Notes
to the Consolidated Financial Statements
June
30, 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 year ended June 30, 2018, the Company had gross revenues of $384,279, net revenues of $275,845, a consolidated net loss of
$910,062 and cash used in operating activities of $411,268. 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 June 30, 2018, the Company had cash of $19,034 and a certificate of deposit of $100,073, working capital of $
208,943
and an accumulated deficit of $4,302,291. 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, 2018 and 2017 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. 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. The Company did not
have any cash equivalents as of June 30, 2018 or 2017.
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, 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 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 relate
d
mortgage notes were reflected as assets and liabilities held for sale in the balance sheets. At that time, we also ceased depreciating
such assets. All such amounts are included in the land and hospitality segment. A sale of these properties did not occur in the
fiscal year ended June 30, 2018 and, as such, the Company has returned these properties to assets held for use and depreciation
expenses has been recorded in 2018 for the period the properties were included in assets held for sale. We will
continue to list these properties for sale, but it is uncertain if the sales will occur during the next twelve months.
As such, these real estate assets, and related liabilities, have been reclassified in the 2018 and 2017 balance sheets.
Based on the present real estate market and discussions with brokers, no impairment of the recorded amounts has occurred as of
June 30, 2018.
We are also pursuing
the sale of our remaining investment in the real estate limited partnership investment. Subsequent to year end, 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
will be recorded as a reduction of our investment in the limited partnership, which is recorded at cost. We are currently in negotiations
to sell our interest in the partnership and anticipate such a transaction will close prior to June 30, 2019. Thus, our investment
is shown as a current liability as of June 30, 2018 in the accompanying consolidated balance sheet.
Effective
July 1, 2017, the Chemin Metairie Road property was leased under a one-year term at a rent of $1,500 per month. The lessee had
an option to purchase the property during the lease for the lesser of $300,000 or the average of two independent appraisals. On
June 30, 2018, the tenant did not exercise his option to purchase the property. The Company has returned the property to service
and currently uses this property as offices for our medical products unit. Effective August 1, 2017, the tenant that leases the
Jefferson Street property has renewed that lease through December 31, 2022 at a rent of $3,250 per month. We continue to offer
these two properties for sale. Since we are not certain a sale will occur during our 2019 fiscal year, we reflect these assets
as non-current.
Income
Taxes
Potential
benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted
Accounting Standard Codification (which we refer to as “ASC”) 740,
Income Taxes,
as of its inception. Pursuant
to ASC 740, the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits
of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more
likely than not it will utilize the net operating losses carried forward in future years. The Company recognizes interest and
penalties related to uncertain tax positions in income tax expense in the period they are incurred. The Company does not believe
that it has any uncertain tax positions.
Basic
and Diluted Net Loss Per Share
The
Company computes net loss per share in accordance with ASC 260,
Earnings Per Share,
which requires presentation of both
basic and diluted earnings per share (EPS) on the face of the statements of operations. Basic EPS is computed by dividing net
loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the
period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock
method and the convertible notes and the convertible preferred stock using the if-converted method. In computing Diluted EPS,
the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of
stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. During the year
ended June 30, 2017, 3,726,480 warrants were exercised, and the remaining warrants expired. There were no outstanding warrants
as of June 30, 2018.
At
June 30, 2018, including accrued but unpaid interest, there were 41,427,384 shares issuable upon conversion of the notes. There
are $359,240 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, 2018, including accrued but unpaid dividends, there were potentially 110,659,289
shares issuable upon the conversion of the Series A Preferred Stock and, including accrued but unpaid dividends, there were potentially
140,734,170 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 June 30, 2018 and 2017 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.
Recent
Accounting Pronouncements
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.
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 do not believe that the adoption of this guidance will significantly affect our financial position,
results of operations, cash flows and 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 June 30, 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 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, 2018, we have approximately $371,894 ($331,894 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. Under the terms of the license agreement, the Company paid $25,000 at closing plus
the first of a total twenty quarterly payments of $21,250 each.
4.
|
LOAN
AND INSURANCE NOTE PAYABLE
|
We
finance a portion of our insurance premiums. At June 30, 2018, there was a $7,786 outstanding balance due on our premium finance
agreements. The policies related to these premiums expire May 31, 2019.
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 June 30, 2018, the principal balance totaled $22,674. 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 $29,250 of 5% convertible notes, which mature in December 2020 and are convertible into
common stock at a rate of $0.015 per share or 1,950,000 shares.
In
the quarter ended June 30, 2018, certain stockholders of the Company made $67,000 in interest free advances to the Company.
All
of the above liabilities are included in Due to Related Parties in the accompanying consolidated balance sheet as of December
31, 2017.
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 June 30, 2018 and 2017,
$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.
We
have authorized the issuance of up to $1 million in principal amount of convertible promissory notes (which we refer to as the
“Fixed Rate Convertible Notes”). The Fixed Rate Convertible Notes are secured by certain Company real estate holdings.
The
Fixed Rate Convertible Notes issued mature on March 15, 2021, the fifth anniversary of the date of issuance and are convertible
into shares of our common stock at a price of $0.015 per share. Interest accrues at a rate of 5% per annum and is payable semi-annually.
The Company has the option to issue a notice of its intent to redeem, for cash, an amount equal to the sum of (a) 120% of the
then outstanding principal balance, (b) accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect
of the Fixed Rate Convertible Notes. The Company may only issue the notice of its intent to redeem the Fixed Rate Convertible
Notes if the trading average of the Company’s common stock equals or exceeds 300% of the conversion price during each of
the five business days immediately preceding the date of the notice of intent to redeem. The holder of the Fixed Rate Convertible
Notes has the right to convert all or any portion of the Fixed Rate Convertible Notes at the conversion price at any time prior
to redemption.
At
June 30, 2018, there were $621,411 ($537,757 net of deferred financing costs and beneficial conversion option) of
Fixed Rate Convertible Notes outstanding, including $71,441 of interest paid in kind. The Fixed Rate Convertible Notes
(plus accrued interest) are convertible into our common stock at a conversion rate of $0.015 per share or 41,427,384 shares. During
the years ended June 30, 2018 and 2017, we paid-in-kind $29,943 and $28,347, respectively, of interest on
these convertible notes.
During
the twelve months ended June 30, 2018, we also issued $468,000 of convertible notes to third parties with variable conversion
rates (“Variable Rate Convertible Notes”). The Variable Rate Convertible Notes mature at various dates between November
2018 and 2019. We received, net of financing costs incurred, $403,350 in cash from the issuance of these notes. These Variable
Rate Convertible Notes have interest accruing at rates ranging between 8% - 12%, and redemption. These notes issued to third parties
have a variable conversion rate based on the price of the Company’s common stock. $326,240 of the convertible notes are
currently convertible into our common stock beginning in the quarter ending June 30, 2018 at a variable conversion rate. We
also paid in full two convertible note in the amount of $88,000 and notes totaling $20,760 were converted into equity. At June 30, 2018, there were $359,240 ($323,432 net of deferred financing costs) of Fixed Rate Convertible
Notes outstanding
The
Variable Rate Convertible Notes have maturity dates prior to June 30, 2019 and are, therefore, classified as a current
liability. It is the Company’s expectation that we will either repay these notes before the conversion period commences,
re-finance these convertible notes to longer terms or permit a limited amount of conversions. 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, 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. (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, 2018, approximately $100,000 was drawn under the line of credit.
The interest rate on the line of credit is 7.0% per annum.
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 24, 2017, a scheduling conference was held. The parties agreed to, among other matters, to exchange documents and conduct
other discovery, and, at this time, to schedule a bench trial starting November 5, 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.
While
we are insured for our legal defense costs in this matter, we have a $250,000 self-insured retention. During the year ended June
30, 2018, we recorded a charge of $250,000 for uinsured costs incurred in connection with this matter. We believe the ultimate
resolution of this matter will not significantly adversely affect our financial position, operations or cash flows, other than
the uninsured costs referred to above.
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, 2018, by a vote of the majority of our stockholders, we increased the number of our authorized shares from 450,000,000
to 1,000,000,000. On August 20, 2018, by a vote of the majority of our stockholders, we increased the number of our authorized
shares from 1,000,000,000 to 2,000,000,000.
Preferred
Stock
Pursuant
to a certificate of designation filed with the Secretary of State of the State of Nevada, effective November 12, 2015, 2,750 shares
of our authorized Preferred Stock have been designated as Series A 5% Convertible Preferred Stock, originally with a $1,000 stated
value (which we refer to as “Series A Preferred Stock”). The holders of the Series A Preferred Stock are entitled
to receive cumulative dividends at a rate of 5% per annum, payable quarterly in cash, or at the Company’s option, such dividends
shall be accreted to, and increase, the stated value of the issued Series A Preferred Stock (which we refer to as “PIK”).
Holders of the Series A Preferred Stock are entitled to votes on all matters submitted to stockholders at a rate of ten votes
for each share of common stock into which the Series A Preferred Stock may be converted. After six months from issuance, each
share of Series A Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock equal
to the quotient of the stated value, as adjusted for PIK dividends, by $0.015, as adjusted for stock splits and dividends.
Pursuant
to a certificate of designation filed with the Secretary of State of the State of Nevada, effective February 16, 2016, 1,250 shares
of our authorized Preferred Stock have been designated as Series B 5% Convertible Preferred Stock, originally with a $1,000 stated
value (which we refer to as “Series B Preferred Stock”). The holders of the Series B Preferred Stock are entitled
to receive cumulative dividends at a rate of 5% per annum, payable quarterly in cash, or at the Company’s option, such dividends
shall be accreted to, and increase, the stated value of the issued Series B Preferred Stock (which we refer to as “PIK”).
Holders of the Series B Preferred Stock are entitled to votes on all matters submitted to stockholders at a rate of ten votes
for each share of common stock into which the Series B Preferred Stock may be converted. After six months from issuance, each
share of Series B Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock equal
to the quotient of the stated value, as adjusted for PIK dividends, by $0.01, as adjusted for stock splits and dividends.
During
the year ended June 30, 2018 and 2017, we paid-in-kind $148,686 and $178,545, 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 year ended June 30, 2017, 3,726,480 warrants were exercised, and the remaining warrants
expired.
As
of June 30, 2018, the Company had approximately $3,600.000 of U.S. net operating losses (NOLs) carried forward to offset
taxable income in future years which expire commencing in fiscal 2026 and run through 2038. As a result of the numerous common
stock transactions that have occurred, the amount of these NOLs which is actually available to offset future income may be severely
limited due to change-in-control tax provisions. The Company has not estimated the effect of such change-in-control limitation.
The related deferred income tax asset of these NOLs, without consideration of any change-of-control limitation, was estimated
to be approximately $750,000 as of June 30, 2018. As a result of the enactment of the Tax Cuts and Jobs Act (The Act) in
December 31, 2017, the estimated deferred income tax asset related to U.S. NOL carry forwards is based on the reduced 21%
corporate income tax rate. Due to our history of operating losses and the uncertainty surrounding the realization of the deferred
tax assets in future years, our management has determined that it is more likely than not that the deferred tax assets will not
be realized in future periods. Accordingly, the Company has recorded a valuation allowance against its net deferred tax assets.
Thus,
there is no net tax asset recorded as of June 30, 2018 or June 30, 2017 as a 100% valuation allowance has been established
for any tax benefit. EcoGen also has a net operating loss as of June 30, 2018 and June 30, 2017 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, 2018 and 2017.
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, 2018 and 2017 and
for the twelve month periods then ended.
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
LAND &
|
|
|
DEVICE &
|
|
|
OTHER
|
|
|
|
|
|
|
|
June
30, 2018
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues, gross
|
|
$
|
67,160
|
|
|
$
|
317,119
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
384,279
|
|
Operating revenues, net
|
|
$
|
67,160
|
|
|
$
|
208,685
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
275,845
|
|
Operating income (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
|
|
|
|
|
|
|
MEDICAL
|
|
|
|
|
|
|
|
|
|
|
Year
ended
|
|
LAND
&
|
|
|
DEVICE
&
|
|
|
OTHER
|
|
|
|
|
|
|
|
June
30, 2017
|
|
HOSPITALITY
|
|
|
PHARMA
|
|
|
SERVICES
|
|
|
CORPORATE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues, gross
|
|
$
|
39,000
|
|
|
$
|
1,631,488
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,670,488
|
|
Operating
revenues, net
|
|
$
|
39,000
|
|
|
$
|
890,859
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
929,859
|
|
Operating
income (loss)
|
|
$
|
(2,223
|
)
|
|
$
|
191,291
|
|
|
$
|
(32,732
|
)
|
|
$
|
(484,251
|
)
|
|
$
|
(327,915
|
)
|
Interest
expense
|
|
$
|
27,221
|
|
|
$
|
769
|
|
|
$
|
-
|
|
|
$
|
40,094
|
|
|
$
|
68,084
|
|
Depreciation
and amortization
|
|
$
|
15,666
|
|
|
$
|
97,063
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
112,729
|
|
Identifiable
assets
|
|
$
|
1,381,622
|
|
|
$
|
739,567
|
|
|
$
|
240
|
|
|
$
|
789,896
|
|
|
$
|
2,911,325
|
|
The
Company evaluates subsequent events through the time of our filing on the date we issue our financial statements, which was on
October 15, 2018. The following are matters which occurred subsequent to June 30, 2018:
|
●
|
In September 2018,
we received a distribution from our real estate limited partnership investment of approximately $370,000;
|
|
●
|
In September 2018,
RedHawk Medical Products, LLC, a wholly-owned subsidiary of the Company, acquired the world-wide exclusive manufacturing and
distribution rights to certain intellectual properties which the Company believes will significantly expand the current market
capabilities of its SANDD mini needle destruction unit;
|
|
●
|
In August 2018,
we increased our authorized shares from 1,000,000,000 to 2,000,000,000.
|
|
●
|
In August 2018, we received notice from holders of the Variable Rate
Convertible Notes of their intent to convert such notes into common stock. The conversion process is still in progress as
of the filing date.
|