Notes
to the Unaudited Consolidated Financial Statements
December
31, 2019
1.
|
NATURE
OF OPERATIONS AND CONTINUANCE OF BUSINESS
|
RedHawk
Holdings Corp. was incorporated in the State of Nevada on November 30, 2005 under the name “Oliver Creek Resources Inc.”
Effective August 12, 2008, we changed our name from “Oliver Creek Resources Inc.” to “Independence Energy Corp.”
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.”
Currently,
the Company is 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 commercial properties under lease. Additionally, the Company’s real estate
investment unit holds limited liability company interests 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 six month period ended December 31, 2019, the Company had revenues of $69,315, a consolidated net loss of $770,853 and cash
of $832,870 used in operating activities. As of December 31, 2019, the Company had cash of $176,145, a certificate of deposit
of $100,374, a working capital deficit of $632,166 and an accumulated deficit of $6,559,880. 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. We cannot predict, with certainty, the outcome of our efforts to generate liquidity and
profitability, or whether such actions would generate the expected proceeds to the Company. 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 December 31, 2019 and for the three and six month periods
ended December 31, 2019 and 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, 2019
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, 2019. 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. 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, intangible assets, 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
In
May 2014, the Financial Accounting Standards Board (which we refer to as the “FASB”) issued ASU 2014-19, Revenue from
Contracts with Customers (ASU 2014-19). ASU 2014-19 established 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. Effective July 1, 2018, we adopted ASU 2014-19 using
the modified retrospective method. The adoption of ASU 2014-19 did not have an impact on our consolidated financial statements
but required enhanced footnote disclosures. See Note 3, Revenue Recognition, for additional information.
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 financial service revenue is from brokerage services. The Company offers customer discounts in certain cases. Such
discounts are estimated at time of product sale and revenues are reduced for such discounts at the time of the sale.
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 December 31, 2019 or June 30, 2019.
Accounts
Receivable
Accounts
receivables are amounts due from customers of our pharmaceutical, medical device and financial services 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 December 31, 2019 or June 30, 2019.
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.
Our Louisiana real estate
holdings include our former corporate headquarters on Chemin Metairie Road in Youngsville, Louisiana and a property on Jefferson
Street in Lafayette, Louisiana. As of December 31, 2019, we are leasing both properties to third parties. The Company is also currently
using the Chemin Metairie Road property for equipment storage for our real estate management unit.
Effective
August 1, 2017, the tenant that leases the Jefferson Street property renewed that lease through December 31, 2022 at a rent of
$3,250 per month. Beginning December 1, 2019, the Chemin Metairie is leased through November 30, 2020 at a rental rate of $1,700
per month.
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 consolidated 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. There were
113,508,450 outstanding warrants as of December 31, 2019 with an exercise price of $0.005 per share. Such warrants are anti-dilutive
to EPS and are excluded from the calculation of EPS.
At
December 31, 2019, including accrued but unpaid interest, there was one remaining 2016 Fixed Rate Convertible Note outstanding
which totaling $60,301 and is convertible into 4,020,092 shares of common stock upon conversion of the remaining 2016 Fixed Rate
Convertible Note.
During the six months
ended December 31, 2019, we issued in private offerings exempt from registration debt securities in the form of new 2019 Variable
Rate Convertible Notes (See Note 7) in the amount of $578,125. The proceeds were used for working capital. The 2019 Variable Rate
Convertible Notes are convertible into shares of common stock at a variable conversion rate.
During the six months
ended December 31, 2019, we issued in private offerings exempt from registration debt securities in the form of new 2019 Fixed
Rate Convertible Notes (See Note 7) in the amount of $762,000. With the proceeds we paid off certain variable rate convertible
notes outstanding in the amount of approximately $61,000, plus accrued interest. The 2019 Fixed Rate Convertible Notes mature
on 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 and include 25% warrant coverage at $0.01 per share (which we refer to as the “2019 Warrants”).
At December 31, 2019, including accrued but unpaid dividends, there were potentially 204,355,790 shares
of common stock issuable upon the conversion of our outstanding Series A Preferred Stock and, including accrued but unpaid dividends,
there were potentially 121,280,359 shares of common stock issuable upon the conversion of our outstanding Series B Preferred Stock.
The shares of common stock to be issued upon conversion of the warrants and the 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.
On September 30, 2019, the Company received notice from the holder of $299,696 of the Series B Preferred
Stock of his intent to convert his holdings into 29,969,648 shares of the Company’s common stock. The conversion was completed
during the quarter ended December 31, 2019. During the fiscal year ended June 30, 2019, certain members of the board of directors
and stockholders of the Company made $242,000 in interest free advances to the Company. During the six month period ended December
31, 2019, $10,000 of the advances were repaid and the remaining advances are convertible into shares of the Company’s common
stock at rates ranging from $0.0024 to $0.0050 or 75,916,667 shares of common stock. During the quarter ended December 31, 2019,
the Company received notice from related parties holding $142,000 of these advances of their intent to exercise their right to
convert their advances into 55,916,667 shares of common stock. The conversion should be completed during the quarter ending March
31, 2020.
Comprehensive
Income (Loss)
ASC
220, Comprehensive Income, establishes standards for the reporting and display of comprehensive loss and its components
in the financial statements. All of our accumulated other comprehensive loss as of December 31, 2019 and June 30, 2019 relate
to foreign currency translation.
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.
Leases
In
February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02), 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 long-term lease arrangements. The Company was required to adopt ASU 2016-02 as of July 1, 2019. The
Company has elected to use the short-term lease exception allowed in ASU 2016-02. The adoption, therefore, did not have any effect
on the Company’s consolidated financial statements as we do not have any leases with non-cancellable terms in excess of
one year.
Reclassification
Certain
amounts in prior periods have been reclassified to conform to the current period presentation.
3.
|
REVENUE
FROM CONTRACTS WITH CUSTOMERS
|
Revenue
Recognition
Sales
of pharmaceuticals and medical devices are recognized generally at the point in time when delivery occurs and title transfers
to the buyer. Sales of pharmaceuticals and medical devices are usually collected within 90 days of the date of sale.
We
have distributorship and sales representative agreements in place with third parties who do not take ownership of products. Any
costs incurred related to these agreements are considered to be sales and marketing expenses.
We
also earn rental income which is recognized over time as the tenant occupies the space and pays the rental amount. Rentals are
paid at the beginning of the month covered by the lease.
Disaggregation
of Revenue
For the six and three month periods ended
December 31, 2019 and 2018, a summary of our revenue on a disaggregated basis is as follows:
|
|
Three Months Ended
|
|
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Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of pharmaceuticals
|
|
$
|
—
|
|
|
$
|
33,611
|
|
|
$
|
—
|
|
|
$
|
70,335
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|
Sales of medical devices
|
|
|
1,904
|
|
|
|
482
|
|
|
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42,712
|
|
|
|
676
|
|
Rental revenue from operating lease payments
|
|
|
16,853
|
|
|
|
14,759
|
|
|
|
26,603
|
|
|
|
24,509
|
|
|
|
$
|
18,757
|
|
|
$
|
48,852
|
|
|
$
|
69,315
|
|
|
$
|
95,520
|
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Transaction
Prices
In
some cases, we may offer introductory discounts to customers. In such cases, we reduce the recorded revenue for such discounts.
For the six month periods ended December 31, 2019 and 2018, our revenues were reduced by $42,649 and $0, respectively, for such
discounts. For the three month periods ended December 31, 2019 and 2018, our revenues were reduced by $28,109 and $0, respectively,
for such discounts.
The
investment in Tower Hotel Fund 2013, LLC is recorded at cost and the Company is not aware of any indicator of impairment as of
December 31, 2019. It is not practicable for the Company to estimate fair value of this investment.
We
are pursuing the sale of our remaining investment in the real estate limited partnership investment. During the year ended
June 30, 2019, based on stability of operations of the underlying real estate property and recent valuations, the partnership
refinanced the property. We received a distribution of approximately $370,000 from the real estate limited partnership following
this refinancing. This distribution was 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, but we are uncertain if such a transaction
will close during the next twelve months. Thus, our investment is shown as a non-current asset as of December 31, 2019 in the
accompanying consolidated balance sheet.
As of December 31,
2019, we have approximately $352,620 ($269,980 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, plus a broker’s fee of
$17,500. Under the terms of the license agreement, the Company has paid $25,000 plus the first of a total twenty quarterly payments
of $21,250. Any remaining payments become immediately payable upon the receipt of final approval by the FDA of devices related
to the technology. Additionally, the Company agreed to pay a consulting fee of $1,000 per month for sixty months. The broker’s
fee was paid through the issuance of 14 million shares of the Company’s common stock. The quarterly payments have been suspended
at the present time as the Company and the seller negotiate certain disputes related to representations made by the seller at
the time the Company acquired the rights. The ultimate date and resolution of this negotiation cannot be estimated at this time.
As a result, the Company has included all of the future payments under the original agreement as noncurrent in the accompanying
December 31, 2019 and June 30, 2019 consolidated balance sheets.
In
the six months ended December 31, 2019, we issued 20,000,000 shares of Common Stock under the terms of a 2015 consulting agreement
as a result of reaching certain milestones related to the development of our needle destruction devices. Under the terms of this
consulting agreement, an additional 40,000,000 shares of Common Stock may be issued if other milestones are met.
5.
|
INSURANCE
NOTE PAYABLE
|
We finance a portion of
our insurance premiums. At December 31, 2019, there was a $159,799 outstanding balance due on our premium finance agreements.
The agreements have effective interest rates of 6.2% to 10.9%. The policies related to these premiums expire between July and
October 2020.
6.
|
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, 2020.
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 December 31, 2019, the outstanding principal balance totaled $0.
During
the fiscal year ended June 30, 2019, certain members of the board of directors and stockholders of the Company made $242,000 in
interest free advances to the Company. During the six month period ended December 31, 2019, $10,000 of the advances were repaid
and the remaining advances are convertible into shares of the Company’s common stock at rates ranging from $0.0024 to $0.0050
or 75,916,667 shares of common stock. During the quarter ended December 31, 2019, the Company received notice from the holders
of $142,000 of these related parties of their intent to exercise their right to convert their advances into 55,916,667 shares
of common stock. The conversion should be completed during the quarter ending March 31, 2020.
Beginning
in the quarter ended March 31, 2017, certain members of management agreed to forgo 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 December 31, 2019 and June
30, 2019, $50,000 in such fees remain unpaid and are recorded in accounts payable and accrued liabilities in the accompanying
balance sheets.
7.
|
LONG-TERM
DEBT, DEBENTURES AND LINES 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 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.
In
March 2016, we 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
2016 Fixed Rate Convertible Notes 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.
Holders of Fixed Rate Convertible Notes have the right to convert all or any portion of the Fixed Rate Convertible Notes
at the conversion price at any time prior to redemption.
During the year ended June 30, 2019, concurrent with the execution of the Exchange Agreement more fully
described in Note 9, holders of $515,247 aggregate principal amount of the Company’s 5% convertible promissory notes (“Notes”),
including accrued interest, converted their Notes into 103,132,226 shares of Common Stock. During the six month period ended December
31, 2019, $17,480 of Notes were converted by the holders into 3,495,943 shares of Common Stock. At December 31, 2019, there was
one remaining 2016 Fixed Rate Convertible Note outstanding with principal and accrued interest approximates $60,301. The one remaining
2016 Fixed Rate Convertible Note (plus accrued interest) is convertible into our common stock at a conversion rate of $0.015 per
share or 4,020,092 shares. During the six month period ended December 31, 2019 and 2018, we paid-in-kind $1,471 and $15,665, respectively,
of interest on these convertible notes.
In August 2019, we authorized
the issuance of up to $1.25 million in principal amount of new convertible promissory notes (which we refer to as the “2019
Fixed Rate Convertible Notes”). The 2019 Fixed Rate Convertible Notes are secured by certain Company real estate holdings.
As of December 31, 2019, $762,000 ($739,500 net of deferred loan costs) of 2019 Fixed Rate Convertible Notes were outstanding.
The
2019 Fixed Rate Convertible Notes mature on 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 and include 25% warrant coverage at $0.01 per share (which we refer to as the “2019
Warrants”). Interest accrues at a rate of 7% 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 2019 Fixed Rate Convertible
Notes. The Company may only issue the notice of its intent to redeem the 2019 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 2019 Fixed Rate Convertible Notes has the right to convert
all or any portion of the 2019 Fixed Rate Convertible Notes at the conversion price at any time prior to redemption.
During the six months
ended December 31, 2019, we also issued $578,125 of convertible notes to third parties with variable conversion rates (“2019
Variable Rate Convertible Notes”). The 2019 Variable Rate Convertible Notes mature at various dates between September 2020
and December 2020. We received, net of financing costs incurred, $505,696 in cash from the issuance of these notes. These 2019
Variable Rate Convertible Notes have interest accruing at rates ranging between 10% - 12%. These notes issued to third parties
have a variable conversion rate based on the price of the Company’s common stock. None of the 2019 Variable Rate Convertible
Notes have been converted into shares of common stock. During the quarter ended September 30, 2019, a holder of certain Variable
Rate Convertible Notes issued in February 2018 converted $41,250 of notes, including accrued interest, into 41,250,000 shares
of common stock as part of a settlement agreement between the parties.
At December 31,
2019, $243,125 of the 2019 Variable Rate Convertible Notes were convertible into common stock beginning in the quarter ending
March 31, 2020. Subsequent to December 31, 2019, we repaid in full the entire outstanding principal amount of $243,125, plus
accrued interest, under these 2019 Variable Convertible Notes.
Certain of the 2019
Variable Rate Convertible Notes have maturity dates prior to December 31, 2020 and could be classified as a current liability.
However, it is the Company’s expectation that we will either re-finance these convertible notes to longer terms, pay off
such amounts with the proceeds of long-term financing, or permit a limited amount of conversions. Therefore, we have classified
these notes as noncurrent. If we do not re-finance these convertible notes to longer terms, however, the holders of the convertible
notes have the option to convert these notes into equity or hold the convertible notes to maturity.
During the year ended
June 30, 2019, we issued $29,250 of convertible notes to our majority stockholder in exchange for 7,450,000 shares of our common
stock.
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 December 31, 2019, approximately $100,000 was drawn under the line of credit. The interest
rate on the line of credit is 7.0% per annum. Subsequent to December 31, 2019, proceeds from the certificate of deposit were used
to repay the outstanding balance under the line of credit plus accrued interest.
On March 12, 2019,
we obtained a $180,000 real estate loan from a financial institution. The note matures on April 1, 2020 and is secured by certain
real estate property and the personal guarantee of an officer and director of the Company. Interest only is payable monthly and
accrues at an interest rate of 12%.
In the quarter ended June
30, 2019, we entered into a series of credit financing arrangements from financing institutions by pledging future accounts receivable.
The proceeds from these credit agreements were used to pay the initial amount due under the Schreiber settlement agreement. As
of June 30, 2019, we had drawn approximately $153,000 under these agreements. During the six month period ended December 31, 2019,
additional draws of approximately $6,000 occurred and payments of approximately $56,000 were made. As of December 31, 2019, approximately
$103,000 remained outstanding on these loans.
8.
|
COMMITMENTS
AND CONTINGENCIES
|
Schreiber
Litigation
On
January 31, 2017, the Company and Beechwood Properties, LLC (“Beechwood”) filed suit against Daniel J. Schreiber (“Mr.
Schreiber”) and the Daniel J. Schreiber Living Trust – Dtd 2/08/95 (“Schreiber Trust”) in the United States
District Court for the Eastern District of Louisiana (the “Louisiana Court”) under Civil Action No. 2:2017cv819-B(3)
(the “Louisiana Lawsuit”).
Mr.
Schreiber and the Schreiber Trust answered the Louisiana Lawsuit and counter-claimed against the Company and Beechwood and made
additional claims against Mr. G. Darcy Klug (“Mr. Klug”) in the Louisiana Lawsuit. Mr. Klug is an officer and director
of RedHawk and is sole owner of Beechwood. Mr. Klug also holds voting control of RedHawk.
On
April 24, 2017, Mr. Schreiber and the Schreiber Trust also filed suit against the Company, Mr. Klug and six (6) other defendants
in the United States District Court for the Southern District of California under Civil Action No. 3:17-cv-00824-WQH-BLM which
case was dismissed without prejudice on September 26, 2017 (the “California Lawsuit” and along with the Louisiana
Lawsuit, the “Litigations”).
On
March 22, 2019, the parties to the Litigations have entered into a Settlement Agreement and General Release (“Settlement
Agreement”) to resolve all issues arising out of the subject matter of the Litigation.
In
consideration of the mutual promises, covenants and conditions contained in the Settlement Agreement, the parties to the Litigation
agreed that (i) Mr. Schreiber and the Schreiber Trust shall transfer all Company stock they presently own (52,377,108 common shares)
to the Company and (ii) the Company shall (a) make to Mr. Schreiber and the Schreiber Trust a cash payment of Two Hundred Fifty
Thousand and 00/100 Dollars (US$250,000.00) and (b) issue two Promissory Notes, each in the principal amount of Two Hundred Thousand
and 00/100 Dollars (US$200,000.00), one of which shall be due and payable on or before September 6, 2020 and the other shall be
due and payable on or before September 5, 2021. As a result of this Settlement Agreement, we have recorded a loss of $471,880
in the year ended June 30, 2019.
Each
Promissory Note shall be non-interest bearing, however each (i) shall bear a $15,000 late penalty if the principal amount is not
repaid by the due date and (ii) shall bear interest at a rate of 18% per annum, from the issue date, if the principal is not repaid
by the 30th date after the due date.
Pursuant
to a Security Agreement between the parties, Mr. Klug and Beechwood secured the Company’s obligations to the Schreiber
Trust under the Settlement Agreement by granting first-priority security interests in (i) 1,000 shares of Mr. Klug’s Series
B Preferred Company Stock; and 1,473 shares of Mr. Klug’s Series A Preferred Company Stock, and (ii) Beechwood’s
interest in the Tower Hotels Fund 2014, LLC.
On
October 11, 2019, Mr. Schreiber and the Schreiber Trust filed a Motion to Enforce Settlement Agreement (the “Motion”)
with the Louisiana Court alleging that the Company has failed to comply with its obligations under the Settlement Agreement by
selling stock for cash subsequent to the parties entering into the Settlement Agreement. The Motion seeks to accelerate the amounts
owed to Mr. Schreiber and the Schreiber Trust under the Settlement Agreement as well as attorneys’ fees. The Company believes
the Motion is without merit and intends to vigorously defend against the Motion.
Consultant
Agreement
On
July 19, 2019 (the “Effective Date”), RedHawk Holdings Corp. (the “Company”) and its wholly-owned subsidiary,
RedHawk Medical Products & Services, along with other affiliated entities, entered into a Consultant Agreement (“Agreement”)
with Drew Pinsky, Inc (“DPI”) f/s/o Dr. Drew Pinsky (“Consultant”), for Consultant to be the exclusive
spokesperson for the Company’s Sharps Needle and Destruction Device (“SANDD”) mini™, SANDD
Pro™ and any related products and/or accessories (“Products”) for an initial period of two (2) years (“Initial
Period”), under the terms and conditions described in the Agreement. At the end of the Initial Period, there shall be an
automatic, immediately consecutive two (2) year extension period unless DPI, within 60 days of the expiration of the Initial Period,
provides written notice of its intention not to extend the Agreement.
Under
the Agreement, the Company will pay DPI a royalty equal to 3% of the “Net Sales”, as defined in the Agreement, of
the Products but in no event will the royalty be less than $3.50 per SANDD mini™ unit sold and $13.50 per SANDD
Pro™ unit sold.
Pursuant to the Agreement, the Company agreed to issue to the Consultant 68,700,000 shares of the Company’s
common stock, which is equal to approximately 5% of the Company’s outstanding common stock on a fully diluted basis as of
the Effective Date. Further, the Company has agreed to issue to the Consultant, one year after the Effective Date, an additional
68,700,000 shares of the Company’s common stock, unless DPI has provided the Company with written notice of its intention
not to extend the Initial Period. As of the date of this Quarterly Report on Form 10-Q, the Company has not yet issued any of the
shares pursuant to the Agreement.
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 six months ended December 31, 2019 and 2018, we paid-in-kind $114,591 and $77,160, respectively, of related preferred stock
dividends.
Exchange
Agreement
On
June 20, 2019, RedHawk Holdings Corp. entered into a Stock Exchange Agreement (“Exchange Agreement”) with Beechwood.
G. Darcy Klug, the Company’s Chairman of the Board, Interim Chief Executive Officer and Chief Financial Officer, is the
sole member and manager of Beechwood. Under the Exchange Agreement, the Company purchased from Beechwood 113,700,000 shares of
the Company’s common stock, $0.001 par value per share (“Common Stock”), in exchange for 1,277 shares of the
Company’s 5% Series A Preferred Stock and a Stock Purchase Warrant (“Warrant”) to acquire 113,508,450
shares of Common Stock at an exercise price of $0.005 per share (collectively, the “Transactions”). The Warrant expires
June 20, 2029.
Concurrent with the execution
of the Exchange Agreement, holders of $580,108 aggregate principal amount of the Company’s 5% convertible promissory notes
(“Notes”), including accrued interest, were offered and converted their Notes into 116,021,700 shares of Common Stock
at aa conversion price of $0.005 per share. The extinguishment of the notes and the related accrued interest for the shares of
common stock resulted in a gain on extinguishment of approximately $419,000 based on the closing price of the common stock as
of the exchange date.
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 (“PIK dividends”). 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.
Warrants
In
conjunction with the Exchange Agreement, Beechwood was issued 113,508,450 warrants to purchase the Company’s common stock
at a price of $0.005 per share. The warrants expire in June 2029 and are assignable.
In
conjunction with the 2019 Fixed Rate Convertible Notes, the holders of the 2019 Fixed Rate Convertible Notes were issued 19,050,000
warrants to purchase the Company’s common stock at a price of $0.01 per share. The warrants expire ten years from the date
of issuance.
As
of June 30, 2019, the Company had approximately $5 million of U.S. net operating losses (NOLs) carried forward to offset taxable
income in future years. Approximately $4 million of this NOL will expire commencing in fiscal 2026 and run through 2038. The NOLs
of approximately $1 million from the year ended June 30, 2019 has an indefinite carryforward period. 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, 2019. 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.
Thus,
there is no net tax asset recorded as of December 31, 2019 or June 30, 2019 as a 100% valuation allowance has been established
for any tax benefit. Similarly, there is no income tax benefit recorded on the net loss of the Company for the periods ended
December 31, 2019 and 2018.
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 & Hospitality and Other Services business units operate in the United States. Our Medical Device and Pharmaceutical
business unit currently operates primarily in the United States and 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 December 31, 2019
and 2018 and for the six month and three month then ended.
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
LAND &
|
|
|
DEVICE &
|
|
|
OTHER
|
|
|
|
|
|
|
|
December 31, 2019
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
26,603
|
|
|
$
|
42,712
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
69,315
|
|
Operating loss
|
|
$
|
(15,976
|
)
|
|
$
|
(197,610
|
)
|
|
$
|
(75
|
)
|
|
$
|
(390,204
|
)
|
|
$
|
(603,865
|
)
|
Interest expense
|
|
$
|
26,569
|
|
|
$
|
317
|
|
|
$
|
—
|
|
|
$
|
184,629
|
|
|
$
|
211,515
|
|
Depreciation and amortization
|
|
$
|
15,667
|
|
|
$
|
26,250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
41,917
|
|
Identifiable assets
|
|
$
|
919,515
|
|
|
$
|
201,189
|
|
|
$
|
77,849
|
|
|
$
|
1,467,089
|
|
|
$
|
2,665,642
|
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
LAND &
|
|
|
DEVICE &
|
|
|
OTHER
|
|
|
|
|
|
|
|
December 31, 2018
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
24,509
|
|
|
$
|
71,011
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
95,520
|
|
Operating income (loss)
|
|
$
|
(2,203
|
)
|
|
$
|
(84,761
|
)
|
|
$
|
(201
|
)
|
|
$
|
(233,663
|
)
|
|
$
|
(320,828
|
)
|
Interest expense
|
|
$
|
7,737
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
173,481
|
|
|
$
|
181,218
|
|
Depreciation and amortization
|
|
$
|
15,667
|
|
|
$
|
45,484
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
61,151
|
|
Identifiable assets
|
|
$
|
943,966
|
|
|
$
|
1,117,450
|
|
|
$
|
—
|
|
|
$
|
162,129
|
|
|
$
|
2,223,545
|
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
LAND &
|
|
|
DEVICE &
|
|
|
OTHER
|
|
|
|
|
|
|
|
December 31, 2019
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
16,853
|
|
|
$
|
1,904
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,757
|
|
Operating loss
|
|
$
|
(10,501
|
)
|
|
$
|
(130,313
|
)
|
|
$
|
(75
|
)
|
|
$
|
(268,291
|
)
|
|
$
|
(409,180
|
)
|
Interest expense
|
|
$
|
12,891
|
|
|
$
|
212
|
|
|
$
|
—
|
|
|
$
|
110,540
|
|
|
$
|
123,643
|
|
Depreciation and amortization
|
|
$
|
7,833
|
|
|
$
|
13,126
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,959
|
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
LAND &
|
|
|
DEVICE &
|
|
|
OTHER
|
|
|
|
|
|
|
|
December 31, 2018
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
14,759
|
|
|
$
|
34.093
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48,852
|
|
Operating income (loss)
|
|
$
|
3,285
|
|
|
$
|
(34,335
|
)
|
|
$
|
(21
|
)
|
|
$
|
(181,743
|
)
|
|
$
|
(212,814
|
)
|
Interest expense
|
|
$
|
3,841
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
88,774
|
|
|
$
|
92,615
|
|
Depreciation and amortization
|
|
$
|
7,834
|
|
|
$
|
22,568
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,402
|
|
The Company evaluated events occurring
after December 31, 2019, and through the date the financial statements were issued, February 19, 2020 and concluded there were
no events or transactions that would require recognition or disclosure in these financial statements.