As was previously announced, FAB Universal's (FU) audit committee has "concluded that the Company's unaudited interim consolidated financial statements" for Q2 and Q3 "should no longer be relied upon." (8-K)
Preliminary estimates indicate the undisclosed $16.3M VIE-issued bond underreported interest expense and inflated net income by $344K in Q2 and $476K in Q3, a $0.04/share overstatement from previously-reported EPS results.
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."
FAB Universal's (FU) trading halt from last Friday has been modified from "Halt - News Pending" to "Halt - News Released." However, no news from the company has hit the wires or the public SEC database.
FAB Universal (FU -13.4%) shares rally, spiking 9.8% in 10 minutes, after word circulates that Jim Rogers has upped his stake by 10K shares at $4.51/share to 69K shares.
Alfred Little, who issued a short report on the company last week, responds, "Jim Rogers buys token 10K shares. If Jim wants to make a real bet on FAB he should call me. I'll wager him $1MM that FAB is a fraud."
FAB Universal (FU -18.9%) plunges after SA contributor The GeoTeam issues a report claiming that one of the company's Variable Interest Entities sold a RMB100M ($16.4M) bond in Aug. (and which currently trades on the Shenzhen exchange) that is nowhere to be found on the company's 10-Qs, in direct and plain violation of SEC regulations.
The author concludes, "FAB's very obvious failure to disclose $16.4 million in debt should take very little time for securities regulators and FAB's auditor (Friedman LLP) to confirm."
Update: The seeming discrepancy was first identified by SA Contributor UNEMON1 after the market closed last Friday.
FAB Universal (FU -4.6%) falls after Chinese fraud researcher Alfred Little issues a short report on the Chinese video content distributor, noting that "FAB's anti-piracy claims are a total and complete fraud."
AL states that based on the firm's due diligence, FAB's Intelligent Media Kiosks are "loaded with very obviously pirated U.S. movies."
The report also claims that FAB's kiosk manufacturers have only supplied 1.6K-1.7K kiosks to the company, or 10% of the claimed 16.8K units deployed. Additionally, AL states that FAB's director of franchisee sales stated that the company only has ~1K kiosk in Beijing, vs. the 3.9K disclosed in a company proxy statement.
AL writes that the company faces a significant undisclosed liability due to the company's promise to kiosk franchisees of guaranteed minimum returns and buyback clauses using FU stock.