and broadcast video systems integration and the acquisition of ioko in May 2011. There was also an increase in these costs due to the increase in revenue over 2010, not including the acquisitions. These costs will continue to increase in 2011 due to the increase in the sale of services for the supply of digital media solutions, services and components, but overall our total gross margin is expected to increase or remain stable due to our overall revenue mix being constituted by approximately 70% KIT Platform-related fees.

Hosting, Delivery and Reporting. These costs increased by $3,620 from $3,035 for the nine months ended September 30, 2010 to $6,655 for the nine months ended September 30, 2011, an increase of 119%. These costs increased primarily due to the increase in revenue over 2010 and the acquisition of ioko in May 2011. We expect these costs to decrease as an overall percentage of revenue through the continued consolidation of our data centers and price negotiations with our content delivery providers due to our increased size and bargaining power.

Content Costs. Content costs decreased by $166 from $746 for the nine months ended September 30, 2010 to $580 for the nine months ended September 30, 2011. The decrease is primarily due to the reduction of the use of content in integrated sales activity and therefore the subsequent reduction in usage and the level of minimum guarantees paid for content.

Direct Third Party Creative Production Costs. Direct third party creative production costs decreased by $1,283 from $2,620 for the nine months ended September 30, 2010 to $1,337 for the nine months ended September 30, 2011, a decrease of 49% attributable to a decrease in revenue requiring creative production costs.

26

General and Administrative Expenses

Compensation, Travel and Associated Costs (Including Non-Cash Stock-Based Compensation). These costs increased by $46,653 from $21,545 for the nine months ended September 30, 2010 to $68,198 for the nine months ended September 30, 2011, an increase of 217%.  The increase was primarily due to the acquisitions in 2010 and 2011, which is offset in part by continuing cost cutting measures as we integrate the acquired businesses and some of these costs are included in integration expenses. The non-cash stock-based compensation expense increased by $9,047, from $2,910 for the nine months ended September 30, 2010 to $11,957 for the nine months ended September 30, 2011 primarily due to the increase in stock options granted in 2010 and 2011, $4,171 accrued for compensation to be issued in stock and $1,318 for restricted stock units and restricted stock vested in 2011.

Legal, Accounting, Audit and Other Professional Services Fees. These expenses increased by $606 from $1,645 for the nine months ended September 30, 2010 to $2,251 for the nine months ended September 30, 2011, an increase of 37%. These costs increased primarily due to increases in accounting and audit fees combined with an overall increase in these expenses from the acquisitions. We expect these absolute costs to remain materially the same but decrease as a percentage of revenue due to an overall strategy to maintain these overall costs by negotiation of consulting agreements.

Office, Marketing and Other Corporate Costs. These expenses increased by $5,917 from $7,718 for the nine months ended September 30, 2010 to $13,635 for the nine months ended September 30, 2011, an increase of 77%.  The increase was primarily due to the acquisitions which increased our number of offices and overall office costs. We expect these costs as a percentage of revenue to decrease in 2011 as we consolidate office space and manage our office costs through cost-cutting policies and negotiations with vendors.

Merger and Acquisition Related Expenses. Merger and acquisition related expenses increased by $13,253 from $3,411 for the nine months ended September 30, 2010 to $16,664 for the nine months ended September 30, 2011, an increase of 389%. The increase is primarily due to the significant acquisitions in 2011. We expect these costs to decrease significantly due to the completion of these acquisitions.

Depreciation and Amortization. Depreciation and amortization expense increased by $2,514 from $6,110 for the nine months ended September 30, 2010 to $8,624 for the nine months ended September 30, 2011, an increase of 41%. The increase was primarily due to the acquisitions in 2010 and 2011. We expect these costs to increase in the next quarter and then to remain relatively stable for the rest of 2011.

Restructuring Charges. Restructuring charges were $3,352 for the nine months ended September 30, 2011 and $3,481 for the nine months ended September 30, 2010. These charges represent the 2011 plan that was initiated in the first quarter of 2011 and the 2010 plan that was initiated in the first quarter of 2010.

Integration Expenses. Integration expenses increased by $10,188 from $10,834 for the nine months ended September 30, 2010 to $21,022 for the nine months ended September 30, 2011. Integration expenses in 2010 consist of IT overlap, recruiting costs, relocation of headquarters, corporate rebranding activities due to acquisitions and relocations during the year.  Integration expenses in 2011 consist of cost overlap due to the integration of acquisitions. We expect these costs to be completed now as a result of the plan to fully integrate acquired businesses by the third quarter of 2011.

Interest Income.  Interest income increased by $142 from $33 for the nine months ended September 30, 2010 to $175 for the nine months ended September 30, 2011. This increase was primarily due to the fluctuation in the level of our cash and cash equivalents.

Interest Expense. Interest expense increased by $779 from $563 for the nine months ended September 30, 2010 to $1,342 for the nine months ended September 30, 2011, an increase of 138%. This increase was mainly due to the issuance of secured notes in April and June of 2010 and May of 2011.

Amortization of Deferred Financing Costs and Debt Discount. Amortization of deferred financing costs and debt discount was $198 for the nine months ended September 30, 2011 and $33 for the nine months ended September 30, 2010. These costs resulted from the issuance of secured notes payable of $5,000 in April 2010, $1,000 in June 2010 and $15,000 in May 2011.

Derivative Income (Expense). Derivative expense was $10,526 for the nine months ended September 30, 2010 as compared to derivative income of $3,670 for the nine months ended September 30, 2011. Derivative income or expense is the change in the period based on the fair value of warrants containing reset provisions.

27

Other Income/(Expense). Other income/(expense) changed by $1,484 from $475 in other expense for the nine months ended September 30, 2010 to other inome of $1,009 for the nine months ended September 30, 2011, primarily due to a gain on settlement of $1,473 related to the Benchmark earn-out paid in 816,592 shares of our common stock valued at $7,905 in satisfaction of $9,378 of earn-out liability and decrease in foreign currency loss.

Net Loss Available to Common Shareholders. As a result of the factors described above, we reported net loss available to common shareholders of $27,516 for the nine months ended September 30, 2011 compared to a net loss available to common shareholders of $26,758 for the nine months ended September 30, 2010, a increase in net loss of $758.

Liquidity and Capital Resources

As of September 30, 2011, we had cash and cash equivalents of $60,047 and working capital of approximately $79,581. Management anticipates that it has enough cash reserves and will generate sufficient cash flows from its operating activities to fund its operations, anticipated capital expenditures and debt repayment obligations for at least the next 12 months.

Our ability to meet our short and long-term liquidity needs depends on our future operating performance and on economic, financial, competitive and other factors. See “Risks Related to Our Business” under Item 1A. Risk Factors in our Form 10-K/A for more detail. Our financial projections are based on assumptions, which we believe are reasonable but contain significant uncertainties. These projections include an increase in revenue, improved operating margins and significant decreases in costs related to the restructuring and integration of acquired companies.

Net cash used by operating activities was $20,277 for the nine months ended September 30, 2011, compared to $17,468 for the nine months ended September 30, 2010, an increase of $2,809. This is due to the increase in the restructuring and integration of acquisitions.

Net cash used by investing activities was $113,607 for the nine months ended September 30, 2011, compared to $25,151 for the nine months ended September 30, 2010, an increase in net cash used in investing activities of $88,456. The increase in net cash used in investing activities is primarily attributable to the increase in cash paid in acquisitions in 2011 as compared to 2010.

Net cash provided by financing activities was $49,856 for the nine months ended September 30, 2011, compared to net cash provided by financing activities of $85,322 for the nine months ended September 30, 2010. In 2011, this primarily consisted of the proceeds from public offering of $32,104, proceeds from the issuance of secured notes of $15,000 less payments of secured notes of $1,254, the proceeds from the exercise of warrants and options of $4,365 and payments of capital leases and other obligations of $359. In 2010, this primarily consisted of the proceeds from public offerings of $106,615, net proceeds from the issuance of secured notes of $5,762 less payments of secured notes of $1,020, proceeds from the exercise of warrants and options of $3,104 offset by payments related to the buyback of warrants of $24,054, payments of notes related to the Multicast acquisition of $4,500 and payments of capital leases and other obligations of $794.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

This Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the United States Private Securities Litigation Reform Act of 1995.  All statements, other than statements of historical facts, included in this Form 10-Q regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements.  The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements.  There are a number of important factors that could cause our actual results to differ materially from those indicated by these forward-looking statements.  These important factors include risks related to our history of net losses and accumulated deficits, integration of acquired businesses, future capital requirements, competition and technological advances, dependence on the market for digital advertising, and other factors that we identify in this Form 10-Q and in other filings we make with the SEC.  For additional factors that can affect these forward-looking statements, see the “Risk Factors” section in our Annual Report on Form 10-K/A for the year ended December 31, 2010.  You should read these factors and other cautionary statements made in this Form 10-Q as being applicable to all related forward-looking statements wherever they appear in the Form 10-Q.  Except to the extent required by federal securities laws, we do not assume any obligation to update any forward-looking statements made by us.

28

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We conduct our operations in primary functional currencies: the United States dollar, the Euro, the British pound, the Czech koruna, the Singaporean dollar, the Australian dollar, the Indian rupee and the Swedish krona We currently do not hedge any of our foreign currency exposures and are therefore subject to the risk of exchange rate fluctuations.

However, we attempt to employ a “natural hedge” by matching as much as possible in like currencies our customer revenues with associated customer delivery costs. We invoice our international customers primarily in U.S. dollars, British pounds, Australian dollars, Euros, Swedish kronor and Czech koruna.

We are exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation and as our foreign currency consumer receipts are converted into U.S. dollars. Our exposure to foreign exchange rate fluctuations also arises from payables and receivables to and from our foreign subsidiaries, vendors and customers.

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. We endeavor to place our cash and cash equivalents with high credit quality institutions to limit credit exposure. We have obtained callable cash collateral wherever we have identified credit risk exists with respect to these investments.

Concentrations of credit risk with respect to trade accounts receivable are limited due to the wide variety of our customers who are dispersed across many geographic regions. We routinely assess the financial strength of customers and, based upon factors concerning credit risk, we establish an allowance for uncollectible accounts. Our management believes that accounts receivable credit risk exposure beyond such allowance is limited.

ITEM 4. CONTROLS AND PROCEDURES.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (1) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure; and (2) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There was no change to our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

29

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are subject to legal proceedings and actions arising in the normal course of our business. While the results of all such proceedings and actions cannot be predicted, management believes, based on facts known to management today, that the ultimate outcome of all such proceedings and actions will not have a material adverse effect on our consolidated financial position, results of operation, or cash flows.

ITEM 1A. RISK FACTORS.

There are no material changes in the risk factors previously disclosed in our annual report on Form 10-K/A for the year ended December 31, 2010.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. REMOVED AND RESERVED

ITEM 5. OTHER INFORMATION.

None

ITEM 6. EXHIBITS.

Exhibit No.	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

30

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	KIT DIGITAL, INC.
Dated:  November 9, 2011	By:	/s/ Kaleil Isaza Tuzman
		Kaleil Isaza Tuzman
		Chairman and Chief Executive Officer (principal executive officer)

Dated:  November 9, 2011	By:	/s/ Robin Smyth
		Robin Smyth
		Chief Financial Officer (principal financial and accounting officer)

31

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Kaleil Isaza Tuzman, Chairman and Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of KIT digital, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 9, 2011	/s/ Kaleil Isaza Tuzman
	Kaleil Isaza Tuzman
	Chairman and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Robin Smyth, Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of KIT digital, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 9, 2011	/s/ Robin Smyth
	Robin Smyth
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of KIT digital, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kaleil Isaza Tuzman, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. section 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Date: November 9, 2011	/s/ Kaleil Isaza Tuzman
	Kaleil Isaza Tuzman
	Chairman and Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of KIT digital, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robin Smyth, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:

(3) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(4) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. section 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Date: November 9, 2011	/s/ Robin Smyth
	Robin Smyth
	Chief Financial Officer

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Sep. 30, 2011	Dec. 31, 2010
Common stock, par value	$ 0.0001	$ 0.0001	[1]
Common stock, authorized	80,000,000	80,000,000	[1]
Common stock, issued	46,156,204	33,196,952	[1]
Common stock, outstanding	46,156,204	33,196,952	[1]

[1] Reference is made to the Company's Annual Report on Form 10-K/A for the year ended December 31, 2010, filed with the U.S. Securities and Exchange Commission on August 3, 2011.

XML

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (USD $) In Thousands, except Share data	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Revenue	$ 62,276	$ 27,746	$ 144,914	$ 68,165
Variable and direct third party costs:
Cost of goods and services (exclusive of depreciation shown separately below)	10,210	11,472	33,300	22,190
Hosting, delivery and reporting	3,058	671	6,655	3,035
Content costs	142	262	580	746
Direct third party creative production costs	655	1,074	1,337	2,620
Total variable and direct third party costs	14,065	13,479	41,872	28,591
Gross profit	48,211	14,267	103,042	39,574
General and administrative expenses:
Compensation, travel and associated costs (including non-cash stock-based compensation of $5,546, $1,273, $11,957 and $2,910, respectively)	33,740	7,359	68,198	21,545
Legal, accounting, audit and other professional service fees	736	425	2,251	1,645
Office, marketing and other corporate costs	5,009	3,341	13,635	7,718
Merger and acquisition and investor relations expenses	498	1,306	16,664	3,411
Depreciation and amortization	3,015	2,407	8,624	6,110
Restructuring charges		(93)	3,352	3,481
Integration expenses	2,624	4,535	21,022	10,834
Total general and administrative expenses	45,622	19,280	133,746	54,744
Income (loss) from operations	2,589	(5,013)	(30,704)	(15,170)
Interest income	34	5	175	33
Interest expense	(682)	(223)	(1,342)	(563)
Amortization of deferred financing costs and debt discount	(104)	(19)	(198)	(33)
Derivative income (expense)	628	(1,451)	3,670	(10,526)
Other (expense) income	1,535	(1,263)	1,009	(475)
Net income (loss) before income taxes	4,000	(7,964)	(27,390)	(26,734)
Income tax benefit (expense)	788	(10)	(126)	(24)
Net income (loss) available to common shareholders	4,788	(7,974)	(27,516)	(26,758)
Basic and diluted net income (loss) per common share	$ 0.11	$ (0.34)	$ (0.74)	$ (1.37)
Basic weighted average common shares outstanding	42,553,768	23,355,298	36,978,752	19,581,084
Diluted weighted average common shares outstanding	43,434,416	23,355,298	36,978,752	19,581,084
Comprehensive income (loss):
Net income (loss)	4,788	(7,974)	(27,516)	(26,758)
Foreign currency translation	(1,416)	3,022	(1,492)	971
Change in unrealized gain (loss) on investments, net	(46)	75	9	91
Comprehensive income (loss):	$ 3,326	$ (4,877)	$ (28,999)	$ (25,696)

XML

Stock Issuances

9 Months Ended

Sep. 30, 2011

Stock Issuances

(16) Stock Issuances

During the quarter ended March 31, 2011, we issued 4,744,467 shares of common stock. Of this amount, we issued 189,348 shares for the acquisition of Kyte, 1,411,704 shares for the acquisition of Kewego, 3,010,296 shares for the acquisition of KickApps, 23,514 shares for the acquisition of WWB, 57,251 shares for the exercise of warrants, 52,354 shares for the exercise of options with proceeds of $390.

During the quarter ended June 30, 2011, we issued 3,462,165 shares of common stock. Of this amount, we issued 1,509,804 shares for the acquisition of ioko, 1,178,381 shares for the acquisition of Polymedia, 265,262 shares for the settlement of the contingent acquisition liabilities of Brickbox, 10,611 shares for Peerset acquisition, 25,423 shares for restricted stock, 425,945 shares for the exercise of warrants with proceeds of $2,982, and 63,603 shares for the exercise of options with proceeds of $447.

On September 20, 2011, we completed an underwritten public offering of 3,200,000 shares of our common stock, pursuant to our shelf registration statement on Form S-3 (No. 333-169918), which was originally filed and declared effective in October 2010, and related prospectus supplement dated September 15, 2011. We simultaneously sold 480,000 additional shares of common stock pursuant to an underwriters’ over-allotment option. We sold these shares at a price of $9.50 per share and received $34,960 in gross proceeds and approximately $32,105 in net proceeds, after deducting underwriting discounts, commissions, legal fees and other estimated offering expenses.

During the quarter ended September 30, 2011, we issued 4,752,620 shares of common stock. Of this amount, we issued 3,680,000 shares for the public offering, 816,592 shares for the payment of the Benchmark Acquisition liability, 186,929 shares for services, 2,434 shares for the exercise of warrants with proceeds of $17 and 66,665 shares for the exercise of options with proceeds of $529.

As of September 30, 2011, the outstanding warrants (excluding the warrants included in the derivative liability of 251,021 and stock-based compensation of 34,286) were 1,361,935 with a weighted average exercise price of $24.21. As of December 31, 2010, the outstanding warrants (excluding the warrants included in the derivative liability of 679,400 and stock-based compensation of 34,286) were 781,737 with a weighted average exercise price of $39.28.

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2011	Nov. 08, 2011
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3
Trading Symbol	KITD
Entity Registrant Name	KIT DIGITAL, INC.
Entity Central Index Key	0001076700
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		46,156,204

XML

Segment Reporting

9 Months Ended

Sep. 30, 2011

Segment Reporting

(19) Segment Reporting

We have presented operating segments in the past for Digital Media Solutions and Professional Services but since Professional services represents less than 10% of total assets and total revenues and this segment continues to decrease, we are not presenting financial information for operating segments.

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Cash and Cash Equivalents

9 Months Ended

Sep. 30, 2011

Cash and Cash Equivalents

(4) Cash and Cash Equivalents

We consider all highly liquid investments with original maturities of ninety days or less when purchased to be cash and cash equivalents. As of September 30, 2011 and December 31, 2010, the Company had $2,095 and $2,068, respectively, of cash equivalents in an account that pays interest at LIBOR plus 150 basis points. This account is guaranteed and backed by liquid collateral instruments, and can be redeemed with 14 days prior written notice.

XML

Related Party Transactions

9 Months Ended

Sep. 30, 2011

Related Party Transactions

(20) Related Party Transactions

In December 2007, we entered into an agreement with KIT Capital, Ltd. (“KIT Capital”), a company wholly owned by Kaleil Isaza Tuzman, our Chairman and Chief Executive Officer, which includes the managerial services of Mr. Isaza Tuzman and two other junior employees. The total amount paid to KIT Capital and included in our results of operations in the nine months ended September 30, 2011 and 2010 were $259 and $330, respectively.

Effective August 31, 2011, Kaleil Isaza Tuzman, Gavin Campion and Robin Smyth entered into employment agreements with the Company, superseding their prior employment agreements with the Company or, in the case of Mr. Isaza Tuzman, the agreement that is described above. Pursuant to these employment agreements, Mr. Isaza Tuzman, Campion and Smyth have agreed to continue to devote substantially all of their professional time and attention to the Company as its Chairman and Chief Executive Officer, its President and its Chief Financial Officer, respectively. Mr. Isaza Tuzman will continue to report to the Company’s board of directors, Mr. Campion will report to Mr. Isaza Tuzman, and Mr. Smyth will report to Mr. Isaza Tuzman.

The employment agreements provide that Messrs. Isaza Tuzman, Campion and Smyth will receive a base salary at an annual rate of $315, $290, and $254 (inclusive of transportation and housing allowance), respectively, for services rendered in such positions. In addition, each executive may be entitled to receive, at the sole discretion of the Company’s board of directors or compensation committee, annual performance bonuses based on achieving targeted corporate objectives for such year in accordance with the year’s operating or incentive plan. Each of Messrs. Isaza Tuzman, Campion and Smyth are also entitled to participate in the Company’s recently-adopted performance-contingent restricted stock unit program and, concurrently with entering into the employment agreements, they received 636,000, 306,000 and 306,000 performance-contingent restricted stock units, respectively.

See Note 14, “Derivative Liabilities” for a description of warrant repurchases from KIT Media and Wellington.

XML

Integration Expenses

9 Months Ended

Sep. 30, 2011

Integration Expenses

(18) Integration Expenses

The Company has recorded integration charges related to the cost overlap due to the reorganization and integration of acquisitions of $2,624 and $21,022 for the three and nine months ended September 30, 2011, respectively. Integration expenses include one‐time expenses for integrating acquired businesses together and eliminating duplication and inefficiencies. This includes rationalizing hosting and delivery infrastructure (data center consolidation, related hardware purchases, trunk T1 and T3 purchases and combinations, etc.) to merging software platforms and physical plant/office combination. These expenses include directly allocable staff time, travel and associated charges related to executing these integration initiatives. These expenses are almost without exception cash‐based.

The Company has recorded integration charges related to the redundancy in staff and consultants for the transition of technology infrastructure during reorganization due to the centralizing of resources in Prague of $4,535 and $10,834 for the three and nine months ended September 30, 2010, respectively.

XML

Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2011

Goodwill and Intangible Assets

(9) Goodwill and Intangible Assets

The change in the carrying amount of goodwill is as follows:

	Goodwill
Balance as of December 31, 2010	$	89,004
Acquisitions		155,777
Balance as of September 30, 2011	$	244,781

Intangible assets include the following:

	September 30, 2011
	Weighted Average Remaining Amortization Period (Years)		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets with determinable lives:
Software		4.25	$	12,447	$	(5,370	)	$	7,077
Customer list		5.5		36,507		(8,275	)		28,232
Trademarks		4.5		133		(60	)		73
Other		1.25		376		(269	)		107
Total			$	49,463	$	(13,974	)	$	35,489

	December 31, 2010
		Weighted Average Remaining Amortization Period (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets with determinable lives:
Software		3.25	$	6,747	$	(4,057	)	$	2,690
Customer list		5.5		15,106		(4,944	)		10,162
Trademarks		4.5		133		(35	)		98
Other		1.5		376		(78	)		298
Total			$	22,362	$	(9,114	)	$	13,248

Amortization expense on intangible assets for the three months ended September 30, 2011 and 2010 were $1,815 and $1,348 respectively. Amortization expense on intangible assets for the nine months ended September 30, 2011 and 2010 were $4,860 and $2,865 respectively.

Estimated future annual amortization expense as of September 30, 2011 is as follows:

	Software		Customer List		Trademarks		Other		Total
2011	$	456	$	1,420	$	3	$	50	$	1,929
2012		1,826		5,546		17		33		7,422
2013		1,624		5,426		17		24		7,091
2014		1,338		5,400		17		-		6,755
2015		1,090		5,259		17		-		6,366
Thereafter		743		5,181		2		-		5,926
Totals	$	7,077	$	28,232	$	73	$	107	$	35,489

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical)	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Non-cash issuances of stock for acquisitions, shares issued	8,398,648	2,460,959

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Receivable

9 Months Ended

Sep. 30, 2011

Accounts Receivable

Receivable

(6) Accounts Receivable

Trade accounts receivable are stated net of allowances for doubtful accounts. Specific customer provisions are made when a review of significant outstanding amounts, customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made at differing amounts, based upon the balance and age of the receivable and the Company’s historical collection experience. Trade accounts are charged off against the allowance for doubtful accounts or expense when it is probable the accounts will not be recovered. The allowance for doubtful accounts as of September 30, 2011 and December 31, 2010 was $2,970 and $1,023, respectively.

Loans Receivable

Receivable

(11) Loan Receivable

	September 30, 2011			December 31, 2010
Dec 2010 Loan receivable on sale of subsidiary	$	9,969		$	10,847
Less current		(3,641	)		(2,486	)
Loan receivable, net of current	$	6,328		$	8,361

In December 2010, we lent $10,847 in gross proceeds in relation to the sale of subsidiary. It matures on January 28, 2015. Commencing on February 28, 2011, payments are due in forty-eight equal consecutive payments of $226. The loan is secured by accounts receivable, cash and other receivables.

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Secured Notes Payable

9 Months Ended

Sep. 30, 2011

Secured Notes Payable

(12) Secured Notes Payable

	September 30, 2011			December 31, 2010
April 2010 secured note payable for $5,000	$	3,809		$	4,858
June 2010 secured note payable for $1,000		823			978
May 2011 secured note payable for $15,000		14,061			-
		18,693			5,836
Less current		(5,035	)		(1,709	)
Secured notes payable, net of current		13,658			4,127

In May 2011, we received $15,000 in gross proceeds from the issuance of a note to a third party investor, as called for in the negotiated structure of our acquisition of ioko, as a means of financing the additional accounts receivable acquired. Interest is payable monthly in advance at 13.6% per year and matures on July 1, 2014.  We paid total interest only of $187 for May and June 2011 and agreed to pay interest only of $122 per month for the next seven months. Commencing on February 1, 2012, payments for principal and interest are due in thirty equal consecutive payments of $561. A final balloon payment of $1,149 will be due and payable upon maturity. The note is secured by the Company’s property, including accounts receivable and inventory.  In conjunction with the borrowing, we issued to the lender a warrant entitling it to purchase, for $13.29 per share, 141,083 shares of our common stock with a seven year life through May 15, 2018. A debt discount of $1,081 was recorded related to these warrants and is being amortized over the term of the loan.

In June 2010, we received $1,000 in gross proceeds from the issuance of a note to a third party investor. Interest is payable monthly in advance at 12.7% per year and matures on September 1, 2013. We paid interest only of $5 for June 2010 and agreed to pay interest only of $8 for the next nine months. Commencing on April 1, 2011 payments for principal and interest are due in thirty equal consecutive payments of $38. A final balloon payment of $108 will be due and payable upon maturity. The note is secured by the Company’s property, including accounts receivable and inventory. In conjunction with the borrowing, we issued to the lender a warrant entitling it to purchase, for $13.76 per share, 8,480 shares of our common stock with a five year life through June 14, 2015. A debt discount of $27 was recorded related to these warrants and is being amortized over the term of the loan.

In April 2010, we received $5,000 in gross proceeds from the issuance of a note to a third party investor. Interest is payable monthly in advance at 12.7% per year and matures on July 1, 2013. We paid interest only of $22 for April 2010 and agreed to pay interest only of $42 for the next nine months. Commencing on February 1, 2011, payments for principal and interest are due in thirty equal consecutive payments of $188. A final balloon payment of $538 will be due and payable upon maturity. The note is secured by the Company’s property, including accounts receivable and inventory. In conjunction with the borrowing, we issued to the lender a warrant entitling it to purchase, for $14.24 per share, 40,976 shares of our common stock with a five year life through April 15, 2015. A debt discount of $183 was recorded related to these warrants and is being amortized over the term of the loan.

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Concentration of Credit Risk

9 Months Ended

Sep. 30, 2011

Concentration of Credit Risk

(7) Concentration of Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. We place our cash and cash equivalents with high credit quality institutions to limit credit exposure, and from time to time, obtain collateral for our accounts where feasible and we deem prudent. As of September 30, 2011, we held cash and cash equivalents of $14,819 in financial institutions outside of the United States. We believe no significant concentration of credit risk exists with respect to these balances. The amount held in foreign currencies as of September 30, 2011 and December 30, 2010 was $9,267 and $8,617, respectively. The amount of cash in excess of FDIC insured amounts as of September 30, 2011 and December 31, 2010, was $57,947 and $139,185, respectively.

Concentrations of credit risk with respect to trade accounts receivable are limited due to the nature of our customers who are dispersed across many industries and geographic regions. As of September 30, 2011, no customer accounted for 10% or more of our trade accounts receivable. As of December 31, 2010, one customer accounted for 11% of our trade accounts receivable. As of September 30, 2011 and 2010, no customer accounted for 10% or more of the year to date revenue. As of September 30, 2011, we held accounts receivable of $55,449 outside of the United States. We routinely assess the financial strength of customers and, based upon factors concerning credit risk, establish an allowance for doubtful accounts. Management believes that accounts receivable credit risk exposure beyond such allowance is limited.

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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2011

Fair Value of Financial Instruments

(5) Fair Value of Financial Instruments

Fair value is the amount that would be received upon sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy which prioritizes the types of inputs to valuation techniques that companies may use to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1). The next highest priority is given to inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly (Level 2). The lowest priority is given to unobservable inputs in which there is little or no market data available and which require the reporting entity to develop its own assumptions (Level 3).

The assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy are Investments and Derivative Liabilities. Investments are measured using net asset value as a practical expedient (Level 2). See Note 14 for fair value hierarchy on the Derivative Liabilities.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $) In Thousands, except Share data	Total		Common Stock	Additional Paid-in Capital	Accumulated (Deficit)	Accumulated Other Comprehensive Income (Loss)
Beginning Balance at Dec. 31, 2010	$ 245,624	[1]	$ 3	$ 375,578	$ (129,203)	$ (754)
Beginning Balance (in shares) at Dec. 31, 2010	33,196,952	[1]	33,196,952
Issue of stock in public offering (in shares)			3,680,000
Issue of stock in public offering	32,105		1	32,104
Issue of stock for exercise of stock options (in shares)			182,622
Issue of stock for exercise of stock options	1,366			1,366
Issue of stock for exercise of warrants (in shares)			485,630
Issue of stock for exercise of warrants	4,860			4,860
Issue of stock for acquisitions (in shares)			8,398,648
Issue of stock for acquisitions	84,122		1	84,121
Debt discount on notes	1,081			1,081
Issue of stock for services (in shares)			186,929
Issue of stock for services	2,213			2,213
Issue of warrants for services	1,697			1,697
Stock-based compensation (in shares)			25,423
Stock-based compensation	7,498			7,498
Foreign currency translation adjustment	(1,492)					(1,492)
Fair market value adjustment for available for sale securities	9					9
Net loss	(27,516)				(27,516)
Ending Balance at Sep. 30, 2011	$ 351,567		$ 5	$ 510,518	$ (156,719)	$ (2,237)
Ending Balance (in shares) at Sep. 30, 2011	46,156,204		46,156,204

[1] Reference is made to the Company's Annual Report on Form 10-K/A for the year ended December 31, 2010, filed with the U.S. Securities and Exchange Commission on August 3, 2011.

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Nature of Business and Nature of Presentation

9 Months Ended

Sep. 30, 2011

Nature of Business and Nature of Presentation

(1) Nature of Business and Nature of Presentation

KIT digital, Inc. (“we,” “us,” “our,” the “Company” or “KIT digital”), through our operating subsidiaries, provide enterprise clients an end-to-end technology platform for managing Internet Protocol (“IP”)-based video assets across browser environments, mobile and tablet devices and connected television sets. We also offer creative interface design, marketing services, content transformation services, systems integration and broadcast engineering services to complement our KIT Platform software. Our revenues are comprised primarily of software-as-a-service (“SaaS”) license and usage fees, enterprise software license, maintenance and usage fees, and professional services fees.

The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information. These financial statements include the accounts of KIT digital and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying financial statements.

Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed or omitted in these interim financial statements. Accordingly, the unaudited consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in KIT digital’s annual report on Form 10-K for the year ended December 31, 2010, filed with the U.S. Securities and Exchange Commission.

The results of operations presented in this quarterly report on Form 10-Q are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited consolidated financial statements include all adjustments and accruals, consisting only of normal recurring adjustments, that are necessary for a fair statement of the results of all interim periods reported herein.

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Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2011

Recent Accounting Pronouncements

(2) Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (FASB) issued a new accounting standard update which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. We will adopt this standard in the first quarter of 2012 and we do not expect the adoption will have a material impact on our financial statements and disclosures.

In June 2011, the FASB issued a new accounting standard which eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. We will adopt this standard in the first quarter of 2012.

In September 2011, the FASB issued a revised accounting standard, which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This guidance is effective for interim and annual financial periods beginning after December 15, 2011, although early adoption is permitted. We are reviewing the impact of early adoption of this update.

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Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes

(21) Income Taxes

Income taxes for the interim periods presented have been included in the accompanying financial statements on the basis of an estimated annual effective tax rate. Based upon our estimated annual effective tax rate and discrete items, our tax expense for the nine months ended September 30, 2011 was approximately $775 less a release of $160 of deferred tax liabilities relating to the Benchmark acquisition and refunds of $489 for a total of $126. Our income tax expense of $615 on our loss before taxes of $27,390 during the nine months ended September 30, 2011 was different than our statutory income tax rate due primarily to our providing for a valuation allowance on deferred tax assets in certain jurisdictions, and foreign tax for the period.

During the nine months ended September 30, 2011, we had several acquisitions and established deferred tax liabilities for Kyte, KickApps, Kewego, ioko and Polymedia for $490, $1,050, $775, $2,500, and $1,884, respectively. These were recorded as a result of the temporary differences generated by the differences between the fair value of assets and liabilities acquired (based on intangible assets).

As of September 30, 2010, we recorded a liability of $170 for the accrual of deficiency interest and penalties, which did not materially change during the nine months ended September 30, 2011. We filed U.S. federal, U.S. state, and foreign income tax returns. We are not currently under examination by any taxing authorities.

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Acquisitions

9 Months Ended

Sep. 30, 2011

Acquisitions

(10) Acquisitions

Brickbox Acquisition

On September 21, 2010, we acquired Brickbox Digital Media s.r.o., a Czech company engaged in providing digital video asset management solutions, and its international subsidiaries (“Brickbox”), in exchange for 339,476 shares of our common stock valued at a share price of $11.00 with a discount of $731 due to the restriction on the sale of these shares for 1 year for a total value of $3,003 and approximately $7,600 in cash at the time of acquisition. Additionally, the cost includes a fair value for contingent consideration of $3,023 which will is based on 10 percent of revenue and meeting earnings targets over a four-year period after closing, which is included in the Balance Sheet in “Acquisition liability, net of current”. We have allocated the aggregate cost of the acquisition to Brickbox’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill. On May 22, 2011, we signed an amendment to the securities purchase agreement to issue 265,262 shares valued at $3,053 for the full settlement of the contingent acquisition liabilities of Brickbox.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	4,241
Property and equipment		1,126
Intangible assets – customer list		2,900
Intangible assets – noncompete		100
Goodwill		8,940
Total assets acquired		17,307
Deferred tax liability		(654	)
Current liabilities and assumed debt		(3,027	)
Net assets acquired	$	13,626

The results of operations of Brickbox have been included in the Consolidated Statements of Operations since September 21, 2010. Revenue and net income after acquisition are not provided as it is impracticable to distinguish due to the integration of sales, delivery and overhead into our overall regional and global operations.

KickApps Acquisition

On January 28, 2011, we acquired KickApps Corporation, a Delaware corporation (“KickApps”) and provider of solutions that enable the creation and management of next generation video-based Web experiences, in exchange for $4,027 in cash and 3,010,296 shares of our common stock valued at a price of $13.55 (with a discount of $11,981 due to the restriction on the sale of these shares), for a total of $28,808. We are holding 528,507 shares of the merger consideration in escrow for a period not to exceed 15 months following the merger to cover any warranty claims related to undisclosed commercial or tax liabilities or litigation. All of our common stock issued in exchange for KickApps is subject to contractual restrictions on transfer, with 60% of such stock being released from this restriction on the first anniversary of the merger and the balance on the second anniversary of the merger. We have allocated the aggregate cost of the acquisition to KickApps’ net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	2,023
Property and equipment		1,326
Intangible assets –developed software		500
Intangible assets – customer list		2,500
Goodwill		30,296
Total assets acquired		36,645
Deferred tax liability		(1,050	)
Current liabilities		(2,760	)
Net assets acquired	$	32,835

 The results of operations of KickApps for the period from January 29, 2011 to September 30, 2011 have been included in the Consolidated Statements of Operations. Revenue and net income after acquisition are not provided as it is impracticable to distinguish due to the integration of sales, delivery and overhead into our overall regional and global operations.

Kyte Acquisition

On January 25, 2011, we acquired decentraltv Corporation, a Delaware corporation doing business as Kyte (“Kyte”), a cloud-based publishing platform that enables companies to deliver live and on-demand video experiences to websites, mobile devices and connected TVs, in exchange for $3,605 in cash and 189,348 shares of our common stock at a price of $13.91 (with a discount of $265 due to the restriction on the sale of these shares for 6 months), for a total of $2,369. Additionally, the cost included contingent consideration of $1,000 to be paid on the one-year anniversary of the acquisition in cash and stock to former Kyte stockholders if specified financial milestones are achieved by that business, which is included in the Balance Sheet in “Acquisition Liability, net of current.” We are holding 56,803 shares of the consideration in escrow for a period of one year to secure certain indemnification obligations. We have allocated the aggregate cost of the acquisition to Kyte’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	131
Property and equipment		71
Intangible assets – developed software		400
Intangible assets – customer list		1,000
Goodwill		5,294
Total assets acquired		7,562
Deferred tax liability		(490	)
Current liabilities		(98	)
Net assets acquired	$	6,974

 The results of operations of Kyte for the period from January 26, 2011 to September 30, 2011 have been included in the Consolidated Statements of Operations. Revenue and net income after acquisition are not provided as it is impracticable to distinguish due to the integration of sales, delivery and overhead into our overall regional and global operations.

Kewego Acquisition

On January 26, 2011, we acquired Kewego S.A., a société anonyme organized under the laws of France (“Kewego”), a provider of professional IP-based, multi-screen video asset management solutions for IP connected devices, including PCs, mobile phones, iPads, connected TVs and gaming consoles, in exchange for $11,965 in cash and 1,411,704 shares of our common stock valued at a price of $14.36 (with a discount of $4,320 due to the restriction on the sale of these shares for 1 year), for a total of $15,952. We have allocated the aggregate cost of the acquisition to Kewego’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	10,064
Property and equipment		388
Intangible assets – developed software		500
Intangible assets – customer list		2,000
Goodwill		21,950
Total assets acquired		34,902
Deferred tax liability		(775	)
Current liabilities		(6,210	)
Net assets acquired	$	27,917

The results of operations of Kewego for the period from January 27, 2011 to September 30, 2011 have been included in the Consolidated Statements of Operations. Revenue and net income after acquisition are not provided as it is impracticable to distinguish due to the integration of sales, delivery and overhead into our overall regional and global operations.

WWB Acquisition

On February 21, 2011, we acquired the assets of Worldwide Broadcast Systems Inc. (“WWB”), a United States-based company engaged in providing broadcast video systems integration to customers in South and Central America, in exchange for $1,900 in cash and 23,514 shares of our common stock valued at a price of $13.25 (with a discount of $33 due to the restriction on the sale of these shares for 6 months), for a total of $279. Additionally, the cost includes a fair value for contingent consideration of $4,505, which will be based on a percentage of revenue over a three-year period after closing, which is included in the Balance Sheet in “Acquisition Liability, net of current.”.We have allocated the aggregate cost of the acquisition to WWB’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	89
Goodwill		6,595
Total assets acquired		6,684
Current liabilities		-
Net assets acquired	$	6,684

The results of operations of WWB for the period from February 22, 2011 to September 30, 2011 have been included in the Consolidated Statements of Operations. Revenue and net income after acquisition are not provided as it is impracticable to distinguish due to the integration of sales, delivery and overhead into our overall regional and global operations.

ioko Acquisition

On May 2, 2011, we acquired ioko365 Ltd. ("ioko") a private company incorporated in England and Wales with principal offices in San Diego, California and London, England and York, England. ioko provides end-to-end managed cloud-based platform solutions for multi-screen video delivery over connected Internet Protocol ("IP") devices to tier-one telecommunications, cable, media and entertainment companies around the world. Total consideration was $74,478 in cash and 1,509,804 of our common stock valued at a price of $10.88 (with a discount of $3,750 due to the restriction on the sale of these shares) for a total value of $12,676. In addition, the cost includes a fair value of contingent consideration of $3,362 based on meeting revenue and earnings targets during the twelve month periods ending March 31, 2012 and March 31, 2013. We are holding $9,000 of the cash and 232,378 shares of the merger consideration in escrow for a period not to exceed 18 months following the merger. Included in this agreement is an employee incentive plan for a total potential payment of our common stock of $7,500 upon meeting specified performance targets during the twelve month periods ending March 31, 2012 and March 31, 2013 and the six month period ended September 30, 2013. We have allocated the aggregate cost of the acquisition to ioko’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	36,271
Property and equipment		1,983
Intangible assets – customer list		10,000
Goodwill		59,050
Total assets acquired		107,304
Deferred tax liability		(2,500	)
Current liabilities and assumed debt		(14,288	)
Net assets acquired	$	90,516

The results of operations of ioko for the period from May 2, 2011 to September 30, 2011 have been included in the Consolidated Statements of Operations. Revenue and net income after acquisition are not provided as it is impracticable to distinguish due to the integration of sales, delivery and overhead into our overall regional and global operations. 

Polymedia Acquisition

On May 17, 2011 we acquired Polymedia S.P.A. (“Polymedia”) a company incorporated in Italy with its principal office in Milan. Polymedia was the IP video platform-provisioning subsidiary of TXT e-solutions, a public company listed on the Italian Stock Exchange. Total consideration was $24,283 in cash and 1,178,381 of our common stock valued at a price of $11.89 (with a discount of $864 due to the restriction on the sale of the shares in escrow) for a total of $13,146. In addition, the cost includes a fair value of contingent consideration of $4,240 based on meeting specified revenue and gross margin targets during the 12-month periods ending May 31, 2012 and May 31, 2013.We are holding 354,286 shares of the merger consideration in escrow for a period of up to 12 months following the closing date. We have allocated the aggregate cost of the acquisition to Polymedia’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	11,649
Property and equipment		1,068
Intangible assets – customer list		6,000
Goodwill		31,523
Total assets acquired		50,240
Deferred tax liability		(1,884	)
Current liabilities and assumed debt		(6,687	)
Net assets acquired	$	41,669

The results of operations of Polymedia for the period from May 17, 2011 to September 30, 2011 have been included in the Consolidated Statement of Operations. Revenue and net income after acquisition are not provided as it is impracticable to distinguish due to the integration of sales, delivery and overhead into our overall regional and global operations.

Peerset Acquisition

On June 9, 2011, we acquired the assets of Peerset, Inc. (“Peerset”), a Canadian based company engaged in developing technology to provide content recommendation services, in exchange for 10,611 shares of our common stock valued at a price of $11.71 for a total of $124 and cash of $1,375. The Peerset acquisition was primarily a purchase of intellectual property and a dedicated research and development team related to content recommendation technology, and the company was generating virtually no reported revenue at the time of purchase. We have allocated the aggregate cost of the acquisition to Peerset’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the aggregate cost of the acquisition over the net estimated fair value of the tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Current assets	$	-
Intangible assets – developed software		400
Goodwill		1,099
Total assets acquired		1,499
Current liabilities		-
Net assets acquired	$	1,499

Selected unaudited pro forma combined results of operations for the nine months ended September 30, 2010, assuming the Multicast, Benchmark, Brickbox, Accela, Megahertz, Kyte, Kewego, Kickapps, WWB, ioko, and Polymedia acquisitions occurred on January 1, 2010 using actual unaudited figures from each entity prior to acquisition, are presented as follows:

Total revenue	$	158,277
Net loss	$	(35,079	)

Selected unaudited pro forma combined results of operations for the nine months ended September 30, 2011, assuming the Kyte, Kewego, Kickapps, WWB, ioko, and Polymedia acquisitions occurred on January 1, 2011 using actual unaudited figures from each entity prior to acquisition, are presented as follows:

Total revenue	$	180,197
Net loss	$	(23,701	)

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Net income (loss) per share

9 Months Ended

Sep. 30, 2011

Net income (loss) per share

(3) Net income (loss) per share

Basic net income per share is computed using the weighted average number of common shares outstanding during the applicable period. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common stock. Potential common stock consists of shares issuable pursuant to stock options, warrants and restricted stock units (“RSUs”).

The following table sets forth the components used in the computation of basic and diluted net income per common share (in thousands, except share and per share data):

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2011		2010			2011			2010
Numerator:
Net income (loss)	$	4,788	$	(7,974	)	$	(27,516	)	$	(26,758	)
Denominator:
Denominator for basic net income (loss) per common share		42,553,768		23,355,298			36,978,752			19,581,084
Effect of dilutive securities:
Stock options		611,918		-			-			-
Warrants		149,221		-			-			-
RSUs		119,509		-			-			-
Denominator for diluted net income (loss) per common share		43,434,416		23,355,298			36,978,752			19,581,084
Basic net income (loss) per common share	$	0.11	$	(0.34	)	$	(0.74	)	$	(1.37	)
Diluted net income (loss) per common share	$	0.11	$	(0.34	)	$	(0.74	)	$	(1.37	)

Outstanding options to acquire an aggregate of 3,173,295 shares of common stock for the three months ended September 30, 2011 were excluded from the calculation of diluted earnings per share because the exercise prices of these stock options were greater than the average market price of the Company’s common stock during the respective period. As a result, the effect of including these options would be anti-dilutive. Similarly, outstanding warrants to acquire an aggregate of 512,439 shares of common stock for the three months ended September 30, 2011 were excluded from the calculation of diluted earnings per share because the exercise prices of the warrants were greater than the average market price of the Company's common stock during the respective period. Additionally, 1,569,741 common stock issuable in respect of outstanding time and performance-based RSUs were excluded from the computation of diluted net income per share for the three ended September 30, 2011 because the time or performance conditions had not been met as of those dates.

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Derivative Liabilities

9 Months Ended

Sep. 30, 2011

Derivative Liabilities

(14) Derivative Liabilities

In June 2008, the Financial Accounting Standards Board issued a new accounting standard. Under this standard, instruments which contain full ratchet anti-dilution provisions will no longer be considered indexed to a company’s own stock for purposes of determining whether it meets the first part of the scope exception. The adoption required us to (1) evaluate our instrument’s contingent exercise provisions and (2) evaluate the instrument’s settlement provisions. Based upon applying this approach to instruments within the scope of the consensus, we have determined that certain of our warrants which were classified in stockholders’ equity on December 31, 2008, no longer meet the definition of Indexed to a Company’s Own Stock provided in the Consensus. Accordingly, effective on January 1, 2009, we were required to reclassify those warrants, at their fair value, into liabilities. The accounting standard requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value over the period reported in the statement of operations. The difference between the amount the warrants were originally recorded in the financial statements and the fair value of the instruments on January 1, 2009 was considered a cumulative effect of a change in accounting principle and required an adjustment to the opening balance of retained earnings and a reduction in additional paid-in capital in the amount of $8,498 and $24,235, respectively. The derivative liability as of January 1, 2009 was $15,737. The common shares indexed to the derivative financial instruments used in the calculation of the fair value and recorded as liabilities at January 1, 2009, December 31, 2009, December 31, 2010 and September 30, 2011 were 5,806,230, 4,794,400, 679,400 and 251,021, respectively. The number of shares for the determination of liability have been computed based on the effective exercise price used in the valuation. The actual number of common shares indexed to the warrants at January 1, 2009, December 31, 2009, December 31, 2010 and September 30, 2011 were 2,886,038, 4,794,400, 679,400 and 251,021, respectively.

We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments.

Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimate and assumption changes. Under the terms of the new accounting standard, increases in the trading price of the company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the company’s common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.

The following table summarizes the components of derivative liabilities as of September 30, 2011, December 31, 2010 and the re-measurement date, January 1, 2009:

	September 30,  2011			December 31,  2010			Re-measurement date January 1,  2009
Fair value of warrants with anti-dilution provisions	$	(565	)	$	(6,096	)	$	(15,736	)
Significant assumptions (or ranges):
Trading market values  (1)	$	8.40		$	16.04			5.25
Term (years)		1.61		2.35			$	4.35 to 5.00
Volatility   (1)		54.44	%		57.73	%		101.98	%
Risk-free rate   (2)		0.25	%		0.61	%		1.55	%
Effective Exercise price  (3)	$	7.00		$	7.00		$	5.92

Fair value hierarchy:

(1) Level 1 inputs are quoted prices in active markets for identical assets and liabilities, or derived there from. Our trading market values and the volatilities that are calculated thereupon are level 1 inputs.

(2) Level 2 inputs are inputs other than quoted prices that are observable. We use the current published yields for zero-coupon US Treasury Securities, with terms nearest the remaining term of the warrants for our risk free rate.

(3) Level 3 inputs are unobservable inputs. Inputs for which any parts are level 3 inputs are classified as level 3 in their entirety. The remaining term used equals the remaining contractual term as our best estimate of the expected term and the effective exercise price which is based on the stated exercise price adjusted for anti-dilution provisions.

The effects on our income (expense) associated with changes in the fair values of our derivative financial instruments for the three months ended September 30, 2011 and 2010 was $628 and $(1,451), respectively. Included in the $1,451 expense for the three months ended September 30, 2010 is a gain on settlement of $55 related to the repurchase of warrants. The effects on our income (expense) associated with changes in the fair values of our derivative financial instruments for the nine months ended September 30, 2011 and 2010 was $3,670 and $(10,526), respectively. Included in the $(10,526) expense for the nine months ended September 30, 2010 is a loss on settlement of $2,961 related to the repurchase of warrants.

On March 7, 2010, our board of directors approved the repurchase of certain outstanding warrants with exercise prices below the then-current market price from certain warrant holders (who had acquired the warrants in May 2008 private placement financings), including KIT Media, an entity controlled by Kaleil Isaza Tuzman, our Chairman and Chief Executive Officer and Wellington Management Company (“Wellington”), an entity with greater than a 10% holding in KIT digital’s outstanding common stock at the time of the transaction. KIT Media and Wellington were at the time considered related parties of the Company. The terms of the warrant repurchase were identical for KIT Media and Wellington, and the negotiation of such terms was led by Wellington. The Company offered to purchase and cancel these warrants at 133% of the intrinsic value of the warrants (but because intrinsic value was based on a 20-day trailing volume weighted average price of the underlying common stock at the time, the ultimate purchase price of the warrants ended up being below the actual intrinsic value at the date of purchase.). These warrants with anti-ratchet dilution provisions totaling 3,030,747 were cancelled effective on March 31, 2010. Total payments for the settlement of these warrants was $22,232 and a loss of $1,665 was recorded in the derivative expense in the statement of operations. These warrants were included in the warrant buyback liability as at March 31, 2010 and were paid after such date. We also repurchased and cancelled another 403,577 warrants with anti-ratchet dilution provisions during the year ended December 31, 2010, at varying prices, from parties other than KIT Media and Wellington, for $1,342.

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Subsequent Events

9 Months Ended

Sep. 30, 2011

Subsequent Events

(22) Subsequent Events

On October 21, 2011, we filed a certificate of amendment of our certificate of incorporation to increase the number of authorized shares of our common stock to 150,000,000 shares from 80,000,000 shares. The amendment was adopted by stockholders holding a majority of our outstanding shares of common stock at our annual meeting of stockholders held on October 21, 2011.

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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Parenthetical) (USD $) In Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Compensation, travel and associated costs, non-cash stock	$ 5,546	$ 1,273	$ 11,957	$ 2,910

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2011

Stock-Based Compensation

(15) Stock-Based Compensation

In December 2010, our board of directors voted unanimously to increase the number of shares which may be issued under the 2008 Incentive Plan by 1,500,000 to an aggregate of 5,000,000 shares of common stock, subject to ratification by our stockholders. Subsequently, as a result of acquisition activity, our board of directors authorized at its meetings on March 5, 2011 and August 5, 2011 to amend and increase the number of shares which may be issued under the 2008 Incentive Plan to a new total of 9,500,000 shares. The holders of a majority of our outstanding shares of common stock approved the amendment to the 2008 Incentive Plan at the stockholders meeting held on October 21, 2011. The 2004 Stock Option Plan has reserved 342,858 shares of common stock for issuance.

Our outstanding unvested stock options have maximum contractual terms of up to five years, principally vest on a quarterly basis ratably over four years and were granted at exercise prices equal to the market price of our common stock on the date of grant. Our outstanding stock options are exercisable into shares of our common stock. We measure the cost of employee services received in exchange for an award of equity instruments, including grants of employee stock options, warrants and restricted stock awards, based on the fair value of the award at the date of grant in accordance with the modified prospective method. We use the Black-Scholes model for purposes of determining the fair value of stock options and warrants granted and recognize compensation costs ratably over the requisite service period, net of estimated forfeitures. For restricted stock awards, the grant-date fair value is the quoted market price of the stock.

For the three months ended September 30, 2011 and 2010, we recognized $5,046 and $1,273, respectively, of non-cash stock-based compensation expense in the consolidated statements of operations. For the nine months ended September 30, 2011 and 2010, we recognized $11,457 and $2,910, respectively, of non-cash stock-based compensation expense in the consolidated statements of operations. Included in the nine months ended September 30, 2011 amount of $11,457 is $4,171 accrued for compensation to be issued in stock, $1,318 for restricted stock units and restricted stock vested in 2011. Included in the nine months ended September 30, 2010 amount of $2,910 is $269 for restricted stock units and restricted stock vested in 2010. Also included in non-cash stock-based compensation are warrants to purchase 34,286 shares of common stock with an exercise price of $4.655 issued on March 30, 2008, that vest over three years from the issue date with $12 and $36 recognized in the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011, all of these warrants were vested. The intrinsic value as of September 30, 2011 of these outstanding warrants and exercisable warrants are $128.

As of September 30, 2011, there was approximately $22,932 of total unrecognized compensation cost related to unvested share-based compensation grants, which is expected to be amortized over a weighted-average period of 3.1 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes model with the following weighted-average assumptions:

	Nine Months  Ended September 30,  2011			Nine Months  Ended September 30,  2010
Expected life (in years)		4.00			3.85
Risk-free interest rate		1.52	%		1.08	%
Volatility		79.40	%		50.69	%
Dividend yield		0			0

In 2010 and 2011, we estimated the expected term of stock options using historical exercise experience and used a forfeiture rate of 25% for employees and 0% for officers and directors

A summary of the status of stock option awards and changes during the nine months ended September 30, 2011 are presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Intrinsic Value
Outstanding at December 31, 2010		3,903,424			10.54
Granted		3,339,759			12.15
Exercised		(182,622	)		9.84
Cancelled, expired, or forfeited		(1,178,930	)		12.52
Outstanding at September 30, 2011		5,881,631			11.17		3.98	$	0
Exercisable at September 30, 2011		1,946,911			10.38		3.48	$	0

The weighted-average grant-date fair value of option awards granted during the nine months ended September 30, 2011 was $7.11.

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Restructuring Charges

9 Months Ended

Sep. 30, 2011

Restructuring Charges

(17) Restructuring Charges

In the first quarter of 2010, management approved restructuring plans for entities acquired in the fourth quarter of 2009 which included a workforce reduction, reduction in costs related to excess and vacated facilities under non-cancelable leases and settlement of contracts. Management expects to make the remaining employee termination costs payments in 2011 and the facility closing costs and contract settlement payments into 2012. 

The following table summarizes the restructuring charges for the three and nine months ended September 30, 2011, respectively, for the plan approved in the first quarter 2010:

	Employee Termination Costs			Contract Settlements			Facility Closing Costs			Total
Balance as of December 31, 2010	$	1,212		$	13		$	518		$	1,743
Additions		-			-			34			34
Reversal		(654	)		-			-			(654	)
Cash payments		(558	)		(4	)		(229	)		(791	)
Balance as of  June 30 , 2011	$	-		$	9		$	323		$	332
Cash payments		-			(2	)		(54	)		(56	)
Balance as of  September 30, 2011	$	-		$	7		$	269		$	276

The accrued restructuring of $276 is included in accrued expenses in the consolidated balance sheets as of September 30, 2011.

In the first quarter of 2011, management approved a companywide restructuring plan which includes a workforce reduction, reduction in costs related to excess and vacated facilities under non-cancelable leases and settlement of contracts. Management expects to make payments during the remaining portion of 2011 and continuing into 2012.

The following table summarizes the restructuring charges for the three and nine months ended September 30, 2011, respectively, for the plan approved in the first quarter 2011:

	Employee Termination Costs			Contract Settlements		Facility Closing Costs		Total
Balance as of December 31, 2010	$	-		$	-	$	-	$	-
Additions		3,973			-		-		3,973
Cash payments		(1,736	)		-		-		(1,736	)
Balance as of  June 30 , 2011	$	2,237		$	-	$	-	$	2,237
Cash payments		(1,975	)		-		-		(1,975	)
Balance as of  September 30, 2011	$	262		$	-	$	-	$	262

The accrued restructuring of $262 is included in accrued expenses in the consolidated balance sheets as of September 30, 2011.

The following table summarizes the restructuring charges:

	Three months ended September 30, 2011		Three months ended September 30, 2010			Nine months ended September 30, 2011		Nine months ended September 30, 2010
Employee termination costs	$	-	$	(66	)	$	3,318	$	2,566
Contract settlements		-		-			-		67
Facility closing costs		-		(27	)		34		848
Total restructuring charges	$	-	$	(93	)	$	3,352	$	3,481

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011		Sep. 30, 2010
Operating Activities:
Net loss	$ (27,516)		$ (26,758)
Adjustments to reconcile net loss to net cash used by operating activities:
Provision for doubtful accounts	223		358
Depreciation	3,646		3,243
Amortization of intangible assets	4,860		2,867
Amortization of deferred financing costs and debt discount	196		33
Loss on disposal of property and equipment			111
Derivative expense (income)	(3,670)		10,526
Less: merger and acquisition expenses	6,738		1,387
Non-cash stock based compensation	11,957		2,909
Non-cash warrants for services	1,697		840
Non-cash stock for services	267		412
Changes in assets and liabilities:
Accounts receivable	(10,952)		(13,926)
Unbilled revenue	(720)		930
Inventory	(152)		(579)
Other assets	(3,473)		(716)
Accounts payable	1,390		2,268
Accrued expenses	333		(1,084)
Income tax payable	(853)		(9)
Other liabilities	(4,248)		(280)
Total adjustments	7,239		9,290
Net cash used by operating activities - forward	(20,277)		(17,468)
Investing Activities:
Cash paid into restricted cash	3,518		(2,035)
Cash paid into investment	(307)		(700)
Cash paid in acquisitions	(122,210)		(26,338)
Cash received in acquisitions	16,860		6,581
Receipt of payment on notes receivable	877
Proceeds from sale of equipment	162
Merger and acquisition expenses	(6,738)		(1,387)
Purchase of equipment	(3,869)		(1,272)
Purchase of software	(1,900)
Net cash used by investing activities - forward	(113,607)		(25,151)
Financing Activities:
Proceeds from public offering, net	32,105		106,615
Proceeds from exercise of stock options	1,366		74
Proceeds from exercise of warrants	2,999		3,030
Payments for warrant buybacks			(24,054)
Bank overdraft and other obligations			209
Proceeds from issuance of secured notes	15,000		5,762
Payments of secured notes	(1,254)		(1,020)
Repayments of notes payable			(4,500)
Payment on capital leases	(360)		(794)
Net cash provided by financing activities	49,856		85,322
Effect of exchange rate changes on cash	2,842		558
Net increase (decrease) in cash and cash equivalents	(81,186)		43,261
Cash and cash equivalents - beginning of period	141,233	[1]	6,791
Cash and cash equivalents - end of period	60,047		50,052
Cash paid during the period for:
Income taxes	739
Interest	1,342		563
Non-cash investing and financing activities:
Non-cash issuances of stock for acquisitions (8,398,648 and 2,460,959 shares issued, respectively)	$ 84,122		$ 25,964

[1] Reference is made to the Company's Annual Report on Form 10-K/A for the year ended December 31, 2010, filed with the U.S. Securities and Exchange Commission on August 3, 2011.

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Inventory

9 Months Ended

Sep. 30, 2011

Inventory

(8) Inventory

Inventory is valued at the lower of cost (first-in, first-out method) or market and is comprised of finished goods. On a quarterly basis, we review inventory quantities on hand and analyze the provision for excess and obsolete inventory based primarily on product age in inventory and our estimated sales forecast, which is based on sales history and anticipated future demand. As of September 30, 2011 and December 31, 2010, our reserves for excess and obsolete inventory were $140 and $145, respectively.

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Acquisition Liabilities

9 Months Ended

Sep. 30, 2011

Acquisition Liabilities

(13) Acquisition Liabilities

	September 30, 2011		December 31, 2010
Acquisition liabilities, current portion
Benchmark	$	1,608	$	2,115
Kyte		1,000		-
WWB		1,126		-
ioko		1,798		-
Polymedia		2,827		-
	$	8,359	$	2,115
Acquisition liabilities, net of current
Benchmark	$	5,621	$	7,382
Brickbox		-		3,023
WWB		3,379		-
ioko		1,563		-
Polymedia		1,414		-
	$	11,977	$	10,405

The fair value of the acquisition-related contingent consideration for Benchmark included above was $8,378 on the acquisition date of May 14, 2010. As of March 31, 2011, the fair value of the acquisition-related contingent consideration for the first anniversary on May 15, 2011 for Benchmark increased by $2,873 based on changes in management’s estimates and other factors that occurred during the three months ended March 31, 2011. As of June 30, 2011, the fair value of the acquisition-related contingent consideration for the first anniversary on May 15, 2011 for Benchmark increased by an additional $2,148 based on the actual earn-out provisions which has been agreed and finalized. As of June 30, 2011, the fair value of the acquisition-related contingent consideration for the second anniversary on May 15, 2012 for Benchmark increased by $3,208 based on changes in management’s estimates and other factors that occurred during the three months ended June 30, 2011. The increase in the liabilities were recorded as a charge to earnings and is included in the “Merger and acquisition and investor relations expenses” line item in the Consolidated Statements of Operations. Also in the three months ended June 30, 2011, the working capital liability was agreed and paid for $357 with the difference of $762 recorded as an offset to the “Merger and acquisition and investor relations expenses” line item in the Consolidated Statements of Operations.

Pursuant to the Benchmark Stock Purchase Agreement on May 14, 2010, following the 12-month anniversary of the closing, we agreed to pay the seller in the form of shares of our common stock $0.60 for every $1.00 of recognized revenue generated by Benchmark during the 12-month period following the closing, less the purchase price paid at closing.  The price per share of our common stock issuable following the first anniversary of the closing was calculated based on the weighted average price of our common stock for the 30 trading days immediately preceding the first anniversary. Pursuant to an amendment to the Stock Purchase Agreement dated August 2, 2011, the parties agreed to accelerate half of the payment which would otherwise be payable to the seller with respect to the 12 months ending May 15, 2012 (based on financial results ending May 15, 2011), and extended a portion of the balance of the 2012 payment until May 15, 2013.  In accordance with the Benchmark Stock Purchase Agreement and the amendment, we issued 816,592 shares of our common stock to the seller for the first anniversary payment. On August 4, 2011, we issued 816,592 shares of our common stock valued at $7,905 in satisfaction of $9,378 of the earn-out provision. The difference of $1,473 was recorded as other income in the Consolidated Statements of Operations due to the change in value of the shares upon issuance

In July 2011, we paid the $1,375 in relation to the Peerset Acquisition liability.

On May 22, 2011, we signed an amendment to the securities purchase agreement to issue 265,262 shares valued at $3,053 for the full settlement of the Brickbox contingent acquisition liabilities estimate of $3,023, with the difference booked to expense in the three months ended June 30, 2011.

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands	Sep. 30, 2011	Dec. 31, 2010
Current assets:
Cash and cash equivalents	$ 60,047	$ 141,233	[1]
Restricted cash	595	2,000	[1]
Investment	1,709	1,050	[1]
Accounts receivable, net	66,069	29,349	[1]
Unbilled revenue	12,174	537	[1]
Inventory, net	449	301	[1]
Loan receivable, current portion	3,641	2,486	[1]
Other current assets	12,797	5,104	[1]
Total current assets	157,481	182,060	[1]
Property and equipment, net	10,841	5,987	[1]
Loan receivable, net of current	6,328	8,361	[1]
Deferred tax assets	448
Intangible assets, net	35,489	13,248	[1]
Goodwill	244,781	89,004	[1]
Total assets	455,368	298,660	[1]
Current liabilities:
Capital lease and other obligations, current portion	504	608	[1]
Secured notes payable, net of debt discount, current portion	5,035	1,709	[1]
Accounts payable	17,857	12,740	[1]
Accrued expenses	12,752	6,411	[1]
Deferred revenue	4,439	4,223	[1]
Income tax payable	4,457	858	[1]
Deferred tax liability	11,454	682	[1]
Acquisition liabilities, current portion	8,359	2,115	[1]
Derivative liability	565	6,096	[1]
Other current liabilities	12,478	2,887	[1]
Total current liabilities	77,900	38,329	[1]
Capital lease and other obligations, net of current	266	175	[1]
Secured notes payable, net of current	13,658	4,127	[1]
Acquisition liabilities, net of current	11,977	10,405	[1]
Total liabilities	103,801	53,036	[1]
Stockholders' Equity:
Common stock, $0.0001 par value: authorized 80,000,000 shares; issued and outstanding 46,156,204 and 33,196,952, respectively	5	3	[1]
Additional paid-in capital	510,518	375,578	[1]
Accumulated deficit	(156,719)	(129,203)	[1]
Accumulated other comprehensive loss	(2,237)	(754)	[1]
Total stockholders' equity	351,567	245,624	[1]
Total liabilities and stockholders' equity	$ 455,368	$ 298,660	[1]

[1] Reference is made to the Company's Annual Report on Form 10-K/A for the year ended December 31, 2010, filed with the U.S. Securities and Exchange Commission on August 3, 2011.