UNITED STATES

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

FAB UNIVERSAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For The Years Ended December 31
	2012	2011
Cash Flows from Operating Activities
Net Loss from continuing operations	$ (4,182,501)	$ (9,488,458)
Net income (loss) from discontinued operations	178,276	(491,425)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of discount on notes payable	-	5,329
Loss on disposal of PPE and leasehold improvements	435,183	-
Gain on sale of equipment	(6,000)	-
Stock issued to employees and consultants	5,113,304	61,869
Non-cash compensation - options vested	5,086	92,888
Recovery of doubtful accounts	(1,612)	-
Deferred tax benefit	(609,986)	-
Re-pricing of warrants and preferred stock	-	243,876
Change in value of derivative liability	-	(15,784)
Non-cash interest expense on notes payable	-	9,942
Depreciation and amortization expense	1,972,047	48,466
Impairment of goodwill	-	7,054,932
Loss on marketable securities	-	150,000
Change in assets and liabilities:
Accounts receivable	(64,441)	15,480
Prepaid expenses	117,453	301
Inventory	(1,305,928)	-
Accounts payable	661,935	(52,655)
Accrued expense	528,309	51,652
Taxes payable	(916,504)	-
Deferred revenue	6,839,129	8,914
Net Cash Provided by (Used in) continuing operations	8,763,750	(2,304,673)
Net Cash Provided by discontinued operations	100,071	717,517
Net Cash Provided by (Used in) Operating Activities	8,863,821	(1,587,156)

Cash Flows from Investing Activities:
Purchase of property and equipment	(420,881)	(11,160)
Cash of discontinued operations	129,445	(535,145)
Cash acquired from Acquisition of DEI (FAB)	13,413,658	-
Proceeds from sale of property and equipment	6,000	-
Payment of long-term deposits	(4,880,390)	-
Investment in marketable securities	-	(150,000)
Net Cash Provided by (Used in) Investing Activities	8,247,832	(696,305)

Cash Flows from Financing Activities:
Issuance of common stock	1,108,923	3,923,575
Proceeds from notes payable	593,881	-
Payments of notes payable	(218,766)	(1,000,000)
Net Cash Provided by Financing Activities	1,484,038	2,923,575

Effect of Exchange Rate Change on Cash	168,926	-

Net Increase in Cash	18,764,617	640,114
Cash at Beginning of Year	907,320	267,206
Cash at the end of Year	$ 19,671,937	$ 907,320
Supplemental Disclosures of Cash Flow Information
Interest	$ 38,582	$ 7,549
Income taxes	$ 1,732,050	$ -

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

FAB UNIVERSAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


(Continued)

Supplemental Disclosure of Non-Cash Investing and Financing Activities:	For the Years Ended December 31,
	2012	2011
Re-pricing of warrants and preferred stock	-	243,876
Value of stock issued upon exercise of options for services	4,159,800	61,869
Value of stock issued to consultants	953,504	-
Amortization of discount on notes payable	-	5,329
Compensation upon vesting of stock options granted	5,086	92,888
Value of stock issued upon conversion of notes payable and related accrued interest	-	9,942
Change in fair market value of derivative liability	-	(15,784)
Loss realized on marketable securities	-	150,000

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

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

FAB Universal Corp (“Parent”, “Company”), a Colorado corporation, formerly known as Wizzard Software Corp., was organized on July 1, 1998. The Company operates in three segments, Software, Healthcare and Media Services. The Software segment engages primarily in the development, sale, and service of custom and packaged computer software products. The Media Services provides podcast hosting, content management tools and advertising services. The Healthcare segment operated primarily in the home healthcare and healthcare staffing services in Wyoming and Montana. (See Note 2) On September 8, 2005, Parent purchased all of the issued and outstanding shares of Interim Healthcare of Wyoming, Inc. (“Interim”), a Wyoming corporation, in a transaction accounted for as a purchase. On February 27, 2007, Parent organized Wizzard Acquisition Corp., a Pennsylvania corporation, to acquire and dissolve into the operations of Webmayhem, Inc. (“Libsyn”), a Pennsylvania corporation, in a transaction accounted for as a purchase. On April 3, 2007, Interim purchased the operations of Professional Personnel, Inc., d.b.a., Professional Nursing Personnel Pool (“PNPP”). On June 22, 2012, Parent organized Future Healthcare of America (“FHA”) and transferred all the shares of Interim to FHA. On October 1, 2012, FAB Universal Corp affected the spin-off of FHA, a wholly owned subsidiary of FAB Universal, and its subsidiary, Interim Healthcare of Wyoming, Inc. Each shareholder of FAB Universal received one share of common stock of FHA for each share of FU held as of the record date of September 5, 2012. FHA is traded on the OTCBB under the ticker symbol “FUTU”.

On September 26, 2012, Parent purchased all of the issued and outstanding shares of Digital Entertainment International Ltd. (“DEI”), a company incorporated under the law of the Hong Kong Special Administrative Region, in a transaction accounted for as a purchase. The accompanying consolidated financial statements include the financial statements of Digital Entertainment International Limited (“DEI”, “FAB”); its wholly owned subsidiary, Beijing Dingtai Guanqun Culture Co., Ltd. (“DGC”); Beijing FAB Culture Media Co., Ltd. (“FAB Media”), which is a variable interest entity (“VIE”), and Beijing FAB Digital Entertainment Products Co., Ltd. (“FAB Digital”), a wholly owned subsidiary of FAB Media from September 27, 2012 to December 31, 2012.

DEI was incorporated under the laws of Hong Kong Special Administrative Region of the People’s Republic of China (“PRC”) in November 2010. It was 85% owned by Universal Entertainment Group Limited (“UEG”), and 15% owned by Eon Capital International Inc. (“ECI”). In June, 2011, ECI agreed to transfer its 15% ownership of DEI to UEG at HK$1.00 per share. As of September 30, 2011, DEI was wholly owned by UEG.

DEI is a holding company and conducts its business through its wholly owned subsidiary, DGC, which is a wholly foreign-owned enterprise (“WFOE”) with limited liability incorporated in the PRC in March 2011. DGC has entered into a series of contractual agreements with the owners of FAB Media.

DEI, through its wholly owned subsidiary and its VIE, is engaged in marketing and distributing various officially licensed digital entertainment products under the “FAB” brand throughout the PRC, including but not limited to audiovisual products such as digital music files, Compact Discs, Video Compact Discs and Digital Video Disks as well as books, magazines, mobile phone accessories and cameras. DEI’s products and services are primarily distributed through its flagship stores, wholesale services, proprietary “FAB” kiosks, and online virtual stores. FAB kiosks, located in high-traffic areas of office buildings, shopping malls, retail stores and airports, are self-service terminals that provide a range of entertainment and consumer applications.

FAB Media was incorporated as a private enterprise in the PRC in April 2008 with a registered capital of RMB 1 million. FAB Media is primarily engaged in operating and providing proprietary multimedia kiosks for music downloads, information exchange and advertising.

FAB Digital was incorporated as a private enterprise in the PRC in September 2003 with a registered capital of 1 million Renminbi (“RMB”) and is a wholly owned subsidiary of FAB Media. FAB Digital specializes in the distribution of entertainment and audio visual products through its two flagship stores in Beijing as well as its online stores. Beijing Jingl-vtong Travel and Science Technology Co., Ltd. (“JLTST”), which is fully owned by FAB Digital, was incorporated in the PRC in November 2010 with a registered capital of RMB 1 million.

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION–(Continued)

In June 2012, a series of contractual arrangements were entered into between DGC, FAB Media and the individual shareholders of FAB Media. (See Note 2) Such arrangements include an Exclusive Service Agreement; an Equity Pledge Agreement; a Call Option Agreement; and a Shareholders’ Voting Right Proxy Agreement.

Pursuant to these agreements, DGC has the exclusive right to provide to FAB Media consulting services related to business operation and management. The key terms of these agreements include:

DGC has the sole discretion to make all operating and business decisions for FAB Media on behalf of the equity owners, including business operations, policies and management, approving all matters requiring shareholder approval;

FAB Media has agreed to pay all of the operating costs incurred by DGC, and transfers 100% of the income earned to DGC; DGC also has the right to determine the amount of the fees it will receive;

During the term of these agreements, DGC will retain the rights to the intellectual properties if they are created by DGC;

FAB Media may not enter into any other agreements with any third party to receive consulting service without the prior consent of DGC;

The equity owners pledge their respective equity interests in the FAB Media as a guarantee for the payment of technical and consulting services fees under the Exclusive Service Agreement;

The shareholders of FAB Media have irrecoverably and unconditionally granted DGC or its designee an exclusive option to purchase, to the extent permitted by PRC laws, all or any portion of equity interest of the FAB Media.

All these contractual agreements obligate DGC to absorb a majority of the risk of loss from FAB Media’s activities and entitle DGC to receive a majority of its residual returns. In essence, DGC has gained effective control over FAB Media. Based on these contractual arrangements, the Company believes that FAB Media should be considered a variable interest entity under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation”. Accordingly, the accounts of this entity are consolidated with those of DGC, the primary beneficiary.

DEI is effectively controlled by the majority shareholders of FAB Media. DEI has 100% equity interest in DGC. Accordingly, DGC, and FAB Media are effectively controlled by the same majority shareholders.

Therefore, DGC and FAB Media are considered under common control. The consolidation of DGC and FAB Media into DEI has been accounted for at historical cost and prepared on the basis as if the aforementioned exclusive contractual agreements between DGC and FAB Media had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements presented reflect the accounts of Parent, Libsyn, Interim, DEI and FHA through September 30, 2012. All significant inter-company transactions have been eliminated in consolidation. The operations’ of FHA, which includes the Interim subsidiary, was spun-off into its own company effective October 1, 2012. September 5, 2012 was the record date for the spin-off of our Home Healthcare subsidiary into a separate entity, and the stock began trading on the OTC BB effective October 1, 2012. The transaction was treated as a special dividend for the shareholders of record as of September 5, 2012.

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management made assumptions and estimates for determining reserve for accounts receivable, obsolete inventory, the realization of deferred tax assets and in determining the impairment of finite life intangible assets and goodwill and accruals for income tax uncertainties and other contingencies when applicable. Actual results could differ from those estimated by management.

Reclassification – The financial statements for the period ended December 31, 2011 have been reclassified to conform to the headings and classifications used in the December 31, 2012 financial statements.

Stock Split - On February 23, 2012, the Company affected a 1 for 12 reverse stock-split. All references to stock issuances and per share data have been retroactively adjusted to reflect this stock-split.

Inventory - Inventory includes books and video products and is recorded at the lower of cost or market, using the first-in, first-out (“FIFO”) method. The Company estimates net realizable value based on current market value and inventory aging analyses. As of December 31, 2012 no reserve for slow-moving or obsolete inventory is considered necessary.

Revenue Recognition - Revenue is recognized when earned. The Company's revenue recognition policies are in compliance with FASB ASC Topic 985-605, Software — Revenue Recognition. The Company's revenue recognition policies are also in compliance with the Securities and Exchange Commission Staff Accounting Bulletin No. 101 and 104.

Digital media publishing services are billed on a month to month basis. The Company recognizes revenue from providing digital media publishing services when the services are provided and when collection is probable. The Company recognizes revenue from the insertion of advertisements in digital media, as the digital media with the advertisement is downloaded and collection is probable. The Company recognizes revenue from the sale of apps and premium subscriptions when sold and collection is probable.

The Company sells packaged and custom software products and related voice recognition product development consulting. Software product revenues are recognized upon shipment of the software product only if no significant Company obligations remain, the fee is fixed or determinable, and collection is received or the resulting receivable is deemed probable.

In the PRC, Value Added Tax (“VAT”) of 17% of the invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Company; instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to the authorities.

Functional Currency / Foreign Currency Translation – The functional currency of FAB Universal Corp is the United States Dollar (USD). The functional currency of DEI is the Renminbi (“RMB”) and its reporting currency is U.S. dollars for the purpose of these financial statements. The Company’s consolidated balance sheet accounts are translated into U.S. dollars at the period-end exchange rates (6.2313 RMB to $1 at December 31, 2012) and all revenue and expenses are translated into U.S. dollars at the average exchange rates prevailing during 2012 (6.2495 RMB to $1) in which these items arise. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value of Financial Instruments - The Company accounts for fair value measurements for financial assets and financial liabilities in accordance with FASB ASC Topic 820. The authoritative guidance, which, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as the exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

•

Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;

•

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

•

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, accounts receivable, prepaid expenses, accounts payable, accrued expenses and notes payable approximates their recorded values due to their short-term maturities. Long-term deposits from customers represent cash and, as such, their carrying values approximates’ fair value.

Property and Equipment - Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization is calculated on the straight-line method over the estimated useful lives of the assets as set out below:

Estimated Useful Life

Electronic equipment 2-5 years

Office furniture and equipment 2-10 years

Vehicles 5 years

Building 48.5 years

Leasehold improvements Shorter of lease terms or estimated useful life

Goodwill and other Intangible Assets - The Company accounts for Goodwill and other intangible assets in accordance with provisions of FASB -ASC Topic 350, Intangibles--Goodwill and Other. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of Topic 350. Impairment losses arising from this impairment test, if any, are included in operating expenses in the period of impairment. Topic 350 requires that intangible assets with finite lives be amortized over their respective estimated useful lives, and reviewed for impairment in accordance with Topic 360, criteria for recognition of an impairment of Long-Lived Assets.

Income Taxes - The Company is subject to the Income Tax Laws of U.S. and the PRC. The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The components of deferred tax assets are individually classified as current and non-current based on their characteristics.

ASC 740-10-25 prescribes a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There is no material uncertain tax positions as of December 31, 2012 and 2011, respectively (See note 12 – Capital Stock and note 15- Contingencies).

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – ACQUISITION AND DISCONTINUED OPERATION

On September 26, 2012, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of DEI, a company incorporated under the law of the Hong Kong Special Administrative Region in exchange for the issuance of a total of 10,282,611 “unregistered” and “restricted” shares (the “Initial Company Shares”) of the Company’s common stock, representing 49% of the Company’s issued and outstanding common shares, on a fully-diluted basis, immediately after the closing (the “Closing”). As additional consideration for the DEI shares, at the Closing the Company also issued 290 “unregistered” and “restricted” shares of its Series B Convertible Preferred Stock.

The transaction was accounted for in accordance with the provisions of ASC 805-10, Business Combinations. The Company retained independent appraisers to advise management in the preliminary determination of the fair value of the various assets acquired and liabilities assumed. The values assigned in these financial statements are preliminary and represent management’s best estimate of fair values as of the Closing Date. The Company has recorded estimated amounts of the fair market value of the assets acquired. The determination of the DEI purchase price and allocation of the purchase price to the underlying tangible and intangible assets in the financial statements are subject to change as additional information becomes available. As required by ASC 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Non-controlling Interest, management conducted a review to reassess whether they identified all the assets acquired and all the liabilities assumed, and followed ASC 805-20’s measurement procedures for Closing Date recognition of the fair value of net assets acquired.

The following are the fair value of assets acquired and liabilities assumed as of the Closing Date of September 26, 2012 (in thousands):


Cash and cash equivalents	$	13,414
Accounts receivable, net		6,586
Advances to suppliers, net		1,823
Inventories, net		3,855
Deferred tax asset, current		1,524
Other current assets		16
Property and equipment		16,430
Deferred tax assets, non-current		2,930
Long-term deposits		19,365
Short-term bank loans		(1,586)
Accounts payable		(5,146)
Accrued expenses		(2,378)
Deferred revenue, current		(3,885)
Other payable		(1,812)
Taxes payable		(2,492)
Long-term deposits from customers		(2,446)
Long-term payable		(143)
Deferred revenue , non-current		(5,315)
Net tangible assets acquired		40,740
Goodwill		48,605
Other intangible assets		28,961
Total Consideration	$	118,306

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – ACQUISITION AND DISCONTINUED OPERATION (Continued)

The fair value of the major components of the other intangible assets acquired and their estimated useful lives are as follows (dollars in thousands):


	Preliminary Fair Value		Weighted Average Useful Life (in Years)
Customer relationships	$	8,900	3
Intellectual Property		4,300	3
Trade name		13,876	(a)
Non-compete		1,885	2
Total	$	28,961

(a) The FAB trade name has been determined to have an indefinite life.

Under ASC 805-10, acquisition-related costs (i.e., advisory, legal, valuation and other professional fees) are not included as a component of consideration transferred, but are accounted for as expenses in the periods in which the costs are incurred. Acquisition-related costs were $405,056 during 2012.

The following unaudited pro forma condensed financial information presents the combined results of operations of FAB Universal and DEI as if the acquisition had occurred as of the beginning of each period presented. The pro forma statement of operations assumes the spin-off of the Home Healthcare subsidiary occurred on January 1, 2011. (in thousands except per share amounts):


	Historical
	FAB Universal	DEI	FHA
	For the Year Ended December, 31			Pro forma
	2012	2012	2012	Adjustments	Combined
Net sales	$ 6,981	$ 87,855	$ (3,231)	-	$ 91,605
Net income (loss)	(7,102)	22,660	(178)	(5,343)	10,037
Net income per common share, basic and diluted					$ 0.21
Shares outstanding, basic and diluted					47,027
	For the Year Ended December, 31			Pro forma
	2011	2011	2011	Adjustments	Combined
Net sales	$ 6,540	$ 76,562	$ (3,426)	-	$ 79,676
Net income (loss)	(9,980)	17,613	491	(5,343)	2,781
Net income per common share, basic and diluted					$ 0.06
Shares outstanding, basic and diluted					45,560

Pro forma adjustments represent the full year amortization of intangible assets acquired in the acquisition of DEI. These assets were amortized on a straight line basis over their estimated useful lives.

The unaudited pro forma condensed financial information is not intended to represent or be indicative of the consolidated results of operations of the Company that would have been reported had the acquisition been completed as of the beginning of the period presented, and should not be taken as being representative of the future consolidated results of operations of the Company.

Effective October 1, 2012, FAB Universal Corp affected the spin-off of FHA, a wholly owned subsidiary of FAB Universal, and its subsidiary, Interim Healthcare of Wyoming, Inc. Each shareholder of FAB Universal received one share of common stock of FHA for each share of FU held as of the record date of September 5, 2012. FHA is traded on the OTCBB under the ticker symbol “FUTU” The major classes of assets at October 1, 2012 were accounts receivables, net ($502k), cash ($406k), and goodwill ($1,190k). The major classes of liabilities at October 1, 2012 were accounts payable ($38k), and other current liabilities ($324k).

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS

The Company completed an analysis of the fair value of the business as it relates to the goodwill associated with Libsyn. The analysis of the business enterprises’ fair value was performed as of December 31, 2012. Based on the results of the application of the Fair Value, no impairment of goodwill was recorded in connection with Libsyn. When making these estimates, we were required to make estimates of future operating trends and judgments on discount rates and other variables. Actual future results and other assumed variables could differ from those estimated.

Goodwill consists of:


		December31,		December 31,
		2012		2011
Digital Entertainment International - DEI	$	49,168,706	$	-
Webmayhem Inc.(Libsyn)		11,484,251		11,484,251
Total Goodwill	$	60,652,957	$	11,484,251

During 2011, the Company recorded an impairment charge of $7,054,932 relating to Libsyn.

The following is a summary of goodwill:


		For the Year Ended December 31,		For the Year Ended December 31,
		2012		2011

Goodwill at beginning of period	$	12,673,912	$	12,673,912
Acquisition of DEI		49,168,706		-
Goodwill discontinued operations		(1,189,661)		(1,189,661)
Goodwill at end of period	$	60,652,957	$	11,484,251

Other intangible assets - Other intangible assets consist of customer relationships, intellectual property, trade name and non-compete, which were generated through the acquisition of DEI. Management considers these intangible assets to have finite-lives except trade name. These assets are being amortized on a straight-line basis over their estimated useful lives.

As of December 31, 2012, identifiable intangible assets consist of following:


	Preliminary Fair Value		Weighted Average Useful Life (in Years)	Accumulated Amortization	Currency Translation Adjustment	Net Carrying Amount
Customer Relationships	$	8,900,000	3	$ 787,029	$ 100,965	$ 8,213,936
Intellectual Property		4,300,000	3	380,250	48,782	3,968,532
Trade name		13,876,000	(a)	(a)	161,000	14,037,000
Non-compete		1,885,200	2	250,063	21,143	1,656,280
Total	$	28,961,200		$ 1,417,342	$ 331,890	$ 27,875,748

(a) The FAB trade name has been determined to have an indefinite life.

The estimated future amortization expenses related to other intangible assets as of December 31, 2012 are as follows:


For twelve months ending December 31,
2013	$ 5,342,600
2014	5,113,680
2015	3,382,468
Total	$ 13,838,748

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ACCOUNTS RECEIVABLE

Accounts receivable as of December 31, 2012 and 2011 consist of the following:


	December 31,
	2012	2011
Accounts receivable	$ 6,941,045	$ 218,545
Allowance for doubtful accounts	(14,000)	(14,000)
Accounts receivable, net	$ 6,927,045	$ 204,545

Currently, the Company grants credit to customers with well-established credit history with terms from net 30 days to twelve months while the Company generally requests other customers to pay either in advance or upon delivery. The Company determines the allowance based on known troubled accounts, historical experience, and other currently available evidence.

NOTE 6 - PROPERTY AND EQUIPMENT

Property and equipment and related accumulated depreciation are as follows:


	December 31	December 31
	2012	2011
Electronic equipment	$ 1,436,466	$ 321,633
Office furniture and equipment	54,077	3,383
Vehicles	57,471	-
Building	14,366,218	-
Leasehold improvements	3,607,563	-
	19,521,795	325,016
Less: Accumulated depreciation	(2,801,158)	(292,988)
Total property and equipment, net	$ 16,720,637	$ 32,028

Depreciation expense for the years ended December 31, 2012 and 2011 was $554,707 and $48,466, respectively.

NOTE 7 – LONG-TERM DEPOSITS

Long term deposits consist of following:


		December 31,		December 31,
		2012		2011
Prepayments for setting up flagship stores	$	20,862,420	$	-
Anti-piracy sales guarantee deposits		3,370,083		-
Rent deposits		255,628		3,582
Total Long-Term Deposits	$	24,488,131	$	3,582

Long term deposits include anti-piracy sales guarantee deposits made to product licensors by FAB Media, rent deposits made to landlords, and prepaid payment which are made to commission agents. The deposits for anti-piracy sales guaranties are fully refundable when FAB Media decides to terminate the license agreements with the licensors to sell their products. The rent deposits are also fully refundable at the end of the lease term. The prepaid payments are used for new FAB flagship stores opening.

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SHORT-TERM LOANS

Short-term bank loans consist of a $1,604,802 loan from China Merchants Bank and $8,024 loan from Bank of Communications as of December 31, 2012.

Short-term bank loans are primarily used for working capital needs. On April 25, 2012, FAB Digital entered into a loan agreement with China Merchants Bank (“CMB”) for a short term loan due April 25, 2013 in the amount of RMB 10,000,000 (Approximately $1.5 million). The interest rate of the loan is around 8.52%, which is a variable interest rate based on the one year benchmark rates of similar loans published by the People’s Bank of China plus 35 basis points, adjustable on a monthly basis. In connection with the loan agreement, the Company’s Chairman, and major shareholder, entered into a pledge agreement with Beijing Lianhekaiyuan Investment and Guarantee Co. LTD (“LIGC”), the loan was guaranteed and collateralized by the software copyrights owned the chairman and major shareholder.

On September 23, 2012, FAB Digital entered into a new loan agreement with Bank of Communications (“CM”) for a one-year term loan due October 10, 2013 in the amount of RMB 50,000 (approximately $0.008 million). The interest rate of the loan is around 6.00%, which is a variable interest rate based on the one year benchmark rates of similar loans published by the People’s Bank of China.

On October 1, 2012, FAB Universal entered into a financing agreement with Prime Rate Premium Finance Corp for an 18 month loan due January 1, 2014 in the amount of $573,750. The loan has a 4.25% interest rate and the loan will be repaid over 15 equal installments of $39,343.

NOTE 9 – STATUTORY RESERVE

The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net income. Such appropriation may cease if the balance of the fund is equal to 50% of the entities’ registered capital or shareholders’ equity. The Company has reserved $131,825 at both December 31, 2012 and 2011 since the amount has reached the statutory limit of 50% of the registered capital.

NOTE 10 – RELATED PARTIES

The table below sets forth the related parties and their affiliation with the Company:


Related Parties	Affiliation with the Company

Guangdong Endless Culture Co., Ltd.(GEC)	Affiliated Company controlled by the chairman and major shareholder
Zhang Hongcheng	Chairman and major stockholder

Amounts due to related parties are as follows:


		December 31		December 31
		2012		2011
Guangdong Endless Culture co., Ltd	$	4,814	$	-
Zhang Hongcheng		36,527		-
Total due to related parties	$	41,341	$	-

Mr. Zhang Hongcheng paid certain professional fees on behalf of FAB Media for the quarter ended September 30, 2012.

FAB Media has four business locations, two of which are subleased from GEC. In addition, GEC entered into a lease agreement with Xidan Joy City on behalf of FAB Media for a term of eight-years from April 2008 to March 2016. Subsequently, FAB Media entered into a sublease agreement with GEC. The average monthly rent expense is $49,604. FAB Media paid the rental and promotion expense to Xidan Joy City directly.

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – RELATED PARTIES (Continued)

Future minimum annual rental payments due are as follows:


		Rental
Twelve months ending December 31,		Commitments
2013		$ 1,197,089
2014		1,180,399
2015		1,180,399
2016		732,660
2017		243,089
Thereafter		-
Total		$ 4,533,636

NOTE 11 – INCOME TAXES

The Company is subject to income taxes on an entity basis on income arising in or derived from U.S. as well as the People’s Republic of China (“PRC”) in which each entity is domiciled.

DEI was incorporated in Hong Kong in November 2010, and has not earned any income that was derived in Hong Kong since inception and therefore was not subject to Hong Kong income tax.

Certain subsidiaries of the Company were organized under the laws of the PRC which are subject to Enterprise Income Tax (“EIT”) on the taxable income as reported in their respective statutory financial statements adjusted in accordance with the Enterprise Income Tax Law. Pursuant to the PRC Income Tax Laws, DGC, FAB Digital and JLTST are subject to EIT at a statutory rate of 25%.

FAB Media was qualified as a High and New Technology Enterprise in Beijing High-Tech Zone in December 24, 2010, and is entitled to a preferential tax rate of 15% through December 2013.

DEI files income tax returns with both the National Tax Bureau and the Local Tax Bureaus in the PRC. All tax returns of DEI since inception are subject to tax examination by tax authorities.

DEI recognized deferred tax assets in the amount of $5,117,965 as of December 31, 2012. Deferred tax assets represent temporary differences arising primarily from deferred revenue and the allowance for doubtful accounts. The components of deferred tax assets are as follows:


		December 31		December 31
		2012		2011
Deferred tax asset
Allowance for doubtful accounts	$	-	$	-
Deferred revenue		5,117,965		-
Total deferred tax assets		5,117,965		-
Current portion		(1,771,799)		-
Deferred tax assets, non-current	$	3,346,166	$	-

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – INCOME TAXES (Continued)

Income tax expense (benefit) consists of:


		December 31		December 31
		2012		2011
Current income tax expense	$	1,908,689	$	-
Deferred income tax benefit		(609,985)		-
Total net taxes expense	$	1,350,704	$	-

Taxes payable consist of the following:


		December 31		December 31
		2012		2011
Value added tax payable	$	(411,352)	$	-
Income tax payable		1,885,489		-
Business tax payable		(6,404)		-
Other		136,088		-
Total taxes payable	$	1,603,821	$	-

The Company accounts for U.S. income taxes in accordance with FASB ASC Topic 740, Accounting for Income Taxes which requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carryforwards. At December 31, 2012 and 2011, the total of all deferred tax assets was $21,381,056 and $18,481,957, respectively, and the total of the deferred tax assets related to good will was $275,687 and $841,717, respectively. The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the Company’s future earnings, and other future events, the effects of which cannot be determined. Because of the uncertainty surrounding the realization of the deferred tax assets the Company has established a valuation allowance of $21,386,739 and $18,481,957 for the years ended December 31, 2012 and 2011. The change in the valuation allowance for the years ended December 31, 2012 and 2011 was $3,022,397 and $3,657,122, respectively.

The components of U.S. income tax expense (benefit) from continuing operations for the years ended December 31, 2012 and 2011 consist of the following:


	For the years ended December 31
		2012		2011
Current tax expense:
Federal	$	-	$	-
State		-		-
Current tax expense		-		-

Deferred tax expense (benefit):
Allowance for doubtful accounts		414		-
Bonus accrual		12,874		5,633
Vacation accrual		340		(371)
Goodwill – impaired		-		(2,947,020)
Goodwill – tax amortization		555,476		596,091
Net operating loss carryforward		(3,519,099)		(1,311,455)
Change in effective rate		(72,401)		-
Valuation allowance		3,022,396		3,657,122
		-		-
Income tax expense	$	-	$	-

Deferred income tax expense/(benefit) results primarily from the reversal of temporary timing differences between tax and financial statement income.

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – INCOME TAXES (Continued)

A reconciliation of income tax expense at the U.S. federal statutory rate to income tax expense at the company’s effective rate is as follows:


		December 31,
		2012		2011
Current deferred tax assets:
Computed tax at the expected statutory rate	$	(2,475,330)	$	(3,393,160)
State and local income taxes, net of federal		(479,154)		(403,297)
Amortization of discount on convertible notes payable for the beneficial conversion feature, and warrants		-		2,123
Other non-deductible expenses		2,760		116,433
Non-cash compensation – options		1,729		20,779
Change in valuation allowance		3,022,396		3,657,122
Change in effective rate		(72,401)		-
Income tax expense	$	-	$	-

The temporary differences, tax credits and carryforwards gave rise to the following deferred tax asset at December 31, 2012 and 2011:


		December 31,
		2012		2011
Current deferred tax assets (liabilities):
Allowance for doubtful accounts	$	5,683	$	13,830
Bonus accrual		-		18,485
Vacation accrual		-		9,665
Valuation allowance		(5,683)		(41,980)
Total current deferred tax assets (liabilities)		-		-

Long-term deferred tax assets (liabilities):
Excess of goodwill/intangible assets amortization for tax over book		275,687		841,717
Net operating loss carryforward		21,105,369		17,598,260
Valuation allowance		(21,381,056)		(18,439,977)
Total long-term deferred tax assets (liabilities)		-		-
	$	-	$	-

The Company has available at December 31, 2012 operating loss carryforwards of approximately $52,000,000 in the U.S. which may be applied against future taxable income and which expires in various years through 2032. Various provisions of the Internal Revenue Code limit the amount of net operating loss or other tax attributes that can be used prospectively following a business combination or merger. The Company has determined that it is not subject to these limitations for the 2012 tax year. The Company will evaluate the applicability of the tax attribute-limiting provisions prospectively.

We file U.S. federal, and multiple U.S. state returns, and we are generally no longer subject to tax examinations for years prior to 2008 for U.S. federal and U.S. states tax returns.

NOTE 12 - CAPITAL STOCK

Preferred Stock - The Company has authorized 10,000,000 shares of preferred stock, $.001 par value. As of December 31, 2012, the Company had 290 Series B Preferred shares issued and outstanding.

On September 26, 2012, at the Closing of the DEI acquisition, the Company issued, as additional consideration 290 “unregistered” and “restricted” shares of its Series B Convertible Preferred Stock.

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - CAPITAL STOCK (Continued)

The Preferred Stock has no dividend rights or voting rights or the right to receive any assets of the Company upon liquidation, dissolution or winding up. The Preferred Stock will be convertible into shares of the Company’s common stock in three tranches upon the occurrence of certain conversion events (see note 15 – Contingencies).

Upon the occurrence of each conversion event, the three tranches of Preferred Stock will be convertible into a number of shares of common stock that will bring the overall equity position in the Company of the holders of the Initial Company Shares, the Preferred Stock and the common stock issuable upon conversion of the Preferred Stock, on a fully diluted basis as of the date of Closing, to 70%, 74% and 78%, respectively. Based on a total of 10,702,309 fully-diluted outstanding common shares as of the Closing date, 14,689,444 common shares will be issuable upon conversion of the first tranche of Preferred Stock; 5,488,364 common shares upon conversion of the second tranche; and 7,484,132 common shares upon conversion of the third tranche.

1 for 12 Reverse Stock Split – On February 8, 2012, the Company shareholders approved a 1 for 12 reverse stock-split for shareholders of record on February 23, 2012. All share and per share amounts in the accompanying consolidated financial statements as of December 31, 2011have been restated to reflect the split. The company issued 2,739 common shares for the fractional shares resulting from the split.

Common Stock - The Company has authorized 200,000,000 shares of common stock, $.001 par value. As of December 31, 2012, the Company had 20,468,860 common shares issued and outstanding.

On February 24, 2012, the Company issued 37,500 common shares upon the exercise of options valued at $63,000 to consultants and employees for services rendered.

On March 21, 2012, the Company issued 28,334 common shares upon the exercise of options valued at $47,601 to consultants and employees for services rendered.

On March 21, 2012, the Company issued 429,169 common shares valued at $721,004 to consultants and employees for services rendered.

On May 29, 2012, the Company issued 70,553 common shares upon the exercise of options valued at $118,529 to management for services rendered.

On June 4, 2012, the Company issued 37,254 common shares upon the exercise of options valued at $76,371 to management for services rendered.

On August 2, 2012, the Company issued 15,784 common shares upon the cashless exercise of warrants valued at $67,086.

On August 14, 2012, the Company entered into a Warrant Amendment Agreement with holders of its Common Stock Purchase Warrants. Under the terms of the Agreement, the parties agreed to reduce the exercise price of the Warrants from $5.16 per share to $3.25. The Warrant Holders exercised 341,208 warrants for 341,207 shares of the Company’s Common Stock. The Company received proceeds of $1,108,923.

On August 27, 2012, the Company issued 925,177 common shares upon the exercise of options valued at $3,222,079 to consultants, employees, management and board members.

On August 29, 2012, the Company issued 50,000 common shares valued at $232,500 to consultant for services rendered.

On September 26, 2012, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of DEI, a company incorporated under the law of the Hong Kong Special Administrative Region in exchange for the issuance of a total of 10,282,611 “unregistered” and “restricted” shares of the Company’s common stock, representing 49% of the Company’s issued and outstanding common shares, on a fully-diluted basis, immediately after the closing. (see note 15 – Contingencies)

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - CAPITAL STOCK (Continued)

On September 28, 2012, the Company issued 123,000 common shares upon the exercise of options valued at $632,220 to consultants for services.

During the 2012, the company recorded $5,086 of non-cash compensation expense related to the vesting of certain stock options issued.

Effective October 1, 2012, FAB Universal Corp spun-off FHA, a wholly owned. Each shareholder of FAB Universal received one share of common stock of FHA for each share of FU held as of the record date of September 5, 2012. FHA is traded on the OTCBB under the ticker symbol “FUTU”.

On January 7, 2011, the Company issued 33,333 common shares in payment of a $100,000 note.

On January 11, 2011, the Company issued 24,981 common shares in payment of a $65,000 note payable and $9,942 of accrued interest.

On January 19, 2011, the Company issued 20,833 unregistered and restricted shares of common stock as part of the settlement with GHS Entertainment.

On January 20, 2011, the Company issued 416,667 shares upon notice of exercise of warrants by five institutional investors and the company received $1.1 million in cash.

On January 21, 2011, the Company closed a Subscription Agreement by which six institutional investors purchased 1,166,672 shares of Common Stock, par value $.001, and 440,268 warrants to purchase common stock at $5.16 per share, for a total amount of $2,823,600, net of fees of $256,400. As a condition to the Subscription agreement, all of the holders of the Company’s Series A 7% Convertible Preferred Stock will convert all of their Preferred Stock into shares of Common Stock at a conversion ratio of $6.40 and agree to a 6 month lock-up on such conversion shares. On January 18, 2011, all of the holders of the Preferred Stock executed Waiver Agreements and Lock-Up Agreements incorporating these terms.

On January 31, 2011, the Company issued 2,647 common shares upon the exercise of options valued at $7,942 to consultants and employees for services rendered.

On January 19, 2011, the Company recorded $114,349 of expense for the re-pricing of the conversion price of the Series A Preferred Stock from $9.60 to $6.399996 per share.

On January 19, 2011, the Company recorded $101,000 of expense for the re-pricing of the conversion price of the Warrants from $4.20 to $2.64 per share.

On January 19, 2011, the Company recorded $28,526 of expense for the re-pricing of the conversion price of the Warrants from $6.00 to $2.64 per share.

On April 25, 2011, the Company issued 241,667 common shares upon notice of conversion of 1,547 shares of Series A Preferred Stock.

On April 28, 2011, the Company issued 1,500 common shares upon the exercise of options valued at $4,500 to consultants and employees for services rendered.

On July 1, 2011, the Company issued 9,885 common shares upon the exercise of options valued at $22,360 to consultants and employees for services rendered.

On August 1, 2011, 15,417 common shares were returned to the company and canceled as the shareholders did not perform their contractual obligations for which the shares were originally issued.

On November 9, 2011, the Company issued 383,333 common shares upon notice of conversion of 2,453 shares of Series A Preferred Stock.

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - CAPITAL STOCK (Continued)

On December 14, 2011, the Company issued 16,111 common shares upon the exercise of options valued at $27,067 to consultants and employees for services rendered.

During 2011, the company recorded $92,888 of non-cash compensation expense related to the vesting of certain stock options issued.

NOTE 13 – STOCK OPTIONS AND WARRANTS

At December 31, 2012, the Company had 99,060 warrants outstanding to purchase common stock of the Company at $5.16 per share held by Iroquois Master Fund Ltd.

Under the terms of the warrant held by Iroquois Master Fund Ltd., if it is deemed that another person acquires more than 50% of the outstanding shares of Common Stock of the Company, a Fundamental Transaction, the holder of the warrant is entitle to receive the shares of stock originally represented by the warrant upon subsequent exercise of the warrant and any additional consideration, the “Alternate Consideration”.

Alternatively, at the Holder’s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction, the Company may purchase this Warrant from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction.

The Company has multiple Stock Options plans. Under the plans, the Board is empowered to grant stock options to employees and officers of the Company. The following table shows the total number of shares of common stock available under each plan, the number of options exercised during 2012 and the options that remain available under each plan. All shares during 2012 were deemed fully paid and issued as common stock.


Plan	Total	Options Exercised	Remaining
Name	Available	During 2012	Available
2012 Plan	3,000,000	961,333	2,038,667
2010 Plan	166,667	165,555	0
2009 Plan	166,667	61,969	0
2008 Plan	16,667	292	28
2008 Key Employee Plan	33,334	959	260
2007 Plan	16,667	3,584	12
2007 Key Employee Plan	16,667	16,667	0
2006 Key Employee Plan	11,459	11,459	0
Total	3,428,128	1,221,818	2,038,967

The fair value of option grants during 2011 was determined using the Black-Scholes option valuation model. The options granted during 2012 were immediately vested and exercised. Therefore, their fair value was the same as the market price of the stock issued when exercised. The significant weighted average assumptions relating to the valuation of the Company’s Stock Options for 2012 and 2011 were as follows:


	2012	2011
Dividend yield	0%	0 %
Expected life	0 yrs	3 yrs
Expected volatility	0.00	100.74
Risk-free interest rate	0.00%	1.09%

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 – STOCK OPTIONS AND WARRANTS (Continued)

A summary of the status of options granted at December 31, 2012, and changes during the year then ended are as follows:


	For the Year Ended December 31, 2012
	Shares		Weighted Average Exercise Price	Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at beginning of year	119,597	$	7.72	2.7 years	$	-
Granted	1,221,818		0.00	-		-
Exercised	(1,221,818)		0.00	-		-
Forfeited	(119,346)		7.72	-		-
Expired	(251)		6.12	-		-
Outstanding at end of year	0		0.00	0.0 years		-
Vested and expected to vest in the future	0		0.00	0.0 years		-
Exercisable at end of year	0		0.00	0.0 years		-
Weighted average fair value of options granted	0	$	0.00	0.0 years	$	-

The Company had 10,922 non-vested options at the beginning of the year with a weighted average exercise price of $2.16. At December 31, 2012 the Company had no options granted that remain unexercised.

During the years ended December 31, 2012 and 2011, the Company recorded $5,086 and $92,888 of non-cash compensation expense related to the vested stock options issued to employees.

For the years December 31, 2012 and 2011, the Company recorded non-cash compensation cost of $4,159,800 and $61,869 for vested and exercised options issued to management, board members, employees and consultants.

NOTE 14 - LOSS PER COMMON SHARE

The following data show the amounts used in computing loss per share and the weighted average number of shares of common stock outstanding for the periods presented:


		2012		2011
Net loss from continuing operations	$	(4,182,501)	$	(9,488,458)
Net income (loss) from discontinued operations		178,276		(491,425)
Net loss available to common shareholders (numerator)	$	(4,004,225)	$	(9,979,883)
Weighted average number of common shares outstanding during the period used in basic and diluted loss per share (denominator)		11,779,195		7,615,663

At December 31, 2012, the Company had 99,060 warrants outstanding to purchase common stock of the Company at $5.16 per share, which were not included in the loss per share computation because their effect would be anti-dilutive.

At December 31, 2011, the Company had 497,738 warrants outstanding to purchase common stock of the Company at exercise prices ranging from $2.40 to $5.16 per share, and the Company had 119,597 options outstanding to purchase common stock of the Company at exercise prices ranging from $2.16 to $26.40 per share.

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - CONTINGENCIES

Contingent Consideration for the Acquisition of DEI As further discussed in Notes 1, 3 and 12, the Initial Company Shares are subject to the terms of the Voting Agreement, which assigns to the Company’s Board of Directors the right to vote all of the Initial Company Shares until the following milestones are achieved for a period of eight (8) consecutive and complete reporting quarters of the Company after the Closing:

(i) if DEI and the VIE Entity successfully complete all of the Corporate Governance Objectives for two (2) consecutive and complete reporting quarters after the Closing, the Company’s Board of Directors will release the voting rights to 50% of the Initial Company Shares held by the designees at such time;

(ii) upon successful completion of all of the Corporate Governance Objectives for six (6) consecutive and complete reporting quarters after the Closing, the Company’s Board of Directors will release the voting rights to another 25% of the Initial Company Shares and

(iii) upon the successful completion of all of the Corporate Governance Objectives for eight (8) consecutive and complete reporting quarters after the Closing, the Company’s Board of Directors will release the voting rights to the remaining Initial Company Shares.

Fifty percent of the Initial Company Shares (the “Lock-up Shares”) are also subject to the terms of a Lock-up Agreement by which UEG’s designees have agreed not to transfer, sell, hypothecate or gift such Lock-up Shares for a period of 12 months following the Closing date.

In addition, during the first 24 months after the Closing, DEI and each of its permitted transferees or designees will have piggyback registration rights with respect to all Initial Company Shares that are not then subject to the restrictions of the Lock-up Agreement or the Voting Agreement, and all Company shares that have been issued upon conversion of Preferred Stock to cause such shares to be included in (i) any registration statement that the Company files with the Securities and Exchange Commission to register under the Securities Act of 1933, as amended, common shares held by any person who was a stockholder of the Company at the time of Closing (or any transferee thereof); or (ii) any other registration statement filed by the Company so long as a majority of the Company’s Board of Directors has made a good faith determination that such piggyback registration will not significantly prejudice the Company’s ability to raise capital.

As additional consideration for the acquisition, the Company issued 290 share of Series B Convertible Preferred Stock. The Company further agreed to convert these shares of Preferred Stock into additional shares of common stock upon DEI achieving corporate government requirement and financial results.

The Preferred Stock will be convertible into shares of the Company’s common stock in three (3) tranches upon the occurrence of the following conversion events:

(i) upon the successful completion of certain Corporate Governance Objectives for the four (4) consecutive and complete reporting quarters of the Company immediately following the Closing, the designees shall have the right to convert the first tranche of 210 shares of Preferred Stock into shares of the Company’s common stock;

(ii) upon the successful completion of: (a) all of the Corporate Governance Objectives for the four (4) consecutive and complete reporting quarters of the Company immediately following the Closing; and (b) a Revenue Objective requiring DEI to attain sales revenues of at least US$60,000,000 and net income of US$12,000,000 for fiscal year 2011, UEG’s designees shall have the right to convert the second tranche of 40 shares of Preferred Stock into shares of the Company’s common stock.

(iii) upon the successful completion of (a) all of the Corporate Governance Objectives for the six (6) consecutive and complete reporting quarters of the Company immediately following the Closing; and (b) a Revenue Objective requiring that DEI attain sales revenues of at least US$70,000,000 and net income of US$14,000,000 for fiscal year 2012, UEG’s designees shall have the right to convert the third tranche of 40 shares of Preferred Stock into shares of the Company’s common stock.

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 – CONTINGENCIES (Continued)

Pending lawsuit - In April 2010, FAB Media filed suit against Beijing Times Square Development Company in the Beijing Xicheng District People’s Court, alleging breach of contract of an agreement entered into with the defendants in 2008 and seeking damages of $281,942 (RMB1,800,000). As of the date of this report, the lawsuit remains pending. The management of FAB Media expects they will settle with Beijing Time Square Development Company through the mediation of the court.

NOTE 16 - CONCENTRATIONS

For the years ended December 31, 2012 and 2011, no individual customer accounted for more than 10% of the total revenues, no single customer accounted for more than 10% of total outstanding accounts receivable.

For the year ended December 31, 2012, four vendors provided 16%, 13%, 13% and 10% of the Company’s purchases, respectively, one vendor accounted for 14% of the total outstanding accounts payable. For the years ended December 31, 2011, no individual suppliers accounted for more than 10% of the Company’s purchases, no single vendor accounted for more than 10% of total outstanding accounts payable.

NOTE 17 - SEGMENT REPORTING

ASC 280, “Segment Reporting”, establishes standards for reporting information about operating segments on a basis consistent with the Company's internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company's business segments.

The Company is engaged in distribution of digital entertainment products and services. The Company's chief operating decision maker (“CODM”) has been identified as the CEO who reviews the financial information of separate operating segments when making decisions about allocating resources and assessing performance of the group. Based on management's assessment, the Company has determined that it has three operating segments as of December 31, 2012 which are wholesale, retail and FAB kiosks/licensing. The Company has reclassified the segment reporting as of and for the year ended December 31, 2011 to conform with the headings and classification used for 2012.

The following table presents summary information by segment for the years ended December 31, 2012 and 2011, respectively:


	Year Ended December 31, 2012
(in thousands)	Wholesale		Retail		Kiosks/ Podcasting		Total
Revenues	$	16,409	$	2,000	$	9,050	$	27,459
Cost of revenues		12,902		1,449		2,089		16,440
Gross Profit		3,507		552		6,960		11,019
Depreciation and amortization		156		305		1,511		1,972
Total assets		37,061		24,719		106,015		167,795

FAB UNIVERSAL CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - SEGMENT REPORTING (Continued)


	Year Ended December 31, 2011
(in thousands)	Wholesale		Retail		Kiosks/ Podcasting		Total
Revenues	$	-	$	-	$	3,114	$	3,114
Cost of revenues		-		-		1,169		1,169
Gross Profit		-		-		1,945		1,945
Depreciation and amortization		-		-		48		48
Total assets		-		-		14,783		14,783

NOTE 18 – QUARTERLY FINANCIAL INFORMATION (Unaudited)

The following table set forth unaudited financial information on a quarterly basis for each of the last two years:


(in thousands)		First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total
2012
Revenues	$	847	$	870	$	1,745	$	23,997	$	27,459
Gross profit		548		507		961		9,003		11,019
Operating income (loss) – continuing operations		(1,103)		(517)		(4,784)		3,572		(2,832)
Net income (loss) – continuing operations		(1,103)		(517)		(4,836)		2,274		(4,182)
Net income (loss) available to common stockholders		(997)		(330)		(4,950)		2,273		(4,004)
Basic and diluted income (loss) per share – continuing operations		(0.13)		(0.06)		(0.50)		0.33		(0.36)
Basic and diluted income (loss) per share		(0.12)		(0.04)		(0.51)		0.33		(0.34)

2011
Revenues	$	717	$	684	$	834	$	879	$	3,114
Gross profit		436		390		528		591		1,945
Operating loss – continuing operations		(627)		(492)		(543)		(7,826)		(9,488)
Net loss – continuing operations		(627)		(492)		(543)		(7,826)		(9,488)
Net loss		(607)		(429)		(473)		(8,471)		(9,980)
Basic and diluted loss per share – continuing operations		(0.09)		(0.07)		(0.07)		(1.03)		(1.25)
Basic and diluted loss per share		(0.09)		(0.06)		(0.06)		(1.11)		(1.31)

NOTE 19 - SUBSEQUENT EVENTS

On January 25, 2013, the Company issued 257,000 common shares valued at $529,080 to consultant for services rendered.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Both the resignation of Gregory & Associates, LLC, as the Company’s independent accountant, and the Company’s engagement of Friedman LLP as its independent accountant on September 27, 2012, were disclosed in the Company’s Current Report on Form 8-K dated September 26, 2012, which was filed with the Securities and Exchange Commission on September 28, 2012.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures—We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”), such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), to allow timely decisions regarding required disclosure.

Our management evaluated, with the participation of our CEO and CFO, the effectiveness of our disclosure controls and procedures as of December 31, 2012, pursuant to paragraph (b) of Rule 13a-15 under the Exchange Act. This evaluation included a review of the controls’ objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Annual Report. Our management, including the CEO and CFO, do not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our disclosure controls and procedures are designed to provide such reasonable assurance of achieving their objectives. Also, the projection of any evaluation of the disclosure controls and procedures to future periods is subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on their review and evaluation, and subject to the inherent limitations described above, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of December 31, 2012 at the above-described reasonable assurance level.

Internal Control over Financial Reporting—Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even internal controls determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The effectiveness of our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the possibility of human error, and the risk of fraud. The projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies may deteriorate. Because of these limitations, there can be no assurance that any system of internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that exempts from this requirement issuers that are neither accelerated filers nor large accelerated filers.

There has been no change in our internal control over financial reporting during the quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting is designed to provide reasonable assurance to management and the Board of Directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2012, was effective.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Board of Directors

FAB UNIVERSAL CORP AND SUBSIDIARIES

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting is designed to provide reasonable assurance to management and the Board of Directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, management believes that we maintained effective internal control over financial reporting as of December 31, 2012.


Date:	3/15/13	By:	/s/ Christopher J. Spencer
			Christopher J. Spencer
			Chief Executive Officer and President


Date:	3/15/13	By:	/s/ John Busshaus
			John Busshaus
			Chief Financial Officer

Pittsburgh, Pennsylvania

March 15, 2013

Item 9B. Other Information

None; not applicable.

PART III

Item 10. Directors, Executive Officers, and Corporate Governance.

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth:

the names of our current directors and executive officers,

their ages as of May 23, 2013, which is the anticipated record date for our 2013 annual meeting of stockholders; and

the capacities in which they currently serve FAB:


Name	Age	Position(s)	Served in Position Since
Zhang Hongcheng	43	Chairman of the Board	2012
Christopher J. Spencer	44	Chief Executive Officer	2001
John Busshaus	50	Chief Financial Officer	2007
Denis Yevstifeyev	31	Director	2007
Douglas Polinsky	53	Director	2007
J. Gregory Smith	43	Director	2007
Gu Jianfen	77	Director	2012

Zhang Hongcheng has served as Chairman of the Board since September 26, 2012. Mr. Zhang has 25 years experience in digital entertainment product publishing and distribution industry in China. He is the Vice President of China Audio & Video Association, Member of Copyright Society of China, Chairman of National Anti-Piracy Alliance; Chairman of the China Digital Education Industry Alliance and Executive Chairman of International Digital Culture Industry Investment Forum. Mr. Zhang holds China -Europe International Business School EMBA degree.

Christopher Spencer has served as our Chief Executive Officer, President and as a director of FAB since February 7, 2001. Mr. Spencer has been responsible for our overall direction since our inception and has been instrumental in leading us to our current position in the podcasting industry. From 1994 until 1996, Mr. Spencer founded and worked for ChinaWire, Inc., a high-technology company engaged in financial remittance between international locations and China. Mr. Spencer worked for Lotto USA, Inc. from 1992-1994, where he was founder and Chief Executive Officer for the Pennsylvania computer networking company. From 1990 until 1992, Mr. Spencer worked for John Valiant, Inc., and was responsible for business concept development and obtaining financing.

John Busshaus served as our Controller from April 2006, until his election as our Chief Financial Officer on January 29, 2007. Mr. Busshaus has been responsible for our overall accounting and financial reporting functions since joining the Company in April 2006. From 2004 to 2006, Mr. Busshaus was an independent business consultant. Mr. Busshaus’ efforts were assisting organizations with the implementation of Sarbanes Oxley, filing of SEC reports, and taking a company through an IPO. Mr. Busshaus worked for Talanga International from 2001 to 2004, where he was the Chief Financial Officer for the company. From 1999 to 2000, Mr. Busshaus worked for Mellon Bank as Controller and Vice President, and was responsible for strategic planning and managing the annual and monthly budgeting within Global Security Services. From 1994 to 1998, Mr. Busshaus worked for PepsiCo as Senior Business Planner, and was responsible for annual and quarterly budgets planning, as well as weekly, monthly and quarterly reporting of results. As a member of management, Mr. Busshaus' efforts contributed to the revenue growth and market share increases in a market that was categorized as saturated.

Douglas Polinsky has served as a Director of FAB since October 2007. Mr. Polinsky serves as the President of Great North Capital Corp., a Minnesota-based financial services company he founded in 1995. Great North advises corporate clients on capital formation and other transaction-related financial matters. Mr. Polinsky earned a Bachelor of Science degree in Hotel Administration at the University of Nevada at Las Vegas.

Greg Smith has served as a Director of FAB since October 2007. Mr. Smith is an award-winning producer and entrepreneur with over 10 years of experience in Non-Fiction Television. In 2000, Mr. Smith established The Solution Film Group, LLC and acts as the Company’s President. Mr. Smith provides professional production and editorial support for various forms of non-fiction television entertainment, including the direction of media projects from development through production and post-production. His clients include Discovery Channel, Science Channel, Discovery HD Theater, Animal Planet, The Military Channel, PBS, and Discovery Networks International. Mr. Smith most recently won an Emmy in 2006 for the Discovery Channel’s animated special Before the Dinosaurs. His other awards for excellence in production and editing include Emmys for the Discovery Channel’s Walking with Prehistoric Beasts and Allosaurus: A Walking with Dinosaurs Special. From 1997 to 2000, Mr. Smith worked for Discovery Communications, Inc. in the capacity of Supervising Producer from January 1998 to November 2000, and Producer/Editor from October 1997 to January 1998. From 1995 to 1996, Mr. Smith worked for Discovery Channel Pictures serving as Assistant Editor from March 1996 to October 1997, and Production Assistant from September 1995 to March 1996. From 1994 to 1995, Mr. Smith worked for Crawford Communications in Atlanta, Georgia as a Manager of Satellite Services for The Learning Channel.

Denis Yevstifeyev has served as a Director of FAB since October 2007. Mr. Yevstifeyev currently serves as the Director of Financial Planning & Analysis for Education Management Corporation – Online Higher Education. From 2007

to 2008, Mr. Yevstifeyev served as Sr. Financial Reporting Analyst for American Eagle Outfitters, Inc, in Pittsburgh. His duties included: preparing and analyzing various internal and external financial reports; researching new accounting pronouncements and evaluating any impact on the financial statements. He also reviewed accounting workpapers and prepared the company’s SEC filings for forms 8-K, 10-Q and 10-K. From 2005 to 2007, Mr. Yevstifeyev worked for Schneider Downs, Inc., where he worked on Sarbanes-Oxley compliance engagements. In 2005, Mr. Yevstifeyev graduated with a Bachelor of Science degree in Business from Washington and Jefferson College. He also graduated with honors from the Moscow Bank College of the Central Bank of Russia in Moscow with a degree in Finance in 2000. From 2002 to 2003, Mr. Yevstifeyev served as the Settlement Department Manager for SDM BANK in Moscow, where he dealt with domestic and international corresponding banks, among other responsibilities.

Gu Jianfen has served as a Director of FAB since September 2012. Ms. Gu is a musician who has served as a composer at Central Song and Dance Ensemble. She has been a council member for several international organizations, including the China International Cultural Exchange Center, Association for Promoting Peaceful Reunification of China, and Beijing Municipal Association for Friendship with Foreign Countries. Ms. Gu has been recognized by several organizations for her compositions. She won an Excellent Work Award of Asian & Pacific Region, sponsored by UNESCO. She was elected vice-president of the Chinese Musicians Association in 1999. Ms. Gu graduated from the Composition Department of Northeast Music School.

There are no non-officer employees who are expected to make a significant contribution to the business.

Family Relationships.

There are no family relationships between any of our directors or executive officers.

Involvement in Certain Legal Proceedings.

During the past ten years, none of our present or former directors, executive officers or persons nominated to become directors or executive officers:

(1) A petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;

(2) Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);

(3) Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:

(i) Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;

(ii) Engaging in any type of business practice; or

(iii) Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;

(4) Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity;

(5) Such person was found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated;

(6) Such person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;

(7) Such person was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:

(i) Any Federal or State securities or commodities law or regulation; or

(ii) Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or

(iii) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

(8) Such person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to us with respect to fiscal 2012 and on representations that no other reports were required, we believe that during the 2012 fiscal year all applicable Section 16(a) filing requirements were met.

CORPORATE GOVERNANCE

Code of Ethics

We uphold a set of basic values to guide our actions and are committed to maintaining the highest standards of business conduct and corporate governance. We have adopted a Code of Business Conduct and Ethics for directors, officers (including our principal executive officer and principal financial officer) and employees, which, in conjunction with our Certificate of Incorporation, Bylaws and Board of Directors committee charters, form the framework for governance of FAB Universal. The Code of Ethics and Business Conduct, Board of Directors committee charters, Bylaws and Certificate of Incorporation are available at our corporate offices. Stockholders may request free printed copies of these documents from:

FAB Universal Corp.

Attn: Chief Financial Officer

5001 Baum Blvd., Suite 770

Pittsburgh, PA 15213

Board of Directors Independence

The Board of Directors has determined that each of J. Gregory Smith, Denis Yevstifeyev, Gu Jianfen and Douglas Polinsky has no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us) and satisfies the independence requirements required by the NYSE MKT. The non-management

independent directors meet in executive session, without management, at least annually. Mr. Polinsky, an independent non-management director, chairs all executive session meetings of directors.

Committees of the Board of Directors

The Board of Directors has adopted written charters for two standing committees: the Nominating Committee and the Audit Committee. The Board has determined that all members of the Nominating and Audit Committees are independent and satisfy the relevant SEC or NYSE MKT independence requirements for members of such committees.

Nominating Committee. The Nominating Committee currently consists of Mr. Polinsky as chair, Mr. Yevstifeyev, and Mr. Smith. This committee provides assistance to the Board in identifying individuals qualified to become members of the Board of Directors consistent with Board criteria. The committee also oversees the evaluation of the Board of Directors and management. There have not been any material changes to the procedures by which stockholders recommend nominees to the Board of Directors.

Audit Committee. The Audit Committee currently consists of Mr. Polinsky as chair, Mr. Yevstifeyev, and Mr. Smith., Mr. Yevstifeyev, the Board of Directors has determined, is an “audit committee financial expert” as defined under SEC rules. This committee oversees the integrity of our financial statements, disclosure controls and procedures, the systems of internal accounting and financial controls, compliance with legal and regulatory requirements, the qualifications and independence of the independent auditors and the performance of our internal audit function and independent auditors, and the quarterly reviews and annual independent audit of our financial statements. Our independent auditors report directly to the Audit Committee.

We will provide a free printed copy of any of the charters of any Board committee to any stockholder on request.

Compensation Committee. The Compensation Committee currently consists of Mr. Polinsky as chair, Mr. Yevstifeyev, and Mr. Smith. This committee provides assistance to the Board of Directors in overseeing our compensation policies and practices. It reviews and approves the compensation levels and policies for the Board of Directors; reviews and approves corporate goals and objectives with respect to CEO compensation and, based upon these evaluations, determines and approves the CEO’s compensation; makes recommendations to the Board of Directors with respect to non-CEO executive officer compensation. The Compensation Committee also has the responsibility to provide the report to stockholders on executive officer compensation, which appears below.

Item 11. Executive Compensation.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the compensation committee (i) was an officer or employee of the Company or a subsidiary of the Company during 2012, (ii) was formerly an officer of the Company or a subsidiary of the Company, or (iii) had any relationship required to be disclosed pursuant to Item 404 of Regulation S-K.

During fiscal 2012, none of the Company’s executive officers served as (i) a member of a compensation committee of another company, one of whose executive officers served on the Company’s compensation committee; (ii) a director of another company, one of whose executive officers served on the Company’s compensation committee; or (iii) a member of a compensation committee of another company, one of whose executive officers served as one of the Company’s directors.

COMPENSATION DISCUSSION AND ANALYSIS

Overview and General Philosophy

At FAB, our focus is to create value through advancement and growth of our media distribution business in China. We are also focused on growing our media business through hosting fees and monetization of unique users. Our executive compensation program supports this goal of value creation by:

rewarding executives for obtaining performance milestones;

aligning the interests of executives with the interests of stockholders; and

attracting and retaining highly motivated and talented executives.

Our compensation elements simultaneously fulfill one or more of these three objectives. The elements include:

base salary;

discretionary bonuses (in the form of cash, restricted stock, and stock options);

benefits programs.

The type and amount of compensation is determined considering current pay, competitive pay data from the external talent market and the opportunity for future pay. We combine compensation elements for each executive in a manner that will meet the performance, alignment and retention goals listed above as well as eliciting the best possible contribution from the executive.

Compensation Objectives

Our executive compensation philosophy is built around two objectives: supporting stockholder value creation through, aligning the interests of executives with the interests of stockholders, and attracting and retaining highly motivated and talented executives.

Due to our diverse businesses, we have determined that no specific peer group is appropriate to use in defining market pay levels for our named executives. We therefore use general industry data of companies which are a similar size to us based on market capitalization to establish market pay levels.

Obtained Performance Milestones:


	•		We construct our annual bonus opportunities to have appropriately aggressive targets that require significant achievement against performance milestones.

Aligned Interests:


	•		Our base pay practices reduce fixed costs and emphasize performance-based incentive programs, which we believe are in the best interests of stockholders.


	•		We base our annual bonus opportunities on performance milestones and value to the stockholder that focus executives on performance results that are of common interest to stockholders.


	•		We award long-term equity incentive opportunities using stock options and restricted stock so that appreciating stock value is a significant factor in executive compensation.

Executive Retention:


	•		We believe our use of lower base salary levels accompanied by an emphasis on incentive programs attracts executives that are appropriately aggressive, innovative, and willing to risk a larger share of their compensation on their own performance and the performance of the Company.


	•		Discretionary bonuses allow us to adjust to unique market conditions in a timely fashion in order to retain key executives.

Compensation Administration

General Process. Executive compensation decisions at FAB are the product of several factors, modified by judgment and discretion as necessary. The predominant factors include:


	•		key performance measurements such as revenue, monthly download of content, and key business developments;


	•		strategic initiatives such as acquisitions, and implementation of process improvements;


	•		achievement of specific operational goals relating to the sphere of influence led by the executive;
	•		compensation of other executives within the Company (to ensure internal equity); and

For the CEO, these factors are judged and compensation is recommended by the Compensation Committee of the Board of Directors and approved by the Board. For the other executive officers (including all of the named executives in the Summary Compensation Table), the factors are considered by the CEO, who recommends compensation levels. These judgments and recommendations are then reviewed and approved or revised by the Compensation Committee.

Generally, the Compensation Committee reviews and makes adjustments to base compensation once per year, effective at the beginning of each fiscal year (January 1). Annual incentives are typically paid within two months of the fiscal year end, usually in mid-February. Equity grants are typically awarded in the spring of each year, in March or early April.

Role of Compensation Committee. The Compensation Committee oversees the design, development and implementation of our compensation program. The Committee evaluates the performance of the CEO and determines CEO compensation consistent with the objectives of the compensation program. The Committee also approves all incentive compensation plans and approves or revises recommendations made by the CEO for compensation decisions affecting other executives. The Committee also approves all bonuses, awards and grants under all incentive plans.

Role of CEO. Our CEO is responsible for the implementation and administration of our compensation program throughout the organization. The CEO evaluates the performance of executives and, consistent with the objectives of the compensation program, meets with the Compensation Committee to consider and recommend compensation programs, set and evaluate performance milestone, and makes specific recommendations on the form and amount of compensation for named executives.

Compensation Components

Short-Term Compensation. Consistent with our stated compensation philosophy, our key metric for executive short-term compensation is annual total cash compensation. Discretionary bonuses provide significant upside potential which results in targeted annual total cash compensation.

Our performance for fiscal 2012 was well above targeted levels. Company-wide, total revenue for the year was $27.4 million, driven by the addition of our subsidiary, DEI, adding $23.7 million of revenue. In August, 2012, the Company was able to have five of the six institutional investors exercise their warrants providing the company with $1.1 million in cash in exchange for 341,207 shares of common stock. This influx of cash allowed the company to complete a major acquisition. On September 26, 2012, the Company acquired DEI in exchange for 49% of the Company’s common stock.

Base Salary. We consider base salary a tool to provide executives with a reasonable base level of income relative to the scope of the positions they hold. Base salaries are established based on the level of responsibility for the position. With the exception of the CEO and named executives all base salaries are reviewed annually, and are adjusted from time to time to reflect changes in responsibility level.

In 2012, our named executives’ salaries ranged from $188,760 to $400,000. In 2011, our named executives’ salaries ranged from $166,375 to $188,760. Changes in senior executive base pay during fiscal year 2012 included an increase in Mr. Spencer’s annual base pay on October 1, 2012 from $188,760 to $400,000; and an increase in Mr. Busshaus’ annual base pay from $166,375 to $350,000 on October 1, 2012.

Annual Bonus. Currently, there is not an established annual incentive bonus plan.

Discretionary Bonuses. Because there is not an annual incentive plan, the Compensation Committee may determine a discretionary bonus is to be awarded to appropriately reward senior executives. In these cases, discretionary bonuses are used to assure that executives are appropriately rewarded. The Committee determines discretionary bonuses for the CEO. The CEO recommends discretionary bonuses for all other named executives, which are then approved or adjusted by the Committee.

In fiscal year 2012 and 2011, discretionary bonuses were awarded to the executive officers.

Our Compensation Committee believes that we have executed on our compensation philosophy given the level of Company performance in fiscal 2012.

Long-Term Incentive Compensation. In 2012 and 2011, we offered a limited group of employees, including all named executives, stock options.

In fiscal 2013, we plan to execute a long-term incentive design that will utilize stock options. For senior management, including named executives, the primary emphasis will be on stock option awards. This results primarily in senior management focus on stock price performance, directly aligning the interests of executives with the interests of stockholders. It also puts a higher percentage of long-term compensation at risk as the design delivers less immediate value to executives.

All stock-options granted to the named executives by the Company must have prior Compensation Committee approval. The exercise price for all stock-based awards coincides with the date the Committee approves the award grant. It is against Company policy to back-date stock-based awards or to try to time stock-based awards for any reason and we have never engaged in these practices.

Award Adjustment or Recovery. We do not have a policy to recover or otherwise adjust payments made or awards earned as a result of changes in subsequent periods relating to performance measures upon which such payments or awards are based, sometimes referred to as a “clawback” policy. We have not required any named executive to return any award or repay any payment received in any fiscal year.

Tax Deductibility of Compensation. Section 162(m) of the Internal Revenue Code of 1986, as amended, imposes a $1,000,000 limit on the amount that a public company may deduct for compensation paid to named executives unless compensation is based on an individual’s meeting pre-established performance goals determined by a compensation committee and approved by stockholders.

Retirement and Other Benefits

Generally, we view retirement savings as a personal matter. We currently do not offer any pre-tax retirement savings through the use of a traditional 401(k) plan; a deferred compensation plan; or other retirement programs.

Perquisites. Eligible employees, including named executives, participate in various other employee benefit plans, including medical and dental care plans; flexible spending accounts for health care; life, accidental death and dismemberment and disability insurance; and vacation plans. The primary purpose of providing these plans and limited perquisites to senior executives is to attract and retain talented executives to manage the Company. With respect to non-insurance perquisites, we prefer to take a minimalist approach. For fiscal 2012, the Company did not have executive non-insurance perquisites.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis set forth in this Annual Report with our management. Based on such review and discussions, the Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

Compensation Committee

Douglas Polinsky, Chairman

J. Gregory Smith

Denis Yevstifeyev

Summary Compensation Table

The following sets forth the compensation of FAB’s Chief Executive Officer during fiscal 2012, and the other persons who served as executive officers during fiscal 2012. Unless otherwise noted, the amounts shown represent what was earned in fiscal 2012.

SUMMARY COMPENSATION TABLE – FISCAL 2012


		Low		High
Fiscal Year 2012
Fourth quarter	$	2.31	$	5.30
Third quarter	$	1.90	$	5.70
Second quarter	$	1.91	$	3.45
First quarter	$	1.32	$	3.00

Fiscal Year 2011*
Fourth quarter	$	1.44	$	2.16
Third quarter	$	1.68	$	2.88
Second quarter	$	1.56	$	3.06
First quarter	$	2.76	$	5.28


Equity Compensation Plan Information

The following information is provided as of December 31, 2012:

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (a)
	(a)	(b)	(c)
Equity compensation plans approved by stockholders	-	-	2,038,967

Equity compensation plans not approved by stockholders	-	-	-

Total	-	-	2,038,967


		Year ended December 31,
(in thousands, except per share data)		2012	2011		2010		2009		2008
OPERATING DATA:
Total revenue	$	27,459	$	3,114	$	5,540	$	5,194	$	6,108
Net loss from continuing operations		(4,183)		(9,488)		(4,110)		(6,509)		(7,692)
Net loss available to common stockholders		(4,004)		(9,980)		(4,110)		(6,509)		(10,065)
Basic and diluted net loss per common share		(0.34)		(1.31)		(0.76)		(1.56)		(2.76)

		As of December 31,
(in thousands)		2012	2011		2010		2009		2008
BALANCE SHEET DATA:
Working capital	$	11,284	$	1,063	$	(1,335)	$	(1,255)	$	670
Net property, plant and equipment		16,721		32		79		129		211
Intangible assets & goodwill		88,529		11,484		20,460		20,538		20,497
Total assets		167,795		14,783		21,355		22,005		23,246
Long-term liabilities:
Long-term debt		39		0		0		0		1,000
Other		10,398		0		0		0		0
Total long-term liabilities		10,437		0		0		0		1,000
Total stockholders’ equity		133,930		13,776		19,208		19,416		20,383


Price	Duration	Number of Downloads
RMB 100	3-month	Points are used when downloading different content. The range is 1-3 points per song, film, coupon, etc. 1 point=RMB 1 yuan So the download number for a card depends on what content the member accesses.
RMB 200	12-month
RMB 300	12-month
RMB 400	12-month
RMB 500	12-month



	FAB Universal Corp.



	Digital Entertainment International Limited (Hong Kong)

Outside PRC		100%
Inside PRC		100%


	Beijing Dingtai Guanqun Culture Co. Ltd (WFOE)


	VIE Contract
	Beijing FAB Culture Media Co., Ltd (PRC)
	Beijing FAB Culture Media Co., Ltd (PRC)



	Beijing FAB Digital Entertainment Products Co., Ltd (PRC Subsidiary)


FAB UNIVERSAL CORP AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


		Page



Reports of Independent Registered Public Accounting Firms		42

Consolidated Balance Sheets as of December 31, 2012 and 2011		44

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2012 and 2011		45

Statement of Stockholders’ Equity for the years ended December 31, 2012 and 2011		46

Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011		47

Notes to Consolidated Financial Statements		49


ASSETS	December 31, 2012		December 31, 2011
CURRENT ASSETS:
Cash	$ 19,671,937		$ 907,320
Accounts receivable, net	6,927,045	[1]	204,545	[1]
Advances to suppliers, net	154,770		-
Inventory	5,207,008		-
Deferred tax assets, current	1,771,799		-
Other current assets	979,021		29,754
Assets from discontinued operations	-		927,582
Total current assets	34,711,580		2,069,201

Property, and equipment, net	16,720,637		32,028
Goodwill	60,652,957		11,484,251
Intangible assets, net	27,875,748		-
Deferred tax assets, non-current	3,346,166		-
Long-term deposits	24,488,131		3,582
Long-term assets from discontinued operations	-		1,193,936
Total assets	$ 167,795,219		$ 14,782,998
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term bank loans	$ 2,072,619		$ -
Accounts payable	6,471,270		608,565
Accrued expenses	3,077,785		250,245
Deferred revenue	8,250,402		15,592
Taxes payable	1,603,821		-
Due to related parties	41,341		-
Other payable	1,910,378		-
Liabilities from discontinued operations	-		132,137
Total current liabilities	23,427,616		1,006,539

Long-term deposits from customers	2,474,604		-
Deferred revenue	7,923,450		-
Long-term payables	39,204		-
Total liabilities	33,864,874		1,006,539
COMMITEMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock	-	[2]	-
Common stock	20,469	[3]	8,126	[4]
Additional paid-in capital	206,786,139		84,024,736
Accumulated other comprehensive income	1,384,365		-
Accumulated deficit	(74,260,628)		(70,256,403)
Total stockholders' equity	133,930,345		13,776,459
Total liabilities and stockholders' equity	$ 167,795,219		$ 14,782,998


	For the Years Ended
	December 31, 2012	December 31, 2011

Revenue	$ 27,458,730	$ 3,114,496
Cost of Revenue	16,439,641	1,169,597
Gross Profit	11,019,089	1,944,899

OPERATING EXPENSES
Selling expenses	2,217,635	196,404
General and administrative	8,472,478	2,615,632
Consulting fees	2,812,075	892,969
Research and development	269,562	286,410
Impairment of goodwill	-	7,054,932
Total Expenses	13,771,750	11,046,347
Loss from continuing operations	(2,752,661)	(9,101,448)

OTHER INCOME (EXPENSE):
Loss on marketable securities	-	(150,000)
Loss on disposal of assets	(32,502)	-
Interest income	284	3,360
Interest expense	(23,304)	(12,257)
Other income (expense)	(23,614)	(228,113)
Total Other Income (Expense)	(79,136)	(387,010)
Loss from continuing operations before income taxes	(2,831,797)	(9,488,458)

Income tax expense	1,350,704	-

Net loss from continuing operations	(4,182,501)	(9,488,458)

Net income (loss) from discontinued operations, net of tax	178,276	(491,425)

Net Loss	(4,004,225)	(9,979,883)

Other comprehensive income
Foreign Currency translation gain	1,384,365	-

COMPREHENSIVE LOSS	$ (2,619,860)	$ (9,979,883)

BASIC AND DILUTED LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS	$ (0.36)	$ (1.25)
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE FROM DISCONTINUED OPERATIONS	$ 0.02	$ (0.06)
BASIC AND DILUTED LOSS PER COMMON SHARE	$ (0.34)	$ (1.31)
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING	11,779,195	7,615,663


								Additional		Accumulated Other
	Preferred Stock			Common Stock				Paid-in		Comprehensive		Accumulated
	Shares		Amount	Shares		Amount		Capital		Income		Deficit

Balance at December 31, 2010	4,000	$	4	5,822,763	$	5,823	$	79,478,169	$	-	$	(60,276,520)

Stock issued for consulting services	-		-	29,167		29		81,470		-		-

Stock issued upon exercise of options for services	-		-	21,810		22		47,847		-		-

Stock issued upon conversion of notes payable and accrued interest	-		-	58,314		58		174,885		-		-

Stock issued upon conversion of Series A Preferred Stock	(4,000)		(4)	625,000		625		(621)		-		-

Stock Issued upon conversion of warrants	-		-	416,671		417		1,099,583		-		-

Issuance of Common Stock for cash	-		-	1,166,672		1,167		2,822,408		-		-

Forfeiture of Stock for Developer Apps	-		-	(15,417)		(15)		15		-		-

Change in FMV of Derivative Liability	-		-	-		-		(15,784)		-		-

Re-pricing of warrants and preferred stock	-		-	-		-		243,876		-		-

Compensation for vested stock options	-		-	-		-		92,888		-		-

Fractional share adjustment with 1 for 12 reverse stock split	-		-	550		-		-		-		-

Net Loss for the year ended December 31, 2011	-		-	-		-		-		-		(9,979,883)

Balance at December 31, 2011	-	$	-	8,125,530	$	8,126	$	84,024,736	$	-	$	(70,256,403)


Stock issued for consulting services	-		-	479,169		479		953,025		-		-

Stock issued upon exercise of options for services	-		-	1,221,818		1,222		4,158,578		-		-

Stock Issued upon conversion of warrants	-		-	356,992		357		1,108,566		-		-

Acquisition of Digital Entertainment International			-	10,282,611		10,282		118,296,017		-

Fractional share adjustment with the 1 for 12 reverse stock split	-		-	2,740		3		(3)		-		-

Compensation for vested stock options	-		-	-		-		5,086		-

Spin-Off of Future Healthcare of America	-		-	-		-		(1,759,866)		-		-

Foreign currency translation gain	-		-	-		-		-		1,384,365		-

Comprehensive Loss for the year ended December 31, 2012	-		-	-		-		-		-		(4,004,225)

Balance at December 31, 2012	-	$	-	20,468,860	$	20,469	$	206,786,139	$	1,384,365	$	(74,260,628)


Name and principal position	Year	Salary(4) ($)	Bonus(1) ($)	Stock(2) awards ($)	Option(3) awards ($)	Nonequity incentive plan compensation ($)	Nonqualified deferred compensation earnings ($)	All other compensation ($)	Total ($)
Chris Spencer – CEO	2012	241,322	100,000	996,031	0	0	0	0	1,337,353
	2011	175,806	30,000	0	31,163	0	0	0	236,969
	2010	145,200	0	0	0	0	0	0	145,200

John Busshaus – CFO	2012	211,317	100,000	1,079,566	0	0	0	0	1,390,883
	2011	155,705	25,000	0	31,163	0	0	0	211,868
	2010	133,100	0	0	0	0	0	0	133,100


(1)	The bonuses shown in this column represent discretionary awards during the respective year by the compensation committee and board.
(2)	The stock awards in 2012 represent the fair value of stock granted to the officers. The stock was issued as discretionary bonuses for the work done for the acquisition of DEI.
(3)	Stock-based compensation for 2011 represents the amounts recognized for financial reporting purposes for granting of stock options.
(4)	The salaries in 2012 for our executive officers were offered by the board of directors to compensate the officers for the additional work associated with the acquisition of our Chinese subsidiary, DEI.


	Option awards						Stock awards
Name		Number of securities underlying unexercised options (#) exercisable	Number of securities underlying unexercised options (#) unexercisable	Equity incentive plan awards: number of securities underlying unexercised unearned options (#)	Option exercise price ($)	Option expiration date	Number of shares or units of stock that have not vested (#)	Market value of shares or units of stock that have not vested ($)	Equity incentive plan awards: number of unearned shares, units or other rights that have not vested (#)	Equity incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested ($)
John L. Busshaus		0	0	0	0	0	0	0	0	0
Chris Spencer		0	0	0	0	0	0	0	0	0


Plan Category	Maximum shares to be issued upon exercise of options	Weighted-average exercise price of outstanding options		Shares remaining available for future issuance under existing equity compensation plans (excluding shares reflected in first column)
Plans approved by stockholders	0	$	0	0
Plans not approved by stockholders	0		0	2,038,967

Total	0	$	0	2,038,967


Name	Fees earned or paid in cash ($)	Stock awards($)	Option awards($)	Non-equity incentive plan compensation ($)	Nonqualified deferred compensation earnings ($)	All other compensation ($)	Total ($)
Doug Polinsky	16,000	367,000	0	0	0	8,000	391,000
J. Gregory Smith	16,000	367,000	0	0	0	8,000	391,000
Denis Yevstifeyev	16,000	367,000	0	0	0	8,000	391,000



Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by stockholders	0	$	0	2,038,967
Equity compensation plans not approved by stockholders	0		0	0

Total	0	$	0	2,038,967


	•		each person (or group of affiliated persons) who, insofar as we have been able to ascertain, beneficially owned more than 5% of the outstanding shares of our common stock;
	•		each director;
	•		each named executive; and
	•		all directors and executive officers as a group.


Name and Address of Beneficial Owner ⁽¹⁾	Amount and Nature of Beneficial Ownership ⁽²⁾	Percent of Class
5% Stockholders:
Christopher Spencer, Chief Executive Officer	430,222	2.1%

Directors:
Douglas Polinsky	112,500	*
J. Gregory Smith	112,500	*
Denis Yevstifeyev	87,665	*
Zhang Hongcheng	2,332,200	11.2%
Executive Officers:
John L. Busshaus, Chief Financial Officer	299,852	1.4%
All directors and executive officers as a group (5 persons)	3,374,669	16.2%


Fee category		2012		2011
Audit Fees ⁽¹⁾	$	317,500	$	96,608
Audit – related fees		0		0
Tax fees		0		0
All other fees		0		0
Total fees	$	317,500	$	96,608


Date:	3/15/13	/s/ J. Gregory Smith
		J. Gregory Smith
		Director


Date:	3/15/13	/s/ Denis Yevstifeyev
		Denis Yevstifeyev
		Director


Date:	3/15/13	/s/ Douglas Polinsky
		Douglas Polinsky
		Director

Date:	3/15/13	/s/ Zhang Hongcheng
		Zhang Hongcheng
		Director and Chairman of Board