FAB Universal, a Pittsburgh company that's been called the Redbox of China, on Wednesday blamed misinformation for unusual, high-volume trading in its shares.
The company's statement came after the New York Stock Exchange asked FAB Universal to respond to the activity.
Since Sept. 16, an average of about 4 million FAB Universal shares have traded daily versus average daily trading of 124,000 shares over the prior three months. Volume peaked at nearly 9.3 million shares Thursday, when the stock hit a 52-week intraday high of $11.48.
On Wednesday, the stock closed at $6.05, up 6 cents, on volume of nearly 3 million shares.
FAB Universal was formed in September 2012, when Wizzard Software, an unprofitable Pittsburgh publicly traded company involved in podcasting and selling applications for mobile phones and other devices, bought Digital Entertainment International, a Hong Kong company that sells video games, movies, music, books and other content to Chinese consumers.
The acquisition came after Wizzard completed a 1-for-12 reverse stock split to elevate its share price, which had been languishing under $1. The growing Chinese market for digital content provided a big boost for its sagging revenue and allowed the former Digital Entertainment to get a listing on the New York Stock Exchange.
The misinformation that the company cited Wednesday concerns the number of shares to be issued to Digital Entertainment's owners as part of the sale. The company said it has consistently disclosed that the owners are entitled to receive 27.7 million shares in three installments once performance criteria are met.
That's 33 percent more shares than the 20.8 million that were outstanding in August, when FAB Universal reported its second fiscal quarter earnings. The company said it earned $10.8 million on revenue of $48.5 million in the first half of the current fiscal year versus a loss of $1.3 million and revenue of $1.7 million in the same period a year ago.
An anonymous post Tuesday on Seeking Alpha, a financial website, accused company management of "dramatically understating" the number of shares.
On Wednesday, FAB Universal said it has repeatedly disclosed the information in Securities and Exchange Commission filings and in conversations with shareholders and potential investors.
Calls to FAB Universal and LHA, the outside firm that manages the company's investor relations, were not returned.
One analyst supported the company.
"The company is doing anything but misleading investors," said Rob Goldman of Goldman Small Cap Research in Baltimore.
Mr. Goldman rated the stock a strong buy in an April 25 research report, where he disclosed a third party paid him $8,000 to write research reports on the company. Mr. Goldman said FAB Universal did not pay him but declined to disclose who did.
Zacks Investment Research analyst Ken Nagy has a $10 price target on FAB Universal shares based on the company's prospects, including explosive growth in the China market. He said that price assumes all of the additional shares will be issued to Digital Entertainment's former owners.
"The fundamental story is the growth of digital," he said.
Mr. Nagy said FAB Universal received a boost from famed investor Jim Rogers, who joined the company's board in June. Mr. Rogers started the Quantum Fund with George Soros and has made several savvy calls about bank stocks and commodities in recent years. He also has a knowledge of China and other emerging markets.
Mr. Rogers "sees trends before others do," Mr. Nagy wrote in a Thursday report, adding that his presence on the board legitimizes FAB Universal's business model.
Len Boselovic: firstname.lastname@example.org or 412-263-1941.