Notes
to the Unaudited Consolidated Financial Statements
September
30, 2020
1.
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NATURE OF OPERATIONS
AND CONTINUANCE OF BUSINESS
|
RedHawk
Holdings Corp.(“RedHawk” or the “Company”) 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™), Personal
Protection Equipment, WoundClot Surgical - Advanced Bleeding Control and the Carotid Artery Digital Non-Contact Thermometer. Through
our United Kingdom based subsidiary, we manufacture and market branded generic pharmaceuticals. 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 two properties. 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 quarter ended
September 30, 2020, the Company had revenues of $477,339, a consolidated net loss of $402,439 and cash of $172,520 used in operating
activities. For the year ended June 30, 2020, the Company had $1,134,192 in revenues, a consolidated net loss of $1,813,702 and
cash of $1,264,675 used in operating activities. As of September 30, 2020, the Company had cash of $28,462, a working capital
deficit of $1,338,110 and an accumulated deficit of $8,133,762. 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 September 30, 2020 and for the quarters ended September
30, 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, 2020 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, 2020. 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, and commercial real estate leasing.
Our medical device sales include the marketing and distribution of certain professional and consumer grade digital non-contact
thermometers, our needle destruction unit, personal protection equipment, and advanced bleeding control. Through our United Kingdom
based subsidiary, we manufacture, and market, branded generic pharmaceuticals. Our real estate leasing revenues are from certain
commercial properties under lease. The Company offers customer discounts in certain cases. Such discounts are estimated at time
of product sale and 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 September 30, 2020 or June 30, 2020.
Accounts
Receivable
Accounts receivables are
amounts due from customers of our medical device, pharmaceutical, 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 September 30, 2020 or June 30, 2020.
Inventory
Inventory consist
of needle destruction devices and its components, purchased thermometers, UV sanitation lights, face masks, an advanced bleeding
control, 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. A portion of our inventory is located in the United Kingdom, which due to
the COVID-19 pandemic has been in a lockdown environment for most of the period since March 31, 2020. As a result, sales efforts
related to this inventory has temporarily ceased. The Company still expects to be able to sell this inventory but may incur additional
costs in order to do so. Accordingly, an inventory reserve of approximately $60,000 has been recorded as of September 30, 2020
to reduce the inventory to net realizable value.
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 September 30, 2020, we are leasing both properties to third parties.
The Company is also continuing to use a portion of the Chemin Metairie Road property for equipment storage for our real estate
management unit.
Effective August 1, 2017, the lease for the Jefferson Street property was through December 31, 2022 at
a rent of $3,250 per month. Beginning September 1, 2020, the Chemin Metairie Road property is leased through February 28, 2021
at a rental rate of $2,000 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
139,558,450 outstanding warrants as of September 30, 2020 of which 113,508,450 have an exercise price of $0.005 per share and
26,050,000 have an exercise price of $0.01 per share.
At September 30, 2020, including accrued but unpaid interest, there was one remaining 2016 Fixed Rate
Convertible Note outstanding which totals $62,544 and is convertible into 4,169,620 shares of common stock upon conversion.
During
the three month period ended September 30, 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 aggregate principal amount of $106,000. The proceeds were
used to pay certain amounts due under certain litigation (See Note 8) and for working capital. The 2019 Variable Rate Convertible
Notes are convertible into shares of common stock at a variable conversion rate.
During the three month
period ended September 30, 2020, we issued in private offerings exempt from registration debt securities in the form of 2019 Fixed
Rate Convertible Notes (See Note 7) in the aggregate principal amount of $200,000. The proceeds were used to pay certain amounts
due under certain litigation (See Note 8), for working capital and to pay off certain variable rate convertible notes outstanding
in the amount of approximately $21,000, plus accrued interest and prepayment penalties. 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.
At
September 30, 2020, including accrued but unpaid dividends, there were potentially 86,151,847 shares of common stock issuable
upon the conversion of our outstanding Series A Preferred Stock and, including accrued but unpaid dividends, there were potentially
518,413 shares of common stock issuable upon the conversion of our outstanding Series B Preferred Stock (See Note 9).
The shares of common
stock that could be issued upon exercise of the warrants discussed above and the shares issuable from the conversion of the promissory
notes, the Series A Preferred Stock, and the Series B Preferred Stock discussed above 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 September 30, 2020 and June 30, 2020 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, and stated interest rates.
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 has elected to use the short-term lease exception allowed
in ASU 2016-02. 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 September 30, 2020 (See Note 6).
Reclassification
Certain
amounts in prior periods have been reclassified to conform to the current period presentation.
3.
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REVENUE
FROM CONTRACTS WITH CUSTOMERS
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Revenue
Recognition
Sales
of medical devices and pharmaceuticals are recognized generally at the point in time when delivery occurs and title transfers
to the buyer. Sales of medical devices and pharmaceuticals 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 September 30, 2020 and September 30, 2019, there was no 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 year ended June 30, 2020,
we entered into a one-year distribution agreement with a 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 net revenue of approximately
$50,000 and accrued the related cost of goods sold in the year ended June 30, 2020 for the required minimum purchase. The
minimum purchase inventory not yet shipped is segregated and held by the Company.
We
also earn rental income from operating leases which is recognized over the rental period as the tenant occupies the space and
pays the rental amount. Rentals are paid at the beginning of the month covered by the lease.
Disaggregation
of Revenue
For
the three month periods ended September 30, 2020 and 2019, a summary of our revenue on a disaggregated basis is as follows:
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Three
Months
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|
|
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September
30,
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|
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2020
|
|
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2019
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|
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|
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|
|
|
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Sales of medical devices
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$
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430,276
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|
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$
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40,808
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Sales of pharmaceuticals
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—
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|
|
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—
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Rental revenue from operating lease payments
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17,063
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9,750
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$
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447,339
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$
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50,558
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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 three month periods ended September
30, 2020 and 2019, our revenues were reduced by $16,894 and $14,540, respectively, for such discounts. Shipping and handling costs
included in revenue was approximately $6,100 for the three month period ended September 30, 2020.
The
investment in Tower Hotel Fund 2013, LLC (“Hotel Fund”) is recorded at cost. The Hotel Fund owns a resort property
in Hawaii. Due to the COVID-19 pandemic, the tourism industry in Hawaii was adversely affected and the resort was temporarily
closed from March 2020 to November 2020. The return to previous operating performance of this property and the timing, if it should
occur, cannot be estimated at this time. Based on the expected reduction in cash flows and uncertainties related to the Hawaii
tourism industry, the Company has recorded as of June 30, 2020, an impairment of $130,000 or approximately 50% of our remaining
carrying value in this investment. The ultimate amount, if any, we recover from this investment cannot be estimated at this time
and is expected to differ from our recorded investment.
We
are continuing to pursue the sale of our remaining investment in the Hotel Fund.
As of September 30, 2020,
we have approximately $367,546 ($262,406 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 entered into an agreement to acquire the exclusive manufacturing and distribution rights to certain
needle incineration intellectual properties 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 scheduled 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 were suspended as the
Company believes the seller breached the terms of the purchase agreement by, among other things: failing to provide RedHawk with
exclusive rights to the intellectual properties and technology, all related inventions, patents, registrations, licenses, applications
and contracts, trademarks, copyrights, designs, drawings, patterns, manuals and instructions, mask works, product certifications,
computer programs and data, research and engineering work, critical tooling, design drawings, products, inventory, raw materials,
molds, molding tools and dies. The prototypes provided were defective, unsafe and failed to work as represented. Further, the
Seller misrepresented that it had exclusive rights to the intellectual property being purchased. We initiated and completed the
reverse engineering of this needle incineration technology.
In
the year ended June 30, 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 in the future if other milestones are met.
5.
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INSURANCE NOTE PAYABLE
|
We
finance a portion of our insurance premiums. At September 30, 2020, there was a $4,929 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 2021 and October 2021.
6.
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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, 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 September 30, 2020, the outstanding principal balance totaled $4,500.
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 per share or 75,916,667 total shares of common stock. During the quarter ended December 31, 2019, the
Company received notice from the holders of $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 is expected to be completed subsequent to the three month period
ended September 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 September 30, 2020 and
September 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 initially recorded operating right-of-use (ROU) assets
and liabilities in the amount of $62,363 upon entering into this 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. During the three month period ended September 30, 2020, the ROU asset and liability
has been reduced by $4,979 for rental payments, which are included in general and administrative expenses in the accompanying
combined statements of operations.
7.
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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 below as “Note”)
plus the issuance of 215 shares of the Company’s 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 remaining principal amount of $221,963 as of September 30, 2020. 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 issued $545,000 in principal amount of convertible promissory notes (which we refer to as the “2016 Fixed
Rate Convertible Notes”). The 2016 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 2016 Fixed Rate Convertible Notes. The Company may only issue the notice of its intent to redeem the 2016 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 2016 Fixed Rate Convertible
Notes have the right to convert all or any portion of the 2016 Fixed Rate Convertible Notes at the conversion price at any
time prior to redemption.
As further disclosed in
Note 9, Exchange Agreement, at September 30, 2020, and June 30, 2020 there was one remaining 2016 Fixed Rate Convertible Note
outstanding with principal and accrued interest of approximately $63,000 and $62,000, respectively. This 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
4,169,620 total shares. During the three month period ended September 30, 2020 and 2019, we paid-in-kind approximately $770 and
$735, respectively, of interest on these convertible notes.
During
the three month period ended September 30, 2020 and the year ended June 30, 2020, we issued $200,000 and $842,000, respectively,
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 September 30, 2020, $1,042,000
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. 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 three month period ended September 30, 2020 and the year ended June 30, 2020, we issued $184,412 and $350,000, respectively,
in principal amount of new convertible notes (which we refer to as the “2020 Fixed Rate Convertible Notes”). As of
September 30, 2020, $546,387 (approximately $168,812 net of unamortized deferred loan costs and unamortized beneficial conversion)
of 2020 Fixed Rate Convertible Notes were outstanding.
The
2020 Fixed Rate Convertible Notes accrue interest at 10% per annum, are convertible into shares of our common stock at a price
of $0.005 per share, mature twelve months after issuance and are unsecured. The proceeds from the 2020 Fixed Rate Convertible
Notes were used to repay approximately $21,000 of 2019 Variable Rate Convertible Notes in the principal amount including accrued
interest and prepayment penalties. When issued, the 2020 Fixed Rate Convertible Notes had an initial conversion rate below the
trading price of the Company’s common stock creating a beneficial conversion feature (“BCF”), which exceeded
the total cash proceeds received from its issuance. Accordingly, the BCF was recorded as a debt discount and additional paid-in
capital of $85,000. The debt discount is being amortized over the one-year term of the note.
During
the three month period ended September 30, 2020 and the year ended June 30, 2020, we issued $106,000 and $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, $100,000 and $960,000, respectively, 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 have a variable conversion rate based on the price
of the Company’s common stock.
During
the three month period ended September 30, 2020, $426,500, plus accrued interest, of the 2019 Variable Rate Convertible Notes
were converted into 130,650,810 shares of common stock. Additionally, $20,737, including accrued interest and prepayment
penalties, of the 2019 Variable Rate Convertible Notes were repaid.
Upon
the repayment of these notes, the Company may, in certain cases, pay a prepayment amount in excess of the outstanding balance
of principal and accrued interest. Such prepayment amounts totaled $20,737 for the three month period ended September 30, 2020
and have been recorded as a loss on extinguishment of debt in the accompanying consolidated statements of operations.
Certain
of the 2019 Variable Rate Convertible Notes have maturity dates prior to June 30, 2021 and could be classified as a current liability.
However, it is the Company’s expectation that such notes will be converted into shares, re-financed to longer terms, or
paid off with the proceeds of long-term financing. 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.
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 October 1, 2020. The Company is working on an additional extension of this loan. 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 various
Company assets and the personal guarantee of an officer and director of the Company. The proceeds from these credit agreements
were used to pay the amounts due under the Schreiber settlement agreement more fully described in Note 8. As of September 30,
2020 and June 30, 2020, we had $207,400 and $129,389, respectively, 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 “Litigation”).
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”), an officer and director of RedHawk
and sole owner of Beechwood, in the Louisiana Lawsuit.
On March 22, 2019,
the parties to the Litigation 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 would transfer all Company stock they then owned (52,377,108 common shares)
to the Company and (ii) the Company would (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 was due and payable on or before September 6, 2020 (“Note 1”) and
the other was due and payable on or before September 5, 2021 (“Note 2”). As a result of this Settlement Agreement,
we recorded a loss of $471,880 in the year ended June 30, 2019.
Each
Promissory Note was non-interest bearing, however each (i) included a $15,000 late penalty if the principal amount was not repaid
by the due date and (ii) would bear interest at a rate of 18% per annum, from the issue date, if the principal was not repaid
by the 30th date after the due date.
Pursuant to Schreiber
Trust a Security Agreement between the parties, Mr. Klug and Beechwood secured the Company’s obligations to the under the
Settlement Agreement by granting first-priority security interests in (i) 1,000 shares of Mr. Klug’s Series B Preferred Stock;
and 1,473 shares of Mr. Klug’s Series A Preferred Stock, and (ii) Beechwood’s interest in the Tower Hotels Fund 2014,
LLC (collectively “the Escrow Account”). During the three month period ended September 30, 2020, Mr. Klug and Beechwood
converted the 1,000 shares of Series B Preferred Stock and the 1,473 shares of Series A Preferred Stock into 124,849,365 and 122,730,903,
respectively, of the Company’s Common Stock (collectively “the Escrow Shares”) and replaced the 1,000 shares
of Series B Preferred Stock and 1,473 shares of Series A Preferred Stock held in the Escrow Account with the Escrow Shares as security
pursuant to the Security Agreement.
On October 11, 2019, Mr. Schreiber and the Schreiber Trust filed a Motion to Enforce Settlement Agreement
with the Court alleging the Company failed to comply with its obligations under the Settlement Agreement by selling stock for cash
subsequent to the parties entering into the Settlement Agreement.
On July 16, 2020, the
Louisiana Court granted the Defendant’s Motion ordering the Company to pay to the Defendants $519,495.78 (“Judgment”)
representing (i) the principal amount due on Note 1 ($200,000.00), which the Company has since paid; (ii) the principal amount
due on Note 2 ($200,000.00), which the Company has since paid; (iii) 18% simple interest on certain outstanding debt charged back
to the date of the Settlement Agreement; (iv) $40,000.00 of attorneys’ fees (10% of the amounts due, which to date remains
greater than the amount of actual reasonable fees); and (v) interest from the date of the Louisiana Court’s judgment and
costs. The Company appealed the Louisiana Court’s ruling to the Court of Appeal.
As previously disclosed,
payment of the principal amount of Note 1 was tendered by the Company to the Defendants on August 13, 2020. Notwithstanding the
appeal to the Court of Appeal, the Company tendered the early repayment of the principal amount of Note 2 to the Defendants on
August 24, 2020. To date, $119,496 of the Judgment remains outstanding.
On November 12, 2020,
the Court of Appeal issued a decision vacating the Judgment and remanded the case back to the Louisiana Court.
The 14 day period to
seek rehearing from the Court of Appeal passed on November 26, 2020 with no petition filed by Schreiber; thereupon, the decision
and Judgment became final. By applicable rule, the mandate of the Court of Appeal issues eight calendar days thereafter, on December
4, 2020.
As previously disclosed,
on September 4, 2020, the Company filed a Consent Motion to Approve Supersedeas Bond and Stay of Execution of Judgment Pending
Appeal (“Motion to Approve”), and on September 8, 2020, the Louisiana Court granted the Company’s Motion to Approve
and the posting of a supersedeas bond (“Bond”) by the Company in the amount of $143,491 representing (i) the remaining,
unsatisfied amount of the Judgment; plus (ii) post-Judgment interest of $80.27; plus, (iii) 20% of the combined amount ($23,915).
As
the Judgment is now vacated, the Bond will be released and the full amount of the funds returned to the Company.
The
Company is currently evaluating its rights on remand. These include its contractual right under the Settlement Agreement to recover
its reasonable attorneys’ fees, expenses, and costs incurred in connection with the litigation of Schreiber’s Motion,
should it prevail at the district court. Regardless, as previously disclosed, the Company believes the Motion is without merit
and intends to vigorously defend against it on remand.
Consultant
Agreement
On July 19, 2019 (the
“Effective Date”), RedHawk and its wholly-owned subsidiary, RedHawk Medical Products & Services, along with other
affiliated entities, entered into a Consultant Agreement (“Agreement”) with Drew Pinsky, Inc. 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 Consultant 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, the later of one year after the Effective Date or upon Consultant’s request, an additional
68,700,000 shares of the Company’s common stock, unless Consultant 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.
On August 4, 2020,
Mr. Klug and Beechwood converted the 1,000 shares of Series B Preferred Stock and the 1,473 shares of Series A Preferred Stock
into 124,849,365 and 122,730,903, respectively, of the Company’s Common Stock. On September 28, 2020, the Escrow Account
in the Schreiber Litigation was dissolved. As a result, on October 6, 2020, the Company’s Board of Directors, Mr. Klug and
Beechwood, agreed to exchange 124,849,365 and 122,730,903 of the Company’s Common Stock into 1,000 shares of Series B Preferred
Stock and the 1,473 shares of Series A Preferred Stock, respectively. On November 4, 2020, the Company agreed to purchase from
Beechwood 122,730,903 shares of the Company’s common stock in exchange for 1,473 shares of Series A Preferred Stock, stated
value of $1,133.81 per share.
During
the three month period ended September 30, 2020 and 2019, we paid-in-kind $21,139 and $56,256, respectively, of related preferred
stock dividends.
2019
Exchange Agreement
On
June 20, 2019, RedHawk entered into a Stock Exchange Agreement (“Exchange Agreement”) with Beechwood. G. Darcy Klug,
the Company’s Chairman of the Board 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, 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 Company 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.
Warrants
In
conjunction with the Exchange Agreement, Beechwood was issued the Warrant, as described above.
In
conjunction with the 2019 Fixed Rate Convertible Notes, the holders of the 2019 Fixed Rate Convertible Notes were issued 26,050,000
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, 2020, the Company has approximately $6.8 million of U.S. net operating losses (NOLs) carried
forward to offset taxable income in future years. Approximately $3.7 million of this NOL will expire commencing in fiscal 2026
through 2038. The NOLs of approximately $3.1 million from years ended subsequent to June 30, 2018 have 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 $1.4 million as of June 30, 2020. 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 June 30, 2020 or June 30,
2019. Similarly, there is no income tax benefit recorded on the net loss of the Company for the years ended June 30, 2020 and 2019.
In
the year ended June 30, 2020, we recognized several asset impairments totaling $214,675. This impairment was comprised of the
following:
|
●
|
The
resort property owned by the real estate limited partnership, in which we have an ownership
interest in, is located in Hawaii. As a result of the COVID-19 pandemic, the tourism
industry in Hawaii has been adversely affect and the resort was temporarily closed for
an extended period.
|
|
|
|
|
●
|
We
have certain inventory located in the United Kingdom. As a result of the COVID-19 pandemic,
the United Kingdom has been in partial or complete lockdown for an extended period and
we have been unable to market the inventory. The inventory is still salable but additional
costs and/or price reductions may be necessary.
|
|
|
|
|
●
|
A third party from
which we had agreed to acquire the exclusive manufacturing and distribution rights to certain needle incineration intellectual
properties defaulted on that agreement.
|
SFAS
No. 131, “Disclosures About Segments of an Enterprise and Related Information,” requires that companies disclose
segment data based on how management makes decisions about allocating resources to segments and measuring their performance. Currently,
we conduct our businesses in three operating segments – Land & Hospitality, Medical Device and Pharmaceutical, and Other
Services. Our Land & Hospital and Other Services business units operate in the United States. Our Medical Device and Pharmaceutical
business unit currently operates primarily in the United Kingdom. All remaining assets, primarily our corporate offices and investment
portfolio, are located in the United States. The segment classified as Corporate includes corporate operating activities that
support the executive offices, capital structure and costs of being a public registrant. These costs are not allocated to the
operating segments when determining profit or loss. The following table reflects our segments as of September 30, 2020 and 2019 and
for the three months then ended.
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
LAND
&
|
|
|
DEVICE
&
|
|
|
OTHER
|
|
|
|
|
|
|
|
September
30, 2020
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
17,063
|
|
|
$
|
430,276
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
447,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
122
|
|
|
$
|
44,732
|
|
|
$
|
(57
|
)
|
|
$
|
(151,943
|
)
|
|
$
|
(107,146
|
)
|
Interest expense
|
|
$
|
11,317
|
|
|
$
|
46,594
|
|
|
$
|
—
|
|
|
$
|
133,924
|
|
|
$
|
191,835
|
|
Depreciation and amortization
|
|
$
|
7,833
|
|
|
$
|
7,700
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,533
|
|
Identifiable assets
|
|
$
|
762,329
|
|
|
$
|
918,380
|
|
|
$
|
77,887
|
|
|
$
|
240,120
|
|
|
$
|
1,998,716
|
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
LAND
&
|
|
|
DEVICE
&
|
|
|
OTHER
|
|
|
|
|
|
|
|
September
30, 2019
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
9,750
|
|
|
$
|
40,808
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(5,475
|
)
|
|
$
|
(67,297)
|
|
|
$
|
—
|
|
|
$
|
(121,912
|
)
|
|
$
|
(194,684
|
)
|
Interest expense
|
|
$
|
13,678
|
|
|
$
|
105
|
|
|
$
|
—
|
|
|
$
|
76,876
|
|
|
$
|
90,659
|
|
Depreciation and amortization
|
|
$
|
7,833
|
|
|
$
|
13,125
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,958
|
|
Identifiable assets
|
|
$
|
927,601
|
|
|
$
|
1,097,558
|
|
|
$
|
78,324
|
|
|
$
|
553,192
|
|
|
$
|
2,656,675
|
|
The
Company evaluated events occurring after September 30, 2020, and through the date the financial statements were issued, December
18, 2020 and concluded the events or transactions below would require recognition or disclosure in these financial statements:
|
●
|
As
described in Note 8 above, in the on-going Litigation involving the Company, Beechwood, Mr. Schreiber
and the Schreiber Trust, on November 12, 2020, the United States Fifth Circuit Court of Appeal ruled
that the United States District Court for the Eastern District of Louisiana (the “Louisiana Court”)
erred by granting the defendant’s motion to enforce the Settlement Agreement based solely on
arguments and evidence presented for the first time in the defendant’s reply brief without allowing
RedHawk to file a surreply. Accordingly, the Court of Appeals vacated a prior order of the Louisiana
Court and remanded the matter back to the Louisiana Court.
|
|
|
|
|
●
|
On
August 4, 2020, Mr. Klug and Beechwood converted the 1,000 shares of Series B Preferred Stock and the 1,473 shares of Series A
Preferred Stock into 124,849,365 and 122,730,903, respectively, of the Company’s Common Stock in connection with the Litigation
and the shares were placed in the related Escrow Account.
On September 28, 2020, the
Escrow Account in the Litigation was dissolved. Thus, on October 6, 2020, the Company agreed to re-purchase from Beechwood 124,849,365
shares of the Company’s common stock in exchange for 1,000 shares of the Company’s 5% Series B Preferred Stock; and
on November 4, 2020, the Company agreed to re-purchase from Beechwood 122,730,903 shares of the Company’s common stock in
exchange for 1,473 shares of the Company’s 5% Series A Preferred Stock. The November 4, 2020 agreed upon exchange has not
yet been completed.
|