Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following
discussion should be read in conjunction with the unaudited interim consolidated financial statements and related notes to the
unaudited interim consolidated financial statements included elsewhere in this report. This discussion contains forward-looking
statements that relate to future events or our future financial performance. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking
statements. These forward-looking statements are based largely on our current expectations and are subject to a number of uncertainties
and risks including the Risk Factors identified in our Quarterly Form 10-Q for the three-month period ending December 31, 2013.
Actual results could differ materially from these forward-looking statements. Hannover House, Inc. is sometimes referred to herein
as "we," "us," "our" and the "Company."
The
nature of the issuer’s business
is driven by the operating entity, Hannover House, which is a full-service producer
and distributor of entertainment products
(i.e., feature films for theatrical, video, television and international distribution,
and a publisher of books).
Hannover
House, Inc., is a Wyoming Corporation. Truman Press, Inc., d/b/a “Hannover House” is an Arkansas Corporation.
Hannover
House, Inc., f/k/a Target Development Group, Inc. (which was also formerly known as "Mindset Interactive Corp.") was
registered as a corporation in Wyoming on January 29, 2009. Truman Press, Inc., d/b/a “Hannover House” was registered
as a corporation in California on September 15, 1993, and re-registered in Arkansas effective June 2008. The Ecklan Corporation,
registered on March 25, 1998, in the State of Texas, was the predecessor entity to Target Development Group, Inc.
The Company,
Hannover House, Inc., as well as Truman Press, Inc., d/b/a “Hannover House” each have an effective fiscal year-end
date of December 31.
Neither
the Company, Hannover House, Inc., nor the operating entity, Truman Press, Inc., d/b/a “Hannover House” have ever
been in bankruptcy. To the best of management’s knowledge, no predecessor entity has ever been in bankruptcy.
Effective
January 1, 2010, Target Development Group, Inc., acquired all of the shares of Truman Press, Inc., d/b/a “Hannover House”
in a stock-swap agreement. The details of this acquisition venture are described in detail within the information statement posted
on the OTC Markets Disclosure Statement of December 14, 2009.
Over the
past four years, the Company has defaulted on several loan or credit obligations, but none representing a material event to the
Company or falling outside of the ordinary course of business. As previously disclosed through the Company's filings with the
OTC Markets, the Company had incurred debt relating to the theatrical releasing costs of the film "Twelve" (debt obligations
were accrued with Andersons, AOL, Bedrock Ventures, 42 West, Technicolor, Tribune Ent. and others). As of December 31, 2013 the
Company had reduced the cumulative total of the outstanding debt balances for this film from an original gross of $4.2-million
(inclusive of obligations to the production company / licensor), down to less than $850,000 as of this reporting period. Other
significant obligations of the Company include "P&A" for the release of the film, "Hounddog" (Weinreb
loan), "P&A" for the release of "All's Faire In Love" (NBCal Loan), producer / licensor obligations to
Interstar Releasing, Fantastic Films and E.E. Smith, all of which are itemized or otherwise included within the Company's financials.
As
of 3-31-2014, there were no further changes of “control”.
As of 3-31-2014,
there were no increases of 10% or more of the same class of outstanding equity securities.
During
the quarterly reporting period ending 3-31-2014, the Company did not issue any new shares.
The Company
has not experienced any delisting of the issuer’s securities. As of the 3-31-2014, there were no current, past, pending
or threatened legal proceedings or administrative actions that could have a material effect on the issuer’s business, financial
condition or operations other than those items specifically described hereunder or otherwise disclosed in OTC Markets Filings.
As of 3-31-2014 and remaining true through the date of this filing, there were no past or pending trading suspensions by a securities
regulator. The legal proceedings, whether past, pending or threatened, all fall under the guidelines of being within the ordinary
course of business, and are disclosed in detail in this filing or incorporated within previously filed disclosures with the OTC
Markets.
Business
of Issuer
-- The SIC Codes most closely conforming to the Company’s business activities are: 7822
(Services –
Motion Picture & Video Tape Distribution)
and 2731
(Books: Publishing).
The Company is currently operating. At
no time has the Company ever been a “shell company” as defined in the guidelines.
Through
the operating entity of “Hannover House,” the Company is actively involved with the production, acquisition and distribution
of entertainment products into the USA and Canadian markets, including theatrical films, home video releases, rights licenses
of films and videos to Video-On-Demand platforms and television, as well as book publishing (including printed editions and electronic
“E-Book” formats).
FILMS
& VIDEOS
– Most of the film and video titles that are distributed by the Company are “acquired” or otherwise
licensed from third-party suppliers, often production companies or media companies seeking to expand their income and market reach
through a relationship with Hannover House. Some of the properties distributed by the Company are “
sales agency
”
ventures, in which the Company performs certain sales & marketing functions on behalf of the owners of the properties, as
opposed to having the Company actually purchase or otherwise license rights into the property. Historically, most of the titles
sold by the Company were under such “
sales agency
” ventures. However, beginning in 2010 with the merger of
Hannover House and Target Development Group, Inc., the Company began moving away from “
sales agency
” ventures
and pursuing actual rights-licensing / acquisition structures for new titles. Examples of “
sales agency
” titles
would include “
Hounddog
” from Empire Film Group and “
Grand Champion
” from American Family
Movies; examples of rights-licensed titles would include “
Twelve
” from Gaumont and “
Turtle: The Incredible
Journey
” from Sola-Media. The Company benefits from rights-licensed titles over sales-agency titles in a variety of
ways: a). the fees to the Company are usually higher under rights licenses, b). the duration of the terms of representation rights
are usually longer for rights licenses, and c). titles falling under rights- licenses provide the Company with additional balance
sheet and collateral benefits.
For the
calendar year ending 12-31-2013, the Company generated over ninety-two percent (92%) of the gross revenues from the sales, distribution
and licensing of Film & Video properties. The average “gross margin” generated for the benefit of the Company
from the release of Films & Videos is twenty-seven percent (27%).
BOOKS
/ E-BOOKS
– The Company remains active in the acquisition and licensing of publishing rights to printed books and e-Books.
The gross margins earned by the Company in the release of Books are generally much higher than the margins derived from the release
of Film and Video properties; however, the upside revenue potential for books is usually not as high as the potential for Films.
So the Company seeks to maintain a balance in its release slate of high-margin book properties, with high-revenue Film and Video
properties.
The use of the term "Company"
refers to the combined entities, as reported on a consolidated basis, of Hannover House, Inc., Truman Press, Inc., d/b/a “Hannover
House” and Bookworks, Inc. (a special purpose entity utilized for Screen Actors Guild activities and productions). Each
of the corporate entities files separate income tax returns with the federal government and respective states of registration;
however, financial statements and reports, as of January 1, 2010, refer to the combined and consolidated results of all entities.
Hannover House, Inc. is the publicly-traded entity for all operating divisions. Truman Press, Inc., d/b/a “Hannover House”
is the operating and releasing division entity for all consumer products. Bookworks, Inc., is a special purpose entity established
for the servicing of book and publishing ventures, and more recently, used for Screen Actors Guild productions.
As of 3-31-2014
and remaining true through the date of this filing, the Company does not foresee any probable or existing governmental regulations
as having an adverse or material impact to the operations.
During
calendar year 2009 (and specifically limited to activities for Truman Press, Inc., d/b/a “Hannover House”), the Company
invested approximately $15,000 on activities that could be characterized as ‘research and development.’ During the
calendar year of 2010, and under the consolidated reporting of all entities, the Company invested approximately $20,000 on projects
and activities that could be characterized as ‘research and development.’ During the calendar year of 2011 and under
consolidated reporting of all entities, the Company invested approximately $166,000 on projects and activities that could be characterized
as ‘research and development.’ (specifically, the production of feature film / video products). During 2012, the Company
invested approximately $287,114 on production projects / R&D assignable; during 2013, the Company made no new investments
in production or activities that would be R&D assignable.
The Company
has not incurred any non-negligible costs relating to compliance with environmental laws, whether to federal, state or local.
As of 3-31-2014,
the Company had 6 full-time employees.
The
nature of products and services offered:
|
A.
|
The principal products
of the Company, and their respective markets are:
|
|
i.
|
Theatrical films
– released to theatres in the United States
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ii.
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Home Video Products
(DVDs, Blu-Rays, Digital Copies) – released to video specialty retailers, mass-merchandisers, bookstores, schools, libraries
and rental outlets (including kiosks) in the United States and Canada;
|
|
iii.
|
Video-On-Demand
releases – films and videos offered for direct ‘in-home viewing’ by consumers via a variety of service providers.
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iv.
|
Books and E-Books
– sold through bookstores, schools, libraries, internet retailers and streamed through a variety of e-Book platforms.
|
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B.
|
The primary distribution
methods used by the Company for all consumer product goods can be categorized as: “two-step wholesale” distribution
(wherein the Company sells its products to an authorized wholesale distributor, which in turn, resells the products to retailers
or consumers) and “direct distribution” wherein the Company sells its products directly to consumers or directly
to the end-user retailer.
|
|
C.
|
The Company has
announced, and included in previously published disclosures, a listing of some of the principal, upcoming theatrical films
that will also be released onto home video formats.
|
|
D.
|
Competitive Position
– The Company competes for theatrical screens and retail (home video) shelf space against seven (7) Major Studio suppliers
and approximately eight (8) independent studio suppliers. While all of the Major Studio competitors operate their own (in-house)
home video distribution divisions, only three of the independent studio suppliers operate both theatrically and in the home
video markets. Operating a home video releasing label “in-house” provides the Company with an advantage in the
solicitation of titles for acquisition, as well as provides greater control over the Company’s cash-flow and corporate
goals.
|
|
E.
|
Materials and Suppliers
– The principal service providers to the Company are listed in detail in this disclosure, below. The principal suppliers
of new release film and video products include the following production companies and programming sources
(listed alphabetically):
Allegheny Image Factory; American Family Movies; Associated Television; Atlas Films; BerVon Entertainment; Cinetic Media;
Daybreak Pictures; Empire Film Group, Inc.; Eurocine International; Gaumont, SA; Origin Motion Pictures; Plaza Entertainment,
Inc.; Phoenix Entertainment; Phoenix Releasing Group; Sola-Media, GmbH; Shoreline Entertainment; Studio 3 Entertainment; PWI-Veracruz
Entertainment. The principal suppliers of books for the Company to publish include (listed alphabetically): James Danielson,
Phil Goodman, Brenda Hancock, Vivian Kaplan, Barr McClellan and Vivian Schilling. The Company sees no shortage of properties
available for acquisition in any of the applicable media.
|
|
F.
|
Dependence on Major
Customers – Two of the Company's current customers as of 12-31-2013 contributed fifteen percent (15%) or more to the
overall, annualized sales revenues. Wal-Mart Stores, Inc. (inclusive of sales to their SAM’S Clubs division),
has been purchasing most of the Company's new release DVD titles.. The Company does not see the Wal-Mart market share as an
unhealthy dependence on a key customer, as Wal-Mart constitutes a much smaller share of the Company’s overall revenues
than for many Major Studios, and the Company does not anticipate that the growth in sales to Wal-Mart Stores, Inc., will grow
disproportionately with the Company’s other customers. Revolution International has commenced activities for the international
sales and licensing of higher-end properties owned or controlled by the Company, the revenue results for which also exceed
the fifteen percent (15%) threshold of total, annualized revenues. The Company does not feel that the rapidly growing
sales revenues being realized from the international markets poses an unreasonable or viable threat to operations, as sales
are cumulative over multiple licensing agreements for specific territories, media and titles.
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G.
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The Company does
not own or control any patents, franchise or concessions. The licenses and royalty agreements fall under the category of being
part of the ordinary course of business.
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H.
|
The company does
not need any government approvals of principal products or services.
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The
nature and extent of the issuer’s facilities
include a primary office and warehouse combo unit (under lease from Elder
Properties, Springdale, AR), comprising approximately 6,000 square feet.