Welcome to the Hannover House Investor Relations Blog

Tuesday, July 5, 2016

Additional Updates & Responses to Shareholder Inquiries

Greetings HHSE Friends & Followers - I hope that everyone had a relaxing and invigorating holiday weekend.  For those of you that went out to see some theatrical releases, this was an incredibly strong (3-day) weekend for the USA Box Office - not only in terms of ticket sales, but also with respect to the quality of films available.  While some analysts are criticizing the opening performances for "TARZAN" and "BFG" - both films are terrific and are well positioned to build into significant box office hits. The family film "FINDING DORY" has topped $371-mm (!!), and as expected, both the "PURGE" and "INDEPENDENCE DAY" sequels delivered for their core audiences.

Fortunately, HHSE did not have any titles in brawl at theatres this past weekend.  The amount of money spent by the major studios to lock their locations made it economically unattractive for anything less than a tent-pole level (super-wide) theatrical opening.  Still, for movie goers, this past weekend was a great time to visit the local multiplexes!

Moving on to shareholder emails and inquiries, we've had more questions regarding ALCHEMY, VODWIZ, LIBRARY and FORM 10 / AUDIT issues, which we will address below.

1).  WHAT IS THE TOTAL "EXPOSURE" OR LOSS THAT AN ALCHEMY BANKRUPTCY COULD IMPACT ONTO HHSE?  Good question, and one for which a precise dollar amount may not be known unless (or until) Alchemy actually files bankruptcy and is ordered by the court to accurately account to it suppliers for sales and product returns.  Based upon WALMART "Point-Of-Sale" reports (actual units paid for by consumers and therefore not subject to return to the supplier), HHSE / MEDALLION estimate that the funds owed to us and our suppliers are in the range of $750,000, covering titles sold through at Walmart and Target Stores from September (2015) through May (2016).  All of these "sales" have been withheld from HHSE filings as the Company moved to begin recognition of third-party consignment sales on a cash-basis (rather than accrual).  So there would be no "write-down" per se against revenues if Alchemy were bankrupt or otherwise never paid.  As may be surmised through trade reports, many suppliers feel that there is a viable path for payment by pursuing the well-funded Anderson Merchandisers / AN Connect.  This was the supplier that HHSE and other studios signed-up with... not Alchemy... so Anderson's "sale" of their obligations to Alchemy may not be without liability to them.  As stated previously - and as reported in public press disclosures - HHSE / Medallion are now aligned with Cinedigm for sales into Walmart and Target; however, we will not ignore our rights and remedies to pursue the collection of sales due from Alchemy / Anderson.  Over the next few days, as the Alchemy matter evolves, HHSE will update shareholders via this blog.  UPDATE: AS OF TODAY (TUESDAY, JULY 5), THE ALCHEMY WEBSITE IS REPORTING THAT THEY HAVE, INDEED, FILED FOR BANKRUPTCY.  THIS WILL ENABLE HHSE / MEDALLION TO FILE A CLAIM AND TO SEEK SETTLEMNT OF BOTH OUR INVENTORY AND OUR RECEIVABLE. 

2).  WHAT ARE THE START UP COSTS FOR GETTING VODWIZ UP AND RUNNING WITH CONTENT?  This is a complex question, because there are fixed costs and variable costs. The basic fixed costs are the formatting of each program into the proper digital formats (including mandatory closed-captioning).  This has been running approx. $400-to-$500 per title; but most of the VODWIZ supplier studios have been delivering pre-formatted elements.  Variable costs include:  how much will be expended in ads and PR to launch the venture?  How many staffers will be needed in operations, promotions and new title acquisitions?  The issues impacting such questions would require a massive executive summary to describe.  HHSE / VODWIZ have been paying these mastering and preparatory costs "as we progress" the venture.

3).  HOW MUCH MONEY WILL BE NEEDED TO PROPERLY ADVERTISE A VODWIZ LAUNCH TO BUILD CUSTOMERS / SUBSCRIBERS?  The key word in this question is "properly" which is subjective.  But VODWIZ expects to have a very visible and a solid "launch" campaign, fueled primarily through the HHSE "prepaid cable & internet advertising" ($765,000) combined with internet banner barter-clicks (with entertainment sites).  The strategy is to focus first on avid film consumers and lovers, as they are the most likely consumer of independent films (comprising over 90% of the VODWIZ product offerings).  As the site builds volume, revenues and subscribers, VODWIZ plans to follow the Netflix launch and growth model of reinvesting 10-to-15% of monthly revenues into building awareness and traffic until such time that an optimal level of revenues and traffic has been balanced.

4).  HOW MANY EMPLOYEES ARE NECESSARY TO KEEP VODWIZ RUNNING, AND WILL THEY BE HIRED BY HHSE AND EMPLOYED AT HHSE HEADQUARTERS?  While all of the "back room" functions of program streaming, technical services and billings will be handled by our third-party services provider, the "front-end" functions of acquisitions and marketing will be handled by VODWIZ management. In this respect, in short order after launching, there will be a President (GM) with middle-management help with Acquisitions, Marketing and Administration, as well as support staff.  The initial launch of VODWIZ (for the first 30-to-60-days) will not require new hires... and when new staff are added, it is anticipated that they will be paid for from the instantaneous daily cash-flow that the venture generates (as all transactions are credit / debit card or ACH-based). The venture will have the flexibility to expand / or contract / to balance with the revenue volume.  Ultimately, VODWIZ will likely NOT remained housed at the HHSE / Medallion office-&-warehouse location currently hosting all other operations.

5).  WHAT IS THE COST OF HAVING A LIBRARY VALUATION COMPLETED?  The primary factors impacting the cost of Film Library Valuation study are:  size of library, access to historical sales or reasonable "comp" titles, and planned usage of the report.  A larger library is going to take more time to evaluate;  a library with no sales history (or lots of "unreleased" titles), requires more time to establish baselines for comparisons; a company that plans to pursue bank-financing using a Film Library as an asset requires additional procedures to be followed.  With respect to HHSE, the total Film Library venture looks headed towards a completed cost of about $38,000.  

6).  WHAT IS THE COST OF A COMPLETED AUDIT?  Again, many factors impact the costs of an audit.  But $40,000 is a reasonable expenditure for a company with the number of items and variables as HHSE, and is consistent with the pricing from our auditor.

7).  HOW WILL A LIMITED CASH CRUNCH AND LACK OF STAFF (PER PRIOR BLOG) AFFECT TIME-FRAMES FOR VODWIZ AND AUDIT?  WHICH OF THESE IS THE COMPANY'S PRIORITY?  This compound questions includes several false assumptions.  So an accurate answer requires a clarification of the items contained within the question.

a).  LIMITED CASH CRUNCH - Prior blogs have referenced a combination of issues that have had a direct impact on cash flow for HHSE.  First of all, the total lack of payments from Alchemy (Anderson) since Sept. 2015 had previously created a painful dip in cash resources - primarily impacting our activities several months ago.  Next, the exciting growth in new product (DVD / BluRay) sales through Cinedigm has required an increased investment in new release manufacturing and freight costs (also creating a dip in cash resources).  But the company's ongoing expansion of theatrical release activities and revenues have - to date - satisfied most of the Company's needs, including providing for sufficient overages to enable ongoing payables management.  Yes, having the Alchemy funds would make our managerial jobs easier.  So we look forward to a resolution of that matter.  But the current and ongoing Cinedigm sales will more than offset the prior loss of a smaller (monthly) revenue component that the Company had previously enjoyed from Alchemy / Anderson.

b).  LACK OF STAFF - A prior blog lamented the loss of Caitlin McKenzie from our staff.  She accepted a better paying position with Universal, and the opportunity was too beneficial for her to reject. We wish her well, and appreciate her long-advanced notice and help with transitional activities.  Caitlin's prior job duties at HHSE have been temporarily picked-up by a combined effort from Tom Sims, Jayson Blocksidge, Betty Pendelton and Eric Parkinson - until such time that we can find a suitable, full-time replacement as Director of Sales. Caitlin was involved in preparing new titles for submission to key accounts ("Title Fact Sheets" and other data required for new releases to be evaluated by Walmart, Target, Best Buy, Netflix and Redbox - all of which have slightly different data requirements).  Caitlin was not involved in any activities relating to VODWIZ or the AUDIT.  So "Lack of Staff" is a non-issue with respect to the actual subject of the above question, which appears to be in reference to TIME-FRAMES for VODWIZ and AUDIT.

c).  TIME-FRAMES FOR VODWIZ AND AUDIT - As posted previously, a joint-announcement for the launch and operations of VODWIZ will govern the public disclosure of time-frames and other factors impacting that venture.  The ongoing activities of the Auditors is not impacted by the fluctuating level of HHSE support staff, nor the Company's cash flow (except to the extent that they might issue another invoice for additional services, in which case, payment of such would be a super - TOP - priority).  

Great Questions!  Thanks for taking the time to think about legitimate and relevant issues that actually affect the company!  We often receive absurd questions about irrelevant or inconsequential items. So to receive legitimate questions that show that someone has put forth some thoughtful analysis is most appreciated.  We are thankful for having many intelligent and insightful "longs" and we look forward to the achievement of our corporate and revenue goals in the comings days / weeks / months.