Welcome to the Hannover House Investor Relations Blog

Friday, October 4, 2013

Don't know VooDoo Math, but do know that VUDU is going to be huge for HHSE!

(Guest Blog from Eric Parkinson, CEO of Hannover House) - Good morning HHSE Friends, Shareholders and Watchers - as is well-known, Hannover House is very open and receptive to shareholder inquiries for clarification of public items.  However, we do require identity verification before responding to calls and emails, as has been suggested by the advisors currently assisting the company.  HHSE takes pride in being extremely candid, open and accessible... to a level far exceeding most public companies (and certainly unprecedented for Pinksheet traded equities).  That's why it's confusing when shareholders occasionally criticize management for not being transparent with information.  To make such a claim conflicts with the reality of the OTC disclosures, and almost always appears as a thinly veiled attempt to manipulate the stock trading price.

Yesterday, several "longs" emailed me to ask if I was planning to respond to a lengthy post that someone ("Mikeymgd"?)  placed on the "IHUB" board (which I understand is an open forum for stock followers to discuss various equities).  Hannover House and our management do not subscribe to or visit these "chat rooms" so we are reliant upon a verified shareholder to  send us "posts" if they want a response.  Late in the day, a verified shareholder finally provided me with the text of the post, and a request that I respond in respect of the lengthy effort made by the poster.  So here goes! >>

The first issue that the poster raises is their personal opinion as to whether or not the company has "truly turned the corner."  The following sentence in their post refers to lawsuits, so I'm going to presume that the barometer the poster is suggesting as being the measure of whether or not HHSE has "truly turned the corner" would be the status of lawsuits.  As of today, there is only one (1) active and unresolved lawsuit affecting the company.  This time last year, there were seven (7).  If the poster feels that resolving lawsuits is the measure of success, then we arguably have satisfied this goal (or are at least extraordinarily close to having zero unresolved lawsuits). To be clear, the Company still owes money on prior legal matters and judgments; what we are referring to is disputed matters of adjudication still before the courts... we do not wish to imply that all prior lawsuits have been paid off as of this date.

The next statement made was about "acquiring movies."  The poster said to "consider it fact once its (sic) available at Walmart, redbox (sic) or netflix(sic)."  Their following sentence seems to elaborate on this position by stating that "too many items fall through prior to execution."  In reviewing our announcements from the past 3-1/2 years, we were only able to identify two titles that were announced but ultimately not released (with forty-two titles announced and released or in active pre-release solicitation).  The two titles that were abandoned were "HappyThankYouMorePlease" and "Wild Hunt."  In the case of HTYMP, the producers were insisting on a 200-print theatrical opening and a major prints & ads expenditure which made no financial sense to Hannover House.  With "Wild Hunt" the producers allowed the Canadian release to precede the USA schedule, with grey-good shipments of DVDs arriving into the US market.  We believe that both decisions were in the best interests of the Company and shareholders.  We also believe that having 95.3% of our announced acquisitions actually / eventually hitting the marketplace ranks HHSE in the highest echelon of all studios. 

The poster then moves onto the issue of VODwiz, and warns shareholders to "not count your eggs until they hatch (sic)."  The poster describes the "On-Demand" market as a "nitch" (sic) that represents only "1% divided amongst hundreds of on demand pay per view channels."  People are entitled to have their own opinions - they can even jumble popular phrases and misspell words if they want - but they are not entitled to invent their own FACTS.  Download the industry report from NPD Group if you want to see the actual breakout of this multi-billion dollar V.O.D. media; transactional on-demand is the fastest growing segment, and there and there are not "hundreds" of on demand pay per view channels.  Most importantly, there's not a single legitimate competitor pursuing the VODwiz "breadth of selection" programming model.  This poster goes on to predict that Hannover's VOD revenues will be "100k or less annually."  Is he even reading our filings, blogs or reports at all?  In its first week of "on-demand" placement, TOYS IN THE ATTIC generated $28,400... and our top VOD title last year ("All's Faire In Love") generated $238,000.  Granted, some of the VODwiz titles are probably not going to be big revenue performers.  But do the math, and use modest numbers.  If we're generating an ultra-conservative $5,000 per title on average - with 2,500+ titles - that's $12,500,000 per year.  The poster is asking people to find the projection of $4 per title / per year to be plausible?  Such a prediction is wildly inconsistent with current VOD results for the company. 

The poster then moves to the issue of debt reductions, and uses some data from selected quarters to attempt to paint a picture of increasing debts.  Certainly, debt management has been a major issue for the Company, and the painful debts from the release of "Twelve" in 2010 have been quite a burden (thank God that we did not proceed with "HappyThankYouMorePlease" and end up doing it again!).  Some adjustments to our debt reporting merit clarification.  First of all, the company recently acknowledged three sizable debts that, in previous quarters, had been in dispute (or they were listed on the financials at their actual liability levels).  Bedrock Ventures, Evelyn Smith and Interstar Releasing are three lawsuits that the Company ultimately lost due to defaults.  As part of the lawsuit resolution, these debts were restated in filings to reflect the gross amount of the judgments (including legal fees and interest) as opposed to the contractual liability.  Ironically, we are now being told by the audit team that the restatement of these debt amounts will likely need to be back-dated to the applicable period, as opposed to being recognized in 2013.  Regardless, these items were not "newly acquired debts" as implied by the poster.  They are newly "recognized" ledger entries, suggested by the audit team (and in two instances, required disclosures for settlement with the judgment creditors). 

The Current Liabilities also reflect approx. $520,000 for TCA Funding as well as newly reconciled and accrued producer royalties.  The TCA Funds have been used to move forward on ten new releases, revenues from which will be realized in Q4 (2013) and in Q1 (2014). 

Again, going back to the poster's opening salvo of determining success by "turning the corner" in resolving lawsuits, the recognition of these previously disputed amounts was an important part of the lawsuit resolution.  We disagree that these items represent that the Company is moving backwards.  That said, there will be some significant adjustments "the other way" in Hannover's favor for Q3 and Q4 in that some payables obligations have been retired with debt conversions, settlements (at lower that booked payables levels) or otherwise corrected from account reconciliations.  These are the types of ledger adjustments that occur when you're going through an audit process.

Q2 2012 Q2 2013 Change Primary Adjustments
Current   $   2,071,238  $   2,251,858  $      180,620  Added in $520k for accrued royalties and TCA
Long Term   $   2,218,326  $   3,444,432  $   1,226,106  Recognition of Judgments, restated by $1,116k
(Officer Totals)  $      969,175  $   1,158,836  $      189,661  Now accruing at 50% of prior rate
Total Liabilities  $   4,289,564  $   5,696,290  $   1,406,726  Includes $1.636-mm in ledger adjustments

The poster then moves onto a chart of revenues for selected (and non-consecutive) quarters, in an attempt to support a prediction that the Company's revenues are declining.  We would remind shareholders that there are four quarters to a year, and that a one-time adjustment for product returns (as occurred in Q2, 2013), does not indicate that sales are waning.  Ironically, we are being told that the Q2 sales adjustment for returns may need to be applied to quarters in 2011 and early 2012, when the shipments for those particular items were accrued as sales (the eventual returns diminished the sales for those items, and may be more properly applied to the quarter that the sales were accrued, rather than a reporting period with different title shipments entirely).  If these debits are applied to the prior reporting periods, then the sales curve for the Company is restored to a double-digit, year-over-year growth rate.  FYI - On a going-forward basis, the Company is no longer accruing as sales the "gross dollar value" of shipments to key retailers... instead, we are applying a hold back for prospective product returns at an amount set by newly established historical levels.  We will continue to account for sales on an accrual (rather than cash) basis, but will apply a hold-back reserve in order to avoid or minimize any future ledger adjustments.  Again, these are issues that arise while undergoing the audit process, and are being done in order to provide reports in an accurate and auditable form.  
The poster then states that the TCA line of credit will show a higher debt amount in Q3.  They are mistaken, as the TCA funding is already included in the Q2 filings. 
Lastly, and most revealing, the poster makes a pricing prediction ($.01 per share), which he does not see as being positively affected without some sort of "blockbuster" development.  Well, taking into account the flaws in the poster's analysis - and knowing that there are several major deals in the works for HHSE - I would recommend that the poster pick-up the phone and call us before spending hours in preparing a factually challenged (and loosely veiled "attack") on the Company and its managers.  We have no secrets or nefarious agenda... but are naturally suspicious of anyone who "anonymously" makes derogatory statements, and presents ill-willed opinions as "fact." 
There's never any guarantees that any particular Company will grow to become hugely successful... or that the stock price will reflect its proper value.  But Hannover House has been operating now for 20+ years, building the library, building the revenue pipelines, and building into a position for major break-out and growth.  Fred and I believe that the stock should be north of $.10 per share... and we think the developments underway should ultimately convince a majority of market traders.  Maybe we're right... maybe we'll be proven wrong... but we can never be accused of not being forthright and open in telling shareholders the accurate status of the Company to the fullest extent allowable at any given time.  If the poster of yesterday's lengthy diatribe is a legitmate "long" or actual shareholder, I invite them to call me and discuss any questions, rather than expending hours of otherwise productive time picking-and-choosing bits of misinformation to support a flawed hypothesis that the stock should not be trading waaayyy higher than the current PPS levels. 
While my feeling is that the poster has used "VooDoo" math in attempting to paint a tainted picture of HHSE, all I can say is to check out the growth rate of the Walmart "On-Demand" site, VUDU, if you want to know which direction the marketplace - and HHSE - is moving!  We want to encourage shareholder inquiries:  if you ever need actual clarification on disclosed items, just give us a call!  Isn't your time worth it?