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FAB Universal Corp. (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:

  1. Contrary to FAB's anti-piracy claims, FAB's "Intelligent Media Kiosks" are in reality loaded with very obviously pirated U.S. movies.
  2. 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 (OTC:CBEH) fraud I exposed in 2011.
  3. 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.

Background - "Best Buy meets iTunes meets Redbox"

FAB (formerly Wizzard Software - WZE) was formed out of a reverse merger with a twist: Wizzard's Pittsburg management, led by CEO Chris Spencer and CFO John Busshaus, claimed to have actually paid professionals to vet the Chinese acquisition target prior to the merger:

"Legal due diligence was performed by King & Wood [a prominent Chinese law firm with its head office in Beijing] and accounting and tax due diligence was performed by a 'big four' accounting and consulting firm."

On Page 22 of the 6/1/12 proxy FAB disclosed that the "big four" accounting due diligence service provider was none other than Ernst & Young. While the use of E&Y certainly may have assured investors, in my opinion E&Y has a very poor track record preventing fraud in China. Consider the case of SinoTech Energy, a former NASDAQ listed company audited by E&Y and charged with fraud by the SEC following my 2011 whistleblower report.

Nevertheless, attracted to the too-good-to-be-true acquisition, Wizzard shareholders overwhelmingly approved a 1-for-12 reverse split and a series of highly dilutive share issuances (spanning two years), to ultimately give the shareholders of FAB's Chinese acquisition 78% of the combined company, provided that certain revenue, income, and corporate governance objectives are achieved.

On 4/12/12, Wizzard announced the definitive Share Exchange Agreement with FAB. CEO Chris Spencer exulted that the newly merged FAB is "Best Buy meets iTunes meets Redbox." Spencer and FAB's Chinese Chairman Hongcheng Zhang appear below banging a gong celebrating the NYSE listing of FAB:

(click to enlarge)

"The Face of Copyright Protection in China"

FAB's SEC filings, press releases, and investor presentations are littered with copyright-protection claims such as the following (found on Pages 28 and 29 of FAB's 3/18/13 FY2012 10-K filing):

"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."

"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."

On 7/24/12, FAB Chairman Zhang Hongcheng strongly asserted FAB's copyright achievements, emphasizing that:

"'Insisting on the protection of copyrights and resisting piracy is the core belief to which FAB always adheres,' said Mr. Zhang Hongcheng, Founder and Chairman of FAB. 'Making the FAB Intelligent Media Kiosks a copyright content distribution platform and providing users with easy access to high-quality digital content is the top business priority of FAB.' FAB has a large library of copyrighted digital content including digital movies, TV shows, video, ebooks, games, music and strategic relationships with more than a hundred digital content providers across Asia."

On FAB's Q2 2013 conference call on 8/14/13, CEO Chris Spencer exalted that Zhang (age 43) is the "face of copyright protection in China":

"Mr. Zhang, the Chairman of our Board here is the head of the anti-piracy copyright protection organizations within China for the last 20 years [since Zhang was 23?]. He, you could argue, is the face of copyright protection in China. He has definitely been a main driver for the last 20 years about this and we've done a good job."

According to FAB, Zhang was the founding chairman of the "Anti-Piracy Alliance" of China. Zhang is shown below (with suit and tie) at the Anti-Piracy Alliance's launch ceremony held on 7/15/10:

(click to enlarge)

FAB's commitment to anti-piracy attracted the legendary investor Jim Rogers to recently join FAB's board and take a small stake in the company. Rogers told Barron's that he was motivated by the Chinese government's stricter enforcement of intellectual property laws. Rogers and Zhang are shown below, after signing the directorship agreement:

(click to enlarge)

While I personally greatly admire Jim Rogers, I have to seriously question his due diligence on FAB. Anyone who takes the time to actually download movies from FAB's kiosks in Beijing will immediately realize that FAB's anti-piracy claims are a total and complete fraud.

I. FAB's "Intelligent Media Kiosks" - The Face of Piracy in China

I recently sent my investigators to download movies from FAB's kiosks at its two Beijing "entertainment superstores." Unfortunately, they found that FAB's 30,000 square foot "Xidan Joy City" store in West Beijing was shut down for "remodeling" as shown in the following photo taken on 10/13/13:

(click to enlarge)

Next my investigators visited FAB's 20,000 square foot "SoShow" store in East Beijing, at Chongwen Men, in the basement of the aging SoShow shopping mall (pictured below). Fortunately, FAB's SoShow store was open for business.

(click to enlarge)

My investigators' first step was to purchase two 50 RMB ($8.20) FAB membership cards from SoShow store employees who explained that movies cost 1, 2, or 3 RMB ($0.16, $0.33, $0.49) to download. Many movies are actually free to download. The average price of a recently released U.S. movie was only 0.8 RMB, or about 13 U.S. cents! Out of 260 movies on each kiosk, around 35 were recent U.S. releases.

The SoShow staff explained that the membership cards would not be immediately activated due to a "virus" infecting FAB's system. The staff then offered to help the investigators download from a kiosk, free of charge, the Hollywood new release Olympus Has Fallen.

However, downloading the movie file proved to be a significant challenge for the SoShow staff. After multiple failed attempts to download Olympus Has Fallen from three different kiosks, the staff finally succeeded (using the store's own USB flash drive) and then transferred the file to my investigator's laptop.

The glitchy kiosks are one problem, but the fact that the movie could be so easily copied more than once (from the kiosk to a flash drive to a laptop) indicates that the movie files contain no Digital Rights Management copyright protection mechanism. FAB movie files can be copied and played on multiple devices, as many times as the customer wants.

The following are screen stills from my investigator's recording of Olympus Has Fallen being downloaded from the SoShow kiosk and then being played on his MacBook inside the SoShow store:

(click to enlarge)(click to enlarge)

The red circle highlights the Chinese subtitles, which are embedded on the film. This is the first sign that the movie is pirated; according to my conversations and emails with an investigator from the Motion Picture Association of America ("MPAA"). Several of FAB's pirated movies even contained advertisements for the pirated source of the subtitles, such as "FISH321@18P2P."

A second, and very obvious, proof that the FAB's Olympus Has Fallen is pirated can be found by inspecting the file metadata shown below:

Filename: FAB5C_白宫陷落.rmvb [Olympus Has Fallen]

File size: 674.2 MB

File creation date: July 4, 2013

File type: RealPlayer Media (RMVB)

The piracy is evident from the file creation date of 7/4/2013. According to IMDB.com Olympus Has Fallen was not released on DVD until 8/13/2013. Apple's iTunes was able to sell an electronic DRM-protected version a week earlier. How could FAB possibly have a legal version in China more than a month before iTunes in the U.S.?

The final proof that this movie is pirated is the quality of the video itself. I uploaded a short clip from FAB's pirated version of Olympus Has Fallen that can be viewed by clicking here.

After reviewing this initial evidence, I sent my investigators back to the SoShow store to download and collect more of the pirated movies as evidence to share with securities regulators and the MPAA. The FAB kiosks continued to repeatedly suffer technical glitches downloading files onto USB flash drives, but eventually my investigators were able to download a total of 5 movies over the course of two hours. Excluding the kiosks' technical problems, each movie took between 3 to 5 minutes to download via USB, depending on the size of each file, and indicating a very slow transfer rate of only around 3MB per second.

The following are screen stills from my investigator's recording of Iron Man 3 being downloaded from the SoShow kiosk and then being played on his MacBook inside the SoShow store:

(click to enlarge)

Here is the Iron Man 3 movie file metadata:

Filename: FAB5C_钢铁侠3.rmvb [Iron Man 3]

File size: 1.05 GB

File creation date: May 15, 2013

File type: RealPlayer Media (RMVB)

Once again, the piracy is evident from the file creation date of 5/15/13. According to IMDB.com, the DVD release date of Iron Man 3 was not until 9/24/13. A special DRM-protected HD digital download was available earlier on iTunes, on 9/3/13. Once again, how could FAB have an electronic copy available in China months prior to iTunes?

The quality of FAB's pirated Iron Man 3 movie file is even worse than Olympus Has Fallen. Whoever pirated Iron Man 3, mistakenly changed the aspect ratio from its original wide-screen format (likely filmed by a camera in a theater) to 1080x720, which had the unsightly effect of making all the images taller and narrower as can be seen in the follow two images.

Official Iron Man 3 Paramount opening credit (widescreen format):

(click to enlarge)

FAB's pirated Iron Man 3 Paramount opening credit with incorrect aspect-ratio and Chinese subtitling:

(click to enlarge)

I uploaded a short clip from FAB's poorly pirated Iron Man 3 that can be viewed by clicking here.

At the request of an investigator from the MPAA, I am carefully documenting the trove of pirated U.S. movies my investigators downloaded from FAB's Beijing kiosks. The following table is a sampling my findings from one kiosk:

Movie Title

Initial DVD Release Date

FAB Movie Release Date

FAB Price (RMB)

The English Teacher

9/3/13

Free

Stoker

6/18/13

6/9/13

Free

The Place Beyond the Pines

8/6/13

6/9/13

1

Vehicle 19

7/23/13

6/9/13

2

Jack the Giant Slayer

10/1/13

6/9/13

1

Phantom

6/25/13

1

Gayby

12/11/12

6/19/13

Free

Aftershock

8/6/13

Free

The Call

6/25/13

2

Tom and Jerry's Giant Adventure

8/6/13

7/5/13

Free

The Urge

10/8/13

7/5/13

Free

Silent Hill: Revelation 3D

2/12/13

10/26/12

Free

Skyfall

2/12/13

1/21/13

1

Dark Skies

5/28/13

5/22/13

1

Truth or Dare

8/27/12

5/15/13

1

The Host

7/9/13

4/25/13

2

Broken City

4/30/13

4/25/13

Free

Spiders

3/12/13

4/25/13

1

Paranormal Movie

4/9/13

4/25/13

3

The Haunting in Connecticut 2

4/16/13

4/25/13

Free

The Numbers Station

5/28/13

4/25/13

Free

A Haunted House

4/23/13

4/25/13

2

Pawn

4/23/13

4/25/13

1

Fright Night

12/31/11

9/2/11

Free

Gambit

9/18/13

11/21/12

Free

Argo

2/19/13

10/22/12

1

The Life of Pi

3/12/13

11/22/12

2

Average Price (RMB)

0.80

It is evident from the table that FAB added nearly every U.S. movie to the kiosks prior to the official DVD release date. In many cases FAB's pirated movies were available months prior to the respective official DVD release dates. FAB's average selling price per movie is only 80 Chinese cents or 13 U.S. pennies!

My investigators recorded interviews surveying multiple FAB kiosk operators both at FAB's flagship SoShow store and other Beijing locations. Below is a summary of their findings:

  1. All staff interviewed insisted that all movies on the kiosks were copyrighted, despite the very obvious evidence to the contrary.
  2. Staff acknowledged that the kiosks' USB connections are "glitchy" and refuse to read many devices, while inconsistently reading other devices.
  3. Kiosk content used to be updated each week, but now are updated less frequently. Additional pirated movie content was being sold from a PC in each store and was repeatedly offered to my investigators when the kiosks were slow to function.
  4. The retail stores routinely give away free kiosk membership cards with each 50 to 100 RMB retail merchandise purchase in the store.
  5. One operator claimed that most kiosk customers obtained membership cards for free with merchandise purchases.
  6. Another operator claimed that most kiosk customers either downloaded free movies or used free membership cards to download movies.
  7. Operators cited having between 10 kiosk customers per week to as little as 10 kiosk customers per month.
  8. Operators believed there were definitely more than 100 kiosks in Beijing, but were not sure whether there were more than 500 kiosks in Beijing.
  9. Operators believed that FAB's kiosks were deployed in 30 to as many as 200 possible locations in Beijing.

In addition to offering pirated movies on its kiosks, FAB also offers pirated movie exhibitions and private screenings to the Chinese public at its Joy City "Private Movie Club" as discussed below.

Xidan Joy City "Private (Read: Pirated) Movie Club"

Not only does FAB let Chinese consumers download pirated Hollywood movies from their kiosks for pennies, FAB also publicly screens pirated Hollywood movies in one of the biggest shopping malls in Beijing. FAB's Xidan Joy City store includes a "Private Movie Club" with 20-30 private soundproof movie-screening rooms that are available 24 hours a day with refreshments and optional "VIP services."

(click to enlarge)

Ironically, FAB's "Private Movie Club" (on the 9th floor of the Joy City Mall) is located right underneath a legitimate Chinese multiplex movie theater chain (on the 10th floor) in the very same shopping mall.

My investigators interviewed the staff of the legitimate "Capital Cinema" upstairs from FAB. The staff immediately explained that all of FAB's movies shown in its Private Movie Club were pirated from the Internet. The staff explained that legitimate movies shown in theaters always have the following State Administration of Radio, Film, and Television ("SARFT") seal of approval at the start:

(click to enlarge)

I therefore sent my investigators to interview the Joy City "Private Movie Club" staff and to record pirated movies being played in the screening rooms. From these interviews, I learned the following:

  1. FAB attracts customers to its private screening rooms (shown below) by emphasizing the privacy, a 500+ database of "theater-quality" movies, and free refreshments for prepaid members.
  2. The staff actually bragged that FAB's private screening room had shown Now You See Me two days prior to its 10/10/13 official release in China. The staff then played a portion of a pirated copy of the movie stored on FAB's network. A screen shot from my investigator's recording appears below: (click to enlarge)
  3. Despite the obvious piracy, the staff of the Private Movie Club nevertheless insisted that all of the movie content was properly licensed and not pirated.

Interview of FAB CEO Chris Spencer

On Monday, 11/11/13, I questioned FAB's CEO, Chris Spencer, regarding piracy, DRM, and FAB's average selling prices for U.S. movies. The key points of our conversation were:

  1. Chris adamantly affirmed that FAB's entire kiosk content was properly licensed and copyright protected.
  2. Chris acknowledged that in the extremely unlikely event that there were pirated movie files on the kiosks, that FAB would detect them and immediately remove them; because
  3. FAB "continuously" and "frequently" checks the kiosks for pirated content. However, Chris was uncertain exactly how frequently FAB staff reviews kiosk content for piracy.
  4. Chris did not dispute the $0.13 average selling price of recently released U.S. movies. He explained that FAB has not really focused on generating revenue from movie downloads.
  5. Chris acknowledged that the kiosk movie files contained no DRM. Chris explained that DRM was incompatible with many devices and that FAB was researching anti-piracy protection methods to possibly implement in the future.

At the beginning of our conversation, Chris explained that FAB management was divided over whether he should talk to me. However, Chris explained that he had taken the time to review my track record on Alfredlittle.com and he complimented the good work that I have done exposing bad companies. Chris hoped that I would only publish the truth. I assured him that is always the case.

Regarding the piracy issue, the truth is clear. FAB's kiosk content is pirated and this fact requires its U.S. management to take immediate action. Furthermore, FAB will have to reconsider its entire kiosk business plan in light of the piracy. Common sense says that properly licensed content requires much more than 13 cents per movie in revenue to turn a profit.

II. FAB's Kiosk Manufacturers Acknowledge Only 1,600-1,700 Units Sold to FAB

FAB claimed to have 3,954 "intelligent" kiosks in Beijing alone, according to its 6/1/12 proxy, with over 16,820 kiosks in 40 Chinese cities according to FAB's 11/13/13 press release announcing 2013 Q3 results.

Historically, the two main manufacturers of FAB's kiosks were Beijing Riyao Technology Co. Ltd. (北京日尧科技有限公司采访) and Beijing Chongfeng Touch and Control Technology Co. Ltd. (崇峰触控(北京)科技有限公司), according to my investigators' interview of a former FAB manager.

My investigators visited Riyao and Chongfeng to interview the management and learned the following:

A). According to Riyao management:

  1. Riyao did business with FAB from 2008 until 2012. Riyao sold less than 500 kiosks to FAB.
  2. Riyao more than once helped FAB stage manufacturing site visits for investors. At FAB's request, Riyao would post signage pretending to be "Xing Wang Xun Tong." Riyao's manager showed my investigators pictures of the fabricated "Xing Wang Xun Tong" signage.
  3. Riyao stopped supplying kiosks to FAB in 2012 because FAB was consistently late to pay.
  4. FAB at one point was one and a half years delinquent paying Riyao 1 million RMB.
  5. FAB has difficulty contracting manufacturers for its kiosks because of FAB's bad reputation (being late to pay suppliers).
  6. FAB's main purpose was not to "run a real business" but rather to use the kiosk concept to go public to "cheat money."

Riyao's staging of investor visits to a fabricated manufacturing facility using the name "Xing Wang Xun Tong" raises some very serious concerns. Did FAB use a phony "Xing Wang" entity to deceive E&Y, King & Wood, its auditor (Friedman), U.S. officers, and directors regarding kiosk production?

FAB's fabricated "Xing Wang" factory tours remind me of China Integrated Energy, a Chinese company delisted from NASDAQ after I busted the management staging phony biodiesel production activity for Rodman & Renshaw investors in 2011. ABC News interviewed me here regarding my investigation.

B). According to Chongfeng management:

  1. Chongfeng has done doing business with FAB since 2007-2008.
  2. Chongfeng sold around 1,000 kiosks to FAB. FAB provided the software.
  3. The poor performance of the kiosks observed by my investigators (insensitive touch screen and glitchy USB drive reader) was due to the low-end hardware chosen by FAB.
  4. Chongfeng is uncertain whether the kiosks can generate a profit. However, Chongfeng pointed out that FAB was certainly successful raising money from investors attracted to the kiosk concept and pointed out that FAB's business model is "just about raising money."
  5. Regarding DRM protection of media files, Chongfeng explained: "That part [of the kiosks] was not done by us. Jingcai [FAB] has no licensed content. You don't know that? The CD/DVDs they were selling are copyright protected. The ones in their kiosks for download are not licensed or copyright protected."
  6. Chongfeng then went on to explain: "There were two reasons FAB's kiosks were not widely deployed. One was the media content being pirated, second was they haven't found a correct model to make money."

Below are some snapshots from my investigators' interviews of FAB's two main historical kiosk suppliers:

Chongfeng office, brochure, and interview:

Riyao's manager showing a photo of the fake Xing Wang Xun Tong sign and Riyao business cards:

(click to enlarge)

During my 11/11/13 interview of FAB CEO Chris Spencer, he mentioned two more kiosk manufacturers contracted by FAB: Beijing Fulei (北京富雷实业有限公司) and Nanjing Pinjia (南京品佳科技开发有限公司).

My investigators followed up by contacting both companies by phone on 11/14/13 and learned the following:

  1. Nanjing Pinjia has historically produced 100-200 kiosks for FAB, according to the Market Department Manager Zhou Chunguo (phone number: 15305181668).
  2. Beijing Fulei only produces lottery kiosks and sold some lottery kiosks to FAB, according to a manager named Mr. Zhou in the laminator equipment department. The lottery kiosks department manager, Mr. Chen (phone number: 13701108558) was not available.

Based on my investigators' interviews of all four of FAB's kiosk suppliers, in total they have historically supplied 1600-1700 kiosks to FAB, only 10% of the 16,820 kiosks FAB claims to have currently in active service (and not including replacement or upgraded units deployed by FAB).

I believe that at the very least FAB should respond by publishing a complete list of all the physical addresses of the nearly 4,000 kiosks FAB claimed to have deployed in Beijing so that investors can verify that they truly exist. Based on my thorough on the ground due diligence I strongly believe that they do not.

III. FAB's Director of Franchisee Sales Acknowledged Only 1000 Kiosks in Beijing and Promises Franchisees Minimum Guaranteed Returns Plus Free-Trading FU Stock at a 20% Discount to Market

After thoroughly analyzing FAB's pirated movie kiosk business model, my investigators turned to FAB itself and approached FAB's director of franchisee sales to learn how the franchise business works. FAB's director of franchisee sales told my investigator:

  1. There are currently only about 1,000 FAB kiosks deployed in Beijing market (including all kiosk models, old and new.)
  2. FAB has stopped distributing the previous versions of its kiosks (including the kiosks in its flagship store) and has started selling a new type of kiosk to franchisees for 80,000 RMB.
  3. Since October 2012, FAB has signed up "several hundred" franchisees for these new kiosks.
  4. After signing an operating agreement with the franchisee, FAB's staff selects a location to deploy the kiosk.
  5. FAB's staff then installs, operates, and maintains all franchisees' kiosks, including uploading and updating all the content.
  6. Each franchisee has the right to know the location where FAB deployed their kiosk and the right to know the P&L performance of the kiosk.
  7. The sales director very clearly pitched that the biggest payoff for the franchisees comes after 2 years when FAB, the "public company," will buy out the franchisees' kiosks for a multiple (from 1.5-5x) of their net asset value (defined as the accumulated profits over the 2 years plus a guaranteed minimum asset value).
  8. The sales director said that FAB "guarantees" a lowest payoff scenario of a minimum 90,000 RMB to the franchisees, who bear no risk of losing money at all.
  9. In the best-case buyout scenario, FAB will buy each kiosk for as much as 500,000 RMB.
  10. To complete the buyout, FAB will offer franchisees cash or common stock valued at 20% discount to the market price.

The director of franchisee sales presented my investigator with this franchisee sales brochure that included a basic term sheet that makes the following points:

  1. Franchisee shall invest 80,000 RMB per kiosk.
  2. Franchisee promises to achieve 20,000 RMB and 40,000 RMB profit targets in the first and second years, respectively.
  3. FAB and the franchisee share any profit above these profit targets.
  4. FAB promises to buy back the kiosks at 1.5 to 5 times the accumulated profits over the first 2 years plus a guaranteed minimum asset value.
  5. In the base case where the kiosk achieves the minimum profit target, FAB would buy it back for 200,000 - 500,000 RMB, using either cash or "free-trading" shares in "FU"
  6. In the event that profit targets are not met, FAB agrees to buy back each kiosk for 1.5 to 2 times the guaranteed minimum asset value of 60,000 RMB.
  7. Using the lower multiple: 1.5 x 60,000 RMB = 90,000 RMB guaranteed minimum return of the 80,000 original investment per kiosk.

From an accounting standpoint, these buyback and minimum guaranteed investment return conditions offered in the franchisee term sheet call into question FAB's kiosk licensing revenue recognition policy, which records kiosk licensing revenue as deferred revenue to be realized over 5 years.

If FAB is indeed promising franchisees a minimum guaranteed return on investment, the sales of franchising licenses are really just a form of financing. The possibility that FAB will repay the franchisee/investor with common stock makes the franchisee "investment" a sort of convertible debt, secured by the kiosk. Obviously, FAB appears to be using its common stock to stimulate franchisee kiosk investments to finance the growth of its kiosk business. How should FAB account for guarantees made to the franchisee investors as well as the potential future dilutive share issuances?

Assuming that FAB has made these promises to most or all of its franchisees, FAB has potentially enormous undisclosed liabilities for guaranteeing minimum investment returns to franchisees and undisclosed potential dilution from common stock issuable to its franchisees.

Below are sample snapshots from my investigator's first recorded interview of FAB's director of franchisee sales:

(click to enlarge)

(click to enlarge)(click to enlarge)

Conclusion

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.

Perhaps FAB's U.S. management and auditor were duped by FAB Chairman Hongcheng Zhang. If so, CEO Chris Spencer and CFO John Busshaus now need to take immediate steps to protect investors. Lock down any cash and prevent FAB's Chairman and his associates from selling their shares. Commence an immediate independent investigation. Authorize FAB's auditor to meet with me.

As I have done in the past, I will provide copies of all of my evidence and recorded interviews to the NYSE, SEC, as well as to any truly independent investigator appointed by FAB's independent directors.

Source: FAB Universal: The Face of Piracy In China