Notes to the Unaudited Consolidated Financial Statements
March 31, 2020
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1.
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NATURE OF OPERATIONS AND CONTINUANCE OF BUSINESS
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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 the SANDD™ Insulin Needle Destruction Unit (formerly known as the Disintegrator™), non-contact thermometers, face masks, surgical masks, UV lights, WoundClot Surgical - Advanced Bleeding Control, 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 three month period ended March 31, 2020, the Company had revenues of $148,674, a consolidated
net loss of $439,259. For the nine month period ended March 31, 2020, the Company had revenues of $217,989, a consolidated net
loss of $1,210,112 and cash of $1,205,950 used in operating activities. As of March 31, 2020, the Company had cash of $99,246,
a working capital deficit of $991,397 and an accumulated deficit of $7,052,616. 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.
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2.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Basis of Presentation
The unaudited interim condensed financial statements
of the Company as of March 31, 2020 and for the three and nine month periods ended March 31, 2020 and 2019 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 and for the year ended 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. Shipping
and handling costs are included in revenue and costs of goods sold.
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 March 31, 2020 or June 30, 2019.
Accounts Receivable
Accounts
receivables are amounts due from customers of our pharmaceutical, medical device and financial services divisions. We do not require
collateral from our customers. 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 March 31, 2020 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. Tooling and equipment are depreciated over a useful life of ten 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 March 31, 2020, we are leasing both properties to third parties.
The Company is also currently using a portion of 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 December 31, 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 follows
Accounting Standard Codification (which we refer to as “ASC”) 740, Income Taxes, which requires the Company
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 March 31, 2020 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 March 31, 2020, including accrued but unpaid interest, there was one remaining 2016 Fixed Rate Convertible Note outstanding which totaling $61,037 and is convertible into 4,069,118 shares of common stock upon conversion of the remaining 2016 Fixed Rate Convertible Note.
During the nine months ended March 31, 2020, 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 $1,078,862. 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 nine months ended March 31, 2020, 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 $832,000. With the proceeds we paid
off certain variable rate convertible notes outstanding in the amount of approximately $458,000, 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 March 31, 2020, including accrued but unpaid dividends, there were potentially 205,846,071 shares of common stock issuable upon the conversion of our outstanding Series A Preferred Stock and, including accrued but unpaid dividends, there were potentially 122,796,364 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.
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 March 31, 2020 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 did not have any leases with non-cancellable terms in excess of one year as of the adoption
date. We did enter into a long-term lease in the quarter ended March 31, 2020 for new office space and have recorded a right-of-use
asset and the related lease obligation as of March 31, 2020. Also see Note 6.
Reclassification
Certain amounts in
prior periods have been reclassified to conform to the current period presentation.
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3.
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REVENUE FROM CONTRACTS WITH CUSTOMERS
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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. In certain cases, the customers make advance payments on orders of medical devices. Such advance payments are recorded
as deferred revenue in the accompanying consolidated balance sheets. As of March 31, 2020 and June 30, 2019, we had $267,145 and
$0, respectively, of deferred revenue recorded.
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. In the quarter ended March 31, 2020, we entered into a one-year distribution agreement with Dolphin Medical
LLC (the “distributor”), which requires the distributor to order and purchase a minimum number of medical devices in
each quarter of the agreement. The Company has invoiced and recorded revenue of approximately $87,500 and the related cost of goods
sold in the quarter ended March 31, 2020 for the required minimum purchase.
We also earn rental income from operating leases which is recognized over the rental period as the tenant
occupies the space and pays the rental amount. Rentals are paid at the beginning of the month covered by the lease.
Disaggregation of Revenue
For the three and nine month periods ended March 31, 2020 and 2019, a summary of our revenue on a disaggregated basis is as follows:
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Three
Months Ended
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Nine
Months Ended
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March
31,
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March
31,
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2020
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2019
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2020
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2019
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Sales of pharmaceuticals
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$
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—
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$
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1,457
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$
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—
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$
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71,792
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Sales of medical devices
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133,824
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61,849
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176,537
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62,525
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Rental revenue from operating lease payments
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14,850
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10,250
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41,452
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34,759
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$
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148,674
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$
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73,556
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$
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217,989
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$
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169,076
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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 nine month periods ended March 31, 2020
and 2019, our revenues were reduced by $95,508 and $39,995, respectively, for such discounts. For the three month periods March
31, 2020 and 2019, our revenues were reduced by $52,859 and $39,995, respectively, for such discounts. Shipping and handling costs
included in revenue was $805 and $1,305 for the three and nine month periods ended March 31, 2020, respectively.
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 March 31, 2020. 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 March 31, 2020 in the accompanying consolidated balance
sheet.
As of March 31, 2020, we have approximately $387,111 ($304,471 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 and the consulting fee 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 March 31, 2020 and June 30, 2019 consolidated balance sheets.
In the nine months ended March 31, 2020, 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.
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5.
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INSURANCE NOTE PAYABLE
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We finance a portion of our insurance premiums. At March 31, 2020, there was a $12,537 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.
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6.
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RELATED PARTY TRANSACTIONS
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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, 2021. 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 March 31, 2020, 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. The 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 subsequent to the year ending
June 30, 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 March 31, 2020 and June 30, 2019,
$50,000 in such fees remain unpaid and are recorded in accounts payable and accrued liabilities in the accompanying consolidated
balance sheets.
We entered into an
office space lease in January 2020 with a company owned by a member of our Board of Directors. The lease is for a three-year term
beginning April 1, 2020. The base annual rent is $25,830. In addition to the base rent, the Company will also pay a proportionate
share of common area operating expenses. The Company has recorded operating right-of-use (ROU) assets and liabilities in the amount
of $67,254 as of March 31, 2020 related to the lease. The ROU asset represents our right to use the asset for the lease term and
the ROU liability represents our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities
are recognized based on the present value of lease payments utilizing an interest rate based on a collateralized loan with the
same term as the related lease.
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7.
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LONG-TERM DEBT, DEBENTURES AND LINES OF CREDIT
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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 below 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 nine month period ended March 31, 2020, $17,480 of Notes were converted
by the holders into 1,165,314 shares of Common Stock. At March 31, 2020, there was one remaining 2016 Fixed Rate Convertible Note
outstanding with principal and accrued interest of $61,037. This 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 4,069,118 shares. During the nine month period
ended March 31, 2020 and 2019, we paid-in-kind approximately $2,000 and $23,000, 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 March 31, 2020, $832,000 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.
As of June 30, 2019, we had $256,500
of previously issued variable rate convertible notes outstanding (“Variable Rate Convertible Notes”). During the nine
months ended March 31, 2020, we also issued $1,078,862 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 June 2021. We received approximately, net of financing costs incurred, $960,000 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 nine months ended March 31, 2020, we repaid $458,375 of Variable Rate Convertible Notes and
2019 Variable Rate Convertible Notes. Upon the retirement of these notes, the Company may also have to pay a prepayment amount
in excess of the outstanding balance of principal and accrued interest. Such prepayment amounts totaled $129,338 for the nine months
ended March 31, 2020 and have been recorded as a loss on extinguishment of debt in the accompanying consolidated statements of
operations. $56,775 of these payments occurred during the six months ended December 31, 2019 and was previously recorded as interest
expense; such amounts were reclassified to loss on extinguishment of debt in the quarter ended March 31, 2020. In the quarter ended
September 30, 2019, we recognized a gain of $44,527 on the extinguishment of certain fixed rate convertible notes.
At March 31, 2020, $835,737
of the 2019 Variable Rate Convertible Notes were convertible into common stock beginning in the quarter ending June 30, 2020. Subsequent
to March 31, 2020, we repaid outstanding principal amount of $335,000, plus accrued interest and prepayment penalties, under these
2019 Variable Rate Convertible Notes.
Certain of the 2019
Variable Rate Convertible Notes have maturity dates prior to March 31, 2021 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 was collateralized by a $100,000 certificate of deposit at the bank.
The interest rate on the line of credit was 7.0% per annum. During the quarter ended March 31, 2020, 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 matured on April 1, 2020 and was extended to August
1, 2020. This real estate note 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%.
Beginning 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 nine month period ended March 31, 2020,
additional draws of approximately $116,000 occurred and payments of approximately $76,000 were made. As of March 31, 2020, approximately
$174,000 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
common 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 nine months ended March 31, 2020 and 2019, we paid-in-kind $114,859 and $116,466, 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 a 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 20,800,000 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.
The Company has not filed its tax returns for the years ended June 30, 2019 and 2018. 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 100% valuation allowance against its net deferred tax assets. Thus, there is no net tax asset recorded as
of March 31, 2020 or June 30, 2019. Similarly, there is no income tax benefit recorded on the net loss of the Company for the periods
ended March 31, 2020 and 2019.
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 March 31, 2020 and 2019 and for the nine months and three months then ended.
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended
|
|
LAND
&
|
|
|
DEVICE
&
|
|
|
OTHER
|
|
|
|
|
|
|
|
|
March
31, 2020
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
41,452
|
|
|
$
|
176,537
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
217,989
|
|
|
Operating
loss
|
|
$
|
(15,145
|
)
|
|
$
|
(248,760
|
)
|
|
$
|
(160
|
)
|
|
$
|
(554,246
|
)
|
|
$
|
(818,311
|
)
|
|
Interest
expense
|
|
$
|
35,452
|
|
|
$
|
627
|
|
|
$
|
—
|
|
|
$
|
243,159
|
|
|
$
|
279,238
|
|
|
Depreciation
and amortization
|
|
$
|
23,500
|
|
|
$
|
39,875
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
63,375
|
|
|
Identifiable
assets
|
|
$
|
903,403
|
|
|
$
|
607,928
|
|
|
$
|
77,814
|
|
|
$
|
1,090,906
|
|
|
$
|
2,680,051
|
|
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
LAND &
|
|
|
DEVICE &
|
|
|
OTHER
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
34,759
|
|
|
$
|
134,317
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
169,076
|
|
|
Operating income (loss)
|
|
$
|
(11,097
|
)
|
|
$
|
(100,660
|
)
|
|
$
|
(201
|
)
|
|
$
|
(343,073
|
)
|
|
$
|
(455,031
|
)
|
|
Interest expense
|
|
$
|
12,526
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
143,178
|
|
|
$
|
155,714
|
|
|
Depreciation and amortization
|
|
$
|
23,500
|
|
|
$
|
56,859
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
80,359
|
|
|
Identifiable assets
|
|
$
|
937,294
|
|
|
$
|
693,185
|
|
|
$
|
—
|
|
|
$
|
630,977
|
|
|
$
|
2,261,456
|
|
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
LAND
&
|
|
|
DEVICE
&
|
|
|
OTHER
|
|
|
|
|
|
|
|
|
March
31, 2020
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
14,849
|
|
|
$
|
133,825
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
148,674
|
|
|
Operating
income (loss)
|
|
$
|
831
|
|
|
$
|
(51,151
|
)
|
|
$
|
(85
|
)
|
|
$
|
(164,041
|
)
|
|
$
|
(214,446
|
)
|
|
Interest
expense
|
|
$
|
8,883
|
|
|
$
|
310
|
|
|
$
|
—
|
|
|
$
|
58,530
|
|
|
$
|
67,723
|
|
|
Depreciation
and amortization
|
|
$
|
7,833
|
|
|
$
|
13,625
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,458
|
|
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
LAND &
|
|
|
DEVICE &
|
|
|
OTHER
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
10,250
|
|
|
$
|
63,306
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73,556
|
|
|
Operating income (loss)
|
|
$
|
(8,894)
|
|
|
$
|
(15,899
|
)
|
|
$
|
—
|
|
|
$
|
(109,410
|
)
|
|
$
|
(134,203
|
)
|
|
Interest expense (income)
|
|
$
|
4,789
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
(20,705
|
)
|
|
$
|
(25,504
|
)
|
|
Depreciation and amortization
|
|
$
|
7,833
|
|
|
$
|
11,375
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,208
|
|
The Company evaluated events occurring after March 31, 2020, and through the date the consolidated financial
statements were issued, June 29, 2020 and concluded there were no events or transactions that would require recognition or disclosure
in these financial statements, except for the following:
|
|
●
|
In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, which has and
is continuing to spread throughout the world, including the United States. On March 11, 2020 the World Health Organization characterized
the spread of the coronavirus disease (“COVID-19”) as a “pandemic”. The significant reach of COVID-19 has
resulted in a widespread public health issue that has and will likely continue to affect the economies worldwide, and could adversely
affect our business, results of operations and financial condition, including a decrease in demand for our medical devices. Specifically,
demand for our newly released SANDD Pro™ may be delayed, postponed or cancelled until hospitals, clinics and physicians
resume normal operations. In addition, the operations of our real estate investment in Hawaii has also been adversely affected.
As a result of the pandemic, we expanded our medical sales efforts to include personal protective equipment (PPE) in the quarter
ending June 30, 2020. The ultimate extent of the impact of COVID-19 on our business and future financial condition, results of
operations and cash flows will depend on future developments, which are highly uncertain and cannot be predicted at this time.
|
|
|
|
|
|
|
●
|
Subsequent to March 31, 2020, we repaid in full two 2019 Variable Rate Convertible Notes in the principal
amount of $335,000 plus accrued interest. There was a prepayment penalty paid with the repayment in the amount of approximately
$19,500. Also, as a result of the full payment, 20,434,782 shares of common stock previously issued as collateral for one of these
notes were returned to the Company.
|