Notes
to the Unaudited Consolidated Financial Statements
September
30, 2018
1.
|
NATURE
OF OPERATIONS AND CONTINUANCE OF BUSINESS
|
RedHawk
Holdings Corp. (formerly Independence Energy Corp.) was incorporated in the State of Nevada on November 30, 2005 under the name
“Oliver Creek Resources Inc.” At inception, we were organized to acquire, explore and develop natural resource properties
in the United States. Effective August 12, 2008, we changed our name from “Oliver Creek Resources Inc.” to “Independence
Energy Corp.” and opened for trading on the Over-the Counter Bulletin Board under the symbol “IDNG.” Effective
October 13, 2015, by vote of a majority of the Company’s stockholders, the Company’s name was changed from “Independence
Energy Corp.” to “RedHawk Holdings Corp.”
On
March 31, 2014, the Company acquired the exclusive right to distribute certain medical devices and changed the focus of its operations
to include medical device distribution. We have expanded our business focus to include other operations.
Currently,
we are a diversified holding company which, through our subsidiaries, is engaged in sales and distribution of medical devices,
sales of branded generic pharmaceutical drugs, commercial real estate investment and leasing, sales of point of entry full-body
security systems, and specialized financial services. Through its medical products business unit, the Company sells WoundClot
Surgical - Advanced Bleeding Control, the SANDD™ Insulin Needle Destruction Unit (formerly known as the Disintegrator™),
the Carotid Artery Digital Non-Contact Thermometer and Zonis®. Through our United Kingdom based subsidiary, we manufacture
and market branded generic pharmaceuticals, certain other generic pharmaceuticals known as “specials” and certain
pharmaceuticals outside of the United Kingdom’s National Health Service drug tariff referred to as NP8’s. Centri Security
Systems LLC, a wholly-owned subsidiary of the Company, holds the exclusive U.S. manufacturing and distribution rights for the
Centri Controlled Entry System, a unique, closed cabinet, nominal dose transmission full body x-ray scanner. Our real estate leasing
revenues are generated from a commercial property under a long-term lease. Additionally, the Company’s real estate investment
unit holds a limited liability company interest in a commercial restoration project in Hawaii.
Going
Concern
These
financial statements have been prepared on a going concern basis, which implies that the Company will be able to continue as a
going concern without further financing. The Company must continue to realize its assets to discharge its liabilities in the normal
course of business. The Company has generated limited revenues to date and has never paid any dividends on its common stock and
is unlikely to pay any common stock dividends or generate significant earnings in the immediate or foreseeable future.
For
the three month period ended September 30, 2018, the Company had gross and net revenues of $46,668, a consolidated net loss of
$196,617 and cash of $ 294,685 used in operating activities. For the year ended June 30, 2018, the Company had $384,279
in gross revenue, $275,845 in net revenue, a consolidated net loss of $910,062 and cash of $ 411,268 used in operating activities.
As of September 30, 2018, the Company had cash of $172,758 and a certificate of deposit of $100,149, working capital of $97,139
and an accumulated deficit of $4,537,248. The continuation of the Company as a going concern is still dependent upon the continued
financial support from its stockholders, the ability to raise equity or debt financing, cash proceeds from the sale of assets
and the attainment of profitable operations from the Company’s businesses in order to discharge its obligations. These factors
raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not
include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
unaudited interim condensed financial statements of the Company as of September 30, 2018 and for the three month period ended
September 30, 2018 included herein have been prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities
and Exchange Commission (the “SEC”). The year-end condensed balance sheet dated as of June 30, 2018 is audited and
is presented here as a basis for comparison. Although the financial statements and related information included herein have been
prepared without audit, and certain information and disclosures normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted, the Company believes that the note disclosures are adequate to make the information
presented not misleading. These unaudited condensed financial statements should be read in conjunction with the Company’s
audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K as
of June 30, 2018. In the opinion of our management, the unaudited interim financial statements included herein reflect all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial position,
results of operations, and cash flows for the periods presented. The results of operations for interim periods are not necessarily
indicative of the results expected for the full year or any future period.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its subsidiaries in which we have a greater than 50%
ownership. All material intercompany accounts have been eliminated upon consolidation. Certain prior year amounts are sometimes
reclassified to be consistent with the current year financial statement presentation. Equity investments, which we have an ownership
greater than 20% but less than 50% through which we exercise significant influence over but do not control the investee and we
are not the primary beneficiary of the investee’s activities, are accounted for using the equity method of accounting. Equity
investments, which we have an ownership less than 20%, are recorded at cost.
Use
of Estimates
The
financial statements and related notes are prepared in conformity with GAAP which requires our management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company
regularly evaluates estimates and assumptions related to valuation and impairment of investments and long-lived assets, and deferred
income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience
and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent
from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s
estimates. To the extent there are material differences between the estimates and the actual results, future results of operations
will be affected.
Revenue
Recognition
We derive revenue from several types of activities – medical device sales, branded generic pharmaceutical
sales, commercial real estate leasing and financial services. Our medical device sales include the marketing and distribution of
certain professional and consumer grade digital non-contact thermometers, needle destruction unit and advanced bleeding control,
non-compression hemostasis. Through our United Kingdom based subsidiary, we manufacture, and market, branded generic pharmaceuticals,
and certain other generic pharmaceuticals known as “specials”. Our real estate leasing revenues are from certain commercial
properties under lease. The Company offers customer discounts in certain cases. Such discounts are estimated at time of product
sale and deducted from gross revenues.
We
adopted as of July 1, 2018, updated revenue recognition guidance (Topic 606). Topic 606 is an update to Topic 605, which was the
revenue recognition standard in effect for all prior periods. Pursuant to Topic 605, revenue generally is realized or realizable
and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery
has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability
is reasonably assured. Topic 606 changes the criteria for recognition of revenue. It establishes a single revenue recognition
model for all contracts with customers, eliminates industry specific requirements and expands disclosure requirements. Revenue
is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, we apply the
following five steps: (1) identify contracts with customers, (2) identify the performance obligations in the contracts, (3) determine
the transaction price, (4) allocate the transaction price to the performance obligation in the contract, and (5) recognize revenue
as the entity satisfies performance obligations. The adoption of this standard did not affect our financial statements.
Cash
and Cash Equivalents
We
consider highly liquid investments with an original maturity of 90 days or less to be cash equivalents. The Company did not have
any cash equivalents as of September 30, 2018 or June 30, 2018.
Accounts
Receivable
Accounts receivables are amounts due from customers of our pharmaceutical and medical device divisions.
The amount is reported at the billed amount, net of any expected allowance for bad debts. There was no allowance for doubtful accounts
as of September 30, 2018 and June 30, 2018.
Inventory
Inventory
consist of purchased thermometers, an advanced bleeding control, non-compression hemostasis, a patented antimicrobial ionic silver
calcium catheter dressing, needle destruction devices and certain branded generic pharmaceuticals held for resale. All inventories
are stated at the lower of cost or net realizable value utilizing the first-in, first-out method.
Property
and Improvements
Property
and improvements are stated at cost. We provide for depreciation expense on a straight-line basis over each asset’s useful
life depreciated to their estimated salvage value. Buildings are depreciated over a useful life of 20 to 30 years. Building improvements
are depreciated over a useful life of 5 to 10 years.
During the year ended June 30, 2017, we decided to sell our Louisiana real estate holdings, which includes
our former corporate headquarters on Chemin Metairie Road in Youngsville, Louisiana and a property on Jefferson Street in Lafayette,
Louisiana that we are leasing to a third party. As a result of that decision, the net book value of those properties along with
related mortgage notes were reflected as assets and liabilities held for sale in the balance sheets. At that time, we also ceased
depreciating such assets. All such amounts are included in the land and hospitality segment. A sale of these properties did not
occur in the fiscal year ended June 30, 2018 and, as such, the Company has returned these properties to assets held for use and
depreciation expenses was recorded in the fourth quarter of fiscal year 2018 for the period the properties were included in assets
held for sale. We will continue to list these properties for sale, but it is uncertain if the sales will occur during the next
twelve months. Based on the present real estate market and discussions with brokers, no impairment of the recorded amounts has
occurred as of September 30, 2018.
Effective
July 1, 2017, the Chemin Metairie Road property was leased under a one-year term at a rent of $1,500 per month. The lessee had
an option to purchase the property during the lease for the lesser of $300,000 or the average of two independent appraisals. On
June 30, 2018, the tenant did not exercise his option to purchase the property. The Company has returned the property to service
and currently uses this property as offices for our medical products unit. Effective August 1, 2017, the tenant that leases the
Jefferson Street property has renewed that lease through December 31, 2022 at a rent of $3,250 per month subject to certain increase
adjustments. We continue to offer these two properties for sale. Since we are not certain a sale will occur during our 2019 fiscal
year, we reflect these assets as non-current.
We are also pursuing the sale of our remaining investment in the real estate limited partnership investment.
In August 2018, based on stability of operations of the underlying real estate property and recent valuations, the partnership
refinanced the property. In September 2018, we received a distribution of approximately $370,000 from the real estate limited partnership
following this refinancing. This distribution is recorded as a reduction of our investment in the limited partnership, which is
recorded at cost. We are currently in negotiations to sell our interest in the partnership and anticipate such a transaction will
close prior to June 30, 2019. Thus, our investment is shown as a current asset as of September 30, 2018 and June 30, 2018 in the
accompanying consolidated balance sheets.
Income
Taxes
Potential
benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted
Accounting Standard Codification (which we refer to as “ASC”) 740,
Income Taxes,
as of its inception. Pursuant
to ASC 740, the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits
of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more
likely than not it will utilize the net operating losses carried forward in future years. The Company recognizes interest and
penalties related to uncertain tax positions in income tax expense in the period they are incurred. The Company does not believe
that it has any uncertain tax positions.
Basic
and Diluted Net Loss Per Share
The Company computes net
loss per share in accordance with ASC 260,
Earnings Per Share,
which requires presentation of both basic and diluted earnings
per share (EPS) on the face of the statements of operations. Basic EPS is computed by dividing net loss available to common shareholders
(numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to
all dilutive potential common shares outstanding during the period using the treasury stock method and the convertible notes and
the convertible preferred stock using the if-converted method. In computing Diluted EPS, the average stock price for the period
is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS
excludes all dilutive potential shares if their effect is anti-dilutive. During the year ended June 30, 2017, 3,726,480 warrants
were exercised, and the remaining warrants expired. There were no outstanding warrants as of September 30, 2018 or June
30, 2018.
At September 30, 2018,
including accrued but unpaid interest, there were 41,945,226 shares issuable upon conversion of our fixed rate convertible
notes. There are $369,557 in convertible notes that are convertible at a variable conversion rate and not included in the
issuable share amount in the preceding sentence. Also, at September 30, 2018, including accrued but unpaid dividends, there were
potentially 112,042,530 shares issuable upon the conversion of the Series A Preferred Stock and, including accrued but unpaid
dividends, there were potentially 142,493,347 shares issuable upon the conversion of the Series B Preferred stock. The e shares
issuable from the conversion of the notes and the Series A and Series B Preferred stock have been excluded from earnings per share
calculations because these shares are anti-dilutive.
Comprehensive Loss
ASC 220,
Comprehensive Income
, establishes standards for the reporting and display of comprehensive
loss and its components in the financial statements.
Financial
Instruments
Pursuant
to ASC 820,
Fair Value Measurements and Disclosures
, an entity is required to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level
of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization
within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC
820 prioritizes the inputs into the following three levels that may be used to measure fair value:
Level
1.
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or
liabilities.
Level
2.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for
the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical
assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations
in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level
3.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that
are significant to the measurement of the fair value of the assets or liabilities.
The
Company’s financial instruments consist principally of cash, accounts receivable, accounts payable and accrued liabilities,
debt, and amounts due to related parties.
We
believe that the recorded values of all of our other financial instruments approximate their current fair values because of their
nature and respective maturity dates or durations.
Reclassification
Certain amounts
in prior periods have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements Not Yet Adopted
Revenue
Recognition
In May 2014, the Financial Accounting Standards Board (which we refer to as the “FASB”) issued
new guidance intended to change the criteria for recognition of revenue. The new guidance establishes a single revenue recognition
model for all contracts with customers, eliminates industry specific requirements and expands disclosure requirements. The core
principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To achieve this core principle, an entity should apply the following five steps: (1) identify contracts with customers, (2) identify
the performance obligations in the contracts, (3) determine the transaction price, (4) allocate the transaction price to the performance
obligation in the contract, and (5) recognize revenue as the entity satisfies performance obligations. In July 2015, the FASB permitted
early adoption and deferred the effective date of this guidance one year; therefore, it was effective for the Company in the first
quarter of fiscal 2019. The adoption of this guidance did not affect our financial position, results of operations, cash flows
and disclosures.
Leases
In
February 2016, the FASB issued ASU 2016-02,
Leases
, which amended guidance for lease arrangements in order to increase
transparency and comparability by providing additional information to users of financial statements regarding an entity’s
leasing activities. The revised guidance requires reporting entities to recognize lease assets and lease liabilities on the balance
sheet for substantially all lease arrangements. The new guidance is effective for the Company in the first quarter of fiscal year
2020 and will be applied on a modified retrospective basis beginning with the earliest period presented. The Company is currently
evaluating the impact of adopting this guidance on our consolidated financial statements.
Additional
Equity Disclosures in Quarterly Reports
On
August 17, 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532,
Disclosure
Update and Simplification
. The amendments are effective on November 5, 2018. Under the amendment, registrants must disclose
(1) change in stockholders’ equity and (2) the amount of dividends per share for each class of share, as opposed to common
stock only as previously required, on the Form 10-Q. The SEC has allowed June 30 fiscal year end filers to omit these disclosures
from its September 30, 2018 and December 31, 2018 Forms 10-Q; however, the disclosures are required in the March 31, 2019 Form
10-Q. The Company has elected to omit this disclosure in the September 30, 2018 Form 10-Q.
On December 31, 2015, RedHawk Land & Hospitality, LLC, a wholly-owned subsidiary of the Company, acquired
from Beechwood Properties, LLC 280,000 Class A Units (approximately a 2.0% membership interest) of fully paid, non-assessable units
of limited liability company interest in Tower Hotel Fund 2013, LLC, a real estate development limited liability company formed
in the state of Hawaii for acquisition, restoration and development of the Naniloa Hilo Resort in Hilo, Hawaii. The $625,000 purchase
price was paid by the issuance of 625 shares of the Company’s Series A Preferred Stock. The purchase price was determined
by an independent third-party valuation. Beechwood Properties, LLC is a real estate limited liability company owned and controlled
by G. Darcy Klug, a stockholder and Chief Financial Officer and Chairman of the board of directors of the Company. This investment
in real estate limited partnership is recorded at cost, less distributions, and the Company is not aware of any indicator of impairment
as of September 30, 2018. It is not practicable for the Company to estimate fair value of this investment.
On March 23, 2016, one of our wholly-owned subsidiaries, RedHawk Pharma UK Ltd (which we refer to herein
as “Pharma”), initially acquired a 25% equity interest in EcoGen Europe Ltd (which we refer to as “EcoGen”)
from Scarlett Pharma Ltd (which we refer to herein as “Scarlett”). On September 12, 2017 we completed a share transfer
agreement wherein we increased our ownership in EcoGen to 75%. On December 19, 2017 we completed another share transfer agreement
wherein we increased our ownership in EcoGen to 100%. In connection with the December share transfer the non-controlling interest
was eliminated. Under the terms of an agreement we reached with Scarlett and its affiliate related to these share exchanges, they
surrendered ten (10) million shares of RedHawk common stock and transferred to RedHawk approximately $300,000 of EcoGen preferred
stock and other consideration. In exchange, RedHawk assumed approximately $370,000 of obligations due to EcoGen by Scarlett and
its affiliates. The RedHawk Shares were originally issued to Scarlett in connection with the Company’s March 2016 investment
of 25% into EcoGen. As of December 31, 2017, Pharma now owns approximately $635,000 of EcoGen’s preferred stock and 100%
of EcoGen’s common stock. The exchange agreements also settled numerous outstanding disputes between the Company, Scarlett,
Warwick and the noncontrolling owners of the Company. A non-cash settlement loss of $62,425 resulted and was included in our results
for the year ended June 30, 2018.
During the fiscal year ended June 30, 2017, we began to consolidate the accounts of EcoGen in our financial
statements under the variable interest entity model. In the quarter ended September 30, 2017, we became the majority owner of EcoGen
and as of December 31, 2017, we now own 100% of the common stock of EcoGen. As of September30, 2018 and June 30, 2018, we have
approximately $373,990 and $371,894, respectively, ($325,350 and $331,894, respectively, net of accumulated amortization) in intangible
assets related to licenses held by EcoGen. Such intangible assets are being amortized over an estimated useful life of 20 years.
In
September 2018, the Company acquired the exclusive license rights to certain medical device technology for $450,000. Under the
terms of the license agreement, the Company will initially pay $25,000 plus the first of a total twenty quarterly payments
of $21,250 each. Any remaining payments become immediately payable upon the receipt of final approval by the FDA of devices related
to the technology. Additionally, the Company will pay a consulting fee of $1,000 per month for sixty months.
4.
|
LOAN
AND INSURANCE NOTE PAYABLE
|
We finance a portion of our insurance premiums. At September 30, 2018, there was a $5,736 outstanding
balance due on our premium finance agreements. The policies related to these premiums expire May 31, 2019.
5.
|
RELATED
PARTY TRANSACTIONS
|
Effective December 1, 2016, the Company entered into a $250,000 Commercial Note Line of Credit (which
we refer to as the “Line of Credit”) with a stockholder and officer of the Company to evidence prior indebtedness and
provide for future borrowings. The advances are used to fund our operations. The Line of Credit accrues interest at 5% per annum
and matures on March 31, 2019. At maturity, or in connection with a pre-payment, subject to the conditions set forth in the Line
of Credit, the stockholder has the right to convert the amount outstanding (or the amount of the prepayment) into the Company’s
Series A Preferred Stock at the par value of $1,000 per share. At September 30, 2018 and June 30, 2018, the principal balance totaled
$12,174 and $22,674, respectively. The amount is included in noncurrent liabilities based on the expectation that either the Line
of Credit maturity date will be extended, the outstanding amount will be refinanced through other long-term debt, or the amount
outstanding will be converted to preferred stock as allowed for in the agreement.
This
same stockholder and officer also holds $29,250 of 5% convertible notes, which mature in December 2020 and are convertible into
common stock at a rate of $0.015 per share or 1,950,000 shares.
In fiscal year 2018, certain stockholders of the Company made $77,000 in interest free advances to the
Company, which is still outstanding as of September 30, 2018
All
of the above liabilities are included in Due to Related Parties in the accompanying consolidated balance sheet as of September
30, 2018.
Beginning in the quarter ended March 31, 2017, certain members of management agreed to forego management
fees in consideration of the operating cash flow needs of the Company. There is not a set timeline to reinstitute such management
fees. As of September 30, 2018 and June 30, 2018, $60,000 in such fees remain unpaid and are recorded in accounts payable and accrued
liabilities in the accompanying balance sheets.
6.
|
LONG-TERM
DEBT, DEBENTURES AND LINE OF CREDIT
|
On November 12, 2015, we acquired certain commercial real estate from a related party that is an entity
controlled by a stockholder and officer of the Company for $480,000 consisting of $75,000 of land costs and $405,000 of buildings
and improvements. The purchase price was paid by through the assumption by the Company of $265,000 of long-term bank indebtedness
(which we refer to as “Note”) plus the issuance of 215 shares of the Company’s newly designated Series A Preferred
Stock. The purchase price also included the cost of specific security improvements requested by the lessee.
The
Note is dated November 13, 2015 and has a principal amount of $265,000. Monthly payments under the Note are $1,962 including interest
accruing at a rate of 5.95% per annum. The Note matures in June 2021 and is secured by the commercial real estate, guarantees
by the Company and its real estate subsidiary and the personal guarantee of a stockholder who is also an officer of the Company.
We
have authorized the issuance of up to $1 million in principal amount of convertible promissory notes (which we refer to as the
“Fixed Rate Convertible Notes”). The Fixed Rate Convertible Notes are secured by certain Company real estate holdings.
The
Fixed Rate Convertible Notes issued mature on March 15, 2021, the fifth anniversary of the date of issuance and are convertible
into shares of our common stock at a price of $0.015 per share. Interest accrues at a rate of 5% per annum and is payable semi-annually.
The Company has the option to issue a notice of its intent to redeem, for cash, an amount equal to the sum of (a) 120% of the
then outstanding principal balance, (b) accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect
of the Fixed Rate Convertible Notes. The Company may only issue the notice of its intent to redeem the Fixed Rate Convertible
Notes if the trading average of the Company’s common stock equals or exceeds 300% of the conversion price during each of
the five business days immediately preceding the date of the notice of intent to redeem. The holder of the Fixed Rate Convertible
Notes has the right to convert all or any portion of the Fixed Rate Convertible Notes at the conversion price at any time prior
to redemption.
At September 30, 2018, there were $629,178 ($548,237 net of deferred financing costs and beneficial conversion
option) of Fixed Rate Convertible Notes outstanding, including $79,178 of interest paid in kind. The Fixed Rate Convertible Notes
(plus accrued interest) are convertible into our common stock at a conversion rate of $0.015 per share or 41,945,226 shares. During
the three month periods ended September 30, 2018 and 2017, we paid-in-kind $7,768 and $7,327, respectively, of interest on these
convertible notes.
In
the year ended June 30, 2018, we also issued $576,000 of convertible notes to third parties with variable conversion rates (“Variable
Rate Convertible Notes”). The Variable Rate Convertible Notes mature at various dates between November 2018 and 2019. We
received, net of financing costs incurred, $495,850 in cash from the issuance of these notes. These Variable Rate Convertible
Notes have interest accruing at rates ranging between 8% - 12%, and redemption. These notes issued to third parties have a variable
conversion rate based on the price of the Company’s common stock. $188,557 of the convertible notes are currently convertible
into our common stock at a variable conversion rate. In the quarter ended September 30, 2018, we issued new convertible notes
of $108,000, paid in full two convertible notes in the amount of $88,000, and notes, including accrued and unpaid interest ,
totaling $ 145,239 were converted into equity. At September 30, 2018, there were $369,557 ($343,365 net of deferred
financing costs) of Variable Rate Convertible Notes outstanding
The
Variable Rate Convertible Notes have maturity dates prior to September 30, 2019. It is the Company’s expectation that we
will either re-finance these convertible notes to longer terms or permit conversions and have, therefore, classified such notes
as non-current.
Also,
during the year ended June 30, 2018, we issued $29,250 of convertible notes to our majority stockholder in exchange for 7,450,000
shares of our common stock. The note matures in December 2020 and is convertible into 1,950,000 shares, or $0.015 per share. (See
Note 5.)
In February 2018, we obtained a $100,000 line of credit from a bank. The line of credit matures in February
2021 and is collateralized by a $100,000 certificate of deposit at the bank. As of September 30, 2018, approximately $100,000 was
drawn under the line of credit. As of September 30, 2018. the interest rate on the line of credit is 7.0% per annum.
7.
|
COMMITMENTS
AND CONTINGENCIES
|
On
January 31, 2017, the Company and a stockholder filed a complaint (the “Complaint”) in the United States District
Court for the Eastern District of Louisiana (RedHawk Holdings Corp. and Beechwood Properties, LLC Case No. 2:17-cv-819). The Complaint
names Daniel J. Schreiber (“Schreiber”) and the Schreiber Living Trust – DTD 2/08/96 (the “Schreiber Trust”)
as defendants. Schreiber is the former Chief Executive Officer and director of RedHawk. The Schreiber Trust, of which Schreiber
is the Trustee, is a shareholder of the Company. The Complaint lodged claims on behalf of RedHawk for securities fraud, fraud,
and Schreiber’s breach of fiduciary duties.
On
April 24, 2017, RedHawk and its shareholder filed an amended complaint (“Amended Complaint”) naming Schreiber as the
only proper defendant in the suit, individually and as Trustee of the Schreiber Trust.
On
May 22, 2017, Schreiber filed a motion to dismiss, or in the alternative to transfer, the suit on the grounds of lack of personal
jurisdiction and improper venue. After the parties filed an opposition and reply, on August 16, 2017 the court denied Schreiber’s
motion to dismiss.
On
September 13, 2017, Schreiber filed an answer to the Amended Complaint, as well as counterclaims against RedHawk, Beechwood, and
a director of RedHawk for actions allegedly taken in the course of his duty as a director. The counterclaims against RedHawk and
its director are for alleged violation of UCC § 8-401, breach of fiduciary duty, negligence, and unfair trade practices.
The legal remedies sought in these counterclaims were the subject of a lawsuit filed previously by Schreiber
in the United States District Court for the Southern District of California on April 24, 2017 (Case No. 3:17-cv-8824). At the time
of the answer of the Louisiana lawsuit, the California action was still pending, and the answer asked that the counterclaim filed
in Louisiana be stayed until the California case was adjudicated. On September 26, 2017, the court in the California action granted
RedHawk’s motion to dismiss that suit.
October 24, 2017,
a scheduling conference was held. The parties agreed to, among other matters, to exchange documents and conduct other discovery,
and to schedule a bench trial to originally start June 11, 2018. On March 12, 2018, the parties agreed to extend the discovery
period to September 7, 2018. The bench trial is now set for February 11, 2019.
RedHawk
plans to vigorously contest the claims against it in this matter and to pursue the claims against Schreiber, individually and
as Trustee of the Schreiber Trust.
While we are insured for our legal defense costs in this matter, we have a $250,000 self-insured retention.
During the year ended June 30, 2018, we recorded a charge of $250,000 for costs that may be uninsured that were incurred in connection
with this matter. As of September 30, 2018, the remaining accrued liability related to this matter is approximately $145,000. We
believe the ultimate resolution of this matter will not significantly adversely affect our financial position, operations or cash
flows, other than the costs referred to above.
Effective on October 13, 2015, we amended and restated our articles of incorporation as previously adopted
by a majority vote of our stockholders. The amended and restated articles of incorporation, among other things, changed our name
to RedHawk Holdings Corp., authorized 5,000 shares of Preferred Stock, and increased the number of authorized shares of common
stock from 375,000,000 to 450,000,000. On December 26, 2017, by a vote of the majority of our stockholders, we increased the number
of our authorized shares from 450,000,000 to 1,000,000,000. On August 20, 2018, by a vote of the majority of our stockholders,
we increased the number of our authorized shares from 1,000,000,000 to 2,000,000,000.
Preferred
Stock
Pursuant
to a certificate of designation filed with the Secretary of State of the State of Nevada, effective November 12, 2015, 2,750 shares
of our authorized Preferred Stock have been designated as Series A 5% Convertible Preferred Stock, originally with a $1,000 stated
value (which we refer to as “Series A Preferred Stock”). The holders of the Series A Preferred Stock are entitled
to receive cumulative dividends at a rate of 5% per annum, payable quarterly in cash, or at the Company’s option, such dividends
shall be accreted to, and increase, the stated value of the issued Series A Preferred Stock (which we refer to as “PIK”).
Holders of the Series A Preferred Stock are entitled to votes on all matters submitted to stockholders at a rate of ten votes
for each share of common stock into which the Series A Preferred Stock may be converted. After six months from issuance, each
share of Series A Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock equal
to the quotient of the stated value, as adjusted for PIK dividends, by $0.015, as adjusted for stock splits and dividends.
Pursuant
to a certificate of designation filed with the Secretary of State of the State of Nevada, effective February 16, 2016, 1,250 shares
of our authorized Preferred Stock have been designated as Series B 5% Convertible Preferred Stock, originally with a $1,000 stated
value (which we refer to as “Series B Preferred Stock”). The holders of the Series B Preferred Stock are entitled
to receive cumulative dividends at a rate of 5% per annum, payable quarterly in cash, or at the Company’s option, such dividends
shall be accreted to, and increase, the stated value of the issued Series B Preferred Stock (which we refer to as “PIK”).
Holders of the Series B Preferred Stock are entitled to votes on all matters submitted to stockholders at a rate of ten votes
for each share of common stock into which the Series B Preferred Stock may be converted. After six months from issuance, each
share of Series B Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock equal
to the quotient of the stated value, as adjusted for PIK dividends, by $0.01, as adjusted for stock splits and dividends.
During the three month periods ended September 30, 2018 and 2017, we paid-in-kind $38,340 and $36,482,
respectively, of related preferred stock dividends.
As of June 30, 2018, the Company had approximately $3,600.000 of U.S. net operating losses (NOLs) carried
forward to offset taxable income in future years which expire commencing in fiscal 2026 and run through 2038. As a result of the
numerous common stock transactions that have occurred, the amount of these NOLs which is actually available to offset future income
may be severely limited due to change-in-control tax provisions. The Company has not estimated the effect of such change-in-control
limitation. The related deferred income tax asset of these NOLs, without consideration of any change-of-control limitation, was
estimated to be approximately $750,000 as of June 30, 2018. As a result of the enactment of the Tax Cuts and Jobs Act (The Act)
in December 31, 2017, the estimated deferred income tax asset related to U.S. NOL carry forwards is based on the reduced 21% corporate
income tax rate. Due to our history of operating losses and the uncertainty surrounding the realization of the deferred tax assets
in future years, our management has determined that it is more likely than not that the deferred tax assets will not be realized
in future periods. Accordingly, the Company has recorded a valuation allowance against its net deferred tax assets. The only change
during the quarter ended September 30, 2018 would be an increase to the NOL due to additional losses incurred.
Thus,
there is no net tax asset recorded as of September 30, 2018 or June 30, 2018 as a 100% valuation allowance has been established
for any tax benefit. EcoGen also has a net operating loss as of September 30, 2018 and June 30, 2018 for which no deferred tax
asset has been provided. Similarly, there is no income tax benefit recorded on the net loss of the Company for the three month
periods ended September 30, 2018 and 2017.
The
Company did not have any accumulated foreign earnings for which taxes were deferred and subject to the one-time transition tax
under The Act.
The
Company accounts for interest and penalties relating to uncertain tax provisions in the current period statement of operations,
as necessary. The Company’s tax years from inception are subject to examination. There are no income tax examinations currently
in progress.
SFAS
No. 131,
“Disclosures About Segments of an Enterprise and Related Information,”
requires that companies disclose
segment data based on how management makes decisions about allocating resources to segments and measuring their performance. Currently,
we conduct our businesses in three operating segments – Land & Hospitality, Medical Device and Pharmaceutical, and Other
Services. Our Land & Hospital and Other Services business units operate in the United States. Our Medical Device and Pharmaceutical
business unit currently operates primarily in the United Kingdom. All remaining assets, primarily our corporate offices and investment
portfolio, are located in the United States. The segment classified as Corporate includes corporate operating activities that
support the executive offices, capital structure and costs of being a public registrant. These costs are not allocated to the
operating segments when determining profit or loss. The following table reflects our segments as of September 30, 2018 and 2017
and for the three month periods then ended.
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
Three months ended
|
|
LAND &
|
|
DEVICE &
|
|
OTHER
|
|
|
|
|
September 30, 2018
|
|
HOSPITALITY
|
|
PHARMA
|
|
SERVICES
|
|
CORPORATE
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues, gross and net
|
|
$
|
9,750
|
|
|
$
|
36,918
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
46,668
|
|
Operating income (loss)
|
|
$
|
(5,488
|
)
|
|
$
|
(50,426
|
)
|
|
$
|
(180
|
)
|
|
$
|
(51,920
|
)
|
|
$
|
(108,014
|
)
|
Interest expense
|
|
$
|
3,896
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
79,257
|
|
|
$
|
83,153
|
|
Depreciation and amortization
|
|
$
|
7,833
|
|
|
$
|
22,916
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,749
|
|
Identifiable assets
|
|
$
|
953,983
|
|
|
$
|
1,119,873
|
|
|
$
|
(16
|
)
|
|
$
|
321,095
|
|
|
$
|
2,394,935
|
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
LAND
&
|
|
|
DEVICE
&
|
|
|
OTHER
|
|
|
|
|
|
|
|
September
30, 2017
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues, gross and net
|
|
$
|
14,250
|
|
|
$
|
53,643
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
67,893
|
|
Operating
income (loss)
|
|
$
|
6,227
|
|
|
$
|
(17,608)
|
|
|
$
|
(1,543
|
)
|
|
$
|
(30,596
|
)
|
|
$
|
(43,520
|
)
|
Interest
expense
|
|
$
|
3,803
|
|
|
$
|
(2)
|
|
|
$
|
—
|
|
|
$
|
20,619
|
|
|
$
|
24,420
|
|
Depreciation
and amortization
|
|
$
|
—
|
|
|
$
|
22,181
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,181
|
|
Identifiable
assets
|
|
$
|
1,376,724
|
|
|
$
|
233,282
|
|
|
$
|
197
|
|
|
$
|
1,244,243
|
|
|
$
|
2,854,446
|
|
On November 12, 2018, Mr. Thomas J. Concannon resigned his position as the Chief Executive Officer
and a member of the board of directors of RedHawk Holdings Corp. and its wholly-owned subsidiary, EcoGen Europe Ltd. in order to
pursue other interests. Upon receipt of Mr. Concannon’s resignation, the Company’s board of directors appointed G.
Darcy Klug to replace Mr. Concannon as the Company’s Interim Chief Executive Officer effective immediately.
With the appointment of Mr. Klug as the Company’s Interim Chief Executive Officer, the Company has
immediately initiated a search for a new Chief Executive Officer. Until a replacement has been identified to fill the vacancy created
with the departure of Mr. Concannon, Mr. Klug will remain as the Company’s Interim Chief Executive Officer.
Mr.
Klug joined RedHawk on February 27, 2015 as its Chief Financial Officer and has held that position since his appointment as Chief
Executive Officer. On April 20, 2016, Mr. Klug was named Chairman of the Company’s Board of Directors.
With
the appointment of Mr. Klug as the Company’s Interim Chief Executive Officer, the Company said it will immediately initiate
a search for a Chief Executive Officer to fill the vacancy resulting from the departure of Mr. Concannon. Until a replacement
has been identified, Mr. Klug will remain as the Company’s Interim Chief Executive Officer.
Mr.
Klug is the founder and sole owner of Beechwood Properties, LLC. This company focuses on acquiring, renovating and leasing select
commercial and residential real estate. Mr. Klug is also the owner of several other investment companies, including Beechwood
Capital Corporation and RedHawk Capital, LLC. From May 2008 until he joined RedHawk, Mr. Klug was engaged in various private investments
including real estate and oilfield service companies. Between May 2001 and May 2008, Mr. Klug was Executive Vice President (formerly
Chief Financial Officer) of OMNI Energy Services Corp., a
Nasdaq
listed company.
From 1987 through May 2001, he was engaged in several private investments in the oilfield service, medical litigation support
and manufacturing industries. Between 1983 and 1987, Mr. Klug held various positions with a private oil and gas fabrication company,
including the position of Chief Operating Officer and Chief Financial Officer. Prior to 1983, he held various positions with Galveston-Houston
Company, a New York Stock Exchange listed manufacturer of oil and gas equipment and held the position of Chief Financial Officer
of First Matagorda Corporation, a
Nasdaq
listed oil and gas exploration company
and affiliate of Galveston-Houston Company. Between 1973 and 1979, he was a member of the audit staff of Coopers & Lybrand
(now PricewaterhouseCoopers). Mr. Klug is a 1973 accounting graduate of Louisiana State University and, in 1974, was admitted
as a member of the Louisiana State Board of Certified Public Accountants, the Texas State Board of Certified Public Accountants
and the American Institute of Certified Public Accountants.
As of September 30, 2018, Mr. Klug beneficially owns approximately 47.6% of the Company’s common
stock and controls approximately 78.2% of the voting power of the Company’s common stock.