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Thursday, April 16, 2015

Question from Annual Shareholder's Meeting - Finally Responded...

Good evening HHSE Friends & Shareholders.  At the Annual Meeting of Shareholders last month, a question was posed about the financing structure of some of the "bigger" productions on the HHSE slate, and why management doesn't consider these to be risky activities.  Management responded to the question by promising to post an explanation and chart to show why this structure poses no reasonable (or real) risk to HHSE, but instead posits only an upside.

We will use "THE SUMMONING" as an example.

The Summoning is a film that by all ordinary measures, is functionally a $4-million dollar production.  However, clever deal-making by the producer and director (including waivers, facility participations and deferrals) has made it possible to produce the film for a budget which qualifies for the S.A.G. Low-Budget rates (which is important for saving another $100k or so).  The production budget for the film has been REDACTED from the graphic above - as have other proprietary details, such as the value of the forecasts or commitments from third party partners.

Structurally, a private lending group is financing the movie.  HHSE ends up with all worldwide rights... BUT... the International is being sublicensed to The Little Film Company and the Subscription Video-On-Demand is being licensed to Netflix through FreeStyle Digital Media. Hannover House has agreed to issue a "standby" guarantee to the lenders for the full amount of their funding, e.g., $2-mm.  However, the value of the sales and revenue sources EXCEEDS the guarantee, SO - the exercise of a call on the HHSE guarantee would be contingent upon a third party default or shortfall in revenues.  Technically, there is risk to HHSE, but the risk has been mitigated with presales, contractual commitments, rebates and revenues.

"This is a lot of work for one movie" one shareholder said recently.  "Why deal with all these production and financing steps when Medallion Releasing have 90+ other titles?"

That's a fair question, but one which ignores the marketplace reality that has a specific limitation on the amount of Video and V.O.D. revenues that are obtainable from direct-to-video properties.  For Hannover House to step up to the next level as a major independent, we need mainstream theatrical titles that have a wide (500+ print) theatrical launch.  It's these sorts of titles that become the locomotives to drive the revenues and pull-through promotions for the catalog and lower-stature properties.  While a movie like "AMERICAN JUSTICE" can achieve placement at Walmart and Redbox, the quantity of units as a direct-to-video release are relatively small when compared against the volume of a 600-title theatrical release like "THE SUMMONING."  Revenue wise, physical home video sales are more than 7-times greater for nationwide theatrical titles than direct-to-video releases.  And in the case of "THE SUMMONING," there's a lucrative home as a Netflix subscription property following its theatrical release.

It's titles like "THE SUMMONING" and "MOTHER GOOSE" that will elevate HHSE into a much larger revenue position - where $50-mm to $100-mm in annual sales becomes both realistic and obtainable.  The core direct-to-video business will always be a good bread-and-butter business... but the sizzle - and the steak - is likely to come from well-structured, high-profile titles for Hannover House in 2015, 2016 and beyond.