FAB Universal said Tuesday that it will restate its second- and third-quarter results after failing to disclose a $16.3 million bond offering made by an affiliate and guaranteed by its chairman.
The Pittsburgh digital content provider, whose battered shares have not traded since Nov. 21, also said it discovered weaknesses in its accounting controls; it will review procedures for preventing the sale of pirated material; and it has asked partners to return $17.8 million in payments the company made to open additional stores in China.
Acknowledgement of the undisclosed bond offering follows what FAB described Nov. 20 as a "vehement denial" of allegations made by short-sellers who profit when the price of a stock falls.
On. Nov. 18, GeoInvesting, a Skippack, Pa., investment research firm, accused the company of failing to disclose the bond offering.
GeoInvesting co-founder Dan David noted Tuesday that FAB shares continued trading for a few days after the company's denial. "It's very unfortunate for investors," he said. "If this was a self-disclosed issue on their part, one would consider what they are doing appropriate."
FAB's announcement comes nearly a month after Jon Carnes, a short-seller who has targeted FAB and other companies involved in reverse mergers with Chinese companies, accused the company of vastly overstating the size of its Chinese business and selling pirated movies. Mr. Carnes estimated the company only has 1,600 to 1,700 kiosks in China that sell movies, music and other digital content and that the kiosks were selling pirated copies of recently released U.S. movies at an average of 13 cents.
On Monday, Mr. Carnes wrote on Seeking Alpha, an online financial blog, that his investigators only found 20 kiosks in Beijing, not the 3,900 that the company disclosed in a securities filing earlier this year.
The allegations have prompted about a half-dozen shareholder lawsuits against the company.
On Tuesday, FAB said its short-selling critics "have a fundamental, but understandable misunderstanding of the economics of the company's business." The company said it sells licenses for the kiosks to agents, who deploy them and report back how many have been installed.
In its statement Tuesday, FAB said it had sold 16,820 kiosk licenses as of Sept. 30 and that it has re-verified 12,866 of them.
However, in a third-quarter report filed with the Securities and Exchange Commission last month, the company said it had "an installed network base in excess of 16,000" kiosks.
"I don't think FAB's U.S. management understands their business in China," Mr. Carnes said Tuesday.
FAB was created last year by a reverse merger in which Wizzard Software of Pittsburgh merged with Hong Kong-based Digital Entertainment International. The transaction provided DEI with Wizzard's coveted New York Stock Exchange listing and transformed the chronically unprofitable Wizzard into what a Zacks Investment Research analyst described last month as a "cash generating machine."
FAB said its second- and third-quarter results will have to be restated to reflect interest expense and financing costs associated with the bond offering. In an SEC filing late Tuesday, the company preliminarily estimated the failure to account for the bond overstated its third-quarter earnings by 2 cents per share. FAB reported earnings of 35 cents per share for the period.
Trading in FAB shares remained suspended Tuesday. They closed Nov. 21 at $3.07, off $1.10 for the day.
Len Boselovic: firstname.lastname@example.org or 412-263-1941.