Notes
to the Consolidated Financial Statements
June
30, 2019
1.
|
NATURE
OF OPERATIONS AND CONTINUANCE OF BUSINESS
|
RedHawk
Holdings Corp. was incorporated in the State of Nevada on November 30, 2005 under the name Oliver Creek Resources Inc.
Effective August 12, 2008, we changed our name from Oliver Creek Resources Inc. to Independence Energy
Corp. Effective October 13, 2015, by vote of a majority of the Company’s stockholders, the Company’s name
was changed from Independence Energy Corp. to RedHawk Holdings Corp.
Currently,
we are a diversified holding company which, through our subsidiaries, is engaged in sales and distribution of medical devices,
sales of branded generic pharmaceutical drugs, commercial real estate investment and leasing, sales of point of entry full-body
security systems, and specialized financial services. Through its medical products business unit, the Company sells WoundClot
Surgical - Advanced Bleeding Control, the SANDD Insulin Needle Destruction Unit (formerly known as the Disintegrator),
the Carotid Artery Digital Non-Contact Thermometer and Zonis®. Through our United Kingdom based subsidiary, we
manufacture and market branded generic pharmaceuticals, certain other generic pharmaceuticals known as specials
and certain pharmaceuticals outside of the United Kingdom’s National Health Service drug tariff referred to as NP8’s.
Centri Security Systems LLC, a wholly-owned subsidiary of the Company, holds the exclusive U.S. manufacturing and distribution
rights for the Centri Controlled Entry System, a unique, closed cabinet, nominal dose transmission full body x-ray scanner. Our
real estate leasing revenues are generated from a commercial property under a long-term lease. Additionally, the Company’s
real estate investment unit holds 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 year ended June 30, 2019, the Company had revenues of $129,006, a consolidated net loss of $1,215,884
and cash used in operating activities of $943,662. For the year ended June 30, 2018, the Company had $275,845 in revenue, a consolidated
net loss of $910,062 and cash of $411,268 used in operating activities. As of June 30, 2019, the Company had cash of $1,648 and
a certificate of deposit of $100,374, a working capital deficit of $1,042,984 and an accumulated deficit of $5,674,436. The continuation
of the Company as a going concern is still dependent upon the continued financial support from its stockholders, the ability to
raise equity or debt financing, cash proceeds from the sale of assets and the attainment of profitable operations from the Company’s
businesses in order to discharge its obligations. These factors raise substantial doubt regarding the Company’s ability to
continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification
of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as
a going concern.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The consolidated financial
statements of the Company as of June 30, 2019 and 2018 included herein have been prepared in accordance with accounting principles
generally accepted in the United States of America (which we refer to as “GAAP”) pursuant to the rules and regulations
of the SEC.
Principles
of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries in which we
have a greater than 50% ownership. All material intercompany accounts have been eliminated upon consolidation. Equity investments,
which we have an ownership greater than 20% but less than 50% through which we exercise significant influence over but do
not control the investee and we are not the primary beneficiary of the investee’s activities, are accounted for using the
equity method of accounting. Equity investments, which we have an ownership less than 20%, are recorded at cost.
Use
of Estimates
The financial statements and related notes are prepared in conformity with GAAP which requires our management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. The Company regularly evaluates estimates and assumptions related to valuation and impairment of investments, intangible
assets, and long-lived assets, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions
on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs
and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially
and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual
results, future results of operations will be affected.
Revenue
Recognition
In May 2014, the Financial
Accounting Standards Board (which we refer to as the “FASB”) issued ASU 2014-19, Revenue from Contracts with Customers
(ASU 2014-19). ASU 2014-19 established a single revenue recognition model for all contracts with customers, eliminates industry
specific requirements and expands disclosure requirements. The core principle of the guidance is that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply
the following five steps: (1) identify contracts with customers, (2) identify the performance obligations in the contracts, (3)
determine the transaction price, (4) allocate the transaction price to the performance obligation in the contract, and (5) recognize
revenue as the entity satisfies performance obligations. Effective July 1, 2018, we adopted ASU 2014-19 using the modified retrospective
method. The adoption of ASU 2014-19 did not have an impact on our consolidated financial statements but required enhanced footnote
disclosures. See Note 3, Revenue Recognition, for additional information.
We derive revenue from
several types of activities – medical device sales, branded generic pharmaceutical sales, commercial real estate leasing
and financial services. Our medical device sales include the marketing and distribution of certain professional and consumer grade
digital non-contact thermometers, needle destruction unit and advanced bleeding control, non-compression hemostasis. Through our
United Kingdom based subsidiary, we manufacture, and market, branded generic pharmaceuticals, and certain other generic pharmaceuticals
known as “specials”. Our real estate leasing revenues are from certain commercial properties under lease. The financial
service revenue is from brokerage services. The Company offers customer discounts in certain cases. Such discounts are estimated
at time of product sale and revenues are reduced for such discounts at the time of the sale.
Cash
and Cash Equivalents
We
consider highly liquid investments with an original maturity of 90 days or less to be cash equivalents. The Company did not have
any cash equivalents as of June 30, 2019 or 2018.
Accounts
Receivable
Accounts
receivables are amounts due from customers of our pharmaceutical, medical device and financial services divisions. The amount
is reported at the billed amount, net of any expected allowance for bad debts. There was no allowance for doubtful accounts as
of June 30, 2019 and June 30, 2018.
Inventory
Inventory
consist of purchased thermometers, an advanced bleeding control, non-compression hemostasis, a patented antimicrobial ionic silver
calcium catheter dressing, needle destruction devices and certain branded generic pharmaceuticals held for resale. All inventories
are stated at the lower of cost or net realizable value utilizing the first-in, first-out method.
Property
and Improvements
Property
and improvements are stated at cost. We provide for depreciation expense on a straight-line basis over each asset’s useful
life depreciated to their estimated salvage value. Buildings are depreciated over a useful life of 20 to 30 years. Building improvements
are depreciated over a useful life of 5 to 10 years.
During the year ended June
30, 2017, we decided to sell our Louisiana real estate holdings, which includes our former corporate headquarters on Chemin Metairie
Road in Youngsville, Louisiana and a property on Jefferson Street in Lafayette, Louisiana that we are leasing to a third party.
As a result of that decision, the net book value of those properties along with related mortgage notes were reflected as assets
and liabilities held for sale in the June 30, 2017 balance sheet. 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 returned these properties to assets held for use and depreciation expenses had been recorded
in 2018 for the period the properties were included in assets held for sale. Based on the present real estate market and discussions
with brokers, no impairment of the recorded amounts has occurred as of June 30, 2019.
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 real estate management unit.
Effective August 1, 2017, the tenant that leases the Jefferson Street property renewed that lease through
December 31, 2022 at a rent of $3,250 per month.
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. There were 113,508,450
outstanding warrants as of June 30, 2019 with an exercise price of $0.005 per share. Such warrants are anti-dilutive to EPS and
are excluded from the calculation of EPS.
At June 30, 2019, including accrued but unpaid interest, there were $135,044 in Fixed Rate Convertible
notes outstanding of which $76,213 were converted subsequent to June 30, 2019. The remaining Fixed Rate Convertible notes are convertible
into 3,922,066 shares upon conversion of the Fixed Rate Convertible notes. There are $256,500 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 June 30, 2019,
including accrued but unpaid dividends, there were potentially 201,430,200 shares issuable upon the conversion of the Series A
Preferred Stock and, including accrued but unpaid dividends, there were potentially 147,903,900 shares issuable upon the conversion
of the Series B Preferred stock. The shares to be issued upon conversion of the warrants and the shares issuable from the conversion
of the notes and the Series A and Series B Preferred stock have been excluded from earnings per share calculations because these
shares are anti-dilutive.
Subsequent to June 30, 2019, we issued new Fixed Rate Convertible notes in the amount of $500,000. With
the proceeds we paid off convertible notes outstanding as of June 30, 2019 in the amount of approximately $217,000, plus accrued
interest, and had $41,250 of convertible notes outstanding as of June 30, 2019 that converted into 41,250,000 shares of Common
Stock subsequent to June 30, 2019.
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 income as of June 30, 2019 and
2018 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.
Reclassification
Certain
amounts in prior periods have been reclassified to conform to the current year presentation.
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 is required to
adopt ASU 2016-02 as of July 1, 2019. The adoption will not have any effect on the Company’s consolidated financial statements
as we do not have any leases with non-cancellable terms in excess of one year.
3.
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REVENUE
FROM CONTRACTS WITH CUSTOMERS
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Revenue
Recognition
Sales
of pharmaceuticals and medical devices are recognized generally at the point in time when delivery occurs and title transfers
to the buyer. Sales of pharmaceuticals and medical devices are usually collected within 90 days of the date of sale.
As
of June 30, 2019, we have distributorship and sales representative agreements in place with third parties who do not take
ownership of products. Any costs incurred related to these agreements are considered to be sales and marketing expenses.
We
also earn rental income which is recognized over time as the tenant occupies the space and pays the rental amount. Rentals
are paid at the beginning of the month covered by the lease.
Disaggregation
of Revenue
For
the years ended June 30, 2019 and 2018, a summary of our revenue on a disaggregated basis is as follows:
|
|
|
2019
|
|
2018
|
Sales of pharmaceuticals
|
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$
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71,792
|
|
|
$
|
208,285
|
|
Sales of medical devices
|
|
$
|
12,705
|
|
|
$
|
400
|
|
Rental revenue
|
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$
|
44,509
|
|
|
$
|
67,160
|
|
|
|
$
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129,006
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|
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$
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275,845
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Transaction
Prices
In
some cases, we may offer discounts to customers. In such cases, we reduce the recorded revenue for such discounts. In
the years ended June 30, 2019 and 2018, our revenues were reduced by $39,995 and $108,434, respectively, for such discounts.
|
On
December 31, 2015, RedHawk Land & Hospitality, LLC, a wholly-owned subsidiary of the Company, acquired from Beechwood Properties,
LLC (“Beechwood”) 280,000 Class A Units (approximately a 2.0% membership interest) of fully paid, non-assessable units
of limited liability company interest in Tower Hotel Fund 2013, LLC, a real estate development limited liability company formed
in the state of Hawaii for acquisition, restoration and development of the Naniloa Hilo Resort in Hilo, Hawaii. The $625,000 purchase
price was paid by the issuance of 625 shares of the Company’s Series A Preferred Stock. The purchase price was determined
by an independent third-party valuation. Beechwood Properties, LLC is a real estate limited liability company owned and controlled
by G. Darcy Klug, a stockholder and Chief Financial Officer and Chairman of the board of directors of the Company. This investment
in real estate limited partnership is recorded at cost and the Company is not aware of any indicator of impairment as of
June 30, 2019. It is not practicable for the Company to estimate fair value of this investment.
We are
also pursuing the sale of our remaining investment in the real estate limited partnership investment. During the year ended June
30, 2019, based on stability of operations of the underlying real estate property and recent valuations, the partnership refinanced
the property. We received a distribution of approximately $370,000 from the real estate limited partnership following this refinancing.
This distribution was recorded as a reduction of our investment in the limited partnership, which is recorded at cost. We are
currently in negotiations to sell our interest in the partnership but we are uncertain if such a transaction will close prior
to June 30, 2020. Thus, our investment is shown as a non-current asset as of June 30, 2019 in the accompanying consolidated balance
sheet.
On
March 23, 2016, one of our wholly-owned subsidiaries, RedHawk Pharma UK Ltd (which we refer to herein as Pharma),
initially acquired a 25% equity interest in EcoGen Europe Ltd (which we refer to as EcoGen) from Scarlett Pharma
Ltd (which we refer to herein as Scarlett). On September 12, 2017 we completed a share transfer agreement wherein
we increased our ownership in EcoGen to 75%. On December 19, 2017 we completed another share transfer agreement wherein we increased
our ownership in EcoGen to 100%. In connection with the December share transfer the non-controlling interest was eliminated. Under
the terms of an agreement we reached with Scarlett and its affiliate related to these share exchanges, they surrendered ten (10)
million shares of RedHawk common stock and transferred to RedHawk approximately $300,000 of EcoGen preferred stock and other consideration.
In exchange, RedHawk assumed approximately $370,000 of obligations due to EcoGen by Scarlett and its affiliates. The RedHawk Shares
were originally issued to Scarlett in connection with the Company’s March 2016 investment of 25% into EcoGen. As of December
31, 2017, Pharma now owns approximately $635,000 of EcoGen’s preferred stock and 100% of EcoGen’s common stock.
The exchange agreements also settled numerous outstanding disputes between the Company, Scarlett, Warwick and the noncontrolling
owners of the Company. A non-cash settlement loss of $62,425 resulted and is included in our results for the year ended June 30,
2018.
During the fiscal year ended June 30, 2017, we began to consolidate the accounts of EcoGen in our financial
statements under the variable interest entity model. In the quarter ended September 30, 2017, we became the majority owner of EcoGen
and as of December 31, 2017, we now own 100% of the common stock of EcoGen. As of June 30, 2019, we have approximately $385,207
($317,567 net of accumulated amortization) in intangible assets related to licenses held by EcoGen. Such intangible assets are
being amortized over an estimated useful life of 20 years.
In September 2018, the Company acquired the exclusive license rights to certain medical device technology
for $450,000, plus a broker’s fee of $17,500. Under the terms of the license agreement, the Company has paid $25,000 plus
the first of a total twenty quarterly payments of $21,250. Any remaining payments become immediately payable upon the receipt of
final approval by the FDA of devices related to the technology. Additionally, the Company 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. The quarterly payments have been suspended at the present time as the Company and the seller negotiate certain disputes
related to representations made by the seller at the time the Company acquired the rights. The ultimate date and resolution of
this negotiation cannot be estimated at this time. As a result, the Company has included all of the future payments under the original
agreement as noncurrent in the accompanying June 30, 2019 consolidated balance sheet.
5.
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INSURANCE NOTE PAYABLE
|
We finance a portion of our insurance premiums. At June 30, 2019, there was a $136,859 outstanding balance
due on our premium finance agreements. The agreements have effective interest rates of 6.6% to 13.5%. The policies related to these
premiums expire between April and June 2020.
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, 2020.
At maturity, or in connection with a pre-payment, subject to the conditions set forth in the Line of Credit, the stockholder has
the right to convert the amount outstanding (or the amount of the prepayment) into the Company’s Series A Preferred Stock
at the par value of $1,000 per share. During the year ended June 30, 2017, $250,000 of the amounts loaned under this line of credit
were converted to preferred stock. At June 30, 2019, the principal balance totaled $0. The amount is included in noncurrent liabilities
based on the expectation that either the Line of Credit maturity date will be extended, the outstanding amount will be refinanced
through other long-term debt, or the amount outstanding will be converted to preferred stock as allowed for in the agreement.
This
same stockholder and officer also holds $8,250 of 5% convertible notes, which mature in December 2020 and are convertible into
common stock at a rate of $0.015 per share or 550,000 shares.
In the year ended June 30, 2019, certain members of the board of directors and stockholders of the Company
made $172,000 in interest free advances to the Company. Subsequent to June 30, 2019, $10,000 of these advances were repaid. The
remaining advances are convertible into shares of the Company’s common stock at rates ranging from $0.0024 to $0.0050 or
49,250,000 shares.
All
of the above liabilities are included in Due to Related Parties in the accompanying consolidated balance sheet as of June 30,
2019.
During the year ended June 30, 2017, EcoGen had sales to customers which are controlled by individuals which
are shareholders of EcoGen and were the noncontrolling interests in our consolidated financial statements. These sales totaled
$1,241,000 on a gross basis and had discounts of $968,000. A portion of these discounts were at levels that exceeded discounts
offered to unaffiliated customers. During the quarter ended March 31, 2017, management of RedHawk and these noncontrolling shareholders
of EcoGen reached an agreement whereby $370,000 of such discounts were to be considered an account receivable due to EcoGen by
this affiliated customer. Subsequent to June 30, 2017, the Company assumed the obligations of these noncontrolling shareholders
in connection with the share exchanges discussed in Note 3. A settlement loss of $62,425 was incurred as a result of this agreement.
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 June 30, 2019 and 2018,
$50,000 in such fees remain unpaid and are recorded in accounts payable and accrued liabilities in the accompanying balance sheet.
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 (see Note
3). The purchase price was paid through the assumption by the Company of $265,000 of long-term bank indebtedness (which we
refer to as Note) plus the issuance of 215 shares of the Company’s newly designated Series A Preferred
Stock. The purchase price also included the cost of specific security improvements requested by the lessee.
The
Note is dated November 13, 2015 and has a principal amount of $265,000. Monthly payments under the Note are $1,962 including interest
accruing at a rate of 5.95% per annum. The Note matures in June 2021 and is secured by the commercial real estate, guarantees
by the Company and its real estate subsidiary and the personal guarantee of a stockholder who is also an officer of the Company.
In March 2016, we
authorized the issuance of up to $1 million in principal amount of convertible promissory notes (which we refer to as the “Fixed
Rate Convertible Notes”). The Fixed Rate Convertible Notes are secured by certain Company real estate holdings.
The
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.
During the year ended June 30, 2019, concurrent with the execution of the Exchange Agreement more fully
described in Note 9, holders of $515,247 aggregate principal amount of the Company’s 5% convertible promissory notes (“Notes”),
including accrued interest, converted their Notes into 103,132,226 shares of Common Stock. At June 30, 2019, there were approximately
$135,000 of Fixed Rate Convertible Notes outstanding, of which $76,068 of Notes was converted into 15,213,646 shares of Common
Stock subsequent to June 30, 2019. The remaining $50,000 of Fixed Rate Convertible Notes (plus accrued interest) are convertible
into our common stock at a conversion rate of $0.015 per share or 3,922,066 shares. During the years ended June 30, 2019 and 2018,
we paid-in-kind $29,294 and $29,943, respectively, of interest on these convertible notes.
During the year ended June 30, 2019, we also issued $334,622 of convertible notes to third parties with variable
conversion rates (“Variable Rate Convertible Notes”). The Variable Rate Convertible Notes mature at various dates between
September and November 2019. We received, net of financing costs incurred, $289,622 in cash from the issuance of these notes. These
Variable Rate Convertible Notes have interest accruing at rates ranging between 10% - 12%, and redemption. These notes issued to
third parties have a variable conversion rate based on the price of the Company’s common stock. At June 30. 2019, $256,500
of the convertible notes are currently convertible into our Common Stock beginning in the quarter ending September 30, 2019. During
the year ended June 30, 2019, holders of Variable Rate Convertible Notes converted $290,885 of notes, including accrued interest,
into 465,397,050 shares of Common Stock. Subsequent to June 30, 2019, we also paid in full three convertible notes in the amount
of $154,250 and notes totaling $41,250 were converted into equity.
The Variable Rate Convertible Notes have maturity dates prior to June 30, 2020 and could be classified as
a current liability. However, it is the Company’s expectation that we will either re-finance these convertible notes to longer
terms or permit a limited amount of conversions. Therefore, we have classified these notes as noncurrent. If we do not re-finance
these convertible notes to longer terms, however, the holders of the convertible notes have the option to convert these notes into
equity or hold the convertible notes to maturity.
Also,
during the year ended June 30, 201, we issued $29,250 of convertible notes to our majority stockholder in exchange for 7,450,000
shares of our common stock. The note matures in December 2020 and is convertible into 1,950,000 shares, or $0.015 per share. (See
Note 5.)
In
February 2018, we obtained a $100,000 line of credit from a bank. The line of credit matures in February 2021 and is collateralized
by a $100,000 certificate of deposit at the bank. As of June 30, 2019, approximately $100,000 was drawn under the line of credit.
The interest rate on the line of credit is 7.0% per annum.
On March 12, 2019, we obtained
a $180,000 real estate loan from a financial institution. The note matures on April 1, 2020 and is secured by certain real estate
property and the personal guarantee of an officer and director of the Company. Interest only is payable monthly and accrues at
an interest rate of 12%.
In the quarter ended June 30, 2019, we entered into a series of credit financing arrangements from financing
institutions by pledging future accounts receivable. The proceeds from these credit agreements were used to pay the initial amount
due under the Schreiber settlement agreement. As of June 30, 2019, we had drawn approximately $150,000 under these agreements.
Subsequent to June 30, 2019, we have paid off approximately $50,000 of these loans.
8.
|
COMMITMENTS
AND CONTINGENCIES
|
On
January 31, 2017, the Company and 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. As a result of this Settlement Agreement, we
have recorded a loss of $471,880 in the year ended June 30, 2019.
Each
Promissory Note shall be non-interest bearing, however each (i) shall bear a $15,000 late penalty if the principal amount is not
repaid by the due date and (ii) shall bear interest at a rate of 18% per annum, from the issue date, if the principal is not repaid
by the 30th date after the due date.
Pursuant
to a Security Agreement between the parties, Mr. Klug and Beechwood secured the Company’s obligations to the Schreiber
Trust under the Settlement Agreement by granting first-priority security interests in (i) 1,000 shares of Mr. Klug’s Series
B Preferred Company Stock; and 1,473 shares of Mr. Klug’s Series A Preferred Company Stock, and (ii) Beechwood’s
interest in the Tower Hotels Fund 2014, LLC.
On
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 year ended June 30, 2019 and 2018, we paid-in-kind $156,261 and $148,686, respectively, of related preferred stock dividends.
Exchange
Agreement
On June 20, 2019,
RedHawk Holdings Corp. entered into a Stock Exchange Agreement (“Exchange Agreement”) with Beechwood. G. Darcy Klug,
the Company’s Chairman of the Board, Interim Chief Executive Officer and Chief Financial Officer, is the sole member and
manager of Beechwood. Under the Exchange Agreement, the Company purchased from Beechwood 113,700,000 shares of the Company’s
common stock, $0.001 par value per share (“Common Stock”), in exchange for 1,277 shares of the Company’s 5%
Series A Preferred Stock and a Stock Purchase Warrant (“Warrant”) to acquire 113,508,450 shares of Common Stock at
an exercise price of $0.005 per share (collectively, the “Transactions”). The Warrant expires June 20, 2029.
Concurrent with the execution of the Exchange Agreement, holders of $574,250 aggregate principal amount of
the Company’s 5% convertible promissory notes (“Notes”), including accrued interest, converted their Notes into
114,849,929 shares of Common Stock. The extinguishment of the notes and the related accrued interest for the shares of common stock
resulted in a gain on extinguishment of $375,000 based on the closing price of the common stock as of the exchange date.
Holders of the Series
A Preferred Stock are entitled to receive cumulative dividends at a rate of 5% per annum, payable quarterly in cash, or at the
Company’s option, such dividends shall be accreted to, and increase, the stated value of the issued Series A Preferred Stock
(“PIK dividends”). Holders of the Series A Preferred Stock are entitled to votes on all matters submitted to stockholders
at a rate of ten votes for each share of common stock into which the Series A Preferred Stock may be converted. After six months
from issuance, each share of Series A Preferred Stock is convertible, at the option of the holder, into the number of shares of
Common Stock equal to the quotient of the stated value, as adjusted for PIK dividends, by $0.015, as adjusted for stock splits
and dividends.
Warrants
In
conjunction with the Exchange Agreement, Beechwood was issued 113,508,450 warrants to purchase the Company’s common stock
at a price of $0.005 per share. The warrants expire in June 2029 and are assignable.
As of June 30, 2019, the Company had approximately $5 million of U.S. net operating losses (NOLs) carried
forward to offset taxable income in future years. Approximately $4 million of this NOL will expire commencing in fiscal 2026 and
run through 2038. The NOLs of approximately $1 million from the year ended June 30, 2019 has an indefinite carryforward period.
As a result of the numerous common stock transactions that have occurred, the amount of these NOLs which is actually available
to offset future income may be severely limited due to change-in-control tax provisions. The Company has not estimated the effect
of such change-in-control limitation. The related deferred income tax asset of these NOLs, without consideration of any change-of-control
limitation, was estimated to be approximately $750,000 as of June 30, 2019. As a result of the enactment of the Tax Cuts and Jobs
Act (The Act) in December 31, 2017, the estimated deferred income tax asset related to U.S. NOL carry forwards is based on the
reduced 21% corporate income tax rate. Due to our history of operating losses and the uncertainty surrounding the realization of
the deferred tax assets in future years, our management has determined that it is more likely than not that the deferred tax assets
will not be realized in future periods. Accordingly, the Company has recorded a valuation allowance against its net deferred tax
assets.
Thus,
there is no net tax asset recorded as of June 30, 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 June 30, 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 years ended June 30,
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 June 30, 2019 and 2018
and for the twelve-month periods then ended.
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
Year
ended
|
|
LAND
&
|
|
|
DEVICE
&
|
|
|
OTHER
|
|
|
|
|
|
|
|
June
30, 2019
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
49,509
|
|
|
$
|
84,497
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
129,006
|
|
Operating loss
|
|
$
|
(16,920
|
)
|
|
$
|
(75,375
|
)
|
|
$
|
(201
|
)
|
|
$
|
(569,447
|
)
|
|
$
|
(661,943
|
)
|
Interest expense
|
|
$
|
24,036
|
|
|
$
|
527
|
|
|
$
|
—
|
|
|
$
|
283,125
|
|
|
$
|
307,688
|
|
Depreciation and amortization
|
|
$
|
31,333
|
|
|
$
|
69,984
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
101,317
|
|
Identifiable assets
|
|
$
|
932,520
|
|
|
$
|
163,857
|
|
|
$
|
18,500
|
|
|
$
|
1,194,456
|
|
|
$
|
2,309,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended
June 30, 2018
|
|
LAND
&
HOSPITALITY
|
|
|
MEDICAL
DEVICE &
PHARMA
|
|
|
OTHER
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
67,160
|
|
|
$
|
208,685
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
275,845
|
|
Operating loss
|
|
|
(22,443
|
)
|
|
$
|
(217,174
|
)
|
|
$
|
(1,791
|
)
|
|
$
|
(196,256
|
)
|
|
$
|
(437,664
|
)
|
Interest
expense
|
|
$
|
15,760
|
|
|
$
|
(5
|
)
|
|
$
|
—
|
|
|
$
|
122,418
|
|
|
$
|
138,173
|
|
Depreciation
and amortization
|
|
$
|
47,000
|
|
|
$
|
91,554
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
138,554
|
|
Identifiable
assets
|
|
$
|
1,347,446
|
|
|
$
|
702,516
|
|
|
$
|
26
|
|
|
$
|
165,329
|
|
|
$
|
2,215,317
|
|
The Company evaluates subsequent events through the time of our filing on the date we issue our financial
statements, which was on October 15, 2019. The following are significant matters which occurred subsequent to June 30, 2019 and
are not described fully in the notes to the financial statements:
|
●
|
On September 16, 2019, the Company announced the sale of $500,000 in aggregate principal amount of
new convertible notes (the “2019 Notes” in a private offering that is exempt from registration under the Securities
Act of 1933, as amended (the “Securities Act”). The Company used the net proceeds of the offering of the 2019
Notes, after payment of related fees and expenses, to retire existing debt and to provide working capital. The 2019 Notes mature
on the fifth anniversary of the date of issuance and are convertible into shares of the Company’s common stock, par value
$0.001 per share, at a price of $0.015 per share. Interest accrues at a rate of 7% per annum and is payable semi-annually. The
2019 Notes are secured by certain real property assets of the Company. At closing, the Company issued to the 2019 Note purchasers
a number of warrants exercisable ten years from the date of issuance for the purchase of an aggregate of 12,500,000 shares of the
Company’s common stock (the “Warrant Shares”) at an exercise price of $0.01 per Warrant Share.
|
|
●
|
On September 30, 2019, a former officer and director of the Company agreed to convert approximately 250
shares of Series B Preferred Stock into 29,969,648 shares of the Company’s common stock.
|