Notes
to the Unaudited Consolidated Financial Statements
March
31, 2019
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1.
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NATURE OF OPERATIONS AND CONTINUANCE OF BUSINESS
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RedHawk
Holdings Corp. (formerly Independence Energy Corp.) was incorporated in the State of Nevada on November 30, 2005 under the name
“Oliver Creek Resources Inc.” At inception, we were organized to acquire, explore and develop natural resource properties
in the United States. Effective August 12, 2008, we changed our name from “Oliver Creek Resources Inc.” to “Independence
Energy Corp.” and opened for trading on the Over-the Counter Bulletin Board under the symbol “IDNG.” Effective
October 13, 2015, by vote of a majority of the Company’s stockholders, the Company’s name was changed from “Independence
Energy Corp.” to “RedHawk Holdings Corp.”
On
March 31, 2014, the Company acquired the exclusive right to distribute certain medical devices and changed the focus of its operations
to include medical device distribution. We have expanded our business focus to include other operations.
Currently, we are a diversified holding company which, through our subsidiaries, is primarily focused
in sales and distribution of specialized line 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™),
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 a commercial property under a long-term lease. Additionally,
the Company’s real estate investment unit holds a limited liability company interest in a commercial restoration project
in Hawaii.
Going
Concern
These
financial statements have been prepared on a going concern basis, which implies that the Company will be able to continue as a
going concern without further financing. The Company must continue to realize its assets to discharge its liabilities in the normal
course of business. The Company has generated limited revenues to date and has never paid any dividends on its common stock and
is unlikely to pay any common stock dividends or generate significant earnings in the immediate or foreseeable future.
For the three month period ended March 31, 2019, the Company had gross and net revenues of $113,551 and
$73,556, respectively, and a consolidated net loss of $98,699. For the nine month period ended March 31, 2019, the Company had
gross and net revenues of $209,071 and $169,076, respectively, a consolidated net loss of $997,245,and cash of $520,292 used in
operating activities. For the year ended June 30, 2018, the Company had $384,279 in gross revenue, $275,845 in net revenue, a consolidated
net loss of $910,062 and cash of $ 411,268 used in operating activities. As of March 31, 2019, the Company had cash of $30,877,
a certificate of deposit of $100,300, a working capital deficit of $215,940 and an accumulated deficit of $5,416,001. 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, 2019 and for the three and nine month
periods ended March 31, 2019 and 2018 included herein have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission (the “SEC”). The year-end condensed balance sheet dated as
of June 30, 2018 is audited and is presented here as a basis for comparison. Although the financial statements and related
information included herein have been prepared without audit, and certain information and disclosures normally included in
financial statements prepared in accordance with GAAP have been condensed or omitted, the Company believes that the note
disclosures are adequate to make the information presented not misleading. These unaudited condensed financial statements
should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto
included in the Company’s Annual Report on Form 10-K as of June 30, 2018. In the opinion of our management, the
unaudited interim financial statements included herein reflect all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows
for the periods presented. The results of operations for interim periods are not necessarily indicative of the results
expected for the full year or any future period.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its subsidiaries in which we have a greater than 50%
ownership. All material intercompany accounts have been eliminated upon consolidation. Certain prior year amounts have been
reclassified to be consistent with the current year financial statement presentation. Equity investments, which we have an ownership
greater than 20% but less than 50% through which we exercise significant influence over but do not control the investee and we
are not the primary beneficiary of the investee’s activities, are accounted for using the equity method of accounting. Equity
investments, which we have an ownership less than 20%, are recorded at cost.
Use
of Estimates
The
financial statements and related notes are prepared in conformity with GAAP which requires our management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company
regularly evaluates estimates and assumptions related to valuation and impairment of investments and long-lived assets, and deferred
income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience
and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent
from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s
estimates. To the extent there are material differences between the estimates and the actual results, future results of operations
will be affected.
Revenue
Recognition
We
derive revenue from several types of activities – medical device sales, branded generic pharmaceutical sales, commercial
real estate leasing and financial services. Our medical device sales include the marketing and distribution of certain professional
and consumer grade digital non-contact thermometers, needle destruction unit and advanced bleeding control, non-compression hemostasis.
Through our United Kingdom based subsidiary, we manufacture, and market, branded generic pharmaceuticals, and certain other generic
pharmaceuticals known as “specials”. Our real estate leasing revenues are from certain commercial properties under
lease. The Company offers customer discounts in certain cases. Such discounts are estimated at time of product sale and deducted
from gross revenues.
We
adopted as of July 1, 2018, updated revenue recognition guidance (Topic 606). Topic 606 is an update to Topic 605, which was the
revenue recognition standard in effect for all prior periods. Pursuant to Topic 605, revenue generally is realized or realizable
and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred
or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is
reasonably assured. Topic 606 changes the criteria for recognition of revenue. It establishes a single revenue recognition model
for all contracts with customers, eliminates industry specific requirements and expands disclosure requirements. Revenue is recognized
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. To achieve this core principle, we apply the following five steps:
(1) identify contracts with customers, (2) identify the performance obligations in the contracts, (3) determine the transaction
price, (4) allocate the transaction price to the performance obligation in the contract, and (5) recognize revenue as the entity
satisfies performance obligations. The adoption of this standard did not affect our financial statements.
Cash
and Cash Equivalents
We
consider highly liquid investments with an original maturity of 90 days or less to be cash equivalents. The Company did not have
any cash equivalents as of March 31, 2019 or June 30, 2018.
Accounts
Receivable
Accounts
receivables are amounts due from customers of our pharmaceutical and medical device divisions. The amount is reported at the billed
amount, net of any expected allowance for bad debts. There was no allowance for doubtful accounts as of March 31, 2019 or June
30, 2018.
Inventory
Inventory
consist of manufactured and purchased needle destruction devices, certain branded generic pharmaceuticals thermometers, an
advanced bleeding control, non-compression hemostasis, and a patented antimicrobial ionic silver calcium catheter dressing,
held for resale. All inventories are stated at the lower of cost or net realizable value utilizing the first-in, first-out
method.
Property
and Improvements
Property
and improvements are stated at cost. We provide for depreciation expense on a straight-line basis over each asset’s useful
life depreciated to their estimated salvage value. Buildings are depreciated over a useful life of 20 to 30 years. Building improvements
are depreciated over a useful life of 5 to 10 years.
During
the year ended June 30, 2017, we decided to sell our Louisiana real estate holdings, which includes our former corporate headquarters
on Chemin Metairie Road in Youngsville, Louisiana and a property on Jefferson Street in Lafayette, Louisiana that we were leasing
to a third party. As a result of that decision, the net book value of those properties along with related mortgage notes were
reflected as assets and liabilities held for sale in the balance sheets. At that time, we also ceased depreciating such assets.
All such amounts are included in the land and hospitality segment. A sale of these properties did not occur in the fiscal year
ended June 30, 2018 and, as such, the Company has returned these properties to assets held for use and depreciation expenses was
recorded in the fourth quarter of fiscal year 2018 for the period the properties were included in assets held for sale.
Effective
July 1, 2017, the Chemin Metairie Road property was leased under a one-year term at a rent of $1,500 per month. The lessee had
an option to purchase the property during the lease for the lesser of $300,000 or the average of two independent appraisals. On
June 30, 2018, the tenant did not exercise his option to purchase the property. The Company has returned the property to service
and currently uses this property as offices for our medical products unit. Effective August 1, 2017, the tenant that leases the
Jefferson Street property has renewed that lease through December 31, 2022 at a rent of $3,250 per month subject to certain increase
adjustments.
We will continue to list these properties for sale, but it is uncertain if the sales will occur during
the next twelve months. Based on our review of the current real estate market and discussions with brokers, no impairment of the
recorded amounts has occurred as of March 31, 2019.
We
are also pursuing the sale of our remaining investment in the real estate limited partnership investment, carried at cost in the balance sheets. In August 2018, based
on stability of operations of the underlying real estate property and recent valuations, the partnership refinanced the property.
In September 2018, we received a distribution of approximately $370,000 from the real estate limited partnership following this
refinancing. This distribution is recorded as a reduction of our investment in the limited partnership, which is recorded at cost.
We are currently in negotiations to sell our interest in the partnership and anticipate such a transaction will close prior to
December 31, 2019. Thus, our investment is shown as a current asset as of March 31, 2019 and June 30, 2018 in the accompanying
consolidated balance sheets.
Income
Taxes
Potential
benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted
Accounting Standard Codification (which we refer to as “ASC”) 740,
Income Taxes,
as of its inception. Pursuant
to ASC 740, the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits
of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more
likely than not it will utilize the net operating losses carried forward in future years. The Company recognizes interest and
penalties related to uncertain tax positions in income tax expense in the period they are incurred. The Company does not believe
that it has any uncertain tax positions.
Basic
and Diluted Net Loss Per Share
The
Company computes net loss per share in accordance with ASC 260,
Earnings Per Share,
which requires presentation of both
basic and diluted earnings per share (EPS) on the face of the statements of operations. Basic EPS is computed by dividing net
loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the
period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock
method and the convertible notes and the convertible preferred stock using the if-converted method. In computing Diluted EPS,
the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of
stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. During the year
ended June 30, 2017, 3,726,480 warrants were exercised, and the remaining warrants expired. There were no outstanding warrants
as of March 31, 2019 or June 30, 2018.
At
March 31, 2019, including accrued but unpaid interest, there were 43,002,626 shares issuable upon conversion of our fixed rate
convertible notes. There are $222,878 in convertible notes that are convertible at a variable conversion rate and not included
in the issuable share amount in the preceding sentence. Also, at March 31, 2019, including accrued but unpaid dividends, there
were potentially 114,861,100 shares issuable upon the conversion of the Series A Preferred Stock and, including accrued but unpaid
dividends, there were potentially 146,077,945 shares issuable upon the conversion of the Series B Preferred stock. 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
Loss
ASC
220,
Comprehensive Income
, establishes standards for the reporting and display of comprehensive loss and its components
in the financial statements.
Financial
Instruments
Pursuant
to ASC 820,
Fair Value Measurements and Disclosures
, an entity is required to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level
of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization
within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC
820 prioritizes the inputs into the following three levels that may be used to measure fair value:
Level
1.
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or
liabilities.
Level
2.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for
the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical
assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations
in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level
3.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that
are significant to the measurement of the fair value of the assets or liabilities.
The
Company’s financial instruments consist principally of cash, accounts receivable, accounts payable and accrued liabilities,
debt, and amounts due to related parties.
We
believe that the recorded values of all of our other financial instruments approximate their current fair values because of their
nature and respective maturity dates or durations.
Correction
to Prior Periods
During the quarter ended March 31, 2019, we determined that we had over accrued interest expense in prior
periods. A reversal of approximately $62,000 in accrued interest expense was recorded in the quarter ended March 31, 2019.
Reclassification
Certain
amounts in prior periods have been reclassified to conform to the current year presentation.
Recent
Accounting Pronouncements Not Yet Adopted
Leases
In
February 2016, the FASB issued ASU 2016-02,
Leases
. This accounting standard requires lessees to recognize assets and liabilities
related to lease arrangements longer than 12 months on the balance sheet as well as additional disclosures. In July 2018, the
FASB issued ASU 2018-11,
Leases (Topic 842): Targeted Improvements
, to simplify the lease standard’s implementation.
The amended guidance relieves businesses and other organizations of the requirement to present prior comparative years’
results when they adopt the new lease standard. Instead of recasting prior year results using the new accounting when they adopt
the guidance, companies can choose to recognize the cumulative effect of applying the new standard to leased assets and liabilities
as an adjustment to the opening balance of retained earnings. The standard is effective for annual periods beginning after December
15, 2019. The Company is currently assessing the impact of this pronouncement on its financial statements.
On December 31, 2015, RedHawk
Land & Hospitality, LLC, a wholly-owned subsidiary of the Company, acquired from Beechwood Properties, LLC 280,000 Class A
Units (approximately a 2.0% membership interest) of fully paid, non-assessable units of limited liability company interest in
Tower Hotel Fund 2013, LLC, a real estate development limited liability company formed in the state of Hawaii for acquisition,
restoration and development of the Naniloa Hilo Resort in Hilo, Hawaii. The $625,000 purchase price was paid by the issuance of
625 shares of the Company’s Series A Preferred Stock. The purchase price was determined by an independent third-party valuation.
Beechwood Properties, LLC is a real estate limited liability company owned and controlled by G. Darcy Klug, a stockholder, Interim
Chief Executive Officer, Chief Financial Officer and Chairman of the board of directors of the Company. This investment in real
estate limited partnership is recorded at cost, less distributions, and the Company is not aware of any indicator of impairment
as of March 31, 2019. In the quarter ended September 30, 2018, we received a distribution of $369,827 from the real estate development
company. It is not practicable for the Company to estimate fair value of this investment. The investment is classified as a current
asset as we expect to sell our interest by December 31, 2019 (see Note 2).
On
March 23, 2016, one of our wholly-owned subsidiaries, RedHawk Pharma UK Ltd (which we refer to herein as “Pharma”),
initially acquired a 25% equity interest in EcoGen Europe Ltd (which we refer to as “EcoGen”) from Scarlett Pharma
Ltd (which we refer to herein as “Scarlett”). On September 12, 2017 we completed a share transfer agreement wherein
we increased our ownership in EcoGen to 75%. On December 19, 2017 we completed another share transfer agreement wherein we increased
our ownership in EcoGen to 100%. In connection with the December share transfer the non-controlling interest was eliminated. Under
the terms of an agreement we reached with Scarlett and its affiliate related to these share exchanges, they surrendered ten (10)
million shares of RedHawk common stock and transferred to RedHawk approximately $300,000 of EcoGen preferred stock and other consideration.
In exchange, RedHawk assumed approximately $370,000 of obligations due to EcoGen by Scarlett and its affiliates. The RedHawk Shares
were originally issued to Scarlett in connection with the Company’s March 2016 investment of 25% into EcoGen. As a result
of these transactions, as of December 31, 2017, Pharma owned approximately $635,000 of EcoGen’s preferred stock and 100%
of EcoGen’s common stock. The exchange agreements also settled numerous outstanding disputes between the Company, Scarlett,
Warwick and the noncontrolling owners of the Company. A non-cash settlement loss of $62,425 resulted and was included in our results
for the year ended June 30, 2018.
During
the fiscal year ended June 30, 2017, we began to consolidate the accounts of EcoGen in our financial statements under the variable
interest entity model. In the quarter ended September 30, 2017, we became the majority owner of EcoGen and as of December 31,
2017, we owned 100% of the common stock of EcoGen. As of March 31, 2019, we have approximately $$379,000, 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 each was paid in January 2019. Any remaining payments become immediately payable upon the receipt of final
approval by the FDA of devices related to the technology. Additionally, the Company will pay a consulting fee of $1,000 per month
for sixty months. The broker’s fee was paid through the issuance of 14 million shares of the Company’s common stock.
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4.
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LOAN AND INSURANCE NOTE PAYABLE
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We
finance a portion of our insurance premiums. At March 31, 2019, there was a $5,715 outstanding balance due on our premium finance
agreements. The policies related to these premiums expire March 31, 2020.
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5.
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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 provide for future borrowings.
The advances are used to fund our operations. The Line of Credit accrues interest at 5% per annum and matured on March 31, 2019.
At maturity, or in connection with a pre-payment, subject to the conditions set forth in the Line of Credit, the stockholder had
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, 2019 and June 30, 2018, the principal balance totaled $0 and $22,674, respectively.
This
same stockholder and officer also holds $16,250 of 5% convertible notes as of March 31, 2019, which mature in December 2020 and
are convertible into common stock at a rate of $0.015 per share or 1,083,333 shares. During the quarter ended March 31, 2019,
$13,000 of convertible notes held by this stockholder and officer was paid.
In
fiscal year 2018, certain stockholders of the Company made $67,000 in advances to the Company. Stockholders have made additional
advances during fiscal year 2019 of $100,000 for a total of $167,000. These advances do not have a stated interest rate. In the
three month period ended December 31, 2018, the Company agreed to issue 15.4 million shares of the Company’s common stock
(cost of $19,250) in lieu of any interest, past or future, related to these advances.
All
of the above liabilities are included in Due to Related Parties in the accompanying consolidated balance sheets.
Beginning
in the quarter ended March 31, 2017, certain members of management agreed to forego management fees in consideration of the operating
cash flow needs of the Company. There is not a set timeline to reinstitute such management fees. As of March 31, 2019 and June
30, 2018, $50,000 and $60,000, respectively, in such fees remain unpaid and are recorded in accounts payable and accrued liabilities
in the accompanying balance sheets.
On
November 12, 2015, we acquired certain commercial real estate from a related party that is an entity controlled by a stockholder
and officer of the Company for $480,000 consisting of $75,000 of land costs and $405,000 of buildings and improvements. The purchase
price was paid by through the assumption by the Company of $265,000 of long-term bank indebtedness (which we refer to as “Note”)
plus the issuance of 215 shares of the Company’s newly designated Series A Preferred Stock. The purchase price also included
the cost of specific security improvements requested by the lessee.
The
Note is dated November 13, 2015 and has a principal amount of $265,000. Monthly payments under the Note are $1,962 including interest
accruing at a rate of 5.95% per annum. The Note matures in June 2021 and is secured by the commercial real estate, guarantees
by the Company and its real estate subsidiary and the personal guarantee of a stockholder who is also an officer of the Company.
As of March 31, 2019, approximately $236,000 of the Note is outstanding.
We
have authorized the issuance of up to $1 million in principal amount of convertible promissory notes (which we refer to as the
“Fixed Rate Convertible Notes”). The Fixed Rate Convertible Notes are secured by certain Company real estate holdings.
The
Fixed Rate Convertible Notes issued mature on March 15, 2021, the fifth anniversary of the date of issuance and are convertible
into shares of our common stock at a price of $0.015 per share. Interest accrues at a rate of 5% per annum and is payable semi-annually.
The Company has the option to issue a notice of its intent to redeem, for cash, an amount equal to the sum of (a) 120% of the
then outstanding principal balance, (b) accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect
of the Fixed Rate Convertible Notes. The Company may only issue the notice of its intent to redeem the Fixed Rate Convertible
Notes if the trading average of the Company’s common stock equals or exceeds 300% of the conversion price during each of
the five business days immediately preceding the date of the notice of intent to redeem. The holder of the Fixed Rate Convertible
Notes has the right to convert all or any portion of the Fixed Rate Convertible Notes at the conversion price at any time prior
to redemption.
At
March 31, 2019, there were $645,039 ($577,975 net of deferred financing costs and beneficial conversion option) of Fixed Rate
Convertible Notes outstanding, including $95,039 of interest paid in kind. The Fixed Rate Convertible Notes (plus accrued interest)
are convertible into our common stock at a conversion rate of $0.015 per share or 43,002,600 shares. During the three and nine
month periods ended March 31, 2019, we paid-in-kind $7,963 and $23,629, respectively, of interest on these convertible notes.
In
the three and nine months March 31, 2019, we issued an additional $38,000 and $181,000, respectively, of convertible notes to
third parties with variable conversion rates (“Variable Rate Convertible Notes”). The Variable Rate Convertible Notes
mature at various dates through May 2020. We received, net of financing costs incurred, $157,093 in cash from the issuance of
these notes. These Variable Rate Convertible Notes have interest accruing at rates ranging between 8% - 12%. These notes issued
to third parties have a variable conversion rate based on the price of the Company’s common stock. $184,878 of the convertible
notes are currently convertible into our common stock at a variable conversion rate. During the quarter ended March 31, 2019,
notes, including accrued and unpaid interest, totaling $86,101 were converted into equity. At March 31, 2019, there were $222,878
($212,755 net of deferred financing costs) of Variable Rate Convertible Notes outstanding.
Some
of the Variable Rate Convertible Notes have maturity dates prior to March 31, 2020. It is the Company’s expectation that
we will either re-finance these convertible notes to longer terms or permit conversions and, therefore, have classified such notes
as non-current.
Also,
during the year ended June 30, 2018, we issued $29,250 of convertible notes to our majority stockholder in exchange for 7,450,000
shares of our common stock. The note matures in December 2020. As of March 31, 2019, the balance on the note is $16,250 and is
convertible into 1,083,333 shares, or $0.015 per share. (See Note 5.)
In
February 2018, we obtained a $100,000 line of credit from a bank. The line of credit matures in February 2021 and is collateralized
by a $100,000 certificate of deposit at the bank. As of March 31, 2019, approximately $100,000 was drawn under the line of credit.
As of March 31, 2019. the interest rate on the line of credit is 7.0% per annum.
On
March 12, 2019, the RedHawk Land & Hospitality, a wholly-owned subsidiary of the Company, obtained a $180,000 real estate
loan from Ameriquest Financial Services, LLC. Interest only is payable monthly and accrues at an interest at a rate of 12% per
annum. The note matures on April 1, 2020 and is secured by certain real estate property and the personal guarantee of an officer
and director of the Company.
In
the quarter ended March 31, 2019, the Company completed several short-term working capital lines of credit, resulting in net proceeds
of approximately $71,000, secured by the Company’s future accounts receivables and the personal guarantee of an officer
and director of the Company. The working capital lines accrue interest at various rates.
The
proceeds from the March 12, 2019 real estate loan and the short-term working capital lines of credit were used to settle certain
litigation matters more fully described in Note 7.
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7.
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COMMITMENTS AND
CONTINGENCIES
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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 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.
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. The Company may repurchase both Promissory Notes for a single
payment of Three Hundred Thousand Dollars (US$300,000.00) provided such payment is tendered to the Schreiber Trust within 180 days
of the execution of the Security Agreement.
Common
Stock
Effective
on October 13, 2015, we amended and restated our articles of incorporation as previously adopted by a majority vote of our stockholders.
The amended and restated articles of incorporation, among other things, changed our name to RedHawk Holdings Corp., authorized
5,000 shares of Preferred Stock, and increased the number of authorized shares of common stock from 375,000,000 to 450,000,000.
On December 26, 2017, by a vote of the majority of our stockholders, we increased the number of our authorized shares from 450,000,000
to 1,000,000,000. On August 20, 2018, by a vote of the majority of our stockholders, we increased the number of our authorized
shares from 1,000,000,000 to 2,000,000,000.
Preferred
Stock
Pursuant
to a certificate of designation filed with the Secretary of State of the State of Nevada, effective November 12, 2015, 2,750 shares
of our authorized Preferred Stock have been designated as Series A 5% Convertible Preferred Stock, originally with a $1,000 stated
value (which we refer to as “Series A Preferred Stock”). The holders of the Series A Preferred Stock are entitled
to receive cumulative dividends at a rate of 5% per annum, payable quarterly in cash, or at the Company’s option, such dividends
shall be accreted to, and increase, the stated value of the issued Series A Preferred Stock (which we refer to as “PIK”).
Holders of the Series A Preferred Stock are entitled to votes on all matters submitted to stockholders at a rate of ten votes
for each share of common stock into which the Series A Preferred Stock may be converted. After six months from issuance, each
share of Series A Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock equal
to the quotient of the stated value, as adjusted for PIK dividends, by $0.015, as adjusted for stock splits and dividends.
Pursuant
to a certificate of designation filed with the Secretary of State of the State of Nevada, effective February 16, 2016, 1,250 shares
of our authorized Preferred Stock have been designated as Series B 5% Convertible Preferred Stock, originally with a $1,000 stated
value (which we refer to as “Series B Preferred Stock”). The holders of the Series B Preferred Stock are entitled
to receive cumulative dividends at a rate of 5% per annum, payable quarterly in cash, or at the Company’s option, such dividends
shall be accreted to, and increase, the stated value of the issued Series B Preferred Stock (which we refer to as “PIK”).
Holders of the Series B Preferred Stock are entitled to votes on all matters submitted to stockholders at a rate of ten votes
for each share of common stock into which the Series B Preferred Stock may be converted. After six months from issuance, each
share of Series B Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock equal
to the quotient of the stated value, as adjusted for PIK dividends, by $0.01, as adjusted for stock splits and dividends.
During
the three month periods ended March 31, 2019 and 2018, we paid-in-kind $39,305 and $37,399 respectively, of related preferred
stock dividends. During the nine month periods ended March 31, 2019 and 2018, we paid-in-kind $116,465 and $110,819, respectively,
of related preferred stock dividends.
As
of June 30, 2018, the Company had approximately $3,600,000 of U.S. net operating losses (NOLs) carried forward to offset taxable
income in future years which expire commencing in fiscal 2026 and run through 2038. As a result of the numerous common stock transactions
that have occurred, the amount of these NOLs which is actually available to offset future income may be severely limited due to
change-in-control tax provisions. The Company has not estimated the effect of such change-in-control limitation. The related deferred
income tax asset of these NOLs, without consideration of any change-of-control limitation, was estimated to be approximately $750,000
as of June 30, 2018. As a result of the enactment of the Tax Cuts and Jobs Act (The Act) in December 31, 2017, the estimated deferred
income tax asset related to U.S. NOL carry forwards is based on the reduced 21% corporate income tax rate. Due to our history
of operating losses and the uncertainty surrounding the realization of the deferred tax assets in future years, our management
has determined that it is more likely than not that the deferred tax assets will not be realized in future periods. Accordingly,
the Company has recorded a valuation allowance against its net deferred tax assets. The only change during the nine month period
ended March 31, 2019 would be an increase to the NOL due to additional losses incurred.
Thus,
there is no net tax asset recorded as of March 31, 2019 or June 30, 2018 as a 100% valuation allowance has been established for
any tax benefit. EcoGen also has a net operating loss as of March 31, 2019 and June 30, 2018 for which no deferred tax asset has
been provided. Similarly, there is no income tax benefit recorded on the net loss of the Company for the three month and nine
month periods ended March 31, 2019 and 2018.
The
Company did not have any accumulated foreign earnings for which taxes were deferred and subject to the one-time transition tax
under The Act.
The
Company accounts for interest and penalties relating to uncertain tax provisions in the current period statement of operations,
as necessary. The Company’s tax years from inception are subject to examination. There are no income tax examinations currently
in progress.
SFAS
No. 131,
“Disclosures About Segments of an Enterprise and Related Information,”
requires that companies disclose
segment data based on how management makes decisions about allocating resources to segments and measuring their performance. Currently,
we conduct our businesses in three operating segments – Land & Hospitality, Medical Device and Pharmaceutical, and Other
Services. Our Land & Hospital and Other Services business units operate in the United States. Our Medical Device and Pharmaceutical
business unit currently operates primarily in the United Kingdom. All remaining assets, primarily our corporate offices and investment
portfolio, are located in the United States. The segment classified as Corporate includes corporate operating activities that
support the executive offices, capital structure and costs of being a public registrant. These costs are not allocated to the
operating segments when determining profit or loss. The following table reflects our segments as of September 30, 2018 and 2017
and for the three month periods then ended.
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
LAND &
|
|
|
DEVICE &
|
|
|
OTHER
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues, gross
|
|
$
|
34,759
|
|
|
$
|
174,312
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
209,071
|
|
|
Operating revenues, net
|
|
$
|
34,759
|
|
|
$
|
134,317
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
169,076
|
|
|
Operating loss
|
|
$
|
(11,097
|
)
|
|
$
|
(100,660
|
)
|
|
$
|
(201)
|
|
|
$
|
(343,073
|
)
|
|
$
|
(455,031
|
)
|
|
Interest expense
|
|
$
|
12,526
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
126,828
|
|
|
$
|
139,364
|
|
|
Depreciation and amortization
|
|
$
|
23,500
|
|
|
$
|
56,859
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
80,359
|
|
|
Identifiable assets
|
|
$
|
937,294
|
|
|
$
|
693,185
|
|
|
$
|
—
|
|
|
$
|
630,977
|
|
|
$
|
2,261,456
|
|
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
LAND
&
|
|
|
DEVICE
&
|
|
|
OTHER
|
|
|
|
|
|
|
|
|
March
31, 2018
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues, gross
|
|
$
|
48,185
|
|
|
$
|
315,461
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
363,646
|
|
|
Operating revenues, net
|
|
$
|
48,185
|
|
|
$
|
208,914
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
257,099
|
|
|
Operating income (loss)
|
|
$
|
16,226
|
|
|
$
|
(114,194
|
)
|
|
$
|
(1,757
|
)
|
|
$
|
(142,014
|
)
|
|
$
|
(241,739
|
)
|
|
Interest expense
|
|
$
|
11,171
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
86,873
|
|
|
$
|
98,045
|
|
|
Depreciation and amortization
|
|
$
|
—
|
|
|
$
|
66,498
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
66,498
|
|
|
Identifiable assets
|
|
$
|
1,373,224
|
|
|
$
|
10,515
|
|
|
$
|
60
|
|
|
$
|
1,025,005
|
|
|
$
|
2,408,804
|
|
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
LAND &
|
|
|
DEVICE &
|
|
|
OTHER
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
Operating revenues, gross
|
|
$
|
10,250
|
|
|
$
|
103,301
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
113,551
|
|
|
Operating revenues, net
|
|
$
|
10,250
|
|
|
$
|
63,306
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73,556
|
|
|
Operating loss
|
|
$
|
(8,894
|
)
|
|
$
|
(15,899
|
)
|
|
$
|
—
|
|
|
$
|
(109,410
|
)
|
|
$
|
(134,203
|
)
|
|
Interest expense
|
|
$
|
4,789
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
(35,753
|
)
|
|
$
|
(30,954
|
)
|
|
Depreciation and amortization
|
|
$
|
7,833
|
|
|
$
|
11,375
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,208
|
|
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
LAND
&
|
|
|
DEVICE
&
|
|
|
OTHER
|
|
|
|
|
|
|
|
|
March
31, 2018
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues, gross
|
|
$
|
14,250
|
|
|
$
|
49,299
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
63,549
|
|
|
Operating revenues, net
|
|
$
|
14,250
|
|
|
$
|
48,719
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
62,969
|
|
|
Operating income (loss)
|
|
$
|
6,995
|
|
|
$
|
(59,367
|
)
|
|
$
|
(32
|
)
|
|
$
|
(42,429
|
)
|
|
$
|
(94,833
|
)
|
|
Interest expense
|
|
$
|
3,642
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
54,800
|
|
|
$
|
58,439
|
|
|
Depreciation and amortization
|
|
$
|
—
|
|
|
$
|
22,166
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,166
|
|
The Company evaluated events occurring after March 31, 2019, and through the date the financial statements
were issued, May 20, 2019 and concluded there were no events or transactions that would require recognition or disclosure in these
financial statements, other than those described below:
|
|
●
|
Subsequent to March 31, 2019, approximately 104 million shares were issued to pay certain variable interest
notes.
|
|
|
●
|
In May 2019, the Company began acquiring as investments certain life settlement insurance policies. These
policies are purchased at a substantial discount to the face value of the life insurance policy acquired. The Company expects to
use these investments as collateral for future loans.
|