FAB Universal responds to fraud allegations, uncovers "deficiencies in the Company's internal controls"

|About: FAB Universal Corp. (FU)|By:, SA News Editor

FAB Universal (FU) discloses it has "uncovered certain deficiencies in the Company's internal controls" after a preliminary internal review undertaken at the direction of its board in response to "numerous published reports ... by acknowledged short-sellers." The board has authorized the hiring of an independent third party to verify the findings.

The review determined that one of FAB's VIEs "conducted a $16.3M bond offering in China which was not reflected on the Company's financials," as has been alleged by The GeoTeam. The company notes none of the funds have been used by FAB to date. FAB will restate its Q2 and Q3 reports to reflect the liability and interest expense.

As to allegations that the company has exaggerated its kiosk count, the board states that "short sellers have a fundamental, but understandable, misunderstanding of the economics of the Company's business. FAB does not buy, sell or own kiosks. Instead, it sells licenses to operate Intelligent Media kiosks ... As of September 30, 2013, 16,820 licenses have been sold, of which 3,954 have been issued for the placement of kiosks in Beijing; all of the 3,954 kiosks in Beijing have been deployed." The board has also re-verified 12,866 licenses thus far and will continue with the remaining licenses.

The company also responds to allegations that kiosk licenses carry minimum guarantees by noting that a review of 75% of contracts "has not identified any instances of a minimum guarantee."

As to pirated content, FAB will examine its content control processes and implement "any measures deemed necessary to tighten controls."

Shares remain in a T1 halt.

This was corrected on 12/11/2013 at 03:55 PM. A previous version of this Market Current erroneously stated that Alfred Little had made the allegation that a FAB Universal VIE had issued a $16.3M bond not reflected on FAB's financials. It was rather SA contributor The GeoTeam who first made the case. Alfred Little has made a number of other claims against FAB, including that its kiosk count was overstated and that the kiosks distributed pirated content.