Notes
to the Unaudited Consolidated Financial Statements
March
31, 2018
1.
|
NATURE
OF OPERATIONS AND CONTINUANCE OF BUSINESS
|
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 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 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 nine month period ended March 31, 2018, the Company had gross revenues of $363,646, net revenues of $257,099, a consolidated
net loss of $418,559 and cash of $327,705 used in operating activities. For the year ended June 30, 2017, the Company had
$1,670,488 in gross revenue, $929,859 in net revenue, a consolidated net loss of $407,681 and cash of $154,640 used in
operating activities. As of March 31, 2018, the Company had cash and a certificate of deposit of $128,835, working capital
of $131,380 and an accumulated deficit of $3,772,910. 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
unaudited interim condensed financial statements of the Company as of March 31, 2018 and for the nine month and three month periods
ended March 31, 2018 and 2017 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, 2017
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, 2017. 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 are sometimes
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 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 deducted from gross revenues.
Cash
and Cash Equivalents
We
consider highly liquid investments with an original maturity of 90 days or less to be cash equivalents.
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 March 31, 2018 and June 30, 2017.
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 years. Building improvements
are depreciated over a useful life of 5 to 10 years.
During
the twelve-month period 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 are 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. We expect the sale of those properties to occur
in the fiscal year ending June 30, 2018 and have, accordingly, presented the held for sale assets and liabilities as current.
Based on the present real estate market and discussions with brokers, no impairment of the recorded amounts has occurred as of
March 31, 2018. We are also pursuing the sale of our real estate limited partnership investment, but we cannot conclude
such a transaction would occur within one year and, therefore, have not reclassified related assets and liabilities as held for
sale.
Effective
July 1, 2017, the Chemin Metairie Road property is leased under a one-year term at a rent of $1,500 per month. The lessee has
an option to purchase the property during the lease for the lesser of $300,000 or the average of two independent appraisals. Although,
there is no certainty that such sale will occur, we do believe the lessee will exercise that purchase option. The tenant that
leases the Jefferson Street property has renewed that lease through December 31, 2022 at a rent of $3,500 per month. We
continue to offer that property for sale and expect a sale to occur in our 2018 fiscal year.
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
twelve-month period ended June 30, 2017, 3,726,480 warrants were exercised, and the remaining warrants expired. There were no
outstanding warrants as of March 31, 2018.
At
March 31, 2018, including accrued but unpaid interest, there were 40,922,172 shares issuable upon conversion of the notes. There
are $347,000 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, 2018, including accrued but unpaid dividends, there were potentially
109,293,125 shares issuable upon the conversion of the Series A Preferred Stock and, including accrued but unpaid dividends, there
were potentially 138,996,711 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.
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 December 31, 2017 relates 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. Pursuant to ASC 820 and ASC 825, the fair value of our cash is determined based on “Level
1” inputs, which consist of quoted prices in active markets for identical assets.
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.
Recent
Accounting Pronouncements
Revenue
Recognition
In
May 2014, the Financial Accounting Standards Board (which we refer to as the “FASB”) issued new guidance intended
to change the criteria for recognition of revenue. The new guidance establishes 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. In July 2015, the FASB permitted early
adoption and deferred the effective date of this guidance one year; therefore, it will be effective for the Company in the first
quarter of fiscal 2019 and may be implemented retrospectively to all years presented or in the period of adoption through a cumulative
adjustment. We are currently evaluating what impact the adoption of this guidance would have on our financial position, results
of operations, cash flows and disclosures.
Going
Concern
In
August 2014, the FASB issued guidance on disclosures of uncertainties about an entity’s ability to continue as a going concern.
The guidance requires management’s evaluation of whether there are conditions or events that raise substantial doubt about
the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
This assessment must be made in connection with preparing financial statements for each annual and interim reporting period. Management’s
evaluation should be based on the relevant conditions and events that are known and reasonably knowable at the date the financial
statements are issued. If conditions or events raise substantial doubt about the entity’s ability to continue as a going
concern, but this doubt is alleviated by management’s plans, the entity should disclose information that enables the reader
to understand what the conditions or events are, management’s evaluation of those conditions or events and management’s
plans that alleviate that substantial doubt. If conditions or events raise substantial doubt and the substantial doubt is not
alleviated, the entity must disclose this in the footnotes. The entity must also disclose information that enables the reader
to understand what the conditions or events are, management’s evaluation of those conditions or events and management’s
plans that are intended to alleviate that substantial doubt. The amendments are effective for annual periods and interim periods
within those annual periods beginning after December 15, 2016. The adoption of this guidance in the current year did not
have an impact on our financial position, results of operations, cash flows or disclosures.
Leases
In
February 2016, the FASB issued ASU 2016-02,
Leases
, 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 lease arrangements. The new guidance is effective for the Company in the first quarter of fiscal year
2020 and will be applied on a modified retrospective basis beginning with the earliest period presented. The Company is currently
evaluating the impact of adopting this guidance on our consolidated 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 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 March 31, 2018. It is
not practicable for the Company to estimate fair value of this investment.
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 nine
months ended March 31, 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 March 31, 2018, we have approximately $417,008 ($382,008 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, except for approximately $50,000 in licenses associated with certain pharmaceutical
products which do not expire and are considered to have an indefinite life. This allocation to intangible assets is preliminary
and may be adjusted as we complete the evaluation of EcoGen assets.
4.
|
LOAN
AND INSURANCE NOTE PAYABLE
|
We
finance a portion of our insurance premiums. At March 31, 2018, there was no outstanding balance due on our premium finance agreements.
The policies related to these premiums expire May 31, 2018.
5.
|
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, 2019.
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 March 31, 2018, the principal balance totaled $28,666. 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.
During
the year ended June 30, 2017, EcoGen had sales to customers which are controlled by individuals which are shareholders of EcoGen
and are 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.
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, 2018, $60,000
in such fees remain unpaid and are recorded in accounts payable and accrued liabilities in the accompanying balance sheet.
6.
|
LONG-TERM
DEBT, DEBENTURES AND LINE 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 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.
The Note is presented in the accompanying balance sheet as liabilities on assets held for sale (see “Property and Improvements”
discussion in Note 1).
We
have authorized the issuance of up to $1 million in principal amount of convertible promissory notes (which we refer to as the
“Convertible Notes”). The Convertible Notes are secured by certain Company real estate holdings and real estate holdings
of a stockholder. As of March 31, 2018, we have $990,083 in Convertible Notes outstanding, including the interest paid-in-kind
on such notes.
Prior
to June 30, 2017, the Convertible Notes issued mature on the fifth anniversary of the date of issuance and are convertible into
shares of our common stock at a price of $0.015 per share. Interest accrues at a rate of 5% per annum and is payable semi-annually.
Beginning 180 days after issuance of the Convertible Notes, 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 Convertible Notes. The Company may only issue the notice of
its intent to redeem the 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 Convertible Notes has the right to convert all or any portion of the Convertible Notes at the conversion price at
any time prior to redemption.
A portion of the convertible
notes have a maturity date prior to March 31, 2019 and are, therefore, classified as a current liability. It is the Company’s
expectation that we will re-finance these convertible notes to longer terms. 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.
At
March 31, 2018, there were $990,803 ($851,394 net of deferred financing costs and beneficial conversion option) of Convertible
Notes outstanding, including $58,833 of interest paid in kind. The Convertible Notes (plus accrued interest) are convertible into
our common stock at a conversion rate of $0.015 per share or 40,922,172 shares. During the nine month periods ended March 31,
2018, we paid-in-kind $22,365 of interest on these convertible notes.
During
the nine months ended March 31, 2018, we also issued $400,000 of convertible notes to third parties with variable conversion
rates. These convertible notes mature at various dates between November 2018 and May 2019. We received, net of financing costs
incurred, $350,000 in cash from the issuance of these notes. These notes have interest accruing at rates ranging between
8% - 12%, and redemption and asset pledge terms similar to the other convertible notes. These notes issued to third parties have
a variable conversion rate based on the price of the Company’s common stock. $119,500 of the convertible notes are convertible
into our common stock beginning in the quarter ending June 30, 2018 at a variable conversion rate. We also refinanced a convertible
note of $38,000 during the three months ended March 31, 2018 and we paid in full one convertible note in the amount of $50,000.
Also,
during the nine months ended March 31, 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 and is convertible into 1,950,000 shares, or
$0.015 per share.
We
had a $1,000,000 line of credit with a bank of which $1,000,495 was outstanding as of June 30, 2016. The line of credit was due
upon demand and was secured by marketable securities, a corporate guarantee and the guarantee of a stockholder who is also an
officer of the Company. During the twelve-month period ended June 30, 2017, the outstanding balance on the line of credit was
paid in full. This line of credit is no longer available to the Company.
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, 2018, $70,000 was drawn under the line of credit and the interest
rate was 6.5%.
7.
|
COMMITMENTS
AND CONTINGENCIES
|
On
January 31, 2017, the Company and a stockholder filed a complaint (the “Complaint”) in the United States District
Court for the Eastern District of Louisiana (RedHawk Holdings Corp. and Beechwood Properties, LLC Case No. 2:17-cv-819). The Complaint
names Daniel J. Schreiber (“Schreiber”) and the Schreiber Living Trust – DTD 2/08/96 (the “Schreiber Trust”)
as defendants. Schreiber is the former Chief Executive Officer and director of RedHawk. The Schreiber Trust, of which Schreiber
is the Trustee, is a shareholder of the Company. The Complaint lodged claims on behalf of RedHawk for securities fraud, fraud,
and Schreiber’s breach of fiduciary duties.
On
April 24, 2017, RedHawk and its shareholder filed an amended complaint (“Amended Complaint”) naming Schreiber as the
only proper defendant in the suit, individually and as Trustee of the Schreiber Trust.
On
May 22, 2017, Schreiber filed a motion to dismiss, or in the alternative to transfer, the suit on the grounds of lack of personal
jurisdiction and improper venue. After the parties filed an opposition and reply, on August 16, 2017 the court denied Schreiber’s
motion to dismiss.
On
September 13, 2017, Schreiber filed an answer to the Amended Complaint, as well as counterclaims against RedHawk, Beechwood, and
a director of RedHawk for actions allegedly taken in the course of his duty as a director. The counterclaims against RedHawk and
its director are for alleged violation of UCC § 8-401, breach of fiduciary duty, negligence, and unfair trade practices.
The
legal remedies sought in these counterclaims were the subject of a lawsuit filed previously by Schreiber in the United States
District Court for the Sothern District of California on April 24, 2017 (Case No. 3:17-cv-8824). At the time of the answer of
the Louisiana lawsuit, the California action was still pending, and the answer asked that the counterclaim filed in Louisiana
be stayed until the California case was adjudicated. On September 26, 2017, the court in the California action granted RedHawk’s
motion to dismiss that suit.
On
October 10, 2017 a scheduling conference was held. The parties agreed to, among other matters, to exchange documents and conduct
other discovery, and to schedule a bench trial starting June 11, 2018.
RedHawk
plans to vigorously contest the claims against it in this matter and to pursue the claims against Schreiber, individually and
as Trustee of the Schreiber Trust.
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 to 1,000,000,000.
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 and nine month periods ended March 31, 2018, we paid-in-kind $37,399 and $110,819, respectively, of related preferred
stock dividends.
Warrants
During
November 2014, we completed a private equity sale of 14,905,918 shares of common stock generating proceeds of $49,900. As a component
of this private equity sale, 7,452,959 warrants to acquire common stock of the Company were also issued with an exercise price
of $0.005 per share. During the twelve-month period ended June 30, 2017, 3,726,480 warrants were exercised, and the remaining
warrants expired.
As
of June 30, 2017, the Company had approximately $2,800,000 of U.S. net operating losses carried forward to offset taxable income
in future years which expire commencing in fiscal 2026 and run through 2037. The related deferred income tax asset of these net
operating losses was estimated to be approximately $1,000,000 as of June 30, 2017. The loss for the nine months ended March 31,
2018 is expected to increase the net operating loss carry forward by an amount similar to the book income of its U.S. operations.
As of March 31, 2018, the Company had approximately $3,200,000 of U.S. net operating loss carry forwards. 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
the carry forwards as of March 31, 2018 is $675,000 which is based on the reduced 21% corporate income tax rate. There
is no net tax asset recorded as of March 31, 2018 or June 30, 2017 as a 100% valuation allowance has been established for the
tax benefit generated. EcoGen also has a net operating loss as of June 30, 2017 and March 31, 2018 for which no deferred tax asset
has been provided. 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.
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.
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 March 31, 2018 and 2017 and
for the nine and three month periods then ended.
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended
|
|
LAND
&
|
|
|
DEVICE
&
|
|
|
OTHER
|
|
|
|
|
|
|
|
March
31, 2017
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues, gross
|
|
$
|
29,250
|
|
|
$
|
1,527,298
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,556,548
|
|
Operating
revenues, net
|
|
$
|
29,250
|
|
|
$
|
795,142
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
824,392
|
|
Operating
income (loss)
|
|
$
|
(5,079
|
)
|
|
$
|
137,718
|
|
|
$
|
(26,292
|
)
|
|
$
|
(354,903
|
)
|
|
$
|
(248,556
|
)
|
Interest
expense
|
|
$
|
11,665
|
|
|
$
|
766
|
|
|
$
|
-
|
|
|
$
|
42,450
|
|
|
$
|
54,881
|
|
Depreciation
and amortization
|
|
$
|
15,667
|
|
|
$
|
52,671
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
68,338
|
|
Identifiable
assets
|
|
$
|
1,373,352
|
|
|
$
|
589,530
|
|
|
$
|
74,465
|
|
|
$
|
562,456
|
|
|
$
|
2,599,803
|
|
|
|
|
|
|
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
|
|
|
$
|
48,720
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
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
|
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
LAND
&
|
|
|
DEVICE
&
|
|
|
OTHER
|
|
|
|
|
|
|
|
March
31, 2017
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues, gross
|
|
$
|
9,750
|
|
|
$
|
329,181
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
338,931
|
|
Operating
revenues, net
|
|
$
|
9,750
|
|
|
$
|
417,526
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
427,276
|
|
Operating
income (loss)
|
|
$
|
8,178
|
|
|
$
|
121,337
|
|
|
$
|
(22,446
|
)
|
|
$
|
62,284
|
|
|
$
|
169,353
|
|
Interest
expense
|
|
$
|
11,664
|
|
|
$
|
766
|
|
|
$
|
-
|
|
|
$
|
(961
|
)
|
|
$
|
11,469
|
|
Depreciation
and amortization
|
|
$
|
(30
|
)
|
|
$
|
17,795
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,765
|
|
The
Company evaluates subsequent events through the time of our filing on the date we issue our financial statements, which was on
May 14, 2018. The following are matters which occurred subsequent to March 31, 2018:
|
●
|
On
April 12, 2018, Judge Vernon S. Broderick, United States District Court, Southern District of New York, signed an ORDER dismissing
American Medical Distributors, Inc.’s third-party claim filed against RedHawk Holdings Corp. (Case #1:16-cv-06016).
|
|
●
|
On
April 19, 2018, the Company provided NOTICE to its insurance provider that the self-insured retention deductible for legal
defense costs under its directors & officers insurance policy has been satisfied. Accordingly, under the terms and conditions
of its directors & officers insurance policy, the Company believes future litigation costs in the matter RedHawk Holdings
Corp., et. al. versus Daniel J. Schreiber, et. al. (Case # 2:17-cv-00819 United States District Court, Eastern District of
Louisiana) are the responsibility of its insurance provider.
|