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Sunday, February 23, 2014

Recap of Shareholder's Meeting - Key issues and Q&A from attendees

The 4th annual Hannover House, Inc. meeting of Shareholder's was held on Friday, Feb. 21, 2014 at the Grand Central Hyatt Hotel, New York City.  Attendees representing direct or beneficial control over 163-million shares were in attendance, representing an increase of about 15% over the prior three years of meetings; additionally, 100% of the preferred shareholders were present.

The presentation covered a recap of 2013 results and a forecast of 2014-2015 activities, and was conducted primarily by Eric Parkinson, C.E.O., who spoke for 2-1/2 hours.  D. Frederick Shefte, HHSE President, was called on to elaborate or interject additional information on several occassions during Parkinson's presentation. 

Throughout the presentation, questions from attendees were being addressed prior to moving on to different agenda topics.  For the benefit of shareholders who were unable to attend the meeting, this recap is designed to clarify issues that were of interest and concern to those in attendance.  As some of the strategies and actions certain topics involve complex steps, every effort will be made in this recap report to present the issues and discussions as clearly as possible.

The overall reception was positive, and enthusiasm for current results and anticipated growth into 2014 and 2015 appeared unanimous.  Despite the success of the Company's core and current activities - as well as the prospects for new and significant revenue growth from VODWIZ and MEDALLION INTERNATIONAL PICTURES - concerns were expressed over areas of corporate governance, audits and communications.

1).  STATUS OF AUDITS - Over the past few years, shareholders have placed great importance on the Company's completion of 2-years of financial audits, as a precursor to "uplisting" the stock and thus improving access to a broader shareholder base.  A lengthy discussion was held regarding the status of materials requested and required by Hogan-Taylor for the audits... as well as additional steps, referred to by Parkison as "parallel paths" to earn an uplist of the stock while awaiting the full review of the audits.  The completed audit report binder, containing over 600 pages of financial data and supporting documentation, was made available for attendee review;  however, the audit opinion letter from Hogan-Taylor is not yet ready for release pending revision of the items / issued described at the meeting and below.

1-a).  Back-Up Reports Still Required - on the Company's balance sheets, under assets, are three items for which the back-up support is extraordinarily complex and data intensive.  These items are:  Prepaid Producer Royalties, Producer Marketing Recoupment and Film Distribution Rights.  Here is an example of what each of these line items represents, for clarity in understanding:

1-a-i).  Prepaid Producer Royalties - in order for Hannover House to obtain the rights to distribute "Zombie Warz," the Company paid to the Producer / Licensor an "advance" of $25,000.  This amount is to be recouped from royalties otherwise due (at a future date) from the Producer / Licensor's net share of revenues.  When you add up ALL of the producer advances paid for all 200+ titles (and for 20-years of HH operations!), the number gets pretty significant on the balance sheet.  However, this number is also constantly being reduced as actual royalties are earned for each item, and the balances of the advances are reduced.  The number is also being increased as new advances that were paid-out to license rights are capitalized.

1-a-ii).  Producer Marketing Recoupment - as with most titles, HHSE earns a distribution (or Sales Agency) fee, PLUS, recoupment of marketing costs (which include theatrical P&A, plus all of the costs to release films or products into the marketplace, including video replication and freight).  In the example of "Zombie Warz," the initial Quarterly Report collections of $80,000 would result in a FEE to HHSE of 30% (e.g., $24,000), plus recoupment of marketing costs (which were approximately $18,000 for the release, plus $28,000 in video replication and freight); leaving a balance due to the producer / licensor of $10,000 (which will be "deducted" from the $25,000 advance payment, leaving an unrecouped Producer Royalty balance of $15,000, but a "$0" balance on Producer Marketing Recoupment since 100% of costs were already recovered.  In the case of "Racing Dreams" which involved a theatrical release expenditure of about $150,000, the "Producer Marketng Recoupment" is still showing about $100,000 in favor of Hannover House, and this balance is added with all others in that category to comprise that balance sheet line item.

1-a-iii).  Film Distribution Rights - This line item is very closely related to "Prepaid Producer Royalties" but can include sums paid for multi-title licensing that are cross-collateralized against multiple titles.

In order for Hannover House to provide Hogan-Taylor with back-up support for these, three balance sheet items, it is necessary to have a detailed summary of the "producer statements" for all products released by Hannover House (and for all time).  The creation of producer statements was attacked during late 2012 and early 2013, at which time a more problematic issue was discovered.  While a variety of accounting methodologies are accepted throughout the world, the first-in-first-out method of revenue recognition does not apply in matters involving third party participants.  For approximately 18-months during 2011 and 2012 (and while preparing audit materials for Hogan-Taylor), the company controller had been applying customer payment receipts on a methodology to pay off the oldest open items first (as opposed to using revenues from "Turtle" DVD sales to pay off invoices for "Turtle" DVDs).  While such actions have no impact on the overall balances due to each customer - or on the Company's bottom line and balance sheet - it does create an error in reporting how much was actually collected "per title" as opposed to "per purchaser."  So if the collections were not applied to title-specific invoices, the producer statements cannot be relied upon for 100% accuracy... and the three balance sheet line-items discussed above cannot be supported with 100% confidence.  Accordingly, the task that has occupied the Company's new bookkeeper since the first week of December has been the "correction" of payment applications on a customer-by-customer / invoice-by-invoice basis so that payments for each title are applied against invoices for that specific title, and not "in general" against the overall balances owed to HHSE from a particular purchaser.  Again, these corrections do not impact how much the Company is owed by any purchaser... they impact only "which invoices" were paid and which may still be open. 

When the Company announced the Shareholder's Meeting, it was believed that the reallocation of payments could be completed faster than has proven to be the case.  With over 20,000 invoices to review against payments, the company's new bookkeeper took 8-weeks just to complete the payments from 2012 - and he is now working on payments for 2013 and will move next to 2011 (so that the Company will have a full 3-years of audits).

MEANWHILE, the Company is pursuing "parallel paths" to expedite the uplist process.  Already completed, the Company has resurrected its CIK and Edgar Access issues so that periodic reports can now be filed through the Securities & Exchange Commission.  This is a step some refer to as "quasi-reporting" status.  However, the benefits of such are that many brokers who could not accept HHSE stock before, may now do so... and the stock also now has a signirficantly greater likelihood of approval for electronic share transfer through D.T.C.  Addiitonally, with the support of an attorney's opion letter, HHSE can move for uplist to OCT:QB status at this point.  A second, alternative path to uplisting available to HHSE is to file a form S-1 Registration for a specific share class; however, the timing of such is not necessarily faster than the filing of the already drafted Form 10 Registration (for all classes of shares), which is awaiting only the auditor's letter.

2).   MEDALLION INTERNATIONAL PICTURES - There was great enthusiasm for the financing structure to enable Hannover House to combine international sales, tax incentives, bank financing and private investor equity for funding of a $40-million slate of high-profile, theatrical features. Attendees agreed with management that the structure of Medallion - providing the Company with access to high-profile and extremely commercial films at no risk - was a significant and material development that could spark meteoric growth in revenues and stature.  Despite the amount of time and project details discussed, no additional information of a material nature was disclosed at the SH meeting beyond the overview presented in the launch press release and the pre-SH Meeting blog.  For clarity, "Medallion" is the entity name that at one time was being contemplated for naming under "Revolution;" the recent operation of another entertainment company with "Revolution" in their name suggested a possible market confusion to the new HHSE entity.  Accordingly, it was determined to be a wiser and safer path to select a less visible entity name.

3).   MULTIPACKS - A discussion of the Company's proposed twelve new "multipack" releases transpired, including a clarification of release dates.  Some Shareholder's expressed concern that retail space availabilities - that often result in street-date delays for Hannover House and other studio items - were being misinterpreted by some shareholders as deadline errors on the Company's part.  It was expressed that greater clarification needed to be made in the future to differentiate between the date that HHSE items will be "made available to retailers" as compared to the date that some of those retailers might actually put those products onto their shelves.  Another issue of concern with the recent multipack announcement was the observation that prior success with multipacks does not indicate that similar sales levels will be achieved with the new multipacks... and that such an inference could be confusing to shareholders.

4).   REVIEW OF RELEASE SLATE - A discussion was held over the types of programming that have been selling for Hannover House in the "core" activities of direct-to-DVD products.  Examples of upcoming titles to reach these key genre's were discussed and presented.  About 36 items for 2014 and 2015 were presented, and many were briefly discussed.

5).   VODWIZ activities - Parkinson announced that ten (10) suppliers have now agreed to join VODWIZ, representing approximately 3,000+ title availabilities;  he also reported that the Company is pursuing 12 additional studio suppliers, and hopes to have over 5,500 titles by the end of this year.  The consumer campaign outreach - through ads, PR and social media - will not commence until at least 2,000 titles are available on the site.  Parkinson felt that VODwiz has the proverbial "one-chance to make a first-impression" and that a wide assortment of titles would be essential to convincing consumers to either join-up on the monthly subscription basis, or try out a pay-per-transaction streaming item.