Item 3.03 Material Modification to Rights of Security Holders.
The disclosure set forth below under Item 8.01 is incorporated herein by
reference.
Item 8.01 Other Events.
As previously disclosed, in October 2020, the Company discovered that Zhang
Hongcheng ("Zhang"), a citizen of the People's Republic of China ("PRC"),
certain individuals associated with Zhang, and certain companies affiliated with
Zhang, including three entities that are incorporated in the British Virgin
Islands (the "BVI Entities," and collectively with Zhang and the companies
affiliated with Zhang, the "Zhang Parties"), obtained shares of common stock of
FAB Universal Corporation ("FAB"), the Company's former parent, through
fraudulent activities that began before 2012. Due to their ownership of FAB
common stock, upon the spin-off distribution of the Company from FAB, the Zhang
Parties putatively became stockholders of the Company. Zhang and certain of the
Zhang Parties who are domiciled in the PRC have been convicted of crimes in
China related to their fraudulent activities.
On November 25, 2020, the Company, as plaintiff, on its own behalf and
derivatively on behalf of FAB, filed a complaint (the "Action") in a Federal
District Court against the Zhang Parties. The Action alleges that the Zhang
Parties have committed, against the Company and derivatively against on behalf
of FAB, among other things, securities fraud under Colorado law, fraudulent
concealment or nondisclosure of material information, and fraudulent
representations. The Company successfully served the BVI Entities and the BVI
Entities failed to satisfy the May 17, 2021 deadline for filing an answer to the
Action. The Company filed a motion for default judgment on June 4, 2021 and a
default was entered against the BVI Entities on June 7, 2021 by the court clerk.
As of December 31, 2021, the Company had 34,010,051 shares of common stock
outstanding of which 7,494,400 shares were registered in the name of the Zhang
Parties (the "Zhang Shares"). Because the Zhang Parties fraudulently obtained
their shares of FAB common stock, and FAB later distributed shares in the
Company in a spin-off transaction, the Board canceled the Zhang Shares effective
as of December 31, 2021. The Board instructed the Company to give notice of the
cancellation of the Zhang Shares to the Zhang Parties at the address of such
holders as reflected in the Company's stock records. The Company plans to engage
counsel or other advisors in the PRC to assist with providing notice to the
Zhang Parties. If any of the Zhang Parties believes it has a valid,
non-fraudulent claim to the Zhang Shares, such party will be instructed to
provide written notice to the Company of its intent to challenge the
cancellation within 90 days of receipt or deemed receipt of the notice and must
provide evidence supporting its claim. In such case, the Company and such Zhang
Party will participate in a dispute resolution process decided on by the
Company. If any of the Zhang Parties makes a sufficient showing that its shares
should not be subject to cancellation, the Company may reissue such shares to
such Zhang Party under applicable law.
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