Fab Universal disputes kiosk claims; will restate earnings

| Tuesday, Dec. 10, 2013, 2:15 p.m.

Fab Universal Corp., whose shares have not traded for 12 days amid claims by investors of unusual business operations and financial reporting, said on Tuesday an internal probe found “certain deficiencies” that it is working to correct.

The Oakland-based company has been targeted by short sellers who claim the company has been selling “pirated U.S. movies” and overstated the size of its distribution network in China.

In a statement, Fab disputed claims that it had far fewer than 16,820 media kiosks in Beijing and other cities but said while it “never authorized the installation of any pirated content,” it will examine internal controls with help from an independent third party and implement measures necessary to tighten controls.

Fab acknowledged a third claim that a subsidiary in China raised $15.8 million in a bond sale that was not reflected in its financial statements: “The company is taking steps to determine both how this occurred and what controls are necessary to ensure that it does not happen again.”

Fab said its board of directors has authorized hiring the independent third party to verify findings of its management-led investigation, and it plans to hire a bilingual financial executive with “public company experience” to work in Beijing with responsibility for financial reporting in China “to reassure the company's shareholders of the integrity of its analysis.”

The company said it will restate financial statements, reducing net income by 2 cents a share in the second and third quarters of this year. It estimated additional interest expense of $820,000 for both periods, in a Securities and Exchange Commission filing. Fab reported $878,000 in deferred costs from the bond offering.

Allegations about the bond sale were reported initially by website Geoinvesting.com on Nov. 18.

Fab's stock, which trades under the ticker symbol FU, closed at $3.07 on Nov. 21, down 42 percent in its last five days of trading, which has not resumed. Fab CEO Chris Spencer said in an email the next day, “It is a halt, pending news.”

On Nov. 14 and 18, Jon Carnes, a short seller who operates investment firm Eos Global Holdings in New York, made allegations against Fab on his website AlfredLittle.com and on the popular investment website Seeking Alpha.

A short seller profits from bets that a company's stock will decline. Carnes said his fund has a “modest” short position in Fab shares, which he declined to specify. Carnes said his allegations are based on information gathered by investigators he employed in China.

Fab said Carnes' anecdotal evidence shows a “misunderstanding” of the company's business. Fab said it does not buy, sell or own the kiosks, and instead sells licenses to operate them through 40 independent regional agents who sign up licensees, deploy the kiosks and report the number installed.

As of Sept. 30, Fab said, 16,820 licenses had been sold, with 3,954 deployed in Beijing. In its review, the board verified 12,866 licenses, and it is working to verify the rest, Fab said.

In an email, Carnes stood by his claims, calling Fab's response “intentionally false and misleading.”

On Nov. 15 and 20, the company called the allegations “misleading and inaccurate” and said it would issue a public statement “to refute these defamatory remarks” as soon as possible.

Several lawsuits were filed on behalf of Fab shareholders and seek class-action status.

Fab's stock reached $6.96 in response to a positive third-quarter earnings report on Nov. 13. Its closing high in the past 12 months was $9.70 on Sept. 25.

In the earnings report, Spencer said Fab has kiosks in 40 cities across China and the company continues to add “high-quality, copyrighted content” to its offerings.

John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or joravecz@tribweb.com.

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