UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

  

 

 

FORM 10-Q

 

 

 

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 000-54323

 

 
RedHawk Holdings Corp.
(Exact name of registrant as specified in its charter)

 

Nevada   20-3866475
(State or other jurisdiction
of incorporation or organization)
  (IRS Employer
Identification No.)

 

100 Petroleum Drive, Suite 200    
Lafayette, Louisiana   70508
(Address of principal executive offices)   (Zip Code)

 

(337) 269-5933

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
None N/A N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
         
Non-accelerated filer   Smaller reporting company
         
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

On June 15, 2020, 963,651,157 shares of common stock, par value 0.001 per share, were outstanding.

 

 

 

 

 

 

EXPLANATORY NOTE

 

RedHawk Holdings Corp. (the “Company”) is hereby relying on the Securities and Exchange Commission’s Order under Section 36 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Modifying Exemptions From the Reporting and Proxy Delivery Requirements for Public Companies dated March 25, 2020 (Release No 34-88465) (the “Order”) in connection with this filing of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the “March 31, 2020 Form 10-Q”) due to the circumstances related to COVID-19. In particular, COVID-19 has caused disruptions in our normal interactions with our auditors. The Company has a minimal accounting staff and historically provided its auditors with full access to work papers and related information. Because the audit personnel are now working remotely as much as possible, and relying on our minimal staff to furnish work papers and other documents, the Company’s ability to complete its review and file the March 31, 2020 Form 10-Q prior to its original due date without unreasonable expense was delayed.

 

 

 

REDHAWK HOLDINGS CORP.

Form 10-Q

 

TABLE OF CONTENTS

 

    Page No.
  PART I - FINANCIAL INFORMATION  
     
Item 1. Unaudited Consolidated Financial Statements 3
  Unaudited Consolidated Balance Sheets 3
  Unaudited Consolidated Statements of Operations 4
  Unaudited Consolidated Statements of Cash Flows 5
  Unaudited Consolidated Statements of Stockholders’ Equity (Deficit) 6
  Notes to the Unaudited Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
     
Item 4. Controls and Procedures 32
     
  PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 33
     
Item 1A. Risk Factors 33
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
     
Item 3. Defaults Upon Senior Securities 33
     
Item 4. Mine Safety Disclosures 33
     
Item 5. Other Information 33
     
Item 6. Exhibits 34
     
Signatures 35

 

 

2 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. UNAUDITED Consolidated Financial Statements.

 

REDHAWK HOLDINGS CORP.
Consolidated Balance Sheets
(unaudited)

 

    March 31,     June 30,  
    2020     2019  
ASSETS                
                 
 Current Assets:                
 Cash   $ 99,246     $ 1,648  
 Certificate of deposit           100,374  
 Receivables     196,192        
 Inventory, at cost     181,604       181,227  
 Prepaid expenses     257,189       122,436  
 Total Current Assets     734,231       405,685  
                 
 Property, Equipment and Improvements:                
 Land     110,000       110,000  
 Tooling and equipment     5,600        
 Building and improvements     670,000       670,000  
      785,600       780,000  
 Less, accumulated depreciation     (135,980 )     (112,479 )
      649,620       667,521  
 Other Assets:                
 Operating lease right-of-use asset     67,254        
 Investment in real estate limited partnership     257,173       257,173  
 Intangible asset, net of amortization of $444,820 and $404,946, respectively     816,713       848,992  
 Other assets     130,060       129,962  
      1,271,200       1,236,127  
 Total Assets   $ 2,655,051     $ 2,309,333  
                 
 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                
                 
 Current Liabilities:                
 Accounts payable and accrued liabilities   $ 1,061,460     $ 899,685  
 Deferred revenue     267,145        
 Current maturities of long-term debt     190,439       184,585  
 Current portion of operating lease right-of-use liabilities     20,386        
 Lines of credit     173,661       253,219  
 Insurance notes payable     12,537       136,859  
 Total Current Liabilities     1,725,628       1,474,348  
                 
 Non-current Liabilities                
 Due to related parties     242,000       230,250  
 Other non-current liabilities     503,750       703,750  
 Real estate note payable, net of current maturities     216,459       224,097  
 Operating lease right-of-use liabilities, net of current portion     46,868        
 Convertible notes payable, net of $94,865 and $49,241 in deferred loan costs     1,633,909       342,304  
      2,642,986       1,500,401  
 Total Liabilities     4,368,614       2,974,749  
                 
  Commitments and Contingencies            
                 
 Stockholders’ Equity (Deficit):                
 Preferred stock, 5,000 authorized shares and 3,750 and 4,000 issued and outstanding at March 31, 2020 and June 30, 2019, respectively                
 5% Series A, 2,750 shares designated, $1,123 and $1,099 stated value, respectively, 2,750 issued and outstanding at March 31, 2020 and June 30, 2019     3,087,691       3,021,453  
 5% Series B, 1,250 shares designated, $1,228 and $1,183 stated value, respectively, and 1,000 issued and outstanding at March 31, 2020 and 1,250 issued and outstanding at June 30, 2019     1,227,964       1,479,039  
 Common Stock, par value of $0.001 per share, 2,000,000,000 authorized shares and 1,171,208,112 and 1,034,340,037 issued, respectively     1,171,208       1,034,340  
 Additional paid-in capital     445,940       51,811  
 Accumulated other comprehensive gain (loss)     (13,392     2,735  
 Accumulated deficit     (7,052,616     (5,674,436 )
      (1,133,205 )     (85,058 )
 Less, Treasury stock 201,548,643 shares, at cost     (580,358 )     (580,358 )
 Total Stockholders’ Equity (Deficit)     (1,713,563 )     (665,416 )
 Total Liabilities and Stockholders’ Equity (Deficit)   $ 2,655,051     $ 2,309,333  

  

The accompanying notes are an integral part of these financial statements

  

3 

 

 

REDHAWK HOLDINGS CORP.
Consolidated Statements of Operations
(unaudited)

 

    Three Months Ended     Nine Months Ended  
    March 31,     March 31,  
    2020     2019     2020     2019  
                         
 Revenues   $ 148,674     $ 73,556     $ 217,989     $ 169,076  
                                 
 Operating Expenses:                                
   Costs of goods sold     38,467       17,986       55,388       49,016  
   Sales and marketing expenses     90,830       1,746       208,701       5,772  
   Professional fees     62,525       43,462       229,885       210,229  
   Research and development costs     25,420             83,901        
   Operating expenses     76,796       97,384       212,893       106,795  
   Depreciation and amortization     21,458       19,208       63,375       80,359  
   General and administrative     47,624       27,973       182,157       171,936  
                                 
 Total Operating Expenses     363,120       207,759       1,036,300       624,107  
                                 
 Net Loss from Operations     (214,446 )     (134,203 )     (818,311 )     (455,031 )
                                 
 Other Income (Expense):                                
   Loss on extinguishment of debt, net      (129,338 )           (84,811 )      
   Settlement gain (loss), net     (27,752 )     10,000       (27,752 )     (386,500 )
   Interest (expense) income, net     (67,723 )     25,504       (279,238 )     (155,714 )
      (224,813 )     35,504       (391,801 )     (542,214 )
                                 
 Net Loss     (439,259 )     (98,699 )     (1,210,112 )     (997,245 )
                                 
 Other comprehensive income (loss):                                
   Gain (loss) on foreign currency translation     (11,898     (52 )     (16,127 )     2,735  
      (11,898     (52 )     (16,127 )     2,735  
                                 
 Comprehensive Loss     (451,157 )     (98,751 )     (1,226,239 )     (994,510 )
                                 
 Preferred Stock Dividends     (53,477 )     (39,305 )     (168,068 )     (116,466
                                 
Comprehensive Loss Available for Common  Stockholders   $ (504,634 )   $ (138,056 )   $ (1,394,307 )   $ (1,110,976 )
                                 
 Net Loss Per Share:                                
   Basic   $     $     $     $  
   Diluted   $     $     $     $  
                                 
 Weighted Average Shares Outstanding:                                
   Basic     969,280,348       557,460,616       924,946,538       487,312,611  
   Diluted     969,280,348       557,460,616       924,946,538       487,312,611  

 

The accompanying notes are an integral part of these financial statements

 

4 

 

 

REDHAWK HOLDINGS CORP.

Consolidated Statements of Cash Flows

(unaudited)

 

    Nine Months Ended  
    March 31,  
    2020     2019  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (1,210,112 )   $ (997,245 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Amortization of intangibles     39,874       56,859  
Amortization of discount on convertible debentures           16,350  
Amortization of deferred loan costs     115,928       50,083  
Depreciation       23,501       23,500  
Non-cash expenses      246,279       95,242  
Non-cash settlement loss           224,976  
Loss on extinguishment of debt     18,449 )      
Changes in operating assets and liabilities:                
Accounts receivable     (196,192 )     (32,327)  
Inventory      (3,594 )     30,547  
Prepaid expense and other assets      (326,184 )     (2,903)  
Accounts payable and accrued liabilities     (181,044 )     14,626  
Deferred Revenue     267,145        
Net Cash Used in Operating Activities     (1,205,950 )     (520,292 )
CASH FLOWS FROM INVESTING ACTIVITIES                
Proceeds from sale of investments     100,374        
Purchase of equipment     (5,600 )      
Proceeds from distribution from limited liability partnership           367,827  
Purchase of license           (46,250 )
Net Cash Provided by Investing Activities     94,774       321,577  
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from related parties, net     11,750       64,326  
Proceeds from issuance of convertible debt     1,910,862       181,000  
Payments on convertible debt     (458,375 )     (132,726 )
Purchase of treasury stock           (78,566)  
Costs related to debt for equity conversions           (10,300 )
Deferred loan costs     (159,566 )     (33,110 )
Proceeds from long-term debt           180,000  
Proceeds from short-term debt     110,914       71,314  
Payments on short-term debt     (190,472 )      
Net proceeds from (payments on) insurance notes payable     21,561       (2,071 )
Principal payments on long-term debt     (7,202 )     (6,818 )
Net Cash Provided by Financing Activities     1,239,472       233,049  
Effect of exchange rate on cash     (30,698     (22,491 )
Net change in cash     97,598       11,843  
Cash, Beginning of Period     1,648       19,034  
Cash, End of Period   $  99,246     $ 30,877  
                 
Non-Cash Investing and Financing Activities:                
Preferred stock dividends paid-in-kind   $ 114,859     $ 116,466  
Conversion of debt to common stock   $ 117,318     $ 184,635  
Common stock issued in lieu of cash for services and assets   $ 97,810     $ 17,500  
Conversion of preferred stock to common stock   $ 299,696     $  
Increase in liabilities related to license agreement acquisition   $     $ 403,750  
Operating lease assets obtained for operating lease liabilities    67,254     $  
                 
Supplemental Disclosures:                
Interest paid   $ 229,867      $ 12,526  
Income taxes paid   $     $  

  

The accompanying notes are an integral part of these financial statements

 

5 

 

 

REDHAWK HOLDINGS CORP.

Consolidated Statements of Stockholders’ Equity (Deficit)

(unaudited)

 

    SERIES A
PREFERRED STOCK
    SERIES B
PREFERRED STOCK
    COMMON STOCK     ADDITIONAL
PAID-IN
    ACCUMULATED
OTHER
COMPREHENSIVE
    ACCUMULATED     TREASURY STOCK        
    SHARES     AMOUNT     SHARES     AMOUNT     SHARES     AMOUNT     CAPITAL     GAIN (LOSS)     DEFICIT     SHARES     AMOUNT     TOTAL  
BALANCE, JUNE 30, 2019     2,750     $ 3,021,453       1,250     $ 1,479,039       1,034,340,037     $ 1,034,340     $ 51,811     $ 2,735     $ (5,674,436 )     201,548,643     $ (580,358 )   $ (665,416 )
Preferred stock dividends declared           66,238             48,621                               (168,068 )                 (53,209 )
                                                                                                 
Conversions                 (250 )     (299,696 )     86,933,293       86,933       288,754                               72,791  
Stock grants                             49,934,782       49,936       105,375                               158,511  
Shares acquired                                                                        
Net loss                                               (16,127)       (1,210,112 )                 (1,226,239 )
                                                                                                 
BALANCE, MARCH 31, 2020     2,750     $ 3,087,691       1,000     $ 1,227,964       1,171,208,112     $ 1,171,208     $ 445,940     $ (13,392)     $ (7,052,616 )     201,548,643     $ (580,358 )   $ (1,713,563 )
                                                                                                 
BALANCE, JUNE 30, 2018     1,473     $ 1,659,889       1,250     $ 1,407,342       398,410,762     $ 398,411     $ 1,311,076     $     $ (4,302,291 )     35,471,535     $ (365,352 )   $ 109,075  
PIK dividends                                                                     (116,465 )                     (116,465 )
Preferred stock dividends declared           63,028             53,438                                                   116,466  
                                                                                                 
Conversions                             293,453,979       293,454(       (22,339 )                             271,115  
Stock grants                             48,400,0004       48,400       40,808                               89,208  
Shares acquired                                                                             52,377,108       (78,566 )     (78,566 )
Net loss                                               2,735       (997,245 )                 (994,510 )
                                                                                                 
BALANCE, MARCH 31, 2019     1,473     $ 1,722,917       1,250     $ 1,460,780       740,264,741     $ 740,265     $ 1,329,545     $ 2,735     $ (5,416,001 )     87,848,643     $ (443,918 )   $ (603,677 )

 

                                                                         
    SERIES A
PREFERRED STOCK
    SERIES B
PREFERRED STOCK
    COMMON STOCK     ADDITIONAL
PAID-IN
    ACCUMULATED
OTHER
COMPREHENSIVE
    ACCUMULATED     TREASURY STOCK        
    SHARES     AMOUNT     SHARES     AMOUNT     SHARES     AMOUNT     CAPITAL     GAIN (LOSS)     DEFICIT     SHARES     AMOUNT     TOTAL  
BALANCE, DECEMBER 31, 2019     2,750     $ 3,065,337       1,000     $ 1,212,803       1,170,708,112     $ 1,170,708     $ 443,240     $ (1,494 )   $ (6,559,880 )     201,548,643     $ (580,358 )   $ (1,249,644 )
                                                                                                 
Preferred stock dividends declared           22,354             15,161                               (53,477 )                 (15,964 )
                                                                                             
Conversions                             500,000       500       2,700                               3,200  
                                                                                                 
Shares acquired                                                                        
Net loss                                               (11,898)       (439,259 )                 (451,157 )
                                                                                                 
BALANCE, MARCH 31, 2020     2,750     $ 3,087,691       1,000     $ 1,227,964       1,171,208,112     $ 1,171,208     $ 445,940     $ (13,392)     $ (7,052,616 )     201,548,643     $ (580,358 )   $ (1,713,563 )
                                                                                                 
BALANCE, DECEMBER 31, 2018     1,473     $ 1,701,646       1,250     $ 1,442,745       560,465,402     $ 514,066     $ 1,341,961     $ 2,787     $ (5,277,997 )     35,471,535     $ (365,352 )   $ (593,744  )
                                                                                                 
Preferred stock dividends declared           21,271             18,034                               (39,305)                    
Conversions                             160,799,339       160,799       (21,916)                               138,883  
Stock grants                             19,400,000       29,400       9,500                               28,500  
Shares acquired                                                           52,377,108        (78,566)       (78,566  )
Net loss                                               (52 )     (98,699 )                 (98,751 )
                                                                                                 
BALANCE, MARCH 31, 2019     1,473     $ 1,722,917       1,250     $ 1,460,708       740,264,741     $ 740,265     $ 1,329,545     $ 2,735     $ (5,416,001 )     87,848,643     $ (443,918 )   $ (603,677)     

  

The accompanying notes are an integral part of these financial statements

 

6 

 

 

REDHAWK HOLDINGS CORP. 

Notes to the Unaudited Consolidated Financial Statements

March 31, 2020

 

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, the Company is a diversified holding company which, through our subsidiaries, is engaged in sales and distribution of medical devices, sales of branded generic pharmaceutical drugs, commercial real estate investment and leasing, sales of point of entry full-body security systems, and specialized financial services. Through its medical products business unit, the Company sells the SANDD™ Insulin Needle Destruction Unit (formerly known as the Disintegrator™), non-contact thermometers, face masks, surgical masks, UV lights, WoundClot Surgical - Advanced Bleeding Control, the Carotid Artery Digital Non-Contact Thermometer and Zonis®. Through our United Kingdom based subsidiary, we manufacture and market branded generic pharmaceuticals, certain other generic pharmaceuticals known as “specials” and certain pharmaceuticals outside of the United Kingdom’s National Health Service drug tariff referred to as NP8’s. Centri Security Systems LLC, a wholly-owned subsidiary of the Company, holds the exclusive U.S. manufacturing and distribution rights for the Centri Controlled Entry System, a unique, closed cabinet, nominal dose transmission full body x-ray scanner. Our real estate leasing revenues are generated from commercial properties under 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 three month period ended March 31, 2020, the Company had revenues of $148,674, a consolidated net loss of $439,259. For the nine month period ended March 31, 2020, the Company had revenues of $217,989, a consolidated net loss of $1,210,112 and cash of $1,205,950 used in operating activities. As of March 31, 2020, the Company had cash of $99,246, a working capital deficit of $991,397 and an accumulated deficit of $7,052,616. The continuation of the Company as a going concern is still dependent upon the continued financial support from its stockholders, the ability to raise equity or debt financing, cash proceeds from the sale of assets and the attainment of profitable operations from the Company’s businesses in order to discharge its obligations. We cannot predict, with certainty, the outcome of our efforts to generate liquidity and profitability, or whether such actions would generate the expected proceeds to the Company. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

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2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The unaudited interim condensed financial statements of the Company as of March 31, 2020 and for the three and nine month periods ended March 31, 2020 and 2019 included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The year-end condensed balance sheet dated as of June 30, 2019 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 and for the year ended June 30, 2019. 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.

 

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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. Shipping and handling costs are included in revenue and costs of goods sold.

 

Cash and Cash Equivalents

 

We consider highly liquid investments with an original maturity of 90 days or less to be cash equivalents. The Company did not have any cash equivalents as of March 31, 2020 or June 30, 2019. 

 

Accounts Receivable

 

Accounts receivables are amounts due from customers of our pharmaceutical, medical device and financial services divisions. We do not require collateral from our customers. The amount is reported at the billed amount, net of any expected allowance for bad debts. There was no allowance for doubtful accounts as of March 31, 2020 or June 30, 2019.

 

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. 

 

 

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Property and Improvements

 

Property and improvements are stated at cost. We provide for depreciation expense on a straight-line basis over each asset’s useful life depreciated to their estimated salvage value. Buildings are depreciated over a useful life of 20 to 30 years. Building improvements are depreciated over a useful life of 5 to 10 years. Tooling and equipment are depreciated over a useful life of ten years.

 

Our Louisiana real estate holdings include our former corporate headquarters on Chemin Metairie Road in Youngsville, Louisiana and a property on Jefferson Street in Lafayette, Louisiana. As of March 31, 2020, we are leasing both properties to third parties. The Company is also currently using a portion of the Chemin Metairie Road property for equipment storage 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. Beginning December 1, 2019, the Chemin Metairie is leased through December 31, 2020 at a rental rate of $1,700 per month.

 

Income Taxes

 

Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company follows Accounting Standard Codification (which we refer to as “ASC”) 740, Income Taxes, which requires the Company to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense in the period they are incurred. The Company does not believe that it has any uncertain tax positions.

 

Basic and Diluted Net Loss Per Share

 

The Company computes net loss per share in accordance with ASC 260, Earnings Per Share, which requires presentation of both basic and diluted earnings per share (EPS) on the face of the consolidated statements of operations. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and the convertible notes and the convertible preferred stock using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. There were 113,508,450 outstanding warrants as of March 31, 2020 with an exercise price of $0.005 per share. Such warrants are anti-dilutive to EPS and are excluded from the calculation of EPS.

 

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At March 31, 2020, including accrued but unpaid interest, there was one remaining 2016 Fixed Rate Convertible Note outstanding which totaling $61,037 and is convertible into 4,069,118 shares of common stock upon conversion of the remaining 2016 Fixed Rate Convertible Note.

 

During the nine months ended March 31, 2020, we issued in private offerings exempt from registration debt securities in the form of new 2019 Variable Rate Convertible Notes (See Note 7) in the amount of $1,078,862. The proceeds were used for working capital. The 2019 Variable Rate Convertible Notes are convertible into shares of common stock at a variable conversion rate.

 

During the nine months ended March 31, 2020, we issued in private offerings exempt from registration debt securities in the form of new 2019 Fixed Rate Convertible Notes (See Note 7) in the amount of $832,000. With the proceeds we paid off certain variable rate convertible notes outstanding in the amount of approximately $458,000, plus accrued interest. The 2019 Fixed Rate Convertible Notes mature on the fifth anniversary of the date of issuance and are convertible into shares of our common stock at a price of $0.015 per share and include 25% warrant coverage at $0.01 per share (which we refer to as the “2019 Warrants”).

 

At March 31, 2020, including accrued but unpaid dividends, there were potentially 205,846,071 shares of common stock issuable upon the conversion of our outstanding Series A Preferred Stock and, including accrued but unpaid dividends, there were potentially 122,796,364 shares of common stock issuable upon the conversion of our outstanding Series B Preferred Stock. The shares of common stock 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 loss as of March 31, 2020 and June 30, 2019 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:

 

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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.

 

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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 was required to adopt ASU 2016-02 as of July 1, 2019. The Company has elected to use the short-term lease exception allowed in ASU 2016-02. The adoption, therefore, did not have any effect on the Company’s consolidated financial statements as we did not have any leases with non-cancellable terms in excess of one year as of the adoption date. We did enter into a long-term lease in the quarter ended March 31, 2020 for new office space and have recorded a right-of-use asset and the related lease obligation as of March 31, 2020. Also see Note 6.

 

Reclassification

 

Certain amounts in prior periods have been reclassified to conform to the current period presentation.

 

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3.

REVENUE FROM CONTRACTS WITH CUSTOMERS

 

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. In certain cases, the customers make advance payments on orders of medical devices. Such advance payments are recorded as deferred revenue in the accompanying consolidated balance sheets. As of March 31, 2020 and June 30, 2019, we had $267,145 and $0, respectively, of deferred revenue recorded.  

 

We have distributorship and sales representative agreements in place with third parties who do not take ownership of products. Any costs incurred related to these agreements are considered to be sales and marketing expenses. In the quarter ended March 31, 2020, we entered into a one-year distribution agreement with Dolphin Medical LLC (the “distributor”), which requires the distributor to order and purchase a minimum number of medical devices in each quarter of the agreement. The Company has invoiced and recorded revenue of approximately $87,500 and the related cost of goods sold in the quarter ended March 31, 2020 for the required minimum purchase.

 

We also earn rental income from operating leases which is recognized over the rental period as the tenant occupies the space and pays the rental amount. Rentals are paid at the beginning of the month covered by the lease.

 

Disaggregation of Revenue 

For the three and nine month periods ended March 31, 2020 and 2019, a summary of our revenue on a disaggregated basis is as follows:

 

    Three Months Ended     Nine Months Ended  
    March 31,     March 31,  
    2020     2019     2020     2019  
                         
Sales of pharmaceuticals   $     $ 1,457      $     $ 71,792   
Sales of medical devices     133,824        61,849        176,537        62,525   
Rental revenue from operating lease payments     14,850        10,250        41,452        34,759   
    $ 148,674      $ 73,556      $ 217,989      $ 169,076   

  

Transaction Prices 

In some cases, we may offer introductory discounts to customers. In such cases, we reduce the recorded revenue for such discounts. For the nine month periods ended March 31, 2020 and 2019, our revenues were reduced by $95,508 and $39,995, respectively, for such discounts. For the three month periods March 31, 2020 and 2019, our revenues were reduced by $52,859 and $39,995, respectively, for such discounts. Shipping and handling costs included in revenue was $805 and $1,305 for the three and nine month periods ended March 31, 2020, respectively.

 

4.

OTHER ASSETS

 

The investment in Tower Hotel Fund 2013, LLC is recorded at cost and the Company is not aware of any indicator of impairment as of March 31, 2020. It is not practicable for the Company to estimate fair value of this investment.

 

We are 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 during the next twelve months. Thus, our investment is shown as a non-current asset as of March 31, 2020 in the accompanying consolidated balance sheet.

 

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As of March 31, 2020, we have approximately $387,111 ($304,471 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 agreed to pay a consulting fee of $1,000 per month for sixty months. The broker’s fee was paid through the issuance of 14 million shares of the Company’s common stock. The quarterly payments and the consulting fee 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 March 31, 2020 and June 30, 2019 consolidated balance sheets.

 

In the nine months ended March 31, 2020, we issued 20,000,000 shares of Common Stock under the terms of a 2015 consulting agreement as a result of reaching certain milestones related to the development of our needle destruction devices. Under the terms of this consulting agreement, an additional 40,000,000 shares of Common Stock may be issued if other milestones are met.

 

5.

INSURANCE NOTE PAYABLE

 

We finance a portion of our insurance premiums. At March 31, 2020, there was a $12,537 outstanding balance due on our premium finance agreements. The agreements have effective interest rates of 6.2% to 10.9%. The policies related to these premiums expire between July and October 2020.

 

6.

RELATED PARTY TRANSACTIONS

 

Effective December 1, 2016, the Company entered into a $250,000 Commercial Note Line of Credit (which we refer to as the “Line of Credit”) with a stockholder and officer of the Company to evidence prior indebtedness and provide for future borrowings. The advances are used to fund our operations. The Line of Credit accrues interest at 5% per annum and matures on March 31, 2021. At maturity, or in connection with a pre-payment, subject to the conditions set forth in the Line of Credit, the stockholder has the right to convert the amount outstanding (or the amount of the prepayment) into the Company’s Series A Preferred Stock at the par value of $1,000 per share. At March 31, 2020, the outstanding principal balance totaled $0.

 

 

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During the fiscal year ended June 30, 2019, certain members of the board of directors and stockholders of the Company made $242,000 in interest free advances to the Company. The advances are convertible into shares of the Company’s common stock at rates ranging from $0.0024 to $0.0050 or 75,916,667 shares of common stock. During the quarter ended December 31, 2019, the Company received notice from the holders of $142,000 of these related parties of their intent to exercise their right to convert their advances into 55,916,667 shares of common stock. The conversion should be completed subsequent to the year ending June 30, 2020.

 

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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 March 31, 2020 and June 30, 2019, $50,000 in such fees remain unpaid and are recorded in accounts payable and accrued liabilities in the accompanying consolidated balance sheets.

 

We entered into an office space lease in January 2020 with a company owned by a member of our Board of Directors. The lease is for a three-year term beginning April 1, 2020. The base annual rent is $25,830. In addition to the base rent, the Company will also pay a proportionate share of common area operating expenses. The Company has recorded operating right-of-use (ROU) assets and liabilities in the amount of $67,254 as of March 31, 2020 related to the lease. The ROU asset represents our right to use the asset for the lease term and the ROU liability represents our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized based on the present value of lease payments utilizing an interest rate based on a collateralized loan with the same term as the related lease.

 

7.

LONG-TERM DEBT, DEBENTURES AND LINES OF CREDIT

 

On November 12, 2015, we acquired certain commercial real estate from a related party that is an entity controlled by a stockholder and officer of the Company for $480,000 consisting of $75,000 of land costs and $405,000 of buildings and improvements. The purchase price was paid through the assumption by the Company of $265,000 of long-term bank indebtedness (which we refer to below as “Note”) plus the issuance of 215 shares of the Company’s 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 2016 Fixed Rate Convertible Notes mature on March 15, 2021, the fifth anniversary of the date of issuance and are convertible into shares of our common stock at a price of $0.015 per share. Interest accrues at a rate of 5% per annum and is payable semi-annually. The Company has the option to issue a notice of its intent to redeem, for cash, an amount equal to the sum of (a) 120% of the then outstanding principal balance, (b) accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect of the 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. Holders of Fixed Rate Convertible Notes have 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. During the nine month period ended March 31, 2020, $17,480 of Notes were converted by the holders into 1,165,314 shares of Common Stock. At March 31, 2020, there was one remaining 2016 Fixed Rate Convertible Note outstanding with principal and accrued interest of $61,037. This one remaining 2016 Fixed Rate Convertible Note (plus accrued interest) is convertible into our common stock at a conversion rate of $0.015 per share or 4,069,118 shares. During the nine month period ended March 31, 2020 and 2019, we paid-in-kind approximately $2,000 and $23,000, respectively, of interest on these convertible notes.

 

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In August 2019, we authorized the issuance of up to $1.25 million in principal amount of new convertible promissory notes (which we refer to as the “2019 Fixed Rate Convertible Notes”). The 2019 Fixed Rate Convertible Notes are secured by certain Company real estate holdings. As of March 31, 2020, $832,000 of 2019 Fixed Rate Convertible Notes were outstanding.

 

The 2019 Fixed Rate Convertible Notes mature on the fifth anniversary of the date of issuance and are convertible into shares of our common stock at a price of $0.015 per share and include 25% warrant coverage at $0.01 per share (which we refer to as the “2019 Warrants”). Interest accrues at a rate of 7% per annum and is payable semi-annually. The Company has the option to issue a notice of its intent to redeem, for cash, an amount equal to the sum of (a) 120% of the then outstanding principal balance, (b) accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect of the 2019 Fixed Rate Convertible Notes. The Company may only issue the notice of its intent to redeem the 2019 Fixed Rate Convertible Notes if the trading average of the Company’s common stock equals or exceeds 300% of the conversion price during each of the five business days immediately preceding the date of the notice of intent to redeem. The holder of the 2019 Fixed Rate Convertible Notes has the right to convert all or any portion of the 2019 Fixed Rate Convertible Notes at the conversion price at any time prior to redemption.

 

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As of June 30, 2019, we had $256,500 of previously issued variable rate convertible notes outstanding (“Variable Rate Convertible Notes”). During the nine months ended March 31, 2020, we also issued $1,078,862 of convertible notes to third parties with variable conversion rates (“2019 Variable Rate Convertible Notes”). The 2019 Variable Rate Convertible Notes mature at various dates between September 2020 and June 2021. We received approximately, net of financing costs incurred, $960,000 in cash from the issuance of these notes. These 2019 Variable Rate Convertible Notes have interest accruing at rates ranging between 10% - 12%. These notes issued to third parties have a variable conversion rate based on the price of the Company’s common stock. None of the 2019 Variable Rate Convertible Notes have been converted into shares of common stock. 

 

During the nine months ended March 31, 2020, we repaid $458,375 of Variable Rate Convertible Notes and 2019 Variable Rate Convertible Notes. Upon the retirement of these notes, the Company may also have to pay a prepayment amount in excess of the outstanding balance of principal and accrued interest. Such prepayment amounts totaled $129,338 for the nine months ended March 31, 2020 and have been recorded as a loss on extinguishment of debt in the accompanying consolidated statements of operations. $56,775 of these payments occurred during the six months ended December 31, 2019 and was previously recorded as interest expense; such amounts were reclassified to loss on extinguishment of debt in the quarter ended March 31, 2020. In the quarter ended September 30, 2019, we recognized a gain of $44,527 on the extinguishment of certain fixed rate convertible notes.

 

At March 31, 2020, $835,737 of the 2019 Variable Rate Convertible Notes were convertible into common stock beginning in the quarter ending June 30, 2020. Subsequent to March 31, 2020, we repaid outstanding principal amount of $335,000, plus accrued interest and prepayment penalties, under these 2019 Variable Rate Convertible Notes.  

 

Certain of the 2019 Variable Rate Convertible Notes have maturity dates prior to March 31, 2021 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, pay off such amounts with the proceeds of long-term financing, 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. 

 

During the year ended June 30, 2019, we issued $29,250 of convertible notes to our majority stockholder in exchange for 7,450,000 shares of our common stock. 

 

In February 2018, we obtained a $100,000 line of credit from a bank. The line of credit was collateralized by a $100,000 certificate of deposit at the bank. The interest rate on the line of credit was 7.0% per annum. During the quarter ended March 31, 2020, proceeds from the certificate of deposit were used to repay the outstanding balance under the line of credit plus accrued interest. 

 

On March 12, 2019, we obtained a $180,000 real estate loan from a financial institution. The note matured on April 1, 2020 and was extended to August 1, 2020. This real estate note is secured by certain real estate property and the personal guarantee of an officer and director of the Company. Interest only is payable monthly and accrues at an interest rate of 12%. 

 

Beginning in the quarter ended June 30, 2019, we entered into a series of credit financing arrangements from financing institutions by pledging 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 $153,000 under these agreements. During the nine month period ended March 31, 2020, additional draws of approximately $116,000 occurred and payments of approximately $76,000 were made. As of March 31, 2020, approximately $174,000 remained outstanding on these loans.

 

8.

COMMITMENTS AND CONTINGENCIES

 

Schreiber Litigation

 

On January 31, 2017, the Company and Beechwood Properties, LLC (“Beechwood”) filed suit against Daniel J. Schreiber (“Mr. Schreiber”) and the Daniel J. Schreiber Living Trust – Dtd 2/08/95 (“Schreiber Trust”) in the United States District Court for the Eastern District of Louisiana (the “Louisiana Court”) under Civil Action No. 2:2017cv819-B(3) (the “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.

 

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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.

 

20 

 

 

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 October 11, 2019, Mr. Schreiber and the Schreiber Trust filed a Motion to Enforce Settlement Agreement (the “Motion”) with the Louisiana Court alleging that the Company has failed to comply with its obligations under the Settlement Agreement by selling stock for cash subsequent to the parties entering into the Settlement Agreement. The Motion seeks to accelerate the amounts owed to Mr. Schreiber and the Schreiber Trust under the Settlement Agreement as well as attorneys’ fees. The Company believes the Motion is without merit and intends to vigorously defend against the Motion.

 

Consultant Agreement

 

On July 19, 2019 (the “Effective Date”), RedHawk Holdings Corp. (the “Company”) and its wholly-owned subsidiary, RedHawk Medical Products & Services, along with other affiliated entities, entered into a Consultant Agreement (“Agreement”) with Drew Pinsky, Inc (“DPI”) f/s/o Dr. Drew Pinsky (“Consultant”), for Consultant to be the exclusive spokesperson for the Company’s Sharps Needle and Destruction Device (“SANDD”) mini™, SANDD Pro™ and any related products and/or accessories (“Products”) for an initial period of two (2) years (“Initial Period”), under the terms and conditions described in the Agreement. At the end of the Initial Period, there shall be an automatic, immediately consecutive two (2) year extension period unless DPI, within 60 days of the expiration of the Initial Period, provides written notice of its intention not to extend the Agreement.

 

Under the Agreement, the Company will pay DPI a royalty equal to 3% of the “Net Sales”, as defined in the Agreement, of the Products but in no event will the royalty be less than $3.50 per SANDD mini™ unit sold and $13.50 per SANDD Pro™ unit sold.

 

Pursuant to the Agreement, the Company agreed to issue to the Consultant 68,700,000 shares of the Company’s common stock, which is equal to approximately 5% of the Company’s outstanding common stock on a fully diluted basis as of the Effective Date. Further, the Company has agreed to issue to the Consultant, one year after the Effective Date, an additional 68,700,000 shares of the Company’s common stock, unless DPI has provided the Company with written notice of its intention not to extend the Initial Period. As of the date of this Quarterly Report on Form 10-Q, the Company has not yet issued any of the shares pursuant to the Agreement.

 

9.

STOCKHOLDERS’ EQUITY

 

On August 20, 2018, by a vote of the majority of our stockholders, we increased the number of our authorized common shares from 1,000,000,000 to 2,000,000,000.

 

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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 nine months ended March 31, 2020 and 2019, we paid-in-kind $114,859 and $116,466, 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.

 

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Concurrent with the execution of the Exchange Agreement, holders of $580,108 aggregate principal amount of the Company’s 5% convertible promissory notes (“Notes”), including accrued interest, were offered and converted their Notes into 116,021,700 shares of Common Stock at a conversion price of $0.005 per share. The extinguishment of the notes and the related accrued interest for the shares of common stock resulted in a gain on extinguishment of approximately $419,000 based on the closing price of the common stock as of the exchange date.

 

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.

 

In conjunction with the 2019 Fixed Rate Convertible Notes, the holders of the 2019 Fixed Rate Convertible Notes were issued 20,800,000 warrants to purchase the Company’s common stock at a price of $0.01 per share. The warrants expire ten years from the date of issuance.

 

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10.

INCOME TAXES

 

The Company has not filed its tax returns for the years ended June 30, 2019 and 2018. 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 100% valuation allowance against its net deferred tax assets. Thus, there is no net tax asset recorded as of March 31, 2020 or June 30, 2019. Similarly, there is no income tax benefit recorded on the net loss of the Company for the periods ended March 31, 2020 and 2019.

 

11.

SEGMENT INFORMATION

 

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 & Hospitality and Other Services business units operate in the United States. Our Medical Device and Pharmaceutical business unit currently operates primarily in the United States and 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, 2020 and 2019 and for the nine months and three months then ended.

 

          MEDICAL                    
Nine months ended   LAND &     DEVICE &     OTHER              
March 31, 2020   HOSPITALITY     PHARMA     SERVICES     CORPORATE     TOTAL  
                               
Operating revenues   $ 41,452     $ 176,537     $     $     $ 217,989  
Operating loss   $ (15,145 )   $ (248,760 )   $ (160 )   $ (554,246 )   $ (818,311 )
Interest expense   $ 35,452     $ 627     $     $ 243,159     $ 279,238  
Depreciation and amortization   $ 23,500     $ 39,875     $     $     $ 63,375  
Identifiable assets   $ 903,403     $ 607,928     $ 77,814     $ 1,090,906     $ 2,680,051  

 

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          MEDICAL                    
Nine months ended   LAND &     DEVICE &     OTHER              
March 31, 2019   HOSPITALITY     PHARMA     SERVICES     CORPORATE     TOTAL  
                               
Operating revenues   $ 34,759     $ 134,317     $     $     $ 169,076  
Operating income (loss)   $ (11,097 )   $ (100,660 )   $ (201 )   $ (343,073 )   $ (455,031 )
Interest expense   $ 12,526     $ 10     $     $ 143,178     $ 155,714  
Depreciation and amortization   $ 23,500     $ 56,859     $     $     $ 80,359  
Identifiable assets   $ 937,294     $ 693,185     $     $ 630,977     $ 2,261,456  

 

          MEDICAL                    
Three months ended   LAND &     DEVICE &     OTHER              
March 31, 2020   HOSPITALITY     PHARMA     SERVICES     CORPORATE     TOTAL  
                               
Operating revenues   $ 14,849     $ 133,825     $     $     $ 148,674   
Operating income (loss)   $ 831     $ (51,151 )   $ (85 )   $ (164,041 )   $ (214,446 )
Interest expense   $ 8,883     $ 310     $     $ 58,530     $ 67,723  
Depreciation and amortization   $ 7,833     $ 13,625     $     $     $ 21,458  

 

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          MEDICAL                    
Three months ended   LAND &     DEVICE &     OTHER              
March 31, 2019   HOSPITALITY     PHARMA     SERVICES     CORPORATE     TOTAL  
                               
Operating revenues   $ 10,250     $ 63,306     $     $     $ 73,556  
Operating income (loss)   $ (8,894)     $ (15,899 )   $     $ (109,410 )   $ (134,203 )
Interest expense (income)   $ 4,789     $ 10     $     $ (20,705 )   $ (25,504 )
Depreciation and amortization   $ 7,833     $ 11,375     $     $     $ 19,208  

 

12.

SUBSEQUENT EVENTS

 

The Company evaluated events occurring after March 31, 2020, and through the date the consolidated financial statements were issued, June 29, 2020 and concluded there were no events or transactions that would require recognition or disclosure in these financial statements, except for the following:

 

 

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout the world, including the United States. On March 11, 2020 the World Health Organization characterized the spread of the coronavirus disease (“COVID-19”) as a “pandemic”. The significant reach of COVID-19 has resulted in a widespread public health issue that has and will likely continue to affect the economies worldwide, and could adversely affect our business, results of operations and financial condition, including a decrease in demand for our medical devices. Specifically, demand for our newly released SANDD Pro™ may be delayed, postponed or cancelled until hospitals, clinics and physicians resume normal operations. In addition, the operations of our real estate investment in Hawaii has also been adversely affected. As a result of the pandemic, we expanded our medical sales efforts to include personal protective equipment (PPE) in the quarter ending June 30, 2020. The ultimate extent of the impact of COVID-19 on our business and future financial condition, results of operations and cash flows will depend on future developments, which are highly uncertain and cannot be predicted at this time.

     

Subsequent to March 31, 2020, we repaid in full two 2019 Variable Rate Convertible Notes in the principal amount of $335,000 plus accrued interest. There was a prepayment penalty paid with the repayment in the amount of approximately $19,500. Also, as a result of the full payment, 20,434,782 shares of common stock previously issued as collateral for one of these notes were returned to the Company.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. Forward-looking statements are all statements other than statements of historical facts. The words “may,” “can,” “will,” “should,” “plans,” “believes,” “estimates,” “expects,” “projects,” “targets,” “intends,” “potential,” “proposed,” and any similar expressions are intended to identify those assertions as forward-looking statements. Investors are cautioned that forward-looking statements are predictions and are inherently uncertain. Actual performance and results may differ materially from that projected or suggested herein due to certain risks and uncertainties. In evaluating forward-looking statements, you should consider the various factors which may cause actual results to differ materially from any forward-looking statements, including the risks below and those listed in the “Risk Factors” section of our latest 10-K report:

 

  The ultimate extent of the impact of COVID-19 on our business and future financial condition, results of operations and cash flows will depend on future developments, which are highly uncertain and cannot be predicted at this time.
     
  Changes in the effects of the significant level of competition that exists in the medical device distribution industry, or our inability to attract customers for other reasons.
     
  The unexpected cost of regulation applicable to our industry, and the possibility of future additional regulation.
     
  Our lack of adequate insurance coverage in the event we incur an unexpected liability.
     
  Our lack of a proven operating history and the possibility of future losses that are greater than we currently anticipate.
     
  The possibility that we may not be able to generate revenues or access other financing sources necessary to operate our business.
     
  Our inability to attract necessary personnel to run and market our business.
     
  The volatility of our stock price.
     
  Changes in the market prices for our products, or our failure to perform or renew the distribution agreement for our products.
     
  Our failure to execute our growth strategy or enter into other lines of business that we may identify as potentially profitable for our company.
     
  Changes in economic and business conditions.
     
  The outcome of pending or future litigation.
     
  Changes in accounting policies and practices we may voluntarily adopt or that we may be required to adopt under generally accepted accounting principles in the United States.

 

Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Therefore, you should not rely on these forward-looking statements as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

 

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Overview

 

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 our stockholders, our name was changed from “Independence Energy Corp.” to “RedHawk Holdings Corp.”

 

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 our medical products business unit, we sell WoundClot Surgical - Advanced Bleeding Control, the SANDD™ Insulin Needle Destruction Unit (formerly known as the Disintegrator™), the Carotid Artery Digital Non-Contact Thermometer. 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 commercial properties under lease. Additionally, the Company’s real estate investment unit holds limited liability company interests in a commercial restoration project in Hawaii.

 

Recent Developments

 

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout the world, including the United States. On March 11, 2020 the World Health Organization characterized the spread of COVID-19 as a “pandemic”. The significant reach of COVID-19 has resulted in a widespread public health issue that has and will likely continue to affect the economies worldwide, and could adversely affect our business, results of operations and financial condition, including a decrease in demand for our medical devices. Specifically, demand for our newly released SANDD Pro™ may be delayed, postponed or cancelled until hospitals, clinics and physicians resume normal operations. In addition, the operations of our real estate investment in Hawaii has also been adversely affected. As a result of the pandemic, we expanded our medical sales efforts to include personal protective equipment (PPE) in the quarter ending June 30, 2020. The ultimate extent of the impact of COVID-19 on our business and future financial condition, results of operations and cash flows will depend on future developments, which are highly uncertain and cannot be predicted at this time.

 

Working Capital

 

    March 31,
2020
    June 30,
2019
 
Current Assets   $ 734,231     $ 405,685  
Current Liabilities   $ 1,725,628     $ 1,474,348  
Working Capital (Deficit)   $ (991,397 )   $ (1,068,663 )

  

RESULTS OF OPERATIONS

 

Operating Revenues

 

We commenced operations in our commercial real estate leasing business units in 2015. On December 31, 2015, our medical device business unit completed the acquisition of certain specialized tangible and intangible medical devices. On March 23, 2016, RedHawk Pharma UK Ltd acquired a 25% equity interest in EcoGen Europe Ltd, a United Kingdom based distributor of branded generic pharmaceuticals. During the quarter ended December 31, 2017, we increased our ownership in EcoGen to 100%. Sales efforts for our medical devices and branded generic pharmaceuticals commenced during the quarter ending September 30, 2016. We changed our revenue focus from branded generic pharmaceutical sales in the United Kingdom to more profitable medical device sales in the United States. The Company sells its smaller needle incineration device (SANDD mini) primarily to consumers, school nurses and law enforcement agencies. During the quarter ended March 31, 2020, the Company expanded its portfolio of medical products offered to consumers including digital non-contact thermometers, protective face masks, surgical masks and UV lights.

 

For the nine month period ended March 31, 2020, revenues from sales of our medical devices, branded generic pharmaceutical products and rentals of our commercial properties totaled $217,989 (net of introductory and distributor discounts totaling $95,508) as compared to revenues of $169,076 (net of introductory discounts of $39,995) for the comparable nine month period ended March 31, 2019.  

 

During the three and nine month periods ended March 31, 2020, the Company’s revenues were principally from sale of the Company’s needle incineration devices and certain newly offered PPE whereas revenues for the comparable three and nine month periods ended March 31, 2019 were principally from the Company’s branded generic pharmaceuticals in the United Kingdom. During the 2019 fiscal year, the Company announced that it would shift its revenue focus away from the lower profit margin branded generic pharmaceuticals to its more profitable needle incineration medical devices. For the nine month period ended March 31, 2020 and 2019, our branded generic pharmaceutical sales totaled $0 and $71,792, respectively. 

 

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Gross profit margin from the sale of the Company’s needle incineration devices approximates 69%; excluding introductory and distributor discounts the gross profit margin approximates 80%, as compared to approximately 27% from sales of the Company’s branded generic pharmaceuticals. The gross profit margin in the three and nine month periods ended March 31, 2020 were affected by the introductory discounts provided to two new customers. The lower gross profit margins from the sale of the Company’s branded generics pharmaceuticals resulted from lowering of posted drug tariff prices by the United Kingdom National Health Service. The change in the Company’s revenue focus away from branded generic pharmaceuticals is expected to be temporary but will remain our revenue focus until tariff prices improve.

  

Revenues in the pharmaceutical business unit are expected to return as tariff prices improve, market acceptance of our products increases, and we continue to execute our business plan to expand marketing of our SANDD™ medical devices. Additionally, net profits are expected to improve as the Company’s sales increase in our more profitable medical device sales and pharmaceutical sales become more weighted to its branded generics which have lower operating costs and require lower sales discounts than the discounts offered by the Company for its highly competitive “special” pharmaceuticals.

 

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Operating Expenses and Loss from Continuing Operations

 

For the nine month period ended March 31, 2020, we reported a consolidated net loss of $1,210,112 on revenues of $217,989 as compared to a consolidated net loss of $997,245 on revenues of $169,076 for the comparable nine month period ended March 31, 2019. For the three month period ended March 31, 2020, we reported a consolidated net loss of $439,259 on revenues of $148,674 as compared to a consolidated net loss of $98,699 on revenues of $73,556 for the comparable three month period ended March 31, 2019. There were introductory and distributor discounts of $95,508 and $52,859 in the nine month and three month periods ended March 31, 2020, respectively. Introductory discounts for the nine and three month periods ended March 31, 2019 were $39,995 and $39,995, respectively. 

 

The net loss for the nine month period ended March 31, 2020 includes approximately $118,004 of non-recurring professional services principally resulting from certain regulatory matters and contract preparation in connection with the Company’s consulting agreement with Drew Pinsky, Inc. (“DPI”) f/s/o Dr. Drew Pinsky (“Consultant”), regulatory filings in connection with the Company’s obligation to issue equity to the Consultant under the consulting agreement and preparation of contractual documents in connection with the 2019 Fixed Rate Convertible Notes. Additionally, the nine and three month periods ended March 31, 2020 also includes approximately $113,768 and $40,153, respectively of marketing consulting fees incurred in connection with the consulting agreement with DPI, $70,389 and $18,014, respectively, of consulting fees principally related to the Company’s new investor and public relations advisors, $65,710 and $12,500, respectively of auditor fees, $83,901 and $25,420, respectively, of non-recurring research and development costs incurred in connection with the re-design of the SANDD Pro™, approximately $11,436 and $8,810, respectively, of higher costs associated with website and social media development, and $20,094 of additional marketing start-up costs associated with the launch of sales for the Company’s needle incineration devices.

 

Liquidity and Capital Resources

 

As of March 31, 2020, we had cash of $99,246 compared with cash of $1,648 as of June 30, 2019. During the three month period ended March 31, 2020, we redeemed our certificate of deposit of $100,374 at June 30, 2019 and used the proceeds to repay the balance due on our line of credit.

 

During the nine months ended March 31, 2020, we issued in private offerings exempt from registration $1,078,862 of variable convertible notes (proceeds of approximately $960,000, net of financing costs). We also issued $832,000 of new fixed rate convertible notes (proceeds of approximately $797,000, net of financing costs). The proceeds from these debt financings were used to pay approximately $458,375, plus accrued interest and prepayment penalties, of variable interest convertible notes and provide working capital.  

 

The Company is continuing to pursue the sale of its real estate holdings. Also refer to the Going Concern section of Note 1 to our unaudited consolidated financial statements.

 

Cash Flows 

 

    Nine months ended
March 31,
 
    2020     2019  
Cash Flows (used in) Operating Activities   $ (1,205,950 )   $ (520,292 )
Cash Flows provided by  Investing Activities   $  94,774     $ 321,577  
Cash Flows provided by  Financing Activities   $ 1,239,472     $ 233,049  
Net Change in Cash During Period   $ 97,598     $ 11,843  

 

Cash Flow from Operating Activities

 

During the nine month period ended March 31, 2020, $1,205,950 of cash was used by our operating activities as compared to $520,292 used in our operating activities for the comparable nine month period ended March 31, 2019. Changes to our operating activities are sporadic and result from the early stage of implementation of our business strategies that are supported by capital raising activities. During the nine month period ended March 31, 2020, as we moved forward with the development and sales efforts of our needle incineration devices and expanded the portfolio of medical device products offered for sale, we expended cash on inventory and made prepayments for additional inventory, and had increase cash outlays on sales and marketing, research and development, professional fees, operating costs (including insurance), and administrative costs. We also paid interest of $229,867 in the nine month period. These added cash outlays increased our cash used in operating activities. 

 

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Cash Flows from Investing Activities

 

During the nine month period ended March 31, 2019, we received approximately $370,000 in distributions from our limited liability real estate investment in Hawaii. This was partially offset by the deposit made in connection with the acquisition of a license. In the nine months ended March 31, 2020, we cashed in our certificate of deposit and used the proceeds to pay the related line of credit.

 

Cash Flows from Financing Activities

 

During the nine month period ended March 31, 2020, we received net proceeds, after financing costs incurred, of approximately $960,000 from the issuance of 2019 Variable Rate Convertible Notes and approximately $797,000 from the issuance and sale of the 2019 Fixed Rate Convertible Notes. The proceeds received were used to pay certain variable interest notes and provide working capital.

 

Going Concern

 

We continue to incur operating losses and use cash in our operating activities and are dependent upon asset sales, obtaining third party financing or shareholder loans to pursue any acquisitions and continue our operating activities. For these reasons, there is substantial doubt that we will be able to continue as a going concern without further financing. Also refer to the Going Concern section of Note 1 to our unaudited consolidated financial statements.

 

Off-Balance Sheet Arrangements

 

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.

 

Future Financings

 

We will continue to rely on financial support from our stockholders and our ability to raise equity capital or debt financing in order to continue to fund our business operations. Issuances of additional shares and debt instruments convertible into shares of our stock will result in dilution to existing stockholders. Additional funding may not be available to us on a timely basis or at acceptable terms, if at all. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund our operations and other activities.

 

Use of Estimates and Critical Accounting Policies

 

Our consolidated financial statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A summary of these policies is included in the notes to our financial statements. In general, our management’s estimates are based on historical experience, information from third party professionals, and various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

 

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Recently Issued Accounting Pronouncements

 

We have implemented all new accounting pronouncements that are in effect and applicable to us. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

As a smaller reporting company, we are not required to provide the information under this item.

 

ITEM 4.  CONTROLS AND PROCEDURES.

 

Management’s Report on Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer to allow for timely decisions regarding required disclosure.

 

As of the end of the quarter covered by this Quarterly Report on Form 10-Q, we carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded, in light of material weaknesses in our internal controls, that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q. The Company has a limited number of employees and, as such, segregation of duties surrounding certain processes are not adequately maintained, including over cash receipts and disbursements. This also means there is limited review of accounting and financial reporting conclusions made by the Company’s chief financial officer.

 

Changes in Internal Control Over Financial Reporting

 

During the nine month period ended March 31, 2020, our board of directors established the following remediation measures to address certain material weaknesses disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019:

 

 

We engaged additional personnel to assist with the preparation and review of the Company’s monthly financial reporting, and to appropriately segregate duties, including those related to cash transactions.

 

Except as indicated above, during the period covered by this Quarterly Report on Form 10-Q, there were no other changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

32 

 

 

PART II - OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS.

 

Please see Note 8 to the unaudited consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for a summary of legal proceedings and developments during the quarter ended March 31, 2020, including a summary of the Motion to Enforce Settlement Agreement that was filed against the Company by Daniel J. Schreiber and the Daniel J. Schreiber Living Trust – Dtd 2/08/95 in the United States District Court for the Eastern District of Louisiana on October 11, 2019.

 

ITEM 1A.  RISK FACTORS.

 

As a smaller reporting company, we are not required to provide the information under this item.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

33 

 

 

ITEM 6. EXHIBITS.

 

The following exhibits are either filed herewith or incorporated herein by reference:

 

Exhibit Number

 

Description of Exhibit

3.01

 

Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on July 26, 2019)

 

 

 

3.02

 

Bylaws (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form SB-2 filed on March 7, 2006)

 

 

 

3.03

 

Certificate of Designation filed on November 12, 2015 (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 19, 2015).

 

 

 

3.04

 

Certificate of Designation filed on February 16, 2016 (Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on January 5, 2016).

     

10.1*

 

Office Lease, dated January 13, 2020, by and between the Company and 100 Petroleum Drive, LLC.

     

31.1*

 

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*

 

Certification of the Principal Financial Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1**

 

Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2**

 

Certification of the Principal Financial Officer and Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

*

Filed herewith.

**

The Certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of RedHawk Holdings Corp., irrespective of any general incorporation language contained in such filing.

 

34 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

REDHAWK HOLDINGS CORP.

 

(Registrant)

 

 

Dated: June 29, 2020

/s/ G. Darcy Klug

 

G. Darcy Klug

 

Chief Financial Officer and Director
(Principal Financial Officer and Principal Accounting Officer)

 

35 

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