10-K: Harrison, Vickers & Waterman Inc. Reports $20 Million Net Loss in Fiscal Year 2016 Amidst Operational Shifts

Harrison, Vickers & Waterman Inc. reported a significant net loss of $20 million for the fiscal year ending June 30, 2016, primarily due to derivative liabilities and operational expenses related to its World of Beer taverns.

Summary

• Harrison, Vickers & Waterman Inc. (HVW) experienced a net loss of $20 million for the fiscal year ending June 30, 2016, a substantial increase from the $3.5 million loss in the previous year.
• The company's revenue for the year was $4.15 million, a significant increase from $1.6 million in 2015, due to a full year of operations of the World of Beer taverns compared to only three months in the prior year.
• Operating expenses also increased significantly to $3.1 million, up from $1.2 million in 2015, primarily due to increased labor and other costs associated with the taverns.
• The company's gross profit was $3 million, with a consistent gross margin of 72% compared to the previous year.
• A major factor contributing to the net loss was a $13.4 million decrease in the fair market value of derivative liabilities, along with $4.9 million in derivative expenses.
• HVW had a working capital deficit of $1.2 million as of June 30, 2016, compared to a $4.4 million deficit the previous year.
• The company's short and long-term survival is dependent on funding from sales of securities or shareholder loans.
• The company has an accumulated deficit of approximately $24 million as of June 30, 2016.
• The company's ability to continue as a going concern is dependent on its ability to obtain adequate funding to support its operations.

Sentiment

Score: 3

Explanation: The document reveals significant financial losses, a going concern warning from the auditor, and a reliance on external funding, indicating a negative outlook for the company. While there are some positive aspects such as revenue growth, the overall sentiment is weak.

Positives

• Revenue increased significantly to $4.15 million due to a full year of operations of the World of Beer taverns.
• Gross profit increased to $3 million, with a consistent gross margin of 72%.
• The working capital deficit improved from $4.4 million to $1.2 million year over year.
• The company has a strategy to be opportunistic in adding to its existing inventory of taverns.

Negatives

• The company experienced a substantial net loss of $20 million for the fiscal year 2016.
• Operating expenses increased significantly to $3.1 million.
• The company has a working capital deficit of $1.2 million.
• The company's accumulated deficit is approximately $24 million.
• The company's auditor has raised concerns about the company's ability to continue as a going concern.
• The company is dependent on external funding to continue operations.
• The company's Milford property filed for bankruptcy protection and ceased operations in July 2017.

Risks

• The company has a limited operating history and has suffered losses.
• The company is dependent on key personnel and consultants.
• The company does not have key man life insurance policies.
• The company is subject to various taxes.
• The company lacks the financial controls and safeguards required of public companies.
• The company has engaged in transactions with related persons.
• Changes in employment laws could harm the company's performance.
• The company's bank accounts may not be fully insured.
• The company's business plan is speculative.
• The company will likely incur debt.
• The company's expenses could increase without a corresponding increase in revenues.
• Increased costs could affect the company.
• The company may not be able to maintain and enhance its image.
• The company may not be able to protect its intellectual property.
• Computer, website or information system breakdowns could affect the company's business.
• Changes in the economy could have a detrimental impact on the company.
• The amount of capital the company is attempting to raise is not enough to sustain its current business plan.
• Additional financing may be necessary for the implementation of the company's growth strategy.
• The company's employees, executive officers, directors and insider shareholders beneficially own or control a substantial portion of the outstanding shares.
• The company's operating plan relies in large part upon assumptions and analyses developed by the company.
• The company has cumulative operating losses and may not be initially profitable for at least the foreseeable future.
• The company may be unable to manage its growth or implement its expansion strategy.
• The company relies upon trade secret protection to protect its intellectual property.
• The company's business model is evolving.
• The company needs to increase brand awareness.
• The company faces competition in its markets.
• A data security breach could expose the company to liability.
• The company depends on third-party providers for a reliable internet infrastructure.
• The company's employees may engage in misconduct or improper activities.
• There is a limitation on director liability.
• The company may undertake additional equity or debt financing that may dilute the shares.
• An investment in the shares is speculative and there can be no assurance of any return.
• The shares are offered on a best efforts basis and the company may not raise the maximum amount being offered.
• The company has not paid dividends in the past and does not expect to pay dividends in the future.
• The company may not be able to obtain additional financing.
• The offering price has been arbitrarily determined.
• The management of the company has broad discretion in application of proceeds.
• An investment in the company's shares could result in a loss of the entire investment.
• There is no assurance the company will be able to pay distributions to shareholders.
• There is a limited public trading market for the company's shares.
• Sales of a substantial number of shares may cause the price of the stock to decline.
• The company has made assumptions in its projections and in forward-looking statements that may not be accurate.
• Investors should be aware of the long-term nature of this investment.
• Neither the offering nor the securities have been registered under federal or state securities laws.
• The shares in this offering have no protective provisions.
• Investors will not have significant influence on the management of the company.
• There is no guarantee of return on investment.

Future Outlook

The company plans to be opportunistic in adding to its existing inventory of taverns and is seeking additional funding to support its operations and expansion.

Management Comments

• Management is currently pursuing a business strategy which includes raising the necessary funds to finance the Company's development and marketing efforts.
• Management believes that it has meritorious defenses against the claim from the former CEO and that it will not likely be enforced.

Industry Context

The craft beer industry has experienced significant growth, with an annualized five-year growth rate of 20.1% through 2016, and is expected to continue growing at a rate of 4.4% over the next five years. The company is attempting to capitalize on this trend by expanding its World of Beer tavern locations.

Comparison to Industry Standards

• The document does not provide specific comparable companies or projects to benchmark against.
• The company's gross margin of 72% is a positive sign, but the high operating expenses and net loss indicate significant challenges.
• The company's reliance on external funding and the auditor's going concern warning are concerning compared to industry standards for established businesses.

Management Changes

Legal Proceedings

• The company is involved in a lawsuit with its former Chief Executive Officer, James Giordano, who is claiming back wages of $175,000 plus other expenses.
• The company's Milford property filed for bankruptcy protection in Connecticut Court, which was later dismissed.

Related Party Transactions

• The company has a receivable of $321,811 due from Attitude Drinks Incorporated, the majority owner of the company.
• Conrad R Huss has an employment agreement which pays him $120,000 annually, which has been accrued to date.

Stakeholder Impact

• Shareholders face a high risk of losing their investment due to the company's financial difficulties and going concern warning.
• Employees may be impacted by potential cost-cutting measures or operational changes due to the company's financial situation.
• Customers may be affected by potential changes in the company's operations or service offerings.
• Suppliers and creditors face increased risk due to the company's financial instability.

Next Steps

• The company plans to be opportunistic in adding to its existing inventory of taverns.
• The company is seeking additional funding to support its operations and expansion.
• The company intends to continue to address the identified material weaknesses in internal control over financial reporting as resources permit.

Key Dates

Keywords

Annual Report, Financial Results, Net Loss, Revenue, Operating Expenses, World of Beer, Taverns, Derivative Liabilities, Going Concern, Capital Raise, Debt Financing, Equity Financing, Risk Factors, Liquidity, OTC Markets