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FU > SEC Filings for FU > Form 10-Q/A on 21-Jan-2014All Recent SEC Filings

Show all filings for FAB UNIVERSAL CORP.

Form 10-Q/A for FAB UNIVERSAL CORP.


21-Jan-2014

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, 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 business, 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, currency fluctuation, 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.

Company Overview

Below is an update of our entire business, from the operations of our wholly-owned subsidiary Digital Entertainment International Ltd. ("DEI"), to our media business of podcast services, apps, advertising, and premium subscriptions. We believe our business of selling and distributing copyright protected media and content in China will continue to grow and generate profits due to the brand recognition of FAB in China as well as the continued support of the government for copyright protection in China. We believe our Media business will also 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. Our business is broken into three segments including: Retail, Wholesale and Digital (Kiosk/ Licensing/Podcasting). In order to expand our business of media entertainment and copyright transaction, in June 2013 we made approximately a $13 million dollar refundable deposit to purchase real estate in Miyun, Beijing, which purchase was subject to the approval of the Company's board of directors, pursuant to a Memorandum of Understanding entered into by BFHTT with the relevant sellers. On January 7, 2014, the Board of Directors decided not to purchase the Longyuan building, and the Company has started the process for the return of the deposit.


Retail

DEI has conducted the retail business through its flagship stores since 2003.
We currently operate a 30,000 sq. ft. store in the prestigious Joy City shopping mall in Beijing, China and an entertainment superstore in SoShow in Beijing, China, opened in October 2012. Each store is over 20,000 square feet in size and carries the largest selection of copyright protected audio and video products in China, including CDs, VCDs, DVDs, blu-rays, books, magazines and portable electronic devices. FAB markets products to individual consumers. The flagship stores are recognized by many Chinese consumers as the right place to buy copyright protected products.

Celebrity signing events are a 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 stars outside mainland China, mostly from Hong Kong, Taiwan, Korea and Japan, wishing to enter the Chinese market choose FAB as their launching platform. FAB flagship stores regularly host such events. Those events not only promote sales of audio-video products but also increase our FAB brand recognition.

The SoShow, which is in a high-end shopping district of Beijing, store is designed to satisfy the tastes of a swiftly emerging middle class with maturing entertainment expectations. DEI's SoShow store provides Beijing shoppers with its first audio visual "hypermarket." As a preferred venue for product announcements, publishing parties, studio releases, author readings, movie showings, live promotional performances and concerts, DEI'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 offers many new electronic digital products and mobile storage devices while serving as a center for the 5C download supermarket of traditional copyright protected audio-video products. 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. The FAB-branded 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- visual products such as compact discs, video compact discs and digital video discs as well as books and magazines to audio- visual products retailers. FAB distributes these media products to over 80 customers including Sohu, Dangdang and Century Outstanding Information Technology Company, a subsidiary of Amazon.com. 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 Chinese Government, the wholesale business segment is growing with DEI and strongly positioned to be the leader in copyright protected material as the media entertainment industry continues to expand in China.

Digital Media

Kiosks

The 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. The 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.

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 over 40 cities and now has sold kiosks and/or brand licenses to operate 16,820 Kiosks and the rights to run FAB's proprietary software on the kiosk terminals.

The FAB kiosk technology platform is an innovative self-service vending model designed and launched by DEI 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 electronic communications. There is licensed digital entertainment content files 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. 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 does not directly sell or own the Media Kiosk. FAB generates revenues from its Kiosk business through the sale of licenses, media membership card sales, kiosk-based advertising and to a lesser extent, media content download.

The FAB Intelligent Media Kiosks have greatly enhanced 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 obtained an Internet Publishing License by China's General Administration of Press and Publication, the national agency of radio, film and television. This license grants FAB Universal the right to distribute both its exclusive and acquired Chinese copyright protected audio and video digital content over the Internet and mobile phone networks.

FAB Membership

In order to retain customers and increase cross-sales, DEI launched its client retention program, the FAB membership program in 2008. This program entitles customers to download digital content from FAB kiosks at lower costs than non-member customers. During the third quarter, sale of membership card reached more than 143,000. The membership 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      accesses.

         RMB 500      12-month

Libsyn Media

Libsyn is the subsidiary for our digital media and entertainment business.
Libsyn is currently the industry's largest network of independent and professional digital media publishers utilizing RSS (podcasting) as a distribution method for episodic, audio and video shows. The Libsyn Network received over 450 million download requests for shows in 2006, 1 billion download requests in 2007, 1.2 billion download requests in 2008, 1.4 billion download requests in 2009, 1.6 billion in 2010, 1.3 billion in 2011 and 1.6 billion in 2012 to approximately 50 million total audience members throughout the year. Libsyn's publishing platform hosts 15,368 shows in the third quarter of 2013.


Management believes that Libsyn offers the best 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. The total number of episodes on the Network totaled 1,607,196 during the third quarter of 2013, all of which are available for immediate distribution. With the continuing success of iPods, iPhones, iPads, Android's mobile phones, 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 rapidly on an annual basis. LibsynPRO Enterprise service has 104 network publishers. As Libsyn derives a portion of its revenues through data transfer from PRO customers, our feature rich version of the PRO publishing platform provides Management with the tools to grow the number of PRO publishers and generates revenue associated with our data transfer business. During the first nine months of 2013, revenue from data transfer totaled $401,672.

Libsyn - Publishing Service

In 2012 the Libsyn Network received approximately 1.6 billion download requests for podcast episodes vs. 1.3 billion download requests in 2011, from a wide variety of distribution outlets to which Libsyn syndicates content. The Libsyn network received over 5.2 million requests for shows per day throughout 2013.
Our network reaches over 32 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.
Libsyn works to generate profits by inserting advertisements in the shows in partnership with the show's publishers, charging for the use of our publishing platform 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 Libsyn's third party advertising partners and its in-house advertising sales team to fill.

Currently, Libsyn distributes digital shows for our producers to a variety of web portals and content aggregators, for both download and streaming.
Approximately 70% of the shows Libsyn distributes' 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 the Libsyn Network's substantial presence in the iTunes Podcast Store is one of the Company's valuable assets as consumers using iTunes are early adopters and spend money regularly on digital media. We believe this provides FAB with a unique offering for advertisers seeking that type of consumer and provides FAB with monetization opportunities for its podcast publishers through the sale of individual and network wide Apps.

The third quarter was a strong quarter for development of Libsyn products as significant improvements were made to the publishing platform, premium subscription service, and mobile app offerings. The first of these improvements resulted in a beta preview of the next generation Libsyn publishing platform (Libsyn 4). The Libsyn 4 platform allows podcasters to manage their podcasts from a greater variety of devices and web browsers including tablets. The user interface was reorganized to make Libsyn's functionality more transparent and easy to use.

The MyLibsyn premium subscription service was also significantly upgraded to provide the subscriber user interface with greatly improved aesthetics, easier use, and it's tailored for both desktop and mobile devices.

The embeddable HTML5 player was also modified to better integrate with MyLibsyn.
The embedded player can now be placed on any web page. This Player that now contains premium content will direct prospective audience members to log in to MyLibsyn or purchase subscriptions to access premium content. In larger players, subscriptions can be purchased from directly within the player, thus lowering the technical barriers to making purchases.

Producers also gained a new tool for their premium offerings. They may now send emails to their subscribers from within the Libsyn 4 publishing platform. This tool allows for increased engagement with their audiences and provides more value to their premium subscription offerings.

The reach of Libsyn into app stores expanded in the third quarter of 2013 as new apps debuted in two markets: The Windows Store and the Windows Phone Store.
Windows Store apps may be installed on computers and tablets running the Microsoft Windows 8 operating system while Windows Phone Store apps can be installed on Microsoft Windows 8 Phone devices. With these two app markets, Libsyn published over 1,300 new apps.


Libsyn Android apps received an upgrade treatment by gaining functionality closer to the capabilities of their respective iOS versions.

Libsyn - Apps

Apps are small software applications that users can purchase and download to their iPhone and iPod Touch mobile devices with relative ease. During 2012, there were over 500,000 Apps in the App Store that have been downloaded by consumers over 25 billion times. 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. FAB continues to push the Apps market using its podcast network and active podcasters to promote the Apps to consumers. Apple, Amazon and Verizon 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. FAB believes it can continue to generate revenue through the iTunes Store, Verizon Store and Amazon App Store, and are briefly outlined below.

Sale of Podcast Apps

FAB created Apps that work on the iPhone and Android platforms and are currently for sale in the iTunes App Store, Windows 8 Market and the Amazon App Store. FAB currently has approximately 4,813 Apps for sale. Podcasters then market their very own App to their show's audience, many of whom use iPhones, 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.

FAB currently offers this App as a free monetizational tool to podcasters on the Libsyn Network as long as they have a qualifying monthly account. Currently, there are approximately 15,368 shows on the Libsyn Network and approximately 32 million audience members who consume podcasts. Libsyn submits 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. FAB expects to retain approximately 35% of the sale price that ranges from $.99 to $4.99 in most cases. These Apps are currently being sold around the world via Apple's App Store, the Verizon Store and the Amazon App Store. In the first nine months of 2013, revenue from App and subscription sales totaled $343,296.

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 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, FAB believes 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 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.

Sale of Podcast Subscriptions and Episodes Via Custom Podcast Apps

Once a podcaster has successfully marketed an App to its audience and has created a significant install base, the podcaster offers new content on a subscription basis or release a special episode, in addition to its normal podcast episodes, and charges a nominal fee ($1 - $3) for that episode or episodes to its audience. By having a successful, extremely easy to use micropayment platform in iTunes/iPhone/iPod Touch, Android and Amazon, the podcast audiences are willing to pay a nominal fee ($1.99), from time to time, for special episodes of their favorite podcast and even sign up for inexpensive subscriptions ($.99 a month; $8.99 for 12 months) for new content. FAB earns a portion of the subscription and episode revenue for administering the App account and delivering the content to the consumer.


Libsyn - Advertising

In the first nine months of 2013, Libsyn has executed multiple national brand advertising campaigns for companies including Audible, Hover and Ting. These campaigns run across multiple shows, with different advertisers, resulting in $655,599 in advertising revenue.

Libsyn's Alchemy system is able to handle the insertion of advertisements into audio and video shows with geographical targeting capabilities, which was used for multiple advertising campaigns throughout 2013. In order to increase the percentage of filled advertising inventory we must continue to execute on our advertising sales strategy, integrate third party ad networks and portals and create relationships with more advertising agencies and their clients.
Management believes that most advertisers prefer to deal with a few companies with large reach rather than many companies with smaller reach as it makes their advertising 'buys' and tracking easier to monitor. Client results of our largest advertising execution to date were excellent in Management's opinion and we expect more buys from the client in the future. We have now had multiple advertisers renew campaigns with Libsyn, demonstrating what Management believes is excellent back-end ad operational customer service on FAB's part and a satisfactory return on investment for our clients. Libsyn currently has 22 distinct ad categories we take to market. As the number of publishers joining Libsyn's Advertising Network grows, so does the available advertising inventory for Libsyn's advertising sales team to sell.

Results of Operations

Three Months Ended September 30, 2013 and 2012.

During the third quarter ended September 30, 2013, FAB recorded revenue of $29.7 million, an increase of $28.0 million, from our revenue of $1.7 million in the same period of 2012. This increase was driven by an increase in revenue from the acquisition of DEI. During the third quarter of 2013, DEI reported $28.3 million of revenue. During the third quarter of 2013, revenue from the wholesale segment of DEI generated $14.0M in revenue with the retail segment providing $2.5M and Kiosks/licensing delivering $11.8M. The Libsyn business saw revenue of $1.4 million with significant increases in hosting fees, ad revenue and the addition of subscription revenue. The increase in hosting fees was due to the increase in the number of producers using our services.

During the third quarter of 2013, our cost of revenue was $15.7 million, an increase of $14.9 million over the 2012 figure of $0.8 million. This increase was driven by the addition of the DEI business and cost of revenue for the sale of copyright protected media. The costs driving DEI's cost of revenue are the cost of the media being sold, the cost to deliver the media to the customer, and the license fee to the copyright holders. We also saw an increase in our Advertising Sharing and Subscription sharing costs and credit card fees during the third quarter of 2013 in our Libsyn business, which was driven by the increase in sales of our services. FAB generated a gross profit of $14.1 million in the third quarter of 2013, versus a gross profit of $1.0 million in the same period of 2012.

In the third quarter of 2013, FAB had operating expenses of $4.9 million, as compared to $5.7 million in the third quarter of 2012. Our operating expenses consisted of:

Selling expenses increased to $1.3 million in the third quarter 2013, from $0.1 million in the third quarter of 2012. The increase was due to the addition of staff and related salaries and social insurance. Also, the increase is due to the increase in advertising commissions resulting from the increase in ad revenue.

General and administrative expenses decreased to $3.0 million in the third quarter of 2013, from $4.1 million in the same period of the prior year. The decrease was because of the issuance of stock to employees, officers and directors during the third quarter of 2012 offset by the addition of DEI and the administrative costs associate with this business. Consulting fees decreased to $0.4 million in the third quarter of 2013 from $1.5 million in the same quarter of 2012. This is due to the payment of consultants with stock in 2012 combined with the reduced spending for consulting services during the third quarter of 2013.

Research and development costs for the quarter ended September 30, 2013 were . . .

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