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FU > SEC Filings for FU > Form 10-K on 27-Jun-2014All Recent SEC Filings

Show all filings for FAB UNIVERSAL CORP.

Form 10-K for FAB UNIVERSAL CORP.


27-Jun-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the information set forth under the caption entitled "Item 6. Selected Financial Data" and the consolidated financial statements and related notes included in this Form 10-K.

Safe Harbor Statement.

Statements made in this Form 10-K 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 FAB, including, without limitation, (i) our ability to gain a larger share of the distribution of Chinese copyright protected media content and podcast hosting and distribution industries, our ability to continue to develop products acceptable to that industry, our ability to retain our business relationships, and our ability to raise capital and the growth of the FAB brand, and (ii) statements preceded by, followed by or that include the words "may", "would", "could", "should", "expects", "projects", "anticipates", "believes", "estimates", "plans", "intends", "targets" or similar expressions.

Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond FAB'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 our reports on file with the SEC: general economic or industry conditions, nationally and/or in the communities in which FAB conducts business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, changes in the industries in which we operate, the development of products that may be superior to the products offered by FAB, demand for financial services, competition, changes in the quality or composition of FAB's products, our ability to develop new products, 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 FAB'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. FAB 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 our wholly-owned subsidiary, Digital Entertainment International Ltd. ("DEI") to our media business of podcast services, apps and premium subscriptions. We believe our business of selling and distributing copyright protected media and content in China from digital platforms will 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 presence in iTunes and the 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 seeing the flow of quality content coming to the Internet increase 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: Retail, Wholesale and Digital (FAB Licensing/Podcasting/ Subscription TV). In September 2013, FAB entered into an agreement with Future TV Co. Ltd. to distribute its copyright protected media content through pay TV terminals used in the home by Future TV's subscribers.

Retail

FAB 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 and an entertainment superstore in SoShow. Each store has 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. The flagship stores are recognized by many Chinese consumers as the right place to buy copyright protected products.

The 20,000 square foot entertainment superstore is located in the Beijing shopping district of SoShow. The store is designed to satisfy the tastes of a swiftly emerging middle class with maturing entertainment expectations. FAB's SoShow store 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.

The 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 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 and other consumer functions.

The Joy City Flagship store, located in the core area in Xidan, Beijing, has superior geographic advantages. In the fourth quarter of 2013 the Joy City store was remodeled, and reopened in the middle of December, 2013. After the remodeling, FAB has increased various kinds of digital facilities, such as electric display screens, enhancing functions of social networks and digitalizing promotional tools.

As the Company gradually transitions the stores to dedicate a larger portion of each store to digital services, as well as a move to selling higher margin products, we anticipate a decrease in revenue within our stores. This store transformation away from selling mostly traditional audio and video products to individualized items such as covers for mobile devices, and electronics combined with digital experience is anticipated to be a temporary reduction in revenue.
Also, our plans are to open a third store during the third quarter of 2014 in Beijing.

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, 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.

The ecommerce business is growing much faster than originally anticipate in China. With this change, many of our retailers are going to transition their retail stores similar to the changes we have made with our retail stores. With our customers move away from the traditional hard goods of audio and video, the outlook for 2014 would be that revenue generated by our Wholesale business will experience a decrease throughout 2014.

Digital

Licensing and Media

The twin components of our strategy are to increase our portfolio of content and expand the number of distribution channels. During 2013, we signed seven copyright licensing agreements with several well-known distributors for additional content. Many of these distributors have long-term cooperation agreements with over 80 independent film producers in the United States. The terms of these agreements range from one to ten years and some are revenue sharing based agreements. This content is expected to be distributed across multiple distribution channels, primarily through digital platforms, thereby leveraging our cost of acquisition.

Through these agreements, we obtained the right to distribute an additional 500 songs, 800 hours of TV series, 100 hours of documentaries and over 1,500 movies, of which over 70% were produced in countries outside of China including Million Dollar Baby, Crouching Tiger Hidden Dragon, Roman Holiday and other popular Oscar, Cannes and Golden Globe winners and nominees. In addition we signed a copyright licensing agreement with the Universal Audio Publishing House to purchase this Chinese company's highly regarded unique music teaching courses.
These music teaching courses are very popular in China and are divided into 71 sets with more than 1,000 curricula delivered by well-known teachers from China's Central Conservatory of Music. We also signed an agreement to distribute over 300 hours of South Korean variety shows with the Seoul Broadcasting System.

With our established media, new distribution opportunities and entertainment distribution platform and the power of the FAB brand we believe that we have the fundamentals in place to continue to drive growth as we increase our content offerings across an expanding number of distributions channels. In order to distribute content over mobile phones and the internet, the Chinese Government requires an internet publishing license which is granted by the General Administration of Press and Publication, the National Agency of Radio, Film and Television. FAB was granted a license by China's Ministry of Commerce to license its business model.

FAB has grown its business through its licensing and regional agent programs and has sold 17,944 brand licenses, which allows the licensees to use FAB's brand on the kiosks.

FAB generates revenues from the sale of FAB Brand licenses, as well as advertising, and FAB membership card sales.

FAB, to date, has sold 40 Regional Agent licenses. The Regional Agent pays an upfront fee of RMB 1,200,000, and a deposit of RMB 100,000. The license fee is non-refundable after 7 days and the contract period is five years. The Regional Agent is responsible for selling the individual licenses in each of their locations and for the development of the business with each licensee.

For each kiosk licensed outside of Beijing, the Licensee pays an upfront RMB 30,000 license fee upon signing the contract. The license fee is non-refundable after three days. The total contract period is five years. FAB pays 20% of each single license fee received (20% of RMB 30,000 = RMB 6,000) to the Regional Agent. The Licensee looks to the Regional Agent for assistance with acquisition of the kiosk, maintenance and operation of the kiosk, and development of the business.

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 copyright protected audio and video digital content over the Internet and mobile phone networks.


FAB Membership - Beijing Only

In order to retain customers and increase cross-sales, FAB launched its client retention program, the FAB membership program, in 2008. This program entitles customers to download digital content from FAB. The membership provides bonus points for member's purchasing products in any of the flagship stores. The bonus points can be exchanged for non-cash gifts.

Cross-Platform Video Operation

The use of digital consumption channels for media in China is growing more rapidly than anticipated. With this change we will transition our business more quickly than previously thought to provide digital content for consumption across multiple channels. This transition will take place starting in 2014.

The Cross-Platform Video Operation business will generate revenue from the distribution of FAB copyright-protected content across various digital platforms. These platforms include digital TV, IPTV, Smart TV, OTT, mobile and the Internet. Initial targets for partners for these platforms will be those with large, existing consumer bases.

Content

FAB has purchased the licenses or has the rights to distribute and broadcast movies, TV shows, and educational programming. FAB will continue to acquire the rights to this type content in 2014.

The distribution of this content will be through the various channels described below and will target large consumer bases through partnerships. During 2014, FAB will pursue agreements with various channels for user paid subscriptions of the purchased content. We will acquire content for which we have the exclusive rights as well as sub-licensing rights for distribution. FAB will also acquire content for which we will have non-exclusive rights for distribution. Some of the agreements for non-exclusive content allow FAB to sub-license the content and others will not.

Digital and Internet TV

One-time view TV Services:

Fees will be generated through paid one-time access to individual content through Pay Per view (PPV) where a viewer must access the programming at a specific broadcast time and True Video on Demand (TVOD) where the programming is available any time. PPV and TVOD fees range from RMB 3 to 9 and FAB would receive a 50% split.

Subscription TV Services

Content is also offered on a monthly subscription basis for both Paid Channels of content (PTV) and Subscription Video on Demand (SVOD). Fees for these subscriptions range from RMB 10 to 25 and FAB would receive a 50 % split.

While these fees are not significant per charge, there is a very large consumer base in China, and we will target channel providers with a large number of consumers, such as Tongzhou Electronics TV Terminals and as we have with Future TV.

In September 2013, FAB entered into an agreement with Future TV Co. Ltd. to distribute its copyright-protected media content through pay TV terminals used in the home by Future TV's subscribers, and the trial operation kicked off in November 2013. The agreement with Future TV is a significant milestone for FAB, marking the launch of our subscription TV business and further extending our multi-channel distribution plans. Our goal is to have our Subscription TV network reach the majority of the households in China in five to ten years.
This can be accomplished with our technical and management team, through the integration of digital TV (via cable network operators), IPTV and OTT (via telecom operators, and content aggregation licensing providers).

Mobile Phones and Tablets

With the increasing trend towards mobile device use and growing consumer base, FAB will also partner with China's top mobile companies to distribute video.
FAB copyright-protected content will be distributed to mobile users via mobile phones and tablets. This market segment is large and will continue to grow.
For example, China Mobile Video Innovation base


reaches an average of 130 million monthly users. Revenues from partnerships with mobile carriers will be based on revenue share for paid content and will be in the range of a 50/50 revenue share.

Internet

Content will be offered for free via the Internet on destination web sites. The web sites are ad-supported through display advertisements on the site as well as advertising inserted within in the videos themselves. The Advertising revenue split is normally 50/50.

FAB will partner with Baidu a leading destination web site for video. Baidu is the largest Chinese search engine with their video web side having accounted for over 75% of the entire network traffic distribution in China. The APP activated users has accumulate to approximately 100 million, with 20 million daily active users. Baidu also offers paid content packaging through user subscriptions for premium packaged content where FAB content can be included for a revenue share.

Libsyn

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 1.6 billion download requests for shows in 2012 and 1.9 billion in 2013 to approximately 34 million monthly audience members in the fourth quarter of 2013. Libsyn's publishing platform hosted 16,241 shows in 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 1,688,057 in 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 had 124 network publishers in 2013. 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 thereby revenues associated with our data transfer business. For 2013, revenue from data transfer totaled $480,723.

LIBSYN - PUBLISHING SERVICES

Hosting, Distribution Network, Content, Platform Development

In 2013 the Libsyn Network received approximately 1.9 billion download requests for podcast episodes vs. 1.6 billion download requests in 2012, from a wide variety of distribution outlets to which Libsyn syndicates content. The Libsyn network received over 5.3 million requests for shows per day throughout 2013.
Our network reaches over 34 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 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 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.


Early in 2013, we debuted the next-generation Libsyn platform (Libsyn 4). In the fourth quarter of 2013, the most significant aspects of the system were developed for Libsyn 4, including content management, publishing, and statistics.

Previously existing content management components were redesigned to improve usability on tablets, and a file manager was introduced to allow producers to view all files associated with their shows in a single location.

The publishing workflow was streamlined and redesigned for an improved overall user experience. The previous publishing system was divided into two modes:
basic and advanced. With Libsyn 4, the publishing workflow provides a single interface that collapses advanced features that producers may expand if needed.
This design choice should decrease user confusion and thus the need for technical support.

New advanced statistics for Libsyn 4 were introduced in the fourth quarter of 2013, allowing producers to observe trends in geographic regions. This geographic trend analysis is particularly useful to producers who schedule events (e.g. comedians), and these trends may prove useful in the future for localized advertising.

The Libsyn platform allows producers to automatically publish to many social media platforms (referred to as "OnPublish") including Facebook and Twitter.
With the Libsyn 4 release, the usefulness of OnPublish was improved.

First, social media services issue temporary authorizations for Libsyn producers to send them content. These authorizations must be renewed by the user from time to time. A dashboard widget was added to Libysn 4 to show the status of these authorizations so they can be quickly renewed. Additionally, the functionality of the Libsyn 4's technology stats now shows the numbers of Facebook likes and Twitter re-tweets that come as a result of content released through OnPublish.

In the fourth quarter of 2013, Libsyn also introduced a new app to both the Windows Store and Windows Phone Store markets called "The Podcast Source." This app serves as a place for people to subscribe to and consume podcasts. The Podcast Source enables audiences to enjoy podcasts from not only Libsyn, but from any podcast that has an RSS feed. The app also supports MyLibsyn premium content, thus making the premium offering more visible to all subscribers of premium shows.

LIBSYN - APPS

Apps are small software applications that users can purchase and download to their 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.

Sale of Podcast Apps

Libsyn created Apps that work on the iPhone and Android platforms and are currently for sale in the iTunes App Store, Verizon Store, Windows Store and the Amazon App Store. Libsyn currently has approximately 4,400 Apps for sale. Podcasters then market their very own App to their show's audience, many of whom use iPhones, iPods and Android phones.

Libsyn also offers Apps as a free monetizational tool to podcasters on the Libsyn Network as long as they have a qualifying monthly account. Currently, there are approximately 16,241 shows on the Libsyn Network and approximately 34 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. Libsyn 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, Windows Store and the Amazon App Store. Throughout 2013, revenue from App and subscription sales totaled $587,329.

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.

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 charge 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. Libsyn earns a portion of the subscription and episode revenue for administering the App account and delivering the content to the consumer.

LIBSYN - ADVERTISING

In 2013, Libsyn executed multiple national brand advertising campaigns for companies including Audible, Hover and Ting. These campaigns run across multiple shows, with different advertisers, resulting in $948,631 in 2013 advertising revenue.

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.

Critical Accounting Policies and Estimates

Revenue Recognition - Revenue is recognized when earned. The Company's revenue recognition policies are in compliance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 605, 985 Software - Revenue Recognition and the Securities and Exchange Commission Staff Accounting Bulletin No. 101 and 104.

Product revenue is recognized when title to the product has transferred to customers in accordance with the terms of the sale; the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Revenues are recorded net of applicable sales taxes.

The Company derives revenue from retail sales, sales to retailers, and Digital . . .

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