FAB Universal Corp (NYSE: FU) claims to be a global leader in the distribution of copyright-protected digital media. FAB derives substantially all of its revenue and profit from its Chinese subsidiary, which, according to its FY2012 10-K filed on 3/18/13:
“… is engaged in marketing and distributing various officially licensed digital entertainment products under the ‘FAB’ brand throughout the PRC…”
At the core of FAB’s Chinese business are its “Intelligent Media Kiosks” allowing consumers to download copyright-protected movies and music to their portable storage devices. FAB claimed to have 3,954 such “intelligent” kiosks in Beijing alone, according to its 6/1/12 proxy (DEF 14A, filed with the SEC on 6/15/12), with over 16,820 active kiosks deployed in 40 Chinese cities according to FAB’s 11/13/13 press release announcing 2013 Q3 financial results.
In today’s report I will show that:
- Contrary to FAB’s anti-piracy claims, FAB’s “Intelligent Media Kiosks” are in reality loaded with very obviously pirated U.S. movies.
- FAB’s kiosk manufacturers acknowledged that: a.) They historically supplied around 1,600-1,700 kiosks to FAB, only 10% of the 16,820 units FAB claims to have deployed. b.) One kiosk supplier helped FAB stage phony manufacturer site visits for FAB’s investors, reminiscent of the China Integrated Energy (CBEH) fraud I exposed in 2011.
- FAB’s director of franchisee sales acknowledged that: a.) FAB has only around 1000 kiosks in Beijing (compared to 3,954 disclosed in the 6/1/12 proxy); and b.) FAB promises kiosk franchisees guaranteed minimum returns on their investments and offers to buy back the franchised kiosks using FAB U.S. listed common stock.
Based on the interviews and evidence that I collected, I conclude that FAB’s business in China is a tiny fraction of what it claims in its SEC filings. FAB’s actual profitability would be reduced even further if the company upgraded its pirated content to properly licensed content (assuming that is even possible). Finally, FAB has potentially enormous undisclosed liabilities for guaranteeing minimum investment returns to franchisees and undisclosed potential dilution from common stock issuable to franchisees.