UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C.  20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

     For the transition period from

 to

Commission File No.   001-33935

FAB UNIVERSAL CORP.

 (Exact name of registrant as specified in its charter)

5001 Baum Boulevard, Suite 770

Pittsburgh, Pennsylvania 15213

 (Address of Principal Executive Offices)

Registrant's Telephone Number:  (412) 621-0902

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   (1) Yes [ X]  No[  ]                

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of ‘‘large accelerated filer”, “accelerated filer’’ and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ]  No [X]

As of August 4, 2014, there were 20,805,860 shares of common stock, par value $0.001, of the registrant issued and outstanding.

PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements.

The Unaudited Condensed Consolidated Financial Statements of FAB Universal Corp., a Colorado corporation ( the “Company,” “we,” “our,” “us” and words of similar import), required to be filed with this 10-Q Quarterly Report were prepared by management and commence on the following page, together with related notes.  In the opinion of management, the Unaudited Condensed Consolidated Financial Statements fairly present the financial condition of the Company.

FAB UNIVERSAL CORP AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

[1] net of $14,000 allowance

[2] $.001 par value, 10,000,000 shares authorized, 290 shares issued and outstanding

[3] $.001 par value, 200,000,000 shares authorized, 20,805,860 shares issued and outstanding

The accompanying notes are an integral part to the unaudited condensed consolidated financial statements.

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FAB UNIVERSAL CORP AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

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FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 - SEGMENT REPORTING – Continued

The following table presents summary information by segment for the three months ended June 30, 2014 and 2013, respectively (in thousands):

NOTE 17 - SUBSEQUENT EVENTS

Management has evaluated subsequent events through August 14, 2014, the date which the consolidated financial statements were available to be issued. All subsequent events requiring recognition as of June 30, 2014 have been incorporated into these consolidated financial statements, and besides the disclosures herein, there are no additional subsequent events that require disclosure in accordance with FASB ASC Topic 855, “Subsequent Events”.

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Item 2.   Management's Discussion and Analysis.

Safe Harbor Statement.

Statements made in this Form 10-Q which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and business of FAB, including, without limitation, (i) our ability to gain a larger share of the distribution of Chinese copyright  protected media content and podcast hosting and distribution industries, our ability to continue to develop products acceptable to that industry, our ability to retain our business relationships, and our ability to raise capital and the growth of the FAB brand, and (ii) statements preceded by, followed by or that include the words "may", "would", "could", "should", "expects", "projects", "anticipates", "believes", "estimates", "plans", "intends", "targets" or similar expressions.

Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond FAB's control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, in addition to those contained in our reports on file with the SEC: general economic or industry conditions, nationally and/or in the communities in which FAB conducts business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, changes in the  industries in which we operate, the development of products that may be superior to the products offered by FAB, demand for financial services, competition, changes in the quality or composition of FAB's products, our ability to develop new products, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting FAB's operations, products, services and prices.

Accordingly, results actually achieved may differ materially from expected results in these statements.  Forward-looking statements speak only as of the date they are made.  FAB does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

Company Overview

Below is an update of our entire business, from the operations of our wholly-owned subsidiary Digital Entertainment International Ltd. (“DEI”), to our media business of podcast services, apps, advertising, and premium subscriptions.  We believe our business of selling and distributing copyright protected media and content in China will 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.  We believe our Media business will also continue to grow and generate profits due to the size of our podcast operations, our market leadership position, our substantial presence in iTunes and the potential monetization of the content we distribute through our publishing platform, advertising, sale of Apps and paid subscriptions for content.  It is Management’s opinion that we are still in the early stages of growth for this industry as we are seeing the flow of quality content coming to the Internet increase and audiences showing increased interest in the medium.  FAB Universal believes that our network and relevance in our industry will continue to grow and that we are positioned to be one of the leading companies in the podcast monetization business.  Our business is broken into three segments including: Retail, Wholesale and Digital Media.  In September 2013, FAB entered into an agreement with Future TV Co. Ltd. to distribute its copyright protected media content through pay TV terminals used in the home by Future TV’s subscribers.  

With the rising popularity of Internet and rapid development of e-commerce in China, simple offline retail business can’t adapt to fierce market competition. Therefore, FAB decided to transform our retail business model from traditional retail stores to Online to Offline (O2O) experience stores, providing e-commerce companies with comprehensive offline services such as product exhibition and demonstration, online and mobile shopping demonstration, offline promotion, and entertainment based sales and marketing activities.

Retail

FAB has conducted the retail business through its flagship stores since 2003.  We currently operate a 30,000 sq. ft. store in the prestigious Joy City shopping mall and an entertainment superstore in SoShow.  Each store has over 20,000 square feet in size and carries the largest selection of copyright protected audio and video products in China, including CDs, VCDs, DVDs, blu-rays, books, magazines and portable electronic devices.  The flagship stores are recognized by many Chinese consumers as the right place to buy copyright protected products.

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The 20,000 square foot entertainment superstore is located in the Beijing shopping district of SoShow. The store is designed to satisfy the tastes of a swiftly emerging middle class with maturing entertainment expectations.  FAB’s SoShow store provides Beijing shoppers with its first audio-video “hypermarket.” As a preferred venue for product announcements, publishing parties, studio releases, author readings, movie showings, live promotional performances and concerts, FAB’s SoShow outlet is one of China’s first ultra-modern entertainment destination for music lovers, film buffs, game enthusiasts, and early electronic adopters.

The SoShow flagship store offers many new electronic digital products and mobile storage devices while serving as a center for the 5C download supermarket of traditional copyright protected audio-video products. Consumers can download movies, songs, games, e-books and applications to mobile storage devices through the intelligent 5C Kiosk.  Additionally, the 5C download supermarket also offers coupon printing, self-service payments, membership points checking, map searching and other consumer functions.

The Joy City Flagship store, located in the core area in Xidan, Beijing, has superior geographic advantages. In the fourth quarter of 2013 the Joy City store was remodeled, and reopened in the middle of December, 2013.  As a result of the remodel, various digital facilities such as electronic display screens, offer enhanced social network functions and digital promotion tools in the Joy city store.

As the Company gradually transitions the stores to dedicate a larger portion of each store to digital services, as well as a move to selling higher margin products, we anticipate continuing to see a decrease in revenue within our stores for a period of time.  This store transformation away from selling mostly traditional audio and video products to individualized items such as covers for mobile devices, and electronics combined with digital experience is anticipated to be a temporary reduction in revenue.  We plan to open a third store during the second half of 2014 in Beijing.

To start the transformation, FAB signed cooperation agreement on July 31, 2013 with Jingcaigou (Beijing) Network Information Technology Co., Ltd., an e-commerce company related to FAB. As the first cooperative project, the name of FAB Joy City Flagship Store will change to “FAB Jingcai Gou Joy City Experience Store”.  We will offer certain display space for Jingcaigou to exhibit and experience products. We will also organize various entertainment marketing and promotional activities in the store. We will charge a promotion service fee and collect sales commission on a monthly basis.

Wholesale

FAB wholesale distribution provides audio-video products such as compact discs, video compact discs and digital video discs as well as books and magazines to audio-video product retailers. FAB distributes these media products to many customers including Sohu, Dangdang and Century Outstanding Information Technology Company, a subsidiary of Amazon.com.   FAB’s wholesale business caters to three types of customers: large retail stores, FAB license stores and small wholesale/resellers. Customers place orders by telephone, through the internet or in-person and fulfillment is handled by FAB’s vehicle fleet or through direct warehouse access.

The ecommerce business is growing much faster than originally anticipated in China.  With this change, many of our retailers are transitioning their retail stores similar to the changes we have made with our retail stores.  With our customers move away from the traditional hard goods of audio and video, the outlook for 2014 would be that revenue generated by our Wholesale business will experience a decrease throughout 2014.

Digital Media

Licensing and Media

The twin components of our strategy are to increase our portfolio of content and expand the number of distribution channels. We have signed several copyright licensing agreements with several well-known distributors for additional content.  Many of these distributors have long-term cooperation agreements with over 80 independent film producers in the United States.  The terms of these agreements range from one to ten years and some are revenue sharing based agreements.  This content is expected to be distributed across multiple distribution channels, primarily through digital platforms, thereby leveraging our cost of acquisition.  

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Through the agreements signed, we have obtained the right to distribute nearly 6000 hours of copyrighted content, including 1500 movies, 3451 TV series, and 100 hours of documentaries. High definition content accounts for 35% of the total, and exclusive content with sub-licensing rights accounts for more than 20%. The acquired copyrighted movies cover various genres including motion, romantic, horror, war, and comedy, of which, movies from Europe and American make up over 60%, and 20% movies were debuted in China for the first time.  There are also 176 award winning or nominated movies at leading film festivals, such as Oscar, Cannes, Golden Globe, and Berlin.  We have nearly 100 movies with exclusive as well as sub-licensing rights, including “The Company You Keep”, which was officially released to the public on July 8, 2014 in Mainland China, and “Her”, which won the 2014 Oscar for best original screenplay.  Furthermore, FAB music teaching courses include more than 1000 hours of exclusive curricula and 72 hours of FAB originally produced curricula, including “music instruments grading test”, “instruments performance”, and “instruments skills instruction”. The “music instruments grading test” are delivered by director and deputy director from the National Grading Test Committee, and by well-known teachers from the Central Conservatory of Music (CCOM) as well as the China Conservatory of Music.

With our established media, new distribution opportunities and entertainment distribution platform and the power of the FAB brand, we believe that we have the fundamentals in place to drive growth as we increase our content offerings across an expanding number of distributions channels.  In order to distribute content over mobile phones and the internet, the Chinese Government requires an internet publishing license which is granted by the General Administration of Press and

Publication, the National Agency of Radio, Film and Television.  FAB was granted a license by China’s Ministry of Commerce to license its business model.

FAB has sold 17,944 brand licenses, which allows the licensees to use FAB’s brand on the kiosks. FAB does not directly sell or own the media kiosks. FAB primarily generates revenue from the sale of FAB Brand licenses, advertising and FAB membership cards.

Prior to 2010, the Company’s business model consisted of brand licensing and agreements that allowed for the purchase and operation of kiosks under the FAB brand.  After 2010, the Company only sold license agreements which were outside of Beijing.  Collectively, these agreements from 2008-2013 are referred to generally as “licenses” and the parties who entered into the agreements are referred to as “licensees”.  Not all kiosks possess the capability of performing all functions noted below.

The Kiosks provide a variety of functions, and some provide multiple functions.  The great majority of the kiosks generate revenue from the sale of advertising.  Some kiosks are ATM style terminals where consumers can download content directly to their cell phones, memory sticks or other mobile storage devices.  Others provide directions or other services or offer coupons or other goods for sale.

FAB, to date, has sold 40 Regional Agent licenses.  The Regional Agent pays an upfront fee of RMB 1,200,000, and a deposit of RMB 100,000. The license fee is non-refundable after 7 days and the contract period is five years.  The Regional Agent is responsible for selling the individual licenses in each of their locations and for the development of the business with each licensee.  Due to the changing market, the Regional Agents sold no additional licenses during the second quarter of 2014.

For each kiosk licensed outside of Beijing, the Licensee pays an upfront RMB 30,000 license fee upon signing the contract. The license fee is non-refundable after three days. The total contract period is five years.  FAB pays 20% of each single license fee received (20% of RMB 30,000 = RMB 6,000) to the Regional Agent.  The Licensee looks to the Regional Agent for assistance with acquisition of the kiosk, maintenance and operation of the kiosk, and development of the business.

FAB obtained an Internet Publishing License by China's General Administration of Press and Publication, the national agency of radio, film and television. This license grants FAB Universal the right to distribute both its exclusive and acquired copyright protected audio and video digital content over the Internet and mobile phone networks.

FAB Membership – Beijing Only

In order to retain customers and increase cross-sales, FAB launched its client retention program, the FAB membership program, in 2008.  This program entitles customers to download digital content from FAB.  The membership provides bonus points for member’s purchasing products in any of the flagship stores.  The bonus points can be exchanged for non-cash gifts.

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As the Company is in the transitioning stage of its business model from traditional distribution channels to more diversified digital channels, including digital TV, IPTV, mobile and the internet, we are anticipating a dramatic decline of revenue in wholesale, retail, advertising and membership card going forward.

Cross-Platform Video Operation

The use of digital consumption channels for media in China is growing rapidly.    With this change we will transition our business more quickly than previously thought to provide digital content for consumption across multiple channels. This transition will take place throughout 2014.

The Cross-Platform Video Operation business will generate revenue from the distribution of FAB copyright-protected content across various digital platforms.  Users pay a subscription fee for FAB’s copyright protected content and the fee is shared between FAB and the digital platform utilized for the delivery of the content.  These platforms include digital TV, IPTV, Smart TV, OTT, mobile and the Internet.  Initial targets for partners for these platforms will be those with large, existing consumer bases.

Content

FAB has purchased the licenses or has the rights to distribute and broadcast movies, TV shows, and educational programming.  FAB will continue to acquire the rights to content throughout 2014.

The distribution of this content will be through the various channels described below and will target large consumer bases through partnerships.  To date, FAB has entered into eight agreements with distribution channels, and FAB will continue to pursue agreements with various channels for user paid subscriptions of the purchased content. We will acquire content for which we have the exclusive rights as well as sub-licensing rights for distribution.  FAB will also acquire content for which we will have non-exclusive rights for distribution.  Some of the agreements for non-exclusive content allow FAB to sub-license the content and others will not.   

Digital and Internet TV Subscription Services

One-time view TV Services:

Fees will be generated through paid one-time access to individual content through Pay Per view (PPV) where a viewer must access the programming at a specific broadcast time and True Video on Demand (TVOD) where the programming is available any time.  PPV and TVOD fees range from RMB 3 to 9 and FAB would receive a 50% split.   

Monthly Subscription

Content is also offered on a monthly subscription basis for both Paid Channels of content (PTV) and Subscription Video on Demand (SVOD).  Fees for these subscriptions range from RMB 10 to 30 and FAB would receive a 50 % split.

While these fees are not significant per charge, there is a very large consumer base in China, and we will target channel providers with a large number of consumers, such as Tongzhou Electronics TV Terminals and as we have with Future TV.

In September 2013, FAB entered into an agreement with Future TV Co. Ltd. to distribute its copyright-protected media content through pay TV terminals used in the home by Future TV’s subscribers, and the trial operation kicked off in November 2013. Since cooperation with Future TV, FAB has officially launched subscription TV business, and our signed channels are growing. In May 2014, FAB entered into an agreement with Shenzhen Tongzhou Electronic Co. Ltd for DVB (Digital Video Broadcasting) and DVB+OTT cooperation. FAB also signed an agreement with Xinjiang Broadcast Network Co., Ltd for digital TV cooperation.    Shenzhen Tongzhou Electronic is China’s leading enterprise in the digital TV industry, delivering more than 50 million set-top boxes for nearly 100 million viewers.  Xinjiang Broadcast Network has more than 1.5 million viewers.  Our goal is to have our Subscription TV network reach the majority of the households in China in five to ten years. This can be accomplished with our technical and management team, through the integration of digital TV (via cable network operators), IPTV and OTT (via telecom operators, and content aggregation licensing providers).

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Mobile Phones and Tablets

With the increasing trend towards mobile device use and a growing consumer base, FAB will also partner with China’s top mobile companies to distribute video.  FAB copyright-protected content will be distributed to mobile users via mobile phones and tablets.  This market segment is large and will continue to grow.  For example, China Mobile Video Innovation base reaches an average of 130 million monthly users.  Revenues from partnerships with mobile carriers will be based on revenue share for paid content and will be in the range of a 50/50 revenue share.  In January 2014, FAB entered into an agreement with People Video Culture Co., Ltd., one of the top three (3) mobile companies with 2 million users and 1 million paid users. On June 20, 2014, FAB entered into an agreement with Beijing Ruoshuitongyun Information Technology Co., Ltd. for mobile video cooperation.  Beijing Ruoshuitongyun has been granted a Mobile Audio-Video License by SARFT (State Administration of Radio, Film and Television) in China, and focuses on health care & medical care information distribution and Treatment Guide services based on internet video technology.

Internet

Content will be offered for free via the Internet on destination web sites. The web sites are ad-supported through display advertisements on the site as well as advertising inserted within in the videos themselves.  The Advertising revenue split is normally 50/50.

FAB will partner with Baidu a leading destination web site for video.  Baidu is the largest Chinese search engine with their video web side having accounted for over 75% of the entire network traffic distribution in China.  The APP activated users has accumulate to approximately 100 million, with 20 million daily active users.  Baidu also offers paid content packaging through user subscriptions for premium packaged content where FAB content can be included for a revenue share.

Libsyn

Libsyn is the subsidiary for our digital media and entertainment business.  Libsyn is currently the industry’s largest network of independent and professional digital media publishers utilizing RSS (podcasting) as a distribution method for episodic, audio and video shows.  The Libsyn Network received over 1.6 billion download requests for shows in 2012, 1.9 billion in 2013 and 1.2 million in 2014 to approximately 38 million monthly audience members in the second quarter of 2014.  Libsyn's publishing platform hosted 19,365 shows in 2014. Management believes that Libsyn offers the best podcast publishing platform in the industry and is one of only a few podcast publishing platforms that are able to charge publishers for use of the service.  The majority of podcast publishing platforms offer their service for free, in hopes of making money exclusively from advertising sales.  Management believes that our ability to charge for the services we provide is a testament to the quality of service.  The total number of episodes on the network totaled 1,893,542 in 2014, all of which are available for immediate distribution.  With the continuing success of iPods, iPhones, iPads, Android’s mobile phones, we expect the number of content publishers using our service and the number of consumers watching the shows to continue to grow rapidly on an annual basis.  LibsynPRO Enterprise service had 136 network publishers in 2014.  As Libsyn derives a portion of its revenues through data transfer from PRO customers, our feature rich version of the PRO publishing platform provides management with the tools to grow the number of PRO publishers and thereby revenues associated with our data transfer business.  For first six months of 2014, revenue from data transfer totaled $202,218.  

LIBSYN – PUBLISHING SERVICES

     Hosting, Distribution Network, Content, Platform Development

In the second quarter of 2014, the Libsyn Network received approximately 627 million download requests for podcast episodes vs. annual requests of 1.9 billion and 1.6 billion download requests in 2013 and 2012, respectively, from a wide variety of distribution outlets to which Libsyn syndicates content.  The Libsyn network received over 6.9 million requests for shows per day during the second quarter of 2014.  Our network reaches over 37 million people monthly around the world, creating what management believes is a strong media asset and a very compelling platform for advertisers as well as smartphone App sales. Download requests are calculated by counting the number of shows requested for download by audience members.  Libsyn works to generate profits by inserting advertisements in the shows in partnership with the show’s publishers, charging for the use of our publishing platform and through the sale of Apps.  As the online digital media industry is in the emerging stages, the majority of these shows are distributed without advertising and the total download requests

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listed above are provided to give an understanding of the potential size of advertising inventory available for Libsyn’s third party advertising partners and its in-house advertising sales team to fill.  

Currently, Libsyn distributes digital shows for our producers to a variety of web portals and content aggregators, for both download and streaming.  Approximately 70% of the shows Libsyn distribute reach audiences using Apple’s iTunes platform which includes iTunes on the computer, iPods, iPads, iPhones and Apple TV.  It is management’s opinion that the Libsyn Network’s substantial presence in the iTunes Podcast Store is one of the Company’s valuable assets as consumers using iTunes are early adopters and spend money regularly on digital media.  We believe this provides FAB with a unique offering for advertisers seeking that type of consumer and provides FAB with monetization opportunities for its podcast publishers through the sale of individual and network wide Apps.

Technological development in the second quarter was focused primarily on three objectives:  Improving system performance, redeveloping the network management interface, and creating a new iOS application.  

The first objective is a response to Libsyn’s incredible growth over the previous few years.  This growth necessitated changes to how Libsyn delivers certain types of content in order to ensure the system can reliably and efficiently handle the massive volume of requests.

During the second quarter, steady progress was made in migrating network management tools from the previous interface (Libsyn 3) to the new Libsyn 4 system.  This network management interface permits network administrators to manage users, shows, episode quality control, and advertising campaigns.  This migration is scheduled for completion during the third quarter.

A completely new version of the Libsyn iOS app was created.  The app was redeveloped from the ground up and utilizes the latest conventions and features for iOS.  This app is expected to become available for podcasts in the early part of the third quarter.

LIBSYN - APPS

Apps are small software applications that users can purchase and download to their mobile devices with relative ease.  App categories include video games, sports, productivity, entertainment, education and health & fitness.  Some of these Apps are free, while others have to be purchased.  These Apps range in price from $.99 to $100.00, with the average price under $4.99.  Producers who wish to offer their Apps for free to their users can now choose to do so for an initial set-up fee and additional ongoing monthly fee per show.

Sale of Podcast Apps

Libsyn created Apps that work on the iPhone and Android platforms and are currently for sale in the iTunes App Store, Verizon Store, Windows Store and the Amazon App Store. Libsyn currently has approximately 4,700 Apps for sale.  Podcasters then market their very own App to their show’s audience, many of whom use iPhones, iPods and Android phones.  

Libsyn also offers Apps as a free monetizational tool to podcasters on the Libsyn Network as long as they have a qualifying monthly account.  Currently, there are approximately 19,365 shows on the Libsyn Network and approximately 38 million audience members who consume podcasts.  Libsyn submits each App for approval, which is not guaranteed and is based on the respective terms of service and approval process of the App Store, and manages the collecting of the revenue and distribution of the podcaster’s share of the revenues.  Libsyn expects to retain approximately 35% of the sale price that ranges from $.99 to $4.99 in most cases.  These Apps are currently being sold around the world via Apple’s App Store, the Verizon Store, Windows Store and the Amazon App Store. During the first six months of 2014, revenue from App and subscription sales totaled $378,753.

Libsyn developed a “Network App” which allows for hundreds of podcast Apps inside one fully functional App.  This is very similar to Amazon’s Kindle App that includes tens of thousands of books inside one App.  This Network App allows us to: 1) continue our business plan to offer App monetization tools to all producers in a streamlined, efficient process; 2) comply with the continually evolving and sometimes inconsistent App approval standards and their desire not to have ‘cookie-cutter’ Apps for all podcasts in iTunes in the App Store causing approval delays and rejections; 3) have more control over the actual

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marketing of the podcast Apps through expanded distribution of the Network App and cross promotional opportunities; 4) focus more time and attention on podcast shows with larger audiences that sell more apps than the smaller podcast shows.  

Sale of Podcast Subscriptions and Episodes Via Custom Podcast Apps

Once a podcaster has successfully marketed an App to its audience and has created a significant install base, the podcaster offers new content on a subscription basis or release a special episode, in addition to its normal podcast episodes, and charge a nominal fee ($1 - $3) for that episode or episodes to its audience.  By having a successful, extremely easy to use micropayment platform in iTunes/iPhone/iPod Touch, Android and Amazon, the podcast audiences are willing to pay a nominal fee ($1.99), from time to time, for special episodes of their favorite podcast and even sign up for inexpensive subscriptions ($.99 a month; $8.99 for 12 months) for new content.  Libsyn earns a portion of the subscription and episode revenue for administering the App account and delivering the content to the consumer.  This offering has been expanded for LibsynPro customers to include private podcast options.  The podcasts are available to audiences via a login on the App and the subscriptions fees are paid by the companies or organizations based on the number of active monthly users.

LIBSYN - ADVERTISING

Libsyn executes multiple national brand advertising campaigns for companies including Audible, Hover and Ting.  These campaigns run across multiple shows, with different advertisers, and resulted in $536,966 in advertising revenue during the first six months of 2014.

In order to increase the percentage of filled advertising inventory we must continue to execute on our advertising sales strategy, integrate third party ad networks and portals and create relationships with more advertising agencies and their clients.  Management believes that most advertisers prefer to deal with a few companies with large reach rather than many companies with smaller reach as it makes their advertising ‘buys’ and tracking easier to monitor.

Results of Operations

Three Months Ended June 30, 2014 and 2013.

During the second quarter ended June 30, 2014, FAB recorded revenue of $13.9 million, a decrease of $12.0 million, from our revenue of $25.9 million in the same period of 2013.  

This decrease was driven by a decrease in Wholesale from $14.0 million to $4.4 million, Retail from $2.3 million to $1.0 million, and Digital decreasing from $9.6 million to $8.4 million.  The decrease in Wholesale is being driven by customers making changes in their business with a move away from traditional goods and a focus on delivery of digital content.  For our retail stores, with the change to a digital experience and personalized products versus our traditional goods, we have seen a decrease in sales during the second quarter of 2014.  Within the Digital segment, advertising delivered $2.5 million, FAB Memberships delivered $2.0 million, Cross Platform Video delivered $0.1 million and FAB Brand Licensing delivered $2.5 million with no brand license sales, and the Libsyn business generated $1.4 million.

During the second quarter of 2014, our cost of revenue was $5.7 million, a decrease of $8.7 million over the 2013 figure of $14.4 million.  This decrease was due to the down-turn in sales experienced in the second quarter within our Wholesale and Retail segments, as well as a decrease of costs within our Digital segment.  FAB generated a gross profit of $8.1 million in the second quarter of 2014, versus a gross profit of $11.5 million in the same period of 2013.  Gross margin increased from 44% for the second quarter of 2013 to 59% in the second quarter of 2014 primarily because the digital segment represented 61% of the revenue in the second quarter of 2014 versus 37% of revenue during the second quarter of 2013.

In the second quarter of 2014, FAB had operating expenses of $5.3 million, as compared to $4.0 million in the second quarter of 2013.  Our operating expenses consisted of:

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Selling expenses increased to $1.2 million in the second quarter 2014, from $1.0 million in the second quarter of 2013.  The increase was driven by the addition of the development of the digital content subscription service, as well as personnel, marketing, travel expenditures and promotional activities associate with these services.

·

General and administrative expenses increased to $3.9 million in the second quarter of 2014, from $2.5 million in the same period of the prior year.   The increase was driven by the recording of non-cash expense for the vesting of stock options, and the increase in audit and legal fees.

·

Consulting fees decreased to $0.1 million in the second quarter of 2014 from $0.4 million in the same quarter of 2013. These decreases in fees were driven by the reduction of investor relation services in the second quarter of 2014.

·

Research and development costs for the quarter ended June 30, 2014 were $79,061 versus $73,189 for the same period in 2013.

Other expense increased to $0.5 million for the quarter ended June 30, 2014, versus $0.4 million for the same period in 2013.  The increase is due primarily to the interest on the long-term bond.

Net income available to common stockholders decreased to $1.4 million for the quarter ended June 30, 2014, as compared to a net income available to common stockholders of $5.4 million for the same period in 2013.  Basic and diluted earnings per common share were $0.07 in the second quarter of 2014, compared to $0.26 earnings per share for the second quarter of 2013.

Six Months Ended June 30, 2014 and 2013

During the first six months ended June 30, 2014, FAB recorded revenue of $28.6 million, a decrease of $19.9 million, from our revenue of $48.5 million in the same period of 2013.  

This decrease was driven by a decrease in Wholesale from $27.7 million to $10.3 million, Retail from $4.3 million to $1.7 million, offset by Digital increasing from $16.4 million to $16.6 million.  The decrease in Wholesale is being driven by customers making changes in their business with a move away from traditional goods and a focus on delivery of digital content.  For our retail stores, with the change to a digital experience and personalized products versus our traditional goods, we have seen a decrease in sales during 2014.  Within the Digital segment, advertising delivered $3.7 million, FAB Memberships delivered $4.7 million, Cross Platform Video delivered $0.4 million and FAB Brand Licensing delivered $4.9 million with no brand license sales, and the Libsyn business generated $2.7 million.

During the first six months of 2014, our cost of revenue was $12.1 million, a decrease of $16.5 million over the 2013 figure of $28.6 million.  This decrease was due to the down-turn in sales experienced in the first six months within our Wholesale and Retail segments, as well as a decrease of costs within our Digital segment.  FAB generated a gross profit of $16.5 million in the first six months of 2014, versus a gross profit of $19.9 million in the same period of 2013.  Gross margin increased from 41% for the first six months of 2013 to 58% in the first six months of 2014 primarily because the digital segment represented 58% of the revenue in the first six months of 2014 versus 34% of revenue during the first six months of 2013.

In the first six months of 2014, FAB had operating expenses of $10.0 million, as compared to $8.2 million in the first six months of 2013.  Our operating expenses consisted of:

·

Selling expenses increased to $2.4 million, from $2.0 million in 2013.  The increase was driven by the addition of the development of the digital content subscription service, as well as personnel, marketing and promotional activities associate with these services.

·

General and administrative expenses increased to $6.7 million in 2014, from $5.1 million in 2013.   The increase was driven by the recording of non-cash expense for the vesting of stock options, and the increase in audit and legal fees.  

·

Consulting fees decreased to $0.7 million in 2014 from $0.9 million in 2013. These fees were driven by the reduction of investor relation services during the first six months of 2014.

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·

Research and development costs for the six months ended June 30, 2014 were $157,043 versus $140,539 for the same period in 2013.

Other expense increased to $1.0 million for the six months ended June 30, 2014, versus $0.4 million for the same period in 2013.  The increase is due to the interest on the long-term bond.

Net income available to common stockholders decreased to $3.4 million for the first six months of 2014, as compared to a net income available to common stockholders of $8.4 million for the same period in 2013.  During the six months of 2014, non-cash expenditures totaled $4.0 million, as compared to $3.7 million for the same period of 2013.  Basic and diluted earnings per common share were $0.16 in the first six months of 2014, compared to $0.41 per share for the same period of 2013.

The following is a summary of non-cash expenditures:

Liquidity and Capital Resources.

Current assets at June 30, 2014 included $99.8 million in cash and accounts receivable, an increase of $47.2 million, from our cash and accounts receivable of $52.6 million at June 30, 2013, while cash and accounts receivable were $107.1 million as of December 31, 2013.  The decrease in cash position was driven by the purchase of copyright protected content and the repayment of notes payable during the first six months of 2014.

Net cash provided by operations was driven by the collection of account receivable as FAB shifts its business from a traditional wholesale and retail store environment to digital distribution of content.

Net cash used in investing activities during the first six months of 2014 was $663,412.  The use was primarily for the purchase of copyright protected content to be used for distribution on multiple platforms.

During the six months ended June 30, 2014, cash used in financing activities was $777,345.  This was the result of payment of short term notes payable as they came due during the first half of 2014.  Operations are funded through the leverage of financial institutions with short-term bank loans.  There was also a capital contribution to the VIE from the shareholders of the VIE.  The contribution was done to be in compliance with changes in regulations that required a larger minimum capital contribution for a PRC business.

Off-balance sheet arrangements

As of June 30, 2014 and December 31, 2013, we had no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.  

Not required for smaller reporting companies.

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Item 4. Controls and Procedures.

(a)  Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), which we refer to as disclosure controls, are controls and procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

In connection with the restatement of the consolidated financial statements in this Quarterly Report on Form 10-Q/A, the Company’s management, including the Company’s chief executive officer and the chief financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of June 30, 2014, the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were not effective.

The Company is conducting additional communication and disclosure training such that information required to be included in our filings is reported within the time periods required to allow timely decisions regarding required disclosure.

(b)  Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), occurred during the fiscal quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.   Legal Proceedings.

FAB is involved in routine legal and administrative proceedings and claims of various types.  We have no material pending legal or administrative proceedings, other than as discussed below or ordinary routine litigation incidental to our business, to which we or any of our subsidiaries are a party or of which any property is the subject.  While any proceeding or claim contains an element of uncertainty, management does not expect that any such proceeding or claim will have a material adverse effect on our results of operations or financial position.

In November and December 2013, three putative class action lawsuits were filed in the federal court for the Southern District of New York against FAB Universal Corp., its CEO and its CFO.  The actions are:  Simmons v. Spencer et al. (1:13-cv-08216-RWS. filed 11/18/13), Stubblefield v. Fab Universal Corp. et al. (1:13-cv-08499-RWS, filed 11/27/13), and Cox v. Fab Universal Corp. et al. (1:13-cv-08716-RWS, filed 12/09/13).  According to the complaints, defendants made false and/or misleading statements and failed to disclose material adverse facts about FAB’s business, operations, prospects and performance. Plaintiffs allege that defendants overstated the number of kiosks that FAB had deployed. FAB’s kiosks are “inundated with pirated digital entertainment content,” and the company’s Chinese subsidiary issued RMB 100 million ($16.4 million) worth of bonds to Chinese investors that are not reflected in the Company’s publicly disclosed financial statements.  Based on the foregoing, plaintiffs assert causes of action for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs seek unspecified compensatory damages, recessionary damages, fees and costs.  

In February 2014, two derivative actions were filed in the federal court for the Southern District of New York against its CEO, CFO and board of directors.  The suits are Thorbjonsen v. Spencer et al. (1:14-cv-00687-UA, filed 02/03/14) and Rowekamp v. Spencer et al. (1:14-cv-01114-RWS, filed 02/21/14).  Plaintiffs in the derivative action claim, on behalf of FAB Universal that Defendants breached their fiduciary duties of loyalty, due care, good faith, independence, candor and full disclosure to shareholders; misappropriated material, non-public information of FAB Universal, and violated of Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated there under.

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We believe this complaint is without merit and plan to defend ourselves vigorously.   Failure by us to obtain a favorable resolution of the claims set forth in the complaint could have a material adverse effect on our business, results of operations and financial condition.  Currently, the amount of such material adverse effect cannot be reasonably estimated, and no provision or liability has been recorded for these claims as of June 30, 2014. The costs associated with defending and resolving the complaint and ultimate outcome cannot be predicted.  These matters are subject to inherent uncertainties and the actual cost, as well as the distraction from the conduct of our business, will depend upon many unknown factors and management’s view of these may change in the future.

In 2009, West Chang’an Avenue Development Co., Ltd (“landlord”) filed a lawsuit against FAB Media for unpaid rent and other payments due the landlord.  The court ruled in favor of the plaintiff, and with this ruling the two parties reached a settlement, which included the implementation of the Lease Agreement commencing January 1, 2010.  The ruling was that FAB pay rent in arrears, penalty and property fees totaling RMB 2 million ($0.32million USD). The landlord then filed a claim against the Company for rent in arrears.  

The Company appealed the decision, and the result was the court overturned the decision and remanded the case. However, after a retrial, the court ruled in favor of the plaintiff, and the company had to vacate the leased space, pay off the rent, property fees and penalty, totaling about RMB 5.9 million ($0.95 million USD).

The case went through second trial, and the retrial procedure did not change the verdict. Payment plus interest on the debt of period, the amount payable rose to RMB 7 million ($1.1 million USD).  On May 23, 2014, the court ruled in favor of the plaintiff and the judgment for rent in arrears and penalty is RMB $7.5 million ($1.2million USD). The judgment has been in force, and has entered into the implementation procedure. The Company has to fulfill the payment in an amount of approximately RMB $7.5 million ($1.2million USD).

Item 1A.   Risk Factors.

Not required for smaller reporting companies.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

     None; not applicable.

Item 3.   Defaults Upon Senior Securities.

     None; not applicable.

Item 4.   Mine Safety Disclosures.

     None; not applicable.

Item 5.   Other Information.

None; not applicable.

(c)

During the quarterly period ended June 30, 2014, there were no changes to the procedures by which shareholders’ may recommend nominees to the Company’s board of directors.

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Item 6.   Exhibits .

(ii)

Exhibit No.

Description

31.1

302 Certification of Christopher J. Spencer

31.2  

302 Certification of John Busshaus

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 906 Certification.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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