Welcome to the Hannover House Investor Relations Blog

Wednesday, March 6, 2013

Currently not winning the Popularity Contest... but HHSE is winning the war.

Guest Blog from Hannover House CEO Eric Parkinson:

Good evening HHSE Shareholders and Blog Followers.  My email in box was overflowing this evening with curse and unhappy shareholder comments to the announcement of a $300,000 Debt Conversion transaction.  In respect of the mutual investments each of us has in HHSE, I feel it's appropriate to address this matter immediately and as clearly as possible.  Please bear with me while I first repeat some history and information as disseminated at the Shareholder's Meeting (Jan. 26).

When Hannover House "merged" into (was acquired by) Target Development Group, Inc. in December, 2009 (effective Jan. 1, 2010), the Company had minimal debts and no active lawsuits from creditors, producers or any other source.  But the Company was in need of working capital, and the contractual promise of $1.5-mm from an investment banking source looked like a good path to stepping up as an independent distributor.  Within two weeks, Hannover House was at the Sundance Film Festival and the Company had successfully acquired the Joel Schumacher drama, "Twelve", for $1.75-million (to be paid out over a manageable release life schedule).  The first $500,000 was remitted, but shortly thereafter, the investment banking funds stopped.  By summer of 2010, Hannover House was deeply committed to a national theatrical release of "Twelve" and the associated costs to effect such an opening.

The Company scrambled to arrange almost $2-million in P&A costs for "Twelve," ranging from $550,000 in private lender notes, to $250,000 in lab credit, $500,000 in ads and $400,000 in publicity, marketing and internet. The film bombed at the theatres, but had a successful home video release through 20th Century Fox, and subsequent revenues from sell-thru video, Video-On-Demand and Television.  Essentially, these sales revenues have substantially retired the balance due to the licensor (and are expected to have the full $1.75-mm fee retired this year).  But Hannover House was stuck with managing the $2-mm (approx) in releasing cost debts.

Quite possibly, the debt burden might have been less painful had Hannover House also continued an agressive home video release slate during 2010 and early 2011.  However, the logistics of coordinating the 50-market simultaneous theatrical release of "Twelve" monopolized all management time, from March of 2011 through the end of the year.  Pretty much "no other release" got the level of attention that we prefer to extend to titles that are added to our schedule.  So suddenly, the Company was sitting on a big pile of debt, and very little in "unpledged" sales revenues with which to manage.  It was an easy decision to let "HappyThankYouMorePlease" go back to the producers, as they insisted on the same level of release as "Twelve," and we would not even entertain such a thought.  Instead, we decided to refocus on the core activities of direct-to-video titles -- items that could be acquired for little or no advance, marketed for little or no cost, and sold for a predictable and profitable return.  That's what the Company's focus has been, pretty much since January of 2011 -- with the exception of the "sponsored" release of "Turtle: The Incredible Journey" and the Regal Entertainment exclusive venture for "All's Faire In Love" to theatres.  The biggest theatrical effort since then has been for "Toys in the Attic" which was tailored to fulfill the specific release levels required for ancillary market output contracts (home video and subscription VOD).  So we think the Company has gotten conservative and smart, in equal measure, with respect to our release strategy to maximize revenues.

Over the past two years, Fred Shefte and I have struggled to manage the "three-legged-stool" of our financial foundational needs:  a).  Funds for Ongoing Operations;  b).  Funds for New Release Activities; and c).  Funds for Debt Management and "Twelve" matters.  Frankly, we have not been consistently successful in properly managing all three needs with the resources at hand.  As sales revenues are collected, decisions are made daily and weekly as to how to allocate among these three areas of need.  If we don't pay the Ongoing Operations (staff, rent, utilities), then the Company could not operate.  If we don't pay for New Release Activities, then the Company will not have sales revenues from which to continue operating.  If we don't deal with the Debt Management and "Twelve" matters, then the Company will have lawsuits, judgments and major distractions.

Finding the balance of how to best manage the Company on the resources at hand has been the main area of conflict with shareholders.  Many have told us to focus all energies towards New Release Activities... in order to build revenues, earnings (and then utilize the cash flow from same to deal with Debts).  Sounds like a good idea, except when put it to an actual timeline, the net result is a lot of really angry creditors who don't want to wait for 15-months while a title like "Toys in the Attic" is prepped for market and eventually released to positive cash flow.  As for Operations, Fred and I are already deferring our salaries, and utilizing a tiny (and overworked) support staff, in a low-cost facility.  You can't pay less than the $0 dollars that Fred and I have each taken home for the past six months.  So there doesn't seem to be a lot of austerity opportunity in the overhead arena.  Which leaves us with the Debts and the increasingly impatient creditors. 

At the Shareholder's Meeting, it was discussed and stated that during 2013, the Company WOULD be pursuing additional Debt Conversion activities in order to ease the issues of creditors and lawsuits.  None of the shareholders present expressed any surprise or objection to this announcement.  The Company has also been pursuing a $350,000 term note (which was slated to close clear back in October, but to this date has not funded), and the Company has pursued a variety of other private funding opportunities and other forms of financing.  Several key shareholders were asked directly if they were interested in providing secured loans to the Company, rather than having the Company do a Debt Conversion.  All of them said "no."  Additionally, three times in the past 60-days, the Company has gotten down to the "closing" process for Accounts Receivable Financing, only to have the existence of judgments (from "Twelve" creditors!) kill the deal (which is ironic, as the proceeds from the Accounts Receivable financing that we were pursuing were intended to create a funding mechanism for these same judgment debts!).  Fred and I see the retirement of these "Twelve" debts as being essential to improving our productivity and bottom line results.

We have entered into a time-staged agreement with Graham Financial to retire $300,000 worth of debts over the next four months.  While the Company is hopeful that our current sales activities for "Toys in the Attic" and other d-t-v releases will enable us to stop from pursuing future Debt Conversions, we cannot state that no others will occur.  We can remind everyone that the A/S has been significantly reduced already, so the "sky is falling" mongers cannot justify claims of a big, impending dilution.

Fred and I do not know what will happen to the stock price and trading over the next few days, weeks or months. Perhaps some will sell now, at very low pricing, to the benefit of others who view our management steps to eliminate debt and focus on revenues as a positive move.  Neither of us are stupid guys, neither of us are liars and neither of us are incompetent.  We have a good business plan already performing,  tempered against some toxic debt that we need to eliminate.  We'll do as much as we can from cash revenues, and we will continue to pursue "better" funding deals (such as the $350,000 note from back in October).  But what we cannot do any longer is permanently "wait" for third party financing actions to help us with these debts.  The responsible action is to deal with them now, suffer the short-term impact from the marketplace, and know that the result is ultimately a better, stronger Company.

I acknowledge that I'm clearly not winning the HHSE Popularity Contest right now.  But Fred and I are making the tough but necessary steps to keep this Company healthy and growing.  For some shareholders, maybe this is too much reality and too much detail, "they only want the desert."  We understand such sentiments, but hope they choose to stick around for what we believe is a deserving bounce-back.

Having now addressed comments on the Form 10 Filing, we plan to resubmit it on Friday.  Will the elevation of HHSE to fully-reporting status bring in new shareholders?  Probably.  Will the share price benefit?  It should, if logic still prevails.  But we do recognize that Fred and I are not making decisions that are unilaterally popular (or agreeable) to all shareholders, and therefore cannot expect all to ignore their emotions and view the success strategy as we see it.  But we're committed to the cause and believe in our plan.  We will win the war... even if we're not the most popular guys of the moment.