Welcome to the Hannover House Investor Relations Blog

Thursday, June 23, 2016

Growing Revenues + Termed-Out Collections = Corporate Growing pains...

Dear HHSE Friends & Followers - We have received some 'confused' communications from shareholders over the past several days. Not that their requests were worded confusingly, but that they were asking to address the apparent disconnect between all of the positive revenue activities for the company, combined with ongoing creditor litigation matters.  To alleviate such confusion, we will elaborate on the current cash status of HHSE and how our growing revenues do not instantly relieve prior payables issues.

The primary question from shareholders has been: why are there still unresolved (or new) payables problems or lawsuits when the company's revenues have been growing so significantly?

There is not a short answer because of the many issues that impact cash flow.  But we will try to be brief.

1).  ALLEGRO DISTRIBUTION & ANDERSON / ALCHEMY - The two largest DVD and Blu-Ray wholesale distributors for HHSE during 2014 and 2015 were ALLEGRO (for sales in CANADA) and ANDERSON / ALCHEMY (for sales into Walmart, Best Buy and Target).  We started experiencing "payment" problems & delays from Allegro as far back as April 2015, which were masked on their part by their notifications of "pending returns" and other holdbacks. Ultimately, we realized that we simply were not being paid for actual NET sales at Walmart, Jumbo and other key Canadian retailers.

Regarding ANDERSON MERCHANDISERS, for more than 20-years, they were always a solidly and reliable wholesaler and payment source.

However, in late Summer (2015) they "merged" (or were acquired?) by ALCHEMY ENTERTAINMENT (previously MMS), which had been our wholesaler for DVDs and BluRays into TARGET STORES.  The combination of ANDERSON and ALCHEMY resulted in several months of uncertainty regarding product returns, payment procedures and new sales solicitations.  But by December, 2015, HHSE had grown very concerned and began ramping up the collections pressure on Alchemy for payment against these significant sales.  By January, we stopped providing them with new release titles (for fear of simply not ever getting paid), and by February, their overall tenuous financial position was the chatter of the film industry (with trade publication articles touting that Alchemy bit off too much in acquiring Anderson).

Alchemy to this day remains "upbeat" that they will survive and ultimately pay what they owe to HHSE / Medallion and other suppliers (it's a substantial amount by our calculations).  However, until that happens (or until we are forced to file a lawsuit), our corporate response has been to terminate Alchemy's representation of our product line - and to align with a far more financially stable wholesale partner in CINEDIGM (NAS: CIDM).  Cash flow wise, what used to be a reliable monthly checks in the $100k range have totally stopped for these past 9+ months during the struggles / mergers of these key physical goods wholesalers.

NET IMPACT TO HHSE'S CASH FLOW HAS BEEN THE SHORT-TERM LOSS OF ABOUT $100,000 PER MONTH.  However, we have not needed to revise our accrued earnings for 2015 as Alchemy and Allegro remain confident in their communications that HHSE will ultimately be paid in full.  That said, these slow-collections issues are the primary reason that physical goods sales (and digital streaming licenses) on a going-forward basis are being accounted for on a CASH Basis (instead of accrual).

2).  NEW VENTURE WITH CINEDIGM IS ROCKETING - Beginning with shipments already delivered - and continuing through to the last month that new releases have been selected (November, 2016), the HHSE sales venture with Cinedigm has been a solid launch - with two and three titles PER MONTH going into Walmart and Best Buy.  This is good-news / bad-news.  Good news because it represents huge shipments and a sunny year-end... Bad news because HHSE has to advance pay all of the manufacturing and freight costs to fulfill these orders. When you add huge new manufacturing costs to an already strained cash flow (see above), it's no wonder that SOME creditor bills get pushed to the back burner...

3).  DISTRACTING LITTLE STUFF? Yes, it was a clerical error or priorities oversight to not pay the $99 fee to renew the Registered Agent for HHSE in Wyoming.  But this has since been "fixed" (paid and filed) and this housekeeping chore is resolved.  Now we're informed that a former employee (Daniel Ackerman) has filed to get paid his accrued / unpaid salary (about $13,500 according to our records).  Is this distracting?  Yes, especially when our management priorities are to fill new orders for the Company's growth, and complete the corporate tasks with the Form 10 (including finalization of the Library Valuation so that the audits can be released). With limited hours in a day, and limited cash resources, it's impossible to promptly resolve all matters... even items that to management's priority can seem to be inconsequential "little stuff."  But every issue that becomes subject to an actual litigation matter is being addressed, regardless of the creditor's merit or the absence therein.  Regarding Daniel Ackerman, his continued position as a bookkeeper / invoice-generator at HHSE was no longer justified last summer when we switched to quarterly reviews with an outside CPA firm and an enhanced version of Quickbooks.  We simply could not justify this salary against the work-product that was so easily fulfilled for a dramatically smaller amount. As Daniel Ackerman had never held a key role in preparing the financials, we did not see a need to replace his position.

4).  IRS TAXES - Yes, HHSE owes some IRS Payroll Taxes.  Payments have commenced, and we are told (by a resolution service) that a formal settlement will happen in the next few business days.  It's not a lot of money, but as it had not been paid in a timely manner, they came for the collections.  On a going-forward basis, we have engaged a payroll service so that our 941 forms and payments are made in a timely manner.

While this blog today is focusing on the ugly stuff of problems and obstacles... the blog for tomorrow will cover all the far-more-impressive GREAT stuff that the Company has achieved in the past few weeks and months.