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FU > SEC Filings for FU > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for FAB UNIVERSAL CORP.

Form 10-Q for FAB UNIVERSAL CORP.


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis.

Safe Harbor Statement.

Statements made in this Form 10-Q which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and business of the Company, including, without limitation, (i) our ability to gain a larger share of the digital media, home healthcare and speech recognition software industries, our ability to continue to develop products and services acceptable to those industries, our ability to retain our business relationships, and our ability to raise capital and the growth of the digital media, home healthcare and speech recognition software industries, and (ii) statements preceded by, followed by or that include the words "may", "would", "could", "should", "expects", "projects", "anticipates", "believes", "estimates", "plans", "intends", "targets", "tend" or similar expressions.

Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond the Company's control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, in addition to those contained in the Company's reports on file with the Securities and Exchange Commission: general economic or industry conditions, nationally and/or in the communities in which the Company conducts business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, changes in the digital media and/or speech recognition technology industries, the development of products and/or services that may be superior to the products and services offered by the Company, competition, changes in the quality or composition of the Company's products and services, our ability to develop new products and services, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting the Company's operations, products, services and prices.

Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. The Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

Highlights of Third Quarter, 2012

Below is an update of our entire business, from our acquisition of Digital Entertainment International Ltd (DEI) on September 26, 2012, to our media business of podcasting and apps, our legacy businesses of offering core speech recognition and text to speech engines and programming tools for software developers and home healthcare and staffing for the healthcare industry. We believe our Media business will continue to grow and generate profits due to the size of our podcast operations, our market leadership position, our substantial presence in iTunes and the potential monetization of the content we distribute through our publishing platform, advertising sale of Apps and paid subscriptions for content. The network growth of our media operation has occurred faster than initially expected and it is Management's opinion that we are still in the early stages of growth for this industry as we are seeing the flow of quality content coming to the Internet increase at a rapid pace and audiences showing increased interest in the medium. FAB Universal believes that our network and relevance in our industry will continue to grow and that we are positioned to be one of the leading companies in the podcast monetization business.

1. MEDIA

Digital Entertainment International (FAB)

On September 26, 2012, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of DEI, a company incorporated under the law of the Hong Kong Special Administrative Region. The closing of this transaction was disclosed in the Company's Current Report on Form 8-K dated September 26, 2012, which was filed with the Securities and Exchange Commission on September 28, 2012, and which is incorporated herein by this reference. See the Exhibit Index, Part II, Item 6 of this Quarterly Report.


Founded in 2003, FAB is headquartered in Beijing and distributes over 150,000 media based products including copyrighted DVD's, Blu-ray Discs, music CD's, video games and downloadable digital content through three distribution channels
- wholesale and retail, licensing and kiosks.

The development of the digital media industry in China is now a national strategic initiative based on China's official Eleventh Five-Year Plan passed by China's National People's Congress. Following sustained lobbying efforts by western media companies, China has begun to relax its longstanding limits on foreign media. For example, up to 20 blockbuster western movies can now be shown in Chinese theaters per year. The demand for viewing foreign DVD content on personal entertainment devices has burgeoned and with the government's official crack-down on pirated content becoming official, FAB and the network of retailers it supplies have experienced substantial increases in demand. The FAB business consists of:

Retail

FAB conducts their retail business through their flagship stores since 2003.
Each store has over 20,000 square feet in size and carries the largest selection of copyrighted audio and video products in China, including CDs, VCDs, DVDs, blu-rays, books, magazines and portable electronic devices. FAB markets their products to individual consumers and audio-video retailers. The flagship stores are recognized by many Chinese consumers as the right place to buy copyright protected products.

Celebrity signing events are the major driver to FAB's retail stores which have been used as a popular venue for Chinese music and movie stars to meet their fans. Additionally many foreign stars, mostly from Hong Kong, Taiwan, Korea and Japan wishing to enter the Chinese market choose FAB as their launch platform. FAB flagship stores host such events at least once a week. Those events not only promote sales of audio-video products but also increase their brand recognition.

FAB announced the grand opening of a new 20,000 square feet entertainment superstore in the high-end Beijing shopping district of SoShow on October 12, 2012.

Designed to satisfy the tastes of a swiftly emerging middle class with maturing entertainment expectations, FAB's SoShow flagship provides Beijing shoppers with its first audio-video "hypermarket." As a preferred venue for product announcements, publishing parties, studio releases, author readings, movie showings, live promotional performances and concerts, FAB's SoShow outlet is one of China's first ultra-modern entertainment destination for music lovers, film buffs, game enthusiasts, and early electronic adopters.

FAB's SoShow flagship store will offer many new electronic digital products and mobile storage devices while serving as a center for the 5C, the download supermarket of traditional copyright protected audio-video products. We believe our new products will provide a modest increase in offerings during the fourth quarter. Consumers can download the latest movies, songs, games, e-books and applications to mobile storage devices through the intelligent 5C Kiosk.
Additionally, the 5C download supermarket also offers coupon printing, self-service payments, membership points checking, map searching, digital printing and other consumer functions. FAB's intelligent 5C Kiosk is the leading multimedia digital network terminal providing services in China.

FAB's SoShow mall location is traditionally famed as a bustling shopping area near Chongwenmen, a sprawling Beijing shopping district just off the East Second Ring Road. Hundreds of thousands of daily shoppers visit the district and frequent popular and ultra-modern shops that benefit from high foot traffic.

Wholesale

FAB wholesale distribution provides audio-video products such as compact discs, video compact discs and digital video discs as well as books and magazines to audio-video products retailers. FAB distributes these media products to over 80 customers including Sohu (NASDAQ: SOHU), Dangdang (NYSE: Dang) and Century Outstanding Information Technology Company, a subsidiary of Amazon.com (NASDAQ:
AMZN). FAB's wholesale business caters to three types of customers: large retail stores, FAB license stores and small wholesale/resellers. Customers place orders by telephone, through the internet or in-person and fulfillment is handled by FAB's vehicle fleet or through direct warehouse access.


With over 100 suppliers and 80 wholesale customers, including the Government, the wholesale business segment is growing with FAB strongly positioned to be the leader in copyright protected material as the media entertainment industry continues to expand in China. Revenues for the wholesale business segment were $23.5m in 2009, $31.9m in 2010, $44.7m in 2011 and $38.8m for the first nine months of fiscal 2012.

License and Kiosk

FAB Intelligent Media Kiosks, based on 61 proprietary national intellectual property rights, are ATM style terminals where consumers can download copyrighted music, video games, ringtones, digital books and movies directly to their cell phones, memory sticks or other mobile storage devices. FAB Media Kiosks can also run video ads on the high-tech LCD screens and accept payments for utility bills, metro cards, and credit card bills.

In 2008, FAB was granted a license by China's Ministry of Commerce to license its business model that has been well received by entrepreneurs throughout the country. FAB has quickly grown its nationwide business network through its license and regional agent programs and to date has expanded to 40 cities with around 7,000 licensees and an installed network count approaching 11,000 Intelligent Media Kiosks.

Total FAB Intelligent Media Kiosk Revenues for 2010 was $15.7 million, in 2011 it was $17.6 million and for the first nine months of fiscal 2012, $19.5 million. Total overall revenues for FAB's fiscal 2011 were $70.9 million with $15.3 million in earnings.

FAB kiosk is an innovative self-service vending kiosk designed and launched by FAB in 2008. The kiosks target the millions of mobile and portable device users combing interactive touch screen and LED display with a large selection of copyrighted content such as music, movies and games. The content is contained on internal hard drives within each terminal thereby eliminating bandwidth download problems associated with the internet and providing content owners with a secure closed system for digital file protection and accurate transparent accounting. The terminals are updated and monitored via web-linked electron communications. There are thousands of licensed digital entertainment content items in each kiosk, such as music, movie and TV episodes, which allows the customer to play or download to their portable device or memory card with payment by cash, FAB membership card or ATM card. FAB has deployed over 11,000 kiosks through their licensing program. Most of the kiosks are located in high-traffic areas, such as, office buildings, shopping malls, and retail stores. Revenue is generated by selling pre-paid membership cards, charging licensing fees and providing advertising.

FAB generates revenues from its Intelligent Media Kiosk business through the sale of licenses and then through ongoing media content download, media membership card sales and kiosk-based advertising. Currently, FAB has more than 300,000 membership cardholders.

The FAB Intelligent Media Kiosks have served to greatly enhance consumer ease-of-purchase while reducing the appeal of pirated content, positively transforming market dynamics in China for legitimate content and facilitating licensing opportunities with traditional media publishers who desire safe access to the world's largest, fastest-growing consumer market. In addition to media content terminals, FAB's kiosk technology also addresses the specific needs of banks, supermarkets, shopping malls, office buildings, government offices, tourist resorts, university campuses and libraries and provides a foundation for the building of intelligent digital cities of the future.

FAB Membership

In order to retain customers and increase cross-sales, FAB launched their client retention program, the FAB member ship program in 2008. This program entitles customers to download digital content from FAB kiosks at lower costs than non-member customers. The membership also provides bonus points for member's purchasing products in any of the flagship stores. The bonus points can be exchanged later for non-cash gifts. FAB offers the following membership levels:


         Price        Duration      Number of Downloads
         RMB 100      3-month       Points are used when downloading
                                    different content. The range is 1-3
         RMB 200      12-month      points per song, film, coupon, etc.
                                    1 point=RMB 1 yuan
         RMB 300      12-month      So the download number for a card
                                    depends on what content the member
         RMB 400      12-month      access.

         RMB 500      12-month

Unaudited pro forma condensed consolidated financial information

The following unaudited pro forma condensed consolidated statement of income reflects the estimated adjustments to FAB Universal's historical consolidated statement of operations for the nine months ended September 30, 2012 and 2011, respectively, to give effect to:

The acquisition of Digital Entertainment International Co. ("DEI"), per the terms of the Share Exchange Agreement, and the related issuance of 37,944,551shares of common stock (including the 10,282,611 shares of common stock at closing and 27,611,940 shares of common stock issued upon the conversion of the 290 shares of Series B Convertible Preferred Stock) as if both had occurred on January 1, 2011.

The spin-off of Future Healthcare of America., a wholly owned subsidiary of FAB Universal, as if both had occurred on January 1, 2011.

The acquisition is treated as purchase transactions. The initial accounting for the business combination is not complete as of the filing of these pro forma condensed consolidated financial statements. We are reporting in these pro forma condensed consolidated financial statements provisional estimated amounts of the fair value of the assets acquired. The determination of the DEI purchase price and allocation of the purchase price to the underlying tangible and intangible assets in the pro forma condensed consolidated financial statements are subject to change as additional information becomes available. The unaudited pro forma condensed consolidated statements of operations are not necessarily indicative of FAB Universal's actual results of operations assuming the transaction were completed on January 1, 2011, nor do they purport to represent FAB Universal's results of operations for the future periods.

For the nine months ended September 30, 2012 and 2011the unaudited pro forma condensed consolidated statement of operations and comprehensive income of FAB Universal Corp and subsidiaries (reflecting the dividend of Future Health Care of America and Subsidiaries) and the acquisition of DEI are as follows:

                                                     September 30
                                                 2012             2011

Total revenues                              $   65,073,423   $   57,402,339

Cost of revenue                                 39,191,494       36,900,908
Operating expense                               17,664,494       10,576,956
Other income(expense)                              629,461        (188,036)
Income Taxes                                     3,107,296        3,130,001
Net Income                                       5,739,600        6,606,438
Foreign Currency gain                              110,555          200,725
Comprehensive income                          $  5,850,155    $   6,807,163

Net income per common share:
Basic and Diluted                                 $   0.12        $    0.15
Weighted-average common shares outstanding:
Basic and Diluted                               48,806,049       45,449,172


Podcasting

Media is the five year old division for our digital media and entertainment business. Media is currently the industry's largest network of independent and professional digital media publishers utilizing RSS (podcasting) as a distribution method. During the third quarter of 2012, the media segment experienced a 45% increase in revenue over the third quarter of 2011. Our publishing platform manages 11,916 clients. Management believes that our Media offers the leading podcast publishing platform in the industry and is one of only a few podcast publishing platforms that are able to charge publishers for use of the service. The majority of podcast publishing platforms offer their service for free, in hopes of making money exclusively from advertising sales.
Management believes that our ability to charge for the services we provide is a testament to the quality of service. In the third quarter of 2012, our total publishing service revenue, including data transfer, was $618,614 versus $452,008 in the third quarter of 2011. The total number of active episodes for the shows on the Network was 1,033,210 in the third quarter of 2012, all of which are available for immediate distribution. With the continuing success of iPods, iPhones, iPads, Android's mobile phones, and Blackberry's smartphones, we expect the number of content publishers using our service and the number of consumers watching the shows to continue to grow on an annual basis. LibsynPRO Enterprise service had 95 network publishers in 2012. We derive a portion of our revenues through data transfer from PRO customers. During the third quarter of 2012, revenue from data transfer totaled $157,382.

Podcasting Publishing Services

Hosting, Distribution Network, Content, Platform Development

Our Podcast Media network receives over 4.5 million requests for shows per day.
Our network reaches over 25 million people around the world, creating what Management believes is a strong media asset and a very compelling platform for advertisers as well as Smartphone App sales. Download requests are calculated by counting the number of shows requested for download by audience members. We work to generate profits by inserting advertisements in the shows in partnership with the show's publishers, charging for the use of our publishing platform, selling premium subscriptions for certain publishers catalog of shows, and through the sale of Apps. As the online digital media industry is in the emerging stages, the majority of these shows are distributed without advertising and the total download requests listed above are provided to give an understanding of the potential size of advertising inventory available for our third party advertising partners and its in-house advertising sales team to fill.

Currently, we distribute digital shows for our producers to a variety of web portals and content aggregators, for both download and video streaming.
Approximately 70% of the shows we distribute reach audiences using Apple's iTunes platform which includes iTunes on the computer, iPods, iPads, iPhones and Apple TV. It is Management's opinion that our Media Network's substantial presence in the iTunes Podcast Store is one of the Company's most valuable assets as consumers using iTunes are early adopters and spend money regularly on digital media. We believe this provides us with a unique offering for advertisers seeking that type of consumer and provides Libsyn with monetization opportunities for its podcast publishers through the sale of individual and network wide Apps.

The third quarter development efforts continued to focus on libsyn publishing platform improvements to attract new producers and new features for audience growth and monetization. Libsyn's product offering was enhanced and expanded to afford more options for multi-platform delivery of producer content to mobile devices as well as constantly enhancing libsyn's integration with third-party social services such as Facebook. In addition, platform-wide infrastructure improvements are on-going to lay the foundation for the next generation of the libsyn service.

Major initiatives focused development efforts on the premium paid subscription service, audience engagement through social media apps such as the Facebook Timeline App and improvements for measuring audience and engagement for producers. Through incremental releases to the platform software, improvements were made to foster better measurement and monetization for producers via the premium subscription service. Improved tracking of subscribers allows premium producers to tailor their offerings and content to expand opportunities for audience growth.

Across the board, improvements were made to gain better insight into audience with vastly-improved stats reporting interface, wider cross-browser compatibility, more responsive interaction, and better visualization tools to expose


the rich, timely data of which the statistics system is capable of generating.
In the third quarter of 2012, libsyn upgraded the Flash player with a modern and lightweight HTML5 player. Producers were instantly able to distribute their media on a wider range of mobile devices as well as take advantage of native browser capabilities. The new player is fully integrated into the libsyn codebase, allowing developers to stay abreast of emerging and evolving HTML5 technology, adding new features as they become available.

Efforts to enhance producers' integration with third-party social networking sites along with adding new social media outlets as they gain traction continued into the third quarter of 2012. Support was added for producers to publish their content to Google's Blogger hosting service with no impact to their publishing workflow, while the ability to customize posts on a per-destination basis was added for the more popular third-party social sites. A critical part of libsyn's ability to incorporate new producers with existing podcasts as well as allow existing producers to synchronize their externally-hosted content with the libsyn platform was re-factored to increase stability, reliability, and consistency. This tool enables producers to maintain their content while affording them access to libsyn's statistics, content management, and third-party tie-ins.

We continue to improve platform performance and stability allowing libsyn to utilize existing infrastructure more effectively and adds expanded capabilities to increase redundancy and flexibility. Restructured internal components enable developers to add new features more quickly and reliably than ever before, as well as refine existing functionality to keep pace with emerging web technologies.

With the goal of realizing more opportunities for high-profile producers and mobile clients, libsyn expanded their mobile application management and automated build systems to facilitate custom builds for third-party clients as well as the ability to manage existing mobile app market accounts for producers with an existing market presence.

-Podcasting Apps

Apps are small software applications that users can purchase and download to their Android, iPhone and iPod Touch mobile devices with relative ease. App categories include video games, sports, productivity, entertainment, education and health & fitness. Some of these Apps are free, while others have to be purchased. These Apps range in price from $.99 to $100.00, with the average price under $4.99. We continue to push on the Apps market using its podcast network and active podcasters to promote the Apps to consumers. Apple, Amazon and Google retain 30% of all App sales to cover the cost of running the App Store and App owners/developers receive 70% of the sales proceeds. We believe we can continue to generate revenue through the iTunes Store, Google Market Place and Amazon App Store.

Sale of Custom Podcast Apps

We created Apps that work on the iPhone and Android platforms and are currently for sale in the iTunes App Store, Google's Market Place and Amazon's App Store. We have approximately 2,463 Apps for sale in the App Stores. Podcasters then market their very own App to their show's audience, many of whom use iPhones, iPads, iPods and Android phones. Management believes podcasters can be very successful marketing Apps to their audience, as they know their audience better than anyone else and are great influencers of their audience. The reasons Management believes an audience member would want to purchase Apps are: 1) Easier, faster access to the content. 2) Bonus content exclusively for App users. 3) Inexpensive and easy way to support their favorite podcasts. 4) Social communication features.

We offer Apps as a free monetization tool to podcasters on the Network as long as they have a qualifying monthly account. Currently, there are approximately 11,916 shows on the Network and approximately 25 million monthly audience members who consume podcasts. We submit each App for approval, which is not guaranteed and is based on the respective terms of service and approval process of the App Store, and manages the collecting of the revenue and distribution of the podcaster's share of the revenues. We have submitted over 3,000 podcast Apps and have received approval for 2,581 Apps. Libsyn retains approximately 35% of the sale price that ranges from $.99 to $4.99 in most cases. During the third quarter of 2012, revenue from App sales totaled $26,879, while revenue from subscriptions totaled $57,758.


Libsyn developed a "Network App" which allows for hundreds of podcast Apps, inside one fully functional App. This is very similar to Amazon's Kindle App that includes tens of thousands of books inside one App. This Network App, if accepted into the various App stores, allows us to: 1) continue our business plan to offer App monetization tools to all producers in a streamlined, efficient process; 2) comply with the continually evolving and sometimes inconsistent App approval standards and their desire not to have 'cookie-cutter' Apps for all podcasts in iTunes in the App Store causing approval delays and rejections; 3) have more control over the actual marketing of the podcast Apps through expanded distribution of the Network App and cross promotional opportunities; 4) focus more time and attention on podcast shows with larger audiences that sell more apps than the smaller podcast shows. As a result of this change in 'go to market' strategy for iPhone Apps, we believe it could enhance revenues going forward due to the fact that we will have more control over the marketing of, wider distribution and more opportunities to generate revenues with a Network App. For example, we could include widespread targeted promotions for Groupon or provide offers allowing people to earn Facebook credits. For our Amazon App products, we plan to continue to create individual Apps for podcasts on our network and off network, focusing on podcasts with the largest audiences. As the Android Market continues to evolve, we may consider . . .
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