Hannover House Inc (HHSE)

[Myth]

After reading this, I would have to say
" you get what you pay for ".....

Contradictory to what has been said about " audits are simple, should be done by now " it's obvious this is VERY complicated. imo they have tried to get this done as cheaply as possible, that hasn't worked so far.

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.

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