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EX-32.2 - RedHawk Holdings Corp.ex32-2.htm
EX-32.1 - RedHawk Holdings Corp.ex32-1.htm
EX-31.2 - RedHawk Holdings Corp.ex31-2.htm
EX-31.1 - RedHawk Holdings Corp.ex31-1.htm
EX-21.1 - RedHawk Holdings Corp.ex21-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended June 30, 2018

 

OR

 

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

 

For the transition period from ____________to____________

 

Commission File No. 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)
  (I.R.S. Employer
Identification No.)
     
120 Rue Beauregard, Suite 206
Lafayette, LA
  70508
(Address of Principal Executive Offices)   (Zip Code)

 

(Registrant’s Telephone Number, Including Area Code): (337) 269-5933

 

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

 

Title of each Class   Name of each Exchange on which registered
N/A   N/A

 

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

 

Common Stock, $0.001 par value

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

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 [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

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

 

  Large accelerated filer [  ]   Accelerated filer [  ]
           
  Non-accelerated filer [  ]   Smaller reporting company [X]
  (Do not check if smaller reporting company)      

 

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

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on August 31, 2018 was approximately $493,634 based on the closing price of $0.0019 per share as reported on the OTCQB Markets. As of June 30, 2018, the registrant had 362,939,227 shares outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

None.

 

 

 

 
 

 

REDHAWK HOLDINGS CORP.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended June 30, 2018

 

Table of Contents

 

    Page No.
  PART I  
Cautionary Note About Forward-Looking Statements 3
Item 1. Business 4
Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 15
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Mine Safety Disclosures 17
  PART II  
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17
Item 6. Selected Financial Data 17
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24
Item 9A. Controls and Procedures 24
Item 9B. Other Information 25
  PART III  
Item 10. Directors, Executive Officers and Corporate Governance 25
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 30
Item 13. Certain Relationships and Related Transactions, and Director Independence 31
Item 14. Principal Accounting Fees and Services 32
  PART IV  
Item 15. Exhibits and Financial Statement Schedules 33

 

 2 
 

 

Cautionary Note About Forward-Looking Statements

 

This Annual Report on Form 10-K (which we refer to as this “Form 10-K”) contains forward-looking statements within the meaning of the federal securities laws. These statements relate to expectations, beliefs, projections, forecasts, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks listed below and described in “Part I, Item 1A. Risk Factors” in this Form 10-K, that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements:

 

  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 us.
     
  Changes in economic and business conditions.
     
  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 expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we are not obligated to, and do not intend to, update or revise any of the forward-looking statements to conform these statements to actual results, 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 Form 10-K.

 

As used in this Form 10-K, references to “Company,” “we,” “us” or “our” refer to RedHawk Holdings Corp., a Nevada corporation, and, unless the context otherwise requires, its subsidiaries and affiliates.

 

 3 
 

 

PART I

 

ITEM 1. BUSINESS

 

General

 

We were incorporated in the State of Nevada on November 30, 2005 under the name “Oliver Creek Resources Inc.” At inception, we were an exploration stage company engaged in the acquisition, exploration and development of natural resources. In 2014, we discontinued our oil and gas operations and changed our business focus. Currently, we are a diversified holding company which, through our subsidiaries, is engaged in sales and distribution of medical devices, sales of branded generic pharmaceutical drugs, commercial real estate investment and leasing, sales of point of entry full-body security systems, and specialized financial services.

 

The Company, through its medical products business unit, manufactures and sells our Sharps and Needle Destruction Device (SANDD mini™) and our Carotid Artery Digital Non-Contact Thermometer. We also distribute for third parties WoundClot – Advanced Bleeding Control, the Thermofinder FS-700 Pro (professional model) and FS-700 (retail model) digital non-contact thermometers and Zonis®. The Company’s real estate leasing revenues are generated from a commercial property under a long-term lease. Additionally, the Company’s real estate investment unit holds limited liability company interest in a commercial restoration project in Hawaii. RedHawk Energy Corp., LLC 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.

 

Effective November 12, 2014, we completed a private equity funding with certain accredited investors pursuant to a Securities Purchase Agreement (“SPA”). Under the terms of the SPA, we sold 14,905,918 shares of our common stock in exchange for $50,000 ($0.0034 per share) in the aggregate. Additionally, in consideration of the purchase price, we granted warrants to acquire an additional 7,452,959 shares of our common stock over a two-year period at an aggregate exercise price of $0.0050 per share or gross proceeds of $37,265.

 

 4 
 

 

On July 31, 2015, by a vote of the majority of our shareholders, we changed our name from “Independence Energy Corp.” to “RedHawk Holdings Corp.” (hereafter referred to as RedHawk or the Company), increased the number of authorized shares of common stock to 450,000,000, and authorized the issuance of 5,000 shares of preferred stock with an initial stated value of $1,000 per share.

 

On December 31, 2015, the Company received from Beechwood Properties, LLC (which we refer to as “Beechwood”) a working capital injection of approximately $1.9 million of cash and marketable securities, net of an approximately $1.0 million line of credit with a 3.5% per annum interest rate. This infusion was received in exchange for 1,000 shares of the Company’s newly designated 5% Series B Convertible Preferred Stock, $1,000 stated value. Additionally, Beechwood converted into 100 shares of the Company’s 5% Series A Convertible Preferred Stock, $1,000 par value, $100,000 of the Company’s outstanding obligation to Beechwood. As of June 30, 2018, Beechwood beneficially controls approximately 79.3% of the voting control Company’s voting shares.

 

On February 1, 2016, we issued 250 shares of the Company’s 5% Series B Convertible Preferred stock, $1,000 stated value, to Thomas J. Concannon, our Chief Executive Officer in exchange for $250,000 in cash.

 

Additionally, on March 15, 2016, we issued approximately $550,000 of convertible promissory notes (“Fixed Rate Convertible Notes”). The Fixed Rate Convertible Notes are secured by certain Company real estate holdings. The 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. Interest accrues at a rate of 5% per annum and is payable semi-annually. Beginning 180 days after issuance of the Convertible Notes, the Company has the option to issue a notice of its intent to redeem, for cash, an amount equal to the sum of (a) 120% of the then outstanding principal balance, (b) accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect of the Fixed Rate Convertible Notes. The Company may only issue the notice of its intent to redeem the Fixed Rate Convertible Notes if the trading average of the Company’s common stock equals or exceeds 300% of the conversion price during each of the five business days immediately preceding the date of the notice of intent to redeem. The holder of the Fixed Rate Convertible Notes has the right to convert all or any portion of the Convertible Notes at the conversion price at any time prior to redemption. At June 30, 2018 and including PIK interest, there were $621,411 ($537,757 net of deferred financing costs and beneficial conversion option) of Fixed Rate Convertible Notes outstanding which are convertible into our common stock at a conversion rate of $0.015 per share or 41,427,384 shares.

 

During the twelve months ended June 30, 2018, we also issued $468,000 of convertible notes to third parties with variable conversion rates (“Variable Rate Convertible Notes”). The Variable Rate Convertible Notes mature at various dates between November 2018 and 2019. We received, net of financing costs incurred, $403,350 in cash from the issuance of these notes. These Variable Rate Convertible Notes have interest accruing at rates ranging between 8% - 12%, due at redemption. These notes issued to third parties have a variable conversion rate based on the price of the Company’s common stock. $326,240 of the convertible notes are currently convertible into our common stock beginning in the quarter ending June 30, 2018 at a variable conversion rate. We also paid in full two convertible note in the amount of $88,000 and notes totaling $20,760 were converted into equity.

 

Approximately $360,000 of the Variable Rate Convertible Notes have maturity dates prior to June 30, 2019, but continue to be classified as noncurrent as the Company has been notified by the holders of their intent to convert such notes to common stock

 

CURRENT BUSINESS ACTIVITIES

 

Branded Generic Pharmaceuticals and Medical Device Sales and Distribution

 

Branded Generic Pharmaceuticals. On March 24, 2016, RedHawk Pharma UK Ltd (“RedHawk Pharma”), a wholly-owned subsidiary of RedHawk, signed a definitive agreement with Scarlett Pharma LTD (which we refer to as “Scarlett”) to complete the acquisition of a 25% ownership investment in EcoGen, a United Kingdom based company specializing in the manufacturing and marketing of certain branded generic pharmaceuticals and medical devices. In the year ended June 30, 2018, the Company entered into a share transfer agreement wherein RedHawk increased its ownership position in EcoGen to 75%, and then later, the Company reached an agreement with Scarlett and its affiliate wherein RedHawk further increased its ownership position in EcoGen to 100%.

 

Under the terms of the agreement, Scarlett and its affiliate agreed to surrender to the Company, 10 million shares of RedHawk’s outstanding common stock, transfer to RedHawk Pharma approximately $300,000 of EcoGen’s preferred stock plus other consideration in exchange for RedHawk Pharma assuming approximately $370,000 of obligations due to EcoGen.

 

 5 
 

 

A generic drug is a pharmaceutical drug that is the equivalent to a brand name product in dosage, strength, route of administration, quality, performance and intended use. The term may also refer to any drug marketed under its chemical name without advertising, or to the chemical makeup of a drug rather than the brand name under which the drug is sold. Although they may not be associated with a particular company, generic drugs are subject to government regulations in the countries where they are dispensed. They are labeled with the name of the manufacturer and the nonproprietary adopted name of the drug. A generic drug must contain the same active ingredients as the original brand name formulation. In most cases, generic drugs become available after the patent afforded to a drug’s original developer expires. Once generic drugs enter the market, competition often leads to substantially lower prices for both the brand name drug and its generic equivalents. Clinicians in the United Kingdom are encouraged to write prescriptions for patent protected drugs by their generic name in preparation for such drugs losing their patent protected status, with the prescribed drug being dispensed to the patient by a community pharmacy. Pharmacists are obligated by law to dispense the brand that is written, should the clinician not use the generic name when prescribing a particular treatment, with all drugs being dispensed against a set tariff pricing structure. The pharmacist therefore procures the generic drug at the lowest available price from the wholesale supply chain, who in turn procures the lowest priced drug from any available manufacturer, ensuring that the generic drug market in the United Kingdom is purely driven by cost. The legal obligation on United Kingdom pharmacists to dispense a branded product if that is so prescribed presents the opportunity for the branded generic strategy of EcoGen. With a portfolio of widely prescribed generic drugs listed as trademarked branded generics, EcoGen can offer significant budgetary savings when compared to standard generics by offering these branded generics for sale at a price below the listed generic tariff. With UK Commissioning Groups (“CCG’s) being driven to find savings across their budgets where possible, EcoGen’s branded generic strategy has been met favorably. Currently, we are currently selling our branded generic drugs to approximately five of the approximately 225 CCG’s through an exclusive distribution agreement with Alliance Healthcare. As we continue to develop our marketing strategy, expand our team of sales representatives and increase the line of products offered to the CCG’s, we expect to capitalize on our distribution agreement with Alliance Healthcare.

 

Needle Destruction. On December 31, 2015, the Company completed the acquisition of certain high-quality medical products technology, including the tangible and intangible assets, for the Disintegrator Insulin Needle Destruction Unit (which we refer to as “Disintegrator”) and the Carotid Artery Non-Contact Thermometer. The Disintegrator is the only needle destruction device which has been approved by the United States Food and Drug Administration.

 

The proper management of medical waste, also referred to as biohazardous waste, biomedical waste or infectious waste, which is generated in healthcare facilities, commercial businesses and private home healthcare is extremely important to avoid regulatory issues and more importantly to prevent the spread of infectious diseases. Needles and soft wastes, those saturated with blood or certain other bodily fluids, must be properly handled, contained, stored, shipped and treated in accordance with all governmental regulations. To date, the most common system used to dispose of used needles has been sharp container boxes. Generally, this type of device is compatible for use in healthcare facilities, commercial businesses and private homes. It is a portable device used to destroy needles and lancets utilizing an electrical current which incinerates the lancet or syringes. It uses a rechargeable battery which delivers an electrical current to produce an arc of electricity directed at the tip of the syringe. This electrical arc disintegrates the needle and any residue is collected in a self-contained chamber in the device. The Company’s initial needle destruction device is referred to as the Sharps and Needle Destruction Device, the SANDD mini. This device aims to change both the way patients and physicians dispose of their needles and to eliminate the risk of needle stick injuries in the future. Utilizing a plasma arc the SANDD mini heats the needle to over 2500 degrees Celsius in less than three seconds, eliminating both the needle and all known pathogens in the process. The device uses a rechargeable battery to deliver the plasma arc to the needle. A fully charged battery will disintegrate greater than 100 needles before needing to be recharged. The SANDD mini is designed to be used with hypodermic needles attached to prefilled syringes or diabetic pen injection devices that measure less than 1 inch in length and between 27-32 gauges in diameter. The device produces little to no waste leaving the syringe to be disposed of in general waste as opposed to the need for the use of a sharps box. The change in this route of waste disposal is projected to offer healthcare providers significant budgetary savings and ease of disposal in home healthcare settings. The SANDD mini has completed its field evaluation and is now available for sale.

 

Subsequent to June 30, 2018, RedHawk Medical Products, LLC, a wholly-owned subsidiary of the Company, acquired the world-wide exclusive manufacturing and distribution rights to certain intellectual properties which the Company believes will significantly expand the current market capabilities of its SANDD mini needle destruction unit. This new needle incineration technology (the “SANDD Pro”) increases the Company’s needle incineration capabilities to include 14 gauge hypodermic needles and higher, up to 8” in length. Additionally, the acquired SANDD Pro technology features a portable, rechargeable, battery operated unit. This portable unit (the “SANDD Pro Portable”) will incinerate as many as 300 needles, ranging in gauges as think as 21 gauge and lengths up to 8” on a single charge. The SANDD Pro Portable is ideal for field use by first responders, home health care nurses and veterinarians.

 

The newly acquired SANDD Pro technology includes, but is not limited to, technical designs, drawings, trademarks, tradenames, clinical test data, and all manufacturing tooling and fixtures.

 

The complete line of SANDD needle incineration units can be used in virtually all home and commercial applications including hospitals, first responders, a full range of clinics and primary care physicians, dentists, veterinarians, retirement and non-acute healthcare facilities. The Company believes the SANDD Pro and the SANDD Pro Portable will be available for sale by the end of the 2018 calendar year.

 

 6 
 

 

Third Party Medical Device Distribution

 

In the future, we will only market products we own and manufacture. Until we adequately develop our product base, we will continue to offer for sale, certain medical devices owned by third parties. We will, however, periodically review the market acceptance of each third-party product being marketed by us and examine the profitability of each third-party marketing effort in comparison to the cost incurred in order to market that product. In the future, we may decide the market acceptance of a particular product is not adequate or profitability of marketing such product is unacceptable. As such, we may periodically add, revise, amend or discontinue various third-party distribution agreements.

 

Woundclot. On February 2, 2016, the Company announced that RedHawk Medical Products UK Ltd, a wholly owned subsidiary of the Company, had entered into a contract with Core Scientific Creations Ltd. for the distribution of WoundClot Surgical – Advanced Bleeding Control (which we refer to as “WoundClot”) in the United Kingdom. WoundClot, developed and manufactured in Israel by Core Scientific Creations Ltd, is the first UK Class III medical device, fully implantable surgical hemostat designed to stop moderate to severe arterial and venous hemorrhage without the need to compress directly onto the wound.

 

Hemostatic refers to a procedure, device or substance that arrests the flow of blood. Direct pressure, tourniquets and surgical clamps are mechanical hemostatic measures. Gelatin sponges, solutions of thrombin and microfibrillar collagen, which cause the aggregation of platelets and formation of clots, are used to arrest bleeding in surgical procedures. WoundClot is a single use sterile bio-absorb Hemostatic product made of non-oxidized cellulose, which can be fabricated into a variety of forms suitable in controlling bleeding from various kinds of wounds. WoundClot has been uniquely engineered and manufactured with a patented molecular structure, designed to entrap platelets and coagulants in a modified physical molecular matrix. WoundClot is the first cellulose-based product to be manufactured using a non-oxidative process. This change in the manufacturing process of WoundClot results in major clinical advantages. The first of these advantages is a significantly increased absorptive capability, enabling WoundClot to arrest and control even severe arterial bleeding. Once bleeding has been stopped and coagulation has formed, WoundClot can be easily removed without disrupting the already formed clot. Additionally, it opens up a much wider range of indications than traditional oxidized cellulose based competitive products, has a truly non-compression application and is fully biodegradable within seven days, meaning it can be implanted within the body, further minimizing the risk of secondary post-surgical bleeding.

 

During 2016, the Company, in conjunction with EcoGen Europe Ltd (which we refer to as “EcoGen”), our European branded generic pharmaceutical subsidiary, has begun marketing the product to large teaching hospitals in the United Kingdom. While the product has been successfully trialed in various surgery disciplines including cardiothoracic, hepatobiliary, pediatric neurosurgery, vascular and trauma surgery and has been shown to outperform currently established products, market acceptance has been limited. We are also considering the introduction of WoundClot into other markets including the United States.

 

Non-Contact Thermometers. On March 31, 2014, we entered into and closed an asset purchase agreement with American Medical Distributors, LLC (which we refer to as “AMD”), pursuant to which we have acquired from AMD all right, title and interest of AMD in and to a certain distribution contract (which we refer to as the “HuBDIC Agreement”) dated November 27, 2013 with HuBDIC Co. Ltd., a Korean corporation (which we refer to as “HuBDIC”), pursuant to which AMD had been granted the exclusive right to distribute in the Americas certain professional and consumer grade non-contact thermometers known as the Thermofinder FS-700 Pro (professional model) and FS-700 (retail model), and any future versions (which we refer to as collectively, the “Thermofinder”). In connection with the acquisition, we also received $60,000 and any assets of AMD related to its distribution business, including all sales leads and related materials (which we refer to as collectively, including the HuBDIC Agreement, the “AMD Assets”), and in consideration of the AMD Assets, we issued to four designees of AMD an aggregate of 152,172,287 shares of our common stock.

 

The material terms of the HuBDIC Agreement are as follows: (a) term of five years from November 7, 2013; (b) upon receiving U.S. Food and Drug Administration (which we refer to as “FDA”) marketing clearance of the HuBDIC products, we are required to purchase a minimum of 3,000 product units for re-sale during year one of the distribution period, 8,000 during year two, and 15,000 during each subsequent year; (c) a $10,000 distribution fee previously paid to HuBDIC by AMD was credited toward our first product order; and (d) the distribution fee is refundable to us at our election. On or about July 2, 2014, HuBDIC received marketing clearance from the FDA for the sale and distribution of the Thermofinder. In November 2014, we paid for and took delivery of 500 units of the Thermofinder FS-700 Pro. We have agreed with HuBDIC to defer payment for and delivery of the balance of 2,500 units until a later date. The Company is actively soliciting orders for and has sold some of the first 500 units. The Company’s board of directors is currently evaluating future marketing strategies for the sales and distribution of additional units.

 

 7 
 

 

The Thermofinder is medical grade non-contact thermometer that is currently approved and distributed in Asia and Europe, and its features include the following:

 

  Two measuring modes, including body temperature and surface/ambience modes, which allow the reading of air temperature and fluid temperature (for example, bath water, baby’s bottles).
     
  Non-invasive design—Operated by pointing and pressing within 3-5 centimeters of the patient’s forehead or other target.
     
  Easy to read LCD backlit display with multi-color screen and alert function. A green light is shown for normal reading, and an orange light for high readings.
     
  Less than 2 second reading response time.
     
  Reading accuracy within 0.3 degrees Celsius for body temperature and 2 degrees Celsius for object temperature.
     
  International Organization for Standardization (ISO) 13485 and American Society for Testing and Materials (ASTM) Compliant.
     
  More hygienic than conventional oral and ear reading thermometers—Eliminates the need for probe covers and reduces sterilization requirements.
     
  The FS-700 Pro model is equipped with a medical grade protection cover, logo lanyard, anti-microbial option, and rechargeable battery and station.

 

 8 
 

 

Zonis. Through independent sales representatives, EcoGen sells Zonis into a number of European countries, Australia and New Zealand. Zonis is a patented antimicrobial ionic silver calcium catheter dressing with both wound healing and hemostatic properties. It is designed to be placed directly over the exit site of all vascular and non-vascular percutaneous medical devices. Zonis reduces bacteria colonization and related bloodstream infections by delivering ionic silver directly to the site.

 

Real Estate

 

During fiscal 2017, we announced the planned sale of certain real estate investments. The Company believes these properties have maximized their return and the sale proceeds resulting therefrom will be better utilized in our branded generic pharmaceutical and medical device business units.

 

Tower Hotel Fund 2013, LLC. On December 31, 2015, RedHawk Land & Hospitality, LLC, a wholly owned subsidiary of the Company, acquired from Beechwood 280,000 Class A Units (approximately a 2.0% membership interest) of fully paid, non-assessable units of limited liability company interest in Tower Hotel Fund 2013, LLC, a real estate development limited liability company formed in the state of Hawaii for acquisition, restoration and development of the Naniloa Hilo Resort in Hilo, Hawaii. The $625,000 purchase price was paid by the issuance of 625 shares of the Company’s Series A Preferred Stock. The purchase price was determined by an independent third-party valuation. Beechwood is a real estate limited liability company owned and controlled by G. Darcy Klug, a stockholder and Chief Financial Officer of the Company.

 

Subsequent to June 30, 2018, the Company received a cash payment of approximately $370,000 as a partial return on our investment. Pursuant to the terms of the limited liability operating agreement, the Company has offered to sell its membership interest in the Tower Hotel Fund 2013 to the remaining members in the Tower Hotel Fund 2013. The Company expects to complete the sale prior to June 30, 2019.

 

Other Real Estate. During the year ended June 30, 2017, we decided to sell our Louisiana real estate holdings, which includes our former corporate headquarters on Chemin Metairie Road in Youngsville, Louisiana and a property on Jefferson Street in Lafayette. As a result of that decision, the net book value of those properties along with related mortgage notes were reflected as assets and liabilities held for sale in the balance sheets. A sale of these properties did not occur in the fiscal year ended June 30, 2018 and, as such, the Company has returned these properties to assets held for use. We will continue to list these properties for sale, but it is uncertain if the sales will occur during the next twelve months. As such, these real estate assets, and related liabilities, have been reclassified in the 2018 and 2017 balance sheets. Based on the present real estate market and discussions with brokers, no impairment of the recorded amounts has occurred as of June 30, 2018.

 

Jefferson Street Property. On November 13, 2015, we acquired certain commercial rental property, consisting of $75,000 of land and $405,000 of buildings and improvements, from Beechwood for $480,000. The purchase price was paid by the Company through the assumption of $265,000 of long-term bank indebtedness (see Note 6) plus the issuance of 215 shares of the Company’s Series A Preferred Stock (see Note 8). The purchase price of the property was determined by independent third-party appraisers commissioned by the financial institution providing the long-term financing for the acquisition, which included the cost of specific security improvements requested by the lessee.

 

In August 2017, we entered into a new triple-net lease agreement with the Louisiana 3rd Circuit Court of Appeals to renew and extend the current lease term to December 31, 2022.

 

Youngsville Property. On December 31, 2015, we acquired certain commercial real estate from Beechwood to be used as our corporate office for $300,000, consisting of $35,000 of land and $265,000 of buildings and improvements. The purchase price was paid by the Company with the issuance of 300 shares of the Company’s Series A Preferred Stock. The purchase price of the property was determined by independent third-party appraisal.

 

On July 1, 2017, we entered into an agreement for the lease, with an option to purchase, these former offices. Under the terms of the agreement, the tenant leased the property through June 30, 2018 and, at the end of the lease term, the tenant had the option to purchase the property for $300,000. On June 30, 2018, the tenant did not exercise his option to purchase the property. The Company has returned the property to service and currently uses this property as offices for our medical products unit.

 

Specialized Security System Manufacturing and Distribution

 

Centri Controlled Entry System. On April 11, 2016, the Company acquired the exclusive United States manufacturing and distribution rights for the Centri Controlled Entry System (which we refer to as “Centri”), a unique, nominal dose transmission x-ray full body scanner capable of finding weapons, drugs and other metallic and non-metallic contraband concealed on and within the human body. The Company acquired these exclusive rights from Basic Technologies, Inc. who holds the exclusive worldwide license to manufacture and sell Centri. During the quarter ended June 30, 2016, the Company received approval from the FDA for the importation, assembly and demonstrations of Centri. Phase I radiation testing has been successfully completed. Approval for human testing and the sale of Centri units was received from the Louisiana Department of Environmental Quality during the quarter ending September 30, 2016.

 

The Company is continuing to successfully test the safe operation of Centri and is currently working with the Louisiana State University Innovation Park to develop our marketing strategy to offer Centri for sale and/or lease as an alternative security system in various commercial applications.

 

Customers, Marketing and Contracting

 

Our medical devices and branded generics are to be marketed to a broad base of users and are ideal for home and institutional use. The market for our devices and branded generics includes:

 

  Retail Pharmacies
     
  Hospitals
     
  Physicians’ Offices
     
  Private and Public Healthcare Clinics
     
  Corrections Facilities
     
  Schools
     
  Veterinary Clinics
     
  Emergency Services
     
  Long Term Care Facilities

 

 9 
 

 

Safety and Quality Assurance

 

Our manufacturing operations require a wide variety of raw materials, including electronic and mechanical components, batteries, carry bags, and molded plastic components and other supplies. We rely on third-party manufacturers to supply several components of our medical devices. We typically enter into supply agreements for these components that specify quantity, quality requirements, and delivery terms, which, in certain cases, can be terminated by either party upon relatively short notice. For each medical device, we have elected to source certain key components from single sources of supply, including our batteries, molded plastic components. While alternative sources of supply are readily available for these components, we believe that maintaining a single source of supply allows us to control production costs and inventory levels, and to manage component quality. In order to mitigate against the risks related to a single source of supply, we qualify alternative suppliers and develop contingency plans for responding to disruptions. If any single-source supplier were no longer able to supply a component, we believe we would be able to promptly and cost-effectively switch to an alternative supplier without a significant disruption to our business and operations. We have adopted additional contingency plans to protect against an immediate disruption in supply of our battery components, and any potential delay that may result from a switch to a new supplier. These contingency plans include our own inventory management, along with a requirement that certain suppliers maintain specified quantities of inventory in multiple locations, as well as requiring certain manufacturers to maintain redundant manufacturing sites. We believe that these contingency plans would limit any disruption to our business in the event of an immediate termination of either our battery supply.

 

Governmental Regulations

 

Our medical devices and generic pharmaceuticals are subject to a wide variety of stringent federal, state and local laws and regulations. We believe we have acquired all of the necessary permits and licenses necessary to manufacture, sell and safely distribute our products.

 

Medical Devices. Government authorities in the United States, Canada, and other countries in the Americas regulate the research, development, testing, manufacturing, labeling, promotion, advertising, distribution, marketing and export and import of medical devices at the federal, state and local levels. The process of obtaining regulatory approvals and the subsequent substantial compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources.

 

In the United States, thermometers for human clinical use are classified as medical devices and require (i) an establishment license and (ii) depending on the class of device sought to be marketed, pre-market approval (PMA) or the less rigorous pre-market clearance.

 

Establishment License. Owners or operators of places of business (also called establishments or facilities) that are involved in both the production and distribution of medical devices intended for use in the United States (U.S.) are required to register annually with the FDA. This process is known as establishment registration. Most establishments that are required to register with the FDA are also required to list the devices that are made there and the activities that are performed on those devices. As a domestic distributor of certain medical devices in the United States, we will not be required to obtain an establishment license for those products, although the owner/operator of the products we distribute will be so required. Certain countries do not require an establishment license. Our needle destruction unit has an establishment license registered with the FDA.

 

Depending on the class designation of the device sought to be marketed, the owner/operator of the product must also obtain pre-market approval (PMA) or pre-market notification clearance before marketing in the U.S.

 

U.S. Medical Device Class Designations. The FDA has established classifications for different generic types of devices and grouped them into medical specialties. Each of these devices is assigned to one of three regulatory classes based on the level of control the FDA deems necessary to assure the safety and effectiveness of the device.

 

Class I includes products of which several examples are already approved and marketed in Canada or the U.S. As long as the basic science remains the same, the application for approval of a new product is straightforward. Examples of products in this category include pregnancy tests or regular needles/syringes.

 

Class II products are those which are non-invasive, meaning they are not injected or inserted into the patient. Often these products are approved and sold throughout the world. The products which we are currently focusing on distributing all belong to Class II. In order to secure the necessary license for these products, we are required to submit all the documentation which led to the approval of the products in other countries. In our case, our products are already approved in Europe and Korea. We are required to submit to the FDA all the scientific data, results, approval process and certificates of good quality management, ISO 13485. Usually, products that have the ISO accreditation will satisfy FDA requirements.

 

Class III and IV include medical devices that use invasive techniques. If the medical device has been approved in another region, it is considered Class III. If it is new, it is considered Class IV. Invasive testing equipment such as colonoscopy, endoscopy, body lesion removal devices etc., are all considered Class III or IV. At this time, we do not manufacture or sell any Class III or Class IV medical devices.

 

Premarket Clearance. We focus our medical device distribution business on Class I and II medical devices. WoundClot and electronic clinical thermometers such as the Thermofinder are classified as Class II devices by the FDA are not subject to Premarket Approval (PMA). SANDD is currently classified as a Class II medical device.

 

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Each person who wants to market in the U.S., a Class I or II device intended for human use, for which a Premarket Approval (PMA) is not required, must submit a 510(k) application to the FDA unless the device is exempt from the Section 510(k) requirements of the Federal Food, Drug, and Cosmetic Act (the Act).

 

A 510(k) application is a pre-market submission made to the FDA to demonstrate that the device to be marketed is at least as safe and effective, that is, substantially equivalent to a legally marketed device that is not subject to PMA. Submitters must compare their device to one or more similar legally marketed devices and make and support their substantial equivalency claims. A legally marketed device is a device that was legally marketed prior to May 28, 1976, for which a PMA is not required, or a device that has been reclassified from Class III to Class II or Class I, or a device which has been found substantially equivalent through the 510(k) process. The legally marketed device(s) to which equivalence is drawn is commonly known as the “predicate.” Although devices recently cleared under 510(k) are often selected as the predicate to which equivalence is claimed, any legally marketed device may be used as a predicate. Legally marketed also means that the predicate cannot be one that is in violation of the Act.

 

Before marketing a device, each submitter must receive an order, in the form of a letter, from the FDA which finds the device to be substantially equivalent and states that the device can be marketed in the U.S. This order “clears” the device for commercial distribution.

 

Until the submitter receives an order declaring a device substantially equivalent, the submitter may not proceed to market the device. Once the device is determined to be substantially equivalent, it can then be marketed in the U.S. The substantially equivalent determination is usually made within 90 days and is made based on the information submitted by the submitter.

 

Substantial Equivalence. A 510(k) clearance requires demonstration of substantial equivalence to another legally U.S. marketed device. Substantial equivalence means that the new device is at least as safe and effective as the predicate.

 

A device is substantially equivalent if, in comparison to a predicate it:

 

  has the same intended use as the predicate; and
  has the same technological characteristics as the predicate;

 

or

 

  has the same intended use as the predicate;
  has different technological characteristics and the information submitted to the FDA;
  does not raise new questions of safety and effectiveness; and
  demonstrates that the device is at least as safe and effective as the legally marketed device.

 

A claim of substantial equivalence does not mean the new and predicate devices must be identical. Substantial equivalence is established with respect to intended use, design, energy used or delivered, materials, chemical composition, manufacturing process, performance, safety, effectiveness, labeling, biocompatibility, standards, and other characteristics, as applicable.

 

A device may not be marketed in the U.S. until the submitter receives a letter declaring the device substantially equivalent. If the FDA determines that a device is not substantially equivalent, the applicant may:

 

  resubmit another 510(k) application with new data;
  request a Class I or II designation through the de novo process;
  file a reclassification petition; or
  submit a premarket approval application (PMA).

 

Status of Medical Device Premarket Clearance. SANDD received its PMA in March 15, 2002. HuBDIC Co. Ltd. made a 510(k) submission to the FDA on January 29, 2014 and received pre-market clearance for the Thermofinder FS-700 and FS-700 Pro on or about July 2, 2014.

 

Future Business Opportunities. The Company’s board of directors is currently evaluating our future strategy for marketing all of our medical devices including SANDD mini, SANDD Pro, WoundClot and the Thermofinder FS-700 and FS-700 Pro non-contact thermometers. Under consideration is possibly contracting with third parties for the distribution of our medical devices to hospitals, doctors, schools, first responders, home health care providers, etc. The Company is considering engaging an independent marketing representative to offer its SANDD mini and the consumer version of the digital non-contact thermometer, Thermofinder FS-700, through retail chains. No decision has yet been made on the future marketing strategies.

 

Our board of directors is evaluating whether to seek opportunities related to the distribution of other medical devices besides WoundClot, Zonis and the Thermofinder.

 

The Company’s board of directors is also considering entry into other lines of business including, but not necessarily limited to, commercial and hospitality real estate, specialized financial services and equipment rental services. No decision has yet been made on entering these or other future lines of business.

 

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Insurance

 

Branded Generic Pharmaceuticals and Medical Devices. Our operations and products are subject to inherent risks of personal safety and injury and, as such, we maintain insurance policies on the sale of our products to protect us in the event of a loss. Insurance coverage is provided for us by the owners of the products we distribute for third parties where we consider such coverage necessary.

 

We believe our insurance coverages for these risks are adequate. Historically, we have not experienced a loss in excess of our policy limits; however, there can be no assurance that we will be able to maintain adequate insurance at rates we consider to be commercially reasonable, nor can there be any assurance such coverage will be adequate to all of the claims that may arise.

 

Property and Casualty. We also maintain insurance against property damage, flood and other catastrophic events that may result in physical damage or destruction to our real estate. All policies are subject to deductibles and other coverage limitations. While we believe over coverage limits are adequate to protect against loss, there can be no assurance that we will be able to maintain adequate insurance at rates we consider to be commercially reasonable, nor can there be any assurance such coverage will be adequate to all of the claims that may arise.

 

Competition

 

The medical device and branded generic pharmaceutical distribution industries are highly competitive. We are a development stage company without established operations in our industry and have a weak competitive position. We aim to compete with junior and senior medical device and branded generic pharmaceutical manufacturers or distributors who are actively seeking to develop or acquire and sell devices competitive with our own. Competition for the medical device and branded generic pharmaceutical assets is intense and we may lack the technological information, human resources, infrastructure, expertise, and financial resources available to our competitors. Such competition could adversely impact our ability to attain the financing necessary for us to develop our current assets, generate revenues, or obtain and develop future assets.

 

Many of the companies with which we aim to compete for financing and for the acquisition of medical device and branded generic pharmaceutical assets have greater financial and technical resources than those available to us. Accordingly, these competitors may be able to spend greater amounts on assets of merit or on developing and distributing their own technologies.

 

General competitive conditions may be substantially affected by various forms of regulation introduced from time to time by the governments of the United States and other countries, as well as factors beyond our control, including overall levels of supply and demand for the product types which we seek to distribute.

 

In the face of competition, we may not be successful in acquiring or successfully exploiting any distribution rights which we have acquired or may acquire in the future. Despite this, we hope to compete successfully in the medical device industry by:

 

  maintaining low operating costs;
  relying on the strength of our management’s and future sales team’s contacts;
  utilizing our team’s previous product and sales and support experience in the specific device area; and
  using our size and experience to our advantage by adapting quickly to changing market conditions or responding swiftly to potential opportunities.

 

Employees

 

Currently, we do not have any employees. Our officers are providing their services to us on an independent consultant basis, but, at this time, we have not entered into any consulting or employment agreements with them. Our directors, executive officers and certain contracted individuals play an important role in the running of the Company. We do not expect any material changes in the number of employees over the next 12-month period. We intend to engage contractors from time to time to consult with us on specific corporate affairs or to perform specific tasks in connection with our anticipated sales and marketing programs.

 

Available Information

 

We are required to file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K with the U.S. Securities and Exchange Commission (which we refer to as the “SEC”) and our filings are available to the public on our website at www.redhawkholdingscorp.com and at the SEC’s website at http://www.sec.gov.

 

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ITEM 1A. RISK FACTORS

 

Our business routinely encounters and attempts to address risks, some of which will cause our future results to differ, sometimes materially, from those originally anticipated. Below, we have described our present view of the most significant risks facing the Company. The risk factors set forth below are not the only risks that we may face or that could adversely affect us. If any of the circumstances described in the risk factors discussed in this Form 10-K actually occur, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected. If this were to occur, the trading price of our securities could decline significantly, and stockholders may lose all or part of their investment.

 

The following discussion of risk factors contains “forward-looking statements,” which may be important to understanding any statement in this Form 10-K or in our other filings and public disclosures. In particular, the following information should be read in conjunction with the sections in this Form 10-K entitled, “Cautionary Note about Forward-Looking Statements,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Item 8. Financial Statements and Supplementary Data.”

 

Risks Related to Our Overall Business Operations

 

We have a limited operating history with significant losses and expect losses to continue for the foreseeable future.

 

We have a limited history of profitable operations – we incurred net losses of $910,052 and $407,681 for the fiscal years ended June 30, 2018 and 2017, respectively. As a result, at June 30, 2018, including preferred stock dividends, we had an accumulated deficit of $4,302,291. We have sustained significant costs in connection with the acquisition and development of certain technologies and businesses combined with significant legal fees incurred in connection with certain litigation matters. Prior to the fiscal year ending June 30, 2017, we did not generate any significant revenues. Our profitability will require successful commercialization of our medical device technology, branded pharmaceutical, security systems or future products for which we may acquire a distribution license and reduction of our operating costs. We may not, however, be able to successfully exploit any distribution rights which we currently have or acquire in the future and may never become profitable.

 

There is doubt about our ability to continue as a going concern due to recurring losses from operations, accumulated deficit and insufficient cash resources to meet our business objectives, all of which means that we may not be able to continue operations.

 

As discussed in Note 1 to our financial statements for the year ended June 30, 2018, with the exception of the three-month period ended March 31, 2017, we have generated operating losses since inception, and our cash resources are insufficient to meet our planned business objectives. We expect to continue to incur development costs and operating costs, losses and negative cash flows until our products gain market acceptance sufficient to generate a commercially viable and sustainable level of sales, and/or additional products are developed and commercially released, and sales of such products made so that we are operating in a profitable manner. The continuation of the Company as a going concern is still dependent upon the continued financial support from its stockholders, the ability to raise equity or debt financing, cash proceeds from the sale of assets and the attainment of profitable operations from the Company’s businesses in order to discharge its obligations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. Our independent auditors included an explanatory paragraph to their audit opinion issued in connection with our 2018 financial statements that states there is substantial doubt about our ability to continue as a going concern.

 

We have had negative cash flows from operations since inception. We will require significant additional financing, the availability of which cannot be assured, and if we are unable to obtain such financing, our business may fail.

 

To date, we have had negative cash flows from operations and have depended on sales of our equity securities, debt financing and stockholder loans to meet our cash requirements. We may continue to have negative cash flows. There is no assurance that actual cash requirements will not exceed our estimates. We may require additional funds to finance working capital and pay for operating expenses and capital requirements until we achieve a positive cash flow.

 

Our ability to market and sell our medical devices will be dependent upon our ability to raise significant additional financing. If we are unable to obtain such financing, we will not be able to fully develop our business. Specifically, we will need to raise additional funds to:

 

  support our planned growth and carry out our business plan;
  hire quality personnel for all areas of our business; and
  address competing technological and market developments.

 

At June 30, 2018, we had a total of 1,000,000,000 authorized shares, of which 362,939,227 shares of our common stock were outstanding as of June 30, 2018. Subsequent to June 30, 2018, we increased our authorized shares to 2,000,000,000. In the future, we may not be able to obtain adequate additional equity or debt financing on acceptable terms as required. In order to raise adequate levels of capital necessary to meet the Company’s future needs, the board of directors may need to consider completing a reverse stock split, amending our articles of incorporation to increase the number of authorized shares or authorize the possible issuance of preferred stock. Certain of these considerations may require regulatory approval.

 

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Even if financing is available, it may not be available on terms that are favorable to us or in sufficient amounts to satisfy our requirements. Any additional equity financing may involve substantial dilution to our then existing shareholders. If we require, but are unable to obtain, additional financing in the future, we may be unable to implement our business plan and our growth strategies, respond to changing business or economic conditions, withstand adverse operating results and compete effectively. More importantly, if we are unable to raise further financing when required, we may be forced to scale down our operations or sell significant assets, and our ability to generate revenues may be negatively affected.

 

If we fail to effectively manage the growth of the Company and the commercialization of our medical devices, our future business results could be harmed, and our managerial and operational resources may be strained.

 

As we proceed with the commercialization of our medical devices and the expansion of our marketing and commercialization efforts, we expect to experience significant growth in the scope and complexity of our business. We will need to add staff to market our services, manage operations, handle sales and marketing efforts and perform finance and accounting functions. We anticipate that we will be required to hire a broad range of personnel in order to successfully advance our operations. This growth is likely to place a strain on our management and operational resources. The failure to develop and implement effective systems, or to hire and retain sufficient personnel for the performance of all of the functions necessary to effectively service and manage our business, or the failure to manage growth effectively, could have a material adverse effect on our business and financial condition.

 

The effect of competition in our industry could adversely impact our ability to generate revenues.

 

The medical device distribution industry is highly competitive. We are a development stage company without established operations in our industry and have a weak competitive position. We aim to compete with junior and senior medical device manufacturers or distributors who are actively seeking to develop or acquire and sell devices competitive with our own. Competition for the medical device assets is intense and we may lack the technological information, human resources, infrastructure, expertise, and financial resources available to our competitors. Such competition could adversely impact our ability to attain the financing necessary for us to develop our current assets, generate revenues, or obtain and develop future assets.

 

Risks Related to the Market for Our Stock

 

The market price of our common stock can become volatile, leading to the possibility of its value being depressed at a time when you may want to sell your holdings.

 

Because our stock is thinly traded, the market price of our common stock can fluctuate significantly. Numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly. These factors include: our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors; changes in financial estimates by us or by any securities analysts who might cover our stock; speculation about our business in the press or the investment community; significant developments relating to our relationships with our customers or suppliers; stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in our industry; customer demand for our products; changes in governmental regulation of the medical devices that we distribute; investor perceptions of our industry in general and the Company in particular; the operating and stock performance of comparable companies; general economic conditions and trends; announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures; changes in accounting standards, policies, guidance, interpretation or principles; loss of external funding sources; sales of our common stock, including sales by our directors, officers or significant stockholders; and additions or departures of key personnel. Securities class action litigation is often instituted against companies following periods of volatility in their stock price. Should this type of litigation be instituted against us, it could result in substantial costs to us and divert our management’s attention and resources.

 

Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to the operating performance of particular companies. These market fluctuations may adversely affect the price of our common stock and other interests in the Company at a time when you want to sell your interest in us.

 

 14 
 

 

We have never declared or paid any cash dividends on shares of our common stock and do not anticipate doing so.

 

We intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends on our common stock in the foreseeable future but will review this policy as circumstances dictate. Should we decide in the future to do so, our ability to pay dividends and meet other obligations may depend upon the receipt of dividends or other payments from any operating subsidiaries we may have in the future.

 

We are subject to penny stock regulations and restrictions, therefore the market for our common stock is limited and you may have difficulty selling your shares.

 

The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is therefore subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended (which we refer to as the “Exchange Act”), or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 (excluding the value of their primary residence) or annual incomes exceeding $200,000 individually, or $300,000 together with their spouses). For transactions covered by the Penny Stock Rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.

 

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

 

There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.

 

A large number of shares may be eligible for future sale and may depress our stock price.

 

We may be required, under terms of current and future financing arrangements, to offer a large number of common shares to the public, or to register for sale by future private investors a large number of shares sold in private sales to them.

 

Sales of substantial amounts of common stock, or a perception that such sales could occur, and the existence of options or warrants to purchase shares of common stock at prices that may be below the then-current market price of our common stock, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities, either of which would decrease the value of any earlier investment in our common stock.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

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

 

ITEM 2. PROPERTIES

 

Our corporate headquarters is located at 120 Rue Beauregard, Suite 206, Lafayette, Louisiana 70508. We lease approximate 1,250 square feet of office space. The offices are under lease through April 30, 2019 at a rate of $1,525 per month with the option to extend the lease for two, one-year periods. As of the date of this filing, we have not sought to move or change our office site as our space is adequate to meet our needs.

 

 15 
 

 

Our primary U.S operations facilities for testing our security system and maintaining our medical device inventory are located in leased facilities in at the Louisiana Business & Technology Center in Baton Rouge, Louisiana (“LSU Innovation Center”). This facility is located on the South Campus of Louisiana State University. At the LSU Innovation Center, we lease two (2) offices and warehouse facilities totaling approximately 1,800 square feet for $1,100 per month. The lease expires on December 31, 2018 and is subject to an annual renewal.

 

Our medical products unit operates from our previous corporate office. This property has about 3,000 square feet of office and storage capabilities and is owned by the Company.

 

In the United Kingdom, we lease approximately 650 square feet of administrative offices. Our inventory of generic pharmaceuticals is maintained in a bonded, pharmaceutical approved, third party warehouse and distribution facility near London, United Kingdom.

 

ITEM 3. LEGAL PROCEEDINGS

 

On January 31, 2017, the Company and a stockholder filed a complaint (the “Complaint”) in the United States District Court for the Eastern District of Louisiana (RedHawk Holdings Corp. and Beechwood Properties, LLC Case No. 2:17-cv-819). The Complaint names Daniel J. Schreiber (“Schreiber”) and the Schreiber Living Trust – DTD 2/08/96 (the “Schreiber Trust”) as defendants. Schreiber is the former Chief Executive Officer and director of RedHawk. The Schreiber Trust, of which Schreiber is the Trustee, is a shareholder of the Company. The Complaint lodged claims on behalf of RedHawk for securities fraud, fraud, and Schreiber’s breach of fiduciary duties.

 

On April 24, 2017, RedHawk and its shareholder filed an amended complaint (“Amended Complaint”) naming Schreiber as the only proper defendant in the suit, individually and as Trustee of the Schreiber Trust.

 

On May 22, 2017, Schreiber filed a motion to dismiss, or in the alternative to transfer, the suit on the grounds of lack of personal jurisdiction and improper venue. After the parties filed an opposition and reply, on August 16, 2017 the court denied the motion.

 

On September 13, 2017, Schreiber filed an answer to the Amended Complaint, as well as counterclaims against RedHawk, Beechwood, and a director of RedHawk for actions allegedly taken in the course of his duty as a director. The counterclaims against RedHawk and its director are for alleged violation of UCC § 8-401, breach of fiduciary duty, negligence, and unfair trade practices.

 

The legal remedies sought in these counterclaims were the subject of a lawsuit filed previously by Schreiber in the United States District Court for the Sothern District of California on April 24, 2017 (Case No. 3:17-cv-8824). At the time of the answer of the Louisiana lawsuit, the California action was still pending, and the answer asked that the counterclaim filed in Louisiana be stayed until the California case was adjudicated. On September 26, 2017, the court in the California action granted RedHawk’s motion to dismiss that suit.

 

On October 24, 2017, a scheduling conference was held. The parties agreed to, among other matters, to exchange documents and conduct other discovery, and, at this time, to schedule a bench trial starting November 5, 2018.

 

RedHawk plans to vigorously contest the claims against it in this matter and to pursue the claims against Schreiber, individually and as Trustee of the Schreiber Trust.

 

While we are insured for our legal defense costs in this matter, we have a $250,000 self-insured retention. During the year ended June 30, 2018, we recorded a charge of $250,000 for uninsured costs incurred in connection with this matter. We believe the ultimate resolution of this matter will not significantly adversely affect our financial position, operations or cash flows, other than the uninsured costs referred to above.

 

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ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is traded on the Over-the-Counter® Venture Market under the symbol “IDNG.” The below table sets forth the range of high and low bid information for our common stock as reported by the Over-the-Counter Official Market site for the periods indicated, and reflects inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.

 

OTC Bulletin Board

 

Quarter Ended  High   Low 
         
June 30, 2018  $0.0077   $0.0036 
March 31, 2018  $0.0088   $0.0050 
December 31, 2017  $0.0200   $0.0041 
September 30, 2017  $0.0210   $0.0056 
June 30, 2017  $0.0200   $0.0032 
March 31, 2017  $0.0200   $0.0075 
December 31, 2016  $0.0280   $0.0075 
September 30, 2016  $0.0420   $0.0131 

 

Holders

 

As of September 15, 2018, an aggregate of 362,939,227 shares of our common stock were outstanding plus an additional 35,471,535 shares were held in treasury stock. There were 23 shareholders of record of our common stock plus approximately 3,000 shareholders of shares held in street name. On September 18, 2018, the last reported sale of our common stock as reported by the Over-the-Counter Official Market site was $0.0013 per share.

 

Our common shares are issued in registered form. ClearTrust, LLC (telephone number 813-235-4490) is the registrar and transfer agent for our common shares.

 

Dividends

 

We have never paid a cash dividend on our common stock. We intend to retain our future earnings, if any, to meet our and to finance the future operations of our business. Therefore, we do not plan to declare or pay any dividends to holders of our common stock in the foreseeable future. Our future dividend policy will be determined from time to time by our board of directors.

 

Recent Sales of Unregistered Securities

 

During the fiscal years ended June 30, 2018 and June 30, 2017, we sold the following securities in transactions that were not registered under the Securities Act of 1933, as amended (which we refer to as the “Securities Act”).

 

  (1) On January 10, 2017, we issued 3,726,480 shares of our common stock in connection with the exercise of warrants exercised pursuant to a private equity sale to an accredited investor on November 1, 2014.
     
  (2) On January 10, 2017, we issued 250,000 shares of our common stock to a former member of our board of directors as compensation of services rendered.
     
  (3) On June 30, 2017, a stockholder and officer of the Company converted $250,000 of the outstanding principal and interest due to the stockholder in exchange for 233 shares of our Series A Preferred Stock (See Note 5).
     
  (4) On November 8, 2017 we sold 7,450,000 shares of our common stock to an accredited investor for $29.250 or an average of $0.0039 per share.
     
  (5)

On February 8, 2018, we granted 5,000,000 to our non-executive members of our board of directors as compensation for services rendered. Such shares were issued to the directors in the quarter ended June 30, 2018.

     
  (6) On May 8, 2018 and June 27, 2018, we issued a total of 6,890,200 shares to accredited investors in connection with the conversion of certain convertible notes.

 

ITEM 6. SELECTED FINANCIAL DATA

 

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

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

RedHawk Holdings Corp. was incorporated in the State of Nevada on November 30, 2005 under the name “Oliver Creek Resources, Inc”. At its inception, we were an exploration stage company engaged in the acquisition, exploration and development of natural resources. We discontinued our oil and gas operations in 2014 and changed our business focus. Currently, we are a diversified holding company which, through our subsidiaries, is engaged in sales and distribution of medical devices, sales of branded generic pharmaceutical drugs, commercial real estate investment and leasing, sales of point of entry full-body security systems, and specialized financial services. Through its medical products business unit, the Company sells WoundClot Surgical - Advanced Bleeding Control, the SANDD™ Insulin Needle Destruction Unit (formerly known as the Disintegrator™), the Carotid Artery Digital Non-Contact Thermometer and Zonis®. Through our United Kingdom based subsidiary, we manufacture, and market branded generic pharmaceuticals, certain other generic pharmaceuticals known as “specials” and certain pharmaceuticals outside of the United Kingdom’s National Health Service drug tariff referred to as NP8’s. Our real estate leasing revenues are generated from a commercial property under a long-term lease. Additionally, the Company’s real estate investment unit holds limited liability company interest in a commercial restoration project in Hawaii. The Company’s financial service revenue is from brokerage services earned in connection with debt placement services. RedHawk Energy 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.

 

Certain Transactions

 

On November 12, 2015, we acquired certain commercial rental property, consisting of $75,000 of land and $405,000 of buildings and improvements, from a related party that is an entity controlled by a stockholder and officer of the Company, for $480,000. The purchase price was paid by the Company through the assumption of $265,000 of long-term bank indebtedness (see Note 7) plus the issuance of 215 shares of the Company’s newly designated Series A Preferred Stock (see Note 8). The purchase price of the property was determined by independent third-party appraisers commissioned by the financial institution providing the long-term financing for the acquisition, which included the cost of specific security improvements requested by the lessee.

 

On December 30, 2015, we received, from a stockholder and officer of the Company, $1,862,458 of cash and marketable securities, net of a $980,000 line of credit balance, in exchange for 1,000 shares of our Series B Preferred Stock.

 

At December 31, 2015, the principal balance plus accrued interest totaled $100,000. At that date, the stockholder elected to convert the outstanding principal and interest balance into 100 shares of our Series A Preferred Stock. At June 30, 2016, there is no outstanding balance on the Line of Credit.

 

On December 31, 2015, we acquired certain commercial real estate from a related party that is an entity controlled by a shareholder and officer of the Company, to be used as our corporate office, for $300,000 consisting of $35,000 of land and $265,000 of buildings and improvements. The purchase price was paid by the Company with the issuance of 300 shares of the Company’s Series A Preferred Stock. The purchase price of the property was determined by independent third-party appraisal.

 

On December 31, 2015, RedHawk Land & Hospitality, LLC acquired from Beechwood Properties, LLC 280,000 Class A Units (approximately a 2.0% membership interest) of fully paid, non-assessable units of limited liability company interest in Tower Hotel Fund 2013, LLC, a real estate development limited liability company formed in the state of Hawaii for acquisition, restoration and development of the Naniloa Hilo Resort in Hilo, Hawaii. The $625,000 purchase price was paid by the issuance of 625 shares of the Company’s Series A Preferred Stock. The purchase price was determined by an independent third-party valuation. Beechwood Properties, LLC is a real estate limited liability company owned and controlled by G. Darcy Klug, a stockholder and Chief Financial Officer and Chairman of the board of directors of the Company.

 

On December 31, 2015, the Company completed the acquisition of certain high-quality medical products technology, including the tangible and intangible assets, for the Disintegrator and the Carotid Artery Non-Contact Thermometer. The Disintegrator is the only needle destruction device which has been approved by the United States Food and Drug Administration.

 

On March 24, 2016, the Company announced that its wholly owned subsidiary, RedHawk Pharma UK Ltd, has signed a definitive agreement with Scarlett to complete the acquisition of a 25% ownership investment in EcoGen, a United Kingdom based company specializing in the manufacturing and marketing of certain branded generic pharmaceuticals and medical devices. Subsequent to June 30, 2017, we have agreed to increase our ownership position in EcoGen to 75%.

 

 18 
 

 

We have authorized the issuance of up to $1 million in principal amount of convertible promissory notes (which we refer to as the “Convertible Notes”). The Convertible Notes are secured by certain Company real estate holdings and real estate holdings of a stockholder. The 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. Interest accrues at a rate of 5% per annum and is payable semi-annually. Beginning 180 days after issuance of the Convertible Notes, the Company has the option to issue a notice of its intent to redeem, for cash, an amount equal to the sum of (a) 120% of the then outstanding principal balance, (b) accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect of the Convertible Notes. The Company may only issue the notice of its intent to redeem the Convertible Notes if the trading average of the Company’s common stock equals or exceeds 300% of the conversion price during each of the five business days immediately preceding the date of the notice of intent to redeem. The holder of the Convertible Notes has the right to convert all or any portion of the Convertible Notes at the conversion price at any time prior to redemption. At June 30, 2017, there were approximately $586,000 of Convertible Notes outstanding which are convertible into our common stock at a conversion rate of $0.015 per share or 39,075,990 shares

 

On February 1, 2016, we received from an officer of the Company, $250,000 of cash in exchange for 250 shares of our Series B Preferred Stock.

 

At June 30, 2017, a stockholder and officer of the Company elected to convert $250,000 of the outstanding principal and interest balance owed to him into 233 shares of our Series A Preferred Stock.

 

In March 2018, certain stockholders of the Company made $67,000 in interest free advances to the Company a group of stockholders and invest.

 

Working Capital

 

   June 30, 
   2018   2017 
Current Assets  $1,101,300   $1,011,888 
Current Liabilities  $892,357   $876,292 
Working Capital  $208,943   $135,596 

 

RESULTS OF OPERATIONS

 

Operating Revenues

 

During the quarter ended December 31, 2015, we commenced operations in our financial services and commercial real estate leasing business units. 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. Sales of our medical devices and branded generic pharmaceuticals commenced during the quarter ending September 30, 2016. Prior to the quarter ended September 30, 2016, we had earned minimal revenue.

 

For the twelve-month period ended June 30, 2018, gross and net revenues from our pharmaceutical products, medical devices and commercial rentals totaled $384,279 and $275,845, respectively. Revenues in the pharmaceutical and medical device business unit are expected to continue to improve as market acceptance of our products increases. We are restructuring the sales of our pharmaceuticals to focus more on our branded generics and less on the more competitive drug market for “specials” and NP8’s. While we initially experienced a decline in our revenues, we expect net sales are expected to eventually improve as the Company’s pharmaceutical sales become more weighted to its branded generics which offer lower discounts than the discounts offered for Company’s “special” pharmaceuticals.

 

Operating Expenses and Consolidated Net Loss

 

For the year ended June 30, 2018, we reported consolidated net loss of $910,062 on net revenues of $275,845 as compared to a net loss of $407,681 on net revenues of $929,859 for the comparable twelve-month period ended June 30, 2017. The increase in our net loss resulted primarily from lower revenue, a $250,000 charge for non-operating litigation expense, and a $62,500 charge resulting from a settlement in connection with the increase of our ownership in EcoGen to 100%.

 

Operating expenses for the year ended June 30, 2018 totaled $713,509, a $544,265 reduction from the $1,257,774 of operating expenses for the comparable twelve-month period ended June 30, 2017. The reduction in operating expenses was primarily attributable to lower professional fees of $343,846, lower management fees of $60,000, lower operating expenses of $99,937, lower general and administrative expenses of $85,784, which were partially offset by an increase in sales and marketing expenses and higher depreciation and amortization.

 

For the twelve-month period ended June 30, 2018, we incurred a consolidated net loss of $910,062 or $nil per share compared with a consolidated net loss of $407,681 or $nil per share for the comparable year ended June 30, 2017. The increase in the loss was primarily attributable to the factors discussed above.

 

 19 
 

 

Liquidity and Capital Resources

 

As of June 30, 2018, we had cash of $19,034 compared with $53,939 of cash as of June 30, 2017. During the twelve-month period ended June 30, 2018, we completed the funding of $501,000 of new convertible notes. With the available proceeds from the notes, we reduced our trade payables.

 

During the year ended June 30, 2018, we commenced sales of our pharmaceutical products and medical devices. We also continued to focus on recapitalizing our balance sheet and reducing cash outlays for recurring operating costs. Because of our short operating history, obtaining traditional bank financing is difficult. As such, we use available cash to acquire pharmaceutical and medical device inventories and internally finance new accounts receivable resulting from increased business activity.

 

At June 30, 2018, we had total assets of $2,215,317 as compared with of $2,911,325 June 30, 2017. We had total liabilities of $2,106,242 at June 30, 2018 as compared with liabilities of $1,615,965 at June 30, 2017. The decrease in total assets was principally due to a reduction in receivables and inventory, along with annual depreciation and amortization charges against other assets. At June 30, 2018, we had working capital of $208,943 as compared to a working capital of $135,596 as of June 30, 2017.

 

To provide liquidity to meet current obligations and finance our internal growth, we have entered into a $250,000 line of credit with a stockholder and officer of the Company. As of June 30, 2017, the stockholder converted into Series A Preferred Stock, $250,000 loan to the Company under this line of credit. At June 30, 2018, the outstanding amount under this line of credit is approximately $23,000, leaving approximately $227,000 currently available to us under the line of credit at June 30, 2018. Additionally, certain of our real estate assets have matured in our portfolio and as such, we are pursuing the sale of its real estate holdings. When completed, we will use sale proceeds to retire debt and for working capital to continue to expand our other, more profitable, business activities. Also refer to the Going Concern section of Note 1 to our audited consolidated financial statements.

 

Cash Flows

 

   Year Ended
June 30,
 
   2018   2017 
Cash Flows used in Operating Activities  $(411,268)  $(154,640)
Cash Flows (used in) provided by Investing Activities  $(100,073)  $11,423 
Cash provided by (used in) Financing Activities  $484,613   $(516,224)
Net Decrease in Cash During Period  $(34,905)  $(673,692)

 

Cash Flow from Operating Activities

 

During the twelve month period ended June 30, 2018, $411,268 of cash was used in our operating activities as compared to $154,640 in the comparable year ended June 30, 2017. 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.

 

For the year ended June 30, 2018, we incurred a net loss of $910,062 compared to a net loss of $407,681 in 2017, or a $502,000 increase in our net loss. This is the primary reason for the increase in our cash used in operating activities of approximately $260,000.

 

Cash Flow from Investing Activities

 

We purchased a certificate of deposit in the year ended June 30, 2018 for approximately $100,000, which is used as collateral for a bank line of credit.

 

 20 
 

 

Cash Flows from Financing Activities

 

During the twelve month period ended June 30, 2018, we had $484,613 of cash provided from financing activities, primarily from the issuance of convertible notes and proceeds from a bank line of credit. During the year ended June 30, 2017, we used $516,224 in our financing activities as we used available cash and proceeds of $210,000 from the issuance and sale of our convertible debentures and approximately $285,000 from advances from a related party under a line of credit agreement to pay in full the outstanding principal balance on our line of credit of approximately $1,000,000.

 

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.

 

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. 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 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 complete 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.

 

 21 
 

 

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. There are also new accounting pronouncements that have been issued that have not yet been adopted.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes prior revenue recognition guidance and provides a five step recognition framework that will require entities to recognize the amount of revenue to which it expects to be entitled for the transfer of goods and services. In July 2015, the FASB permitted early adoption and deferred the effective date of this guidance one year; therefore, it will be effective for the Company in the first quarter of fiscal 2019 and may be implemented retrospectively to all years presented or in the period of adoption through a cumulative adjustment. We do not believe that the adoption of this guidance will significantly affect our financial position, results of operations, cash flows and disclosures.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which amended guidance for lease arrangements in order to increase transparency and comparability by providing additional information to users of financial statements regarding an entity’s leasing activities. The revised guidance requires reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. The new guidance is effective for the Company in the first quarter of fiscal year 2020 and will be applied on a modified retrospective basis beginning with the earliest period presented. The Company is currently evaluating the impact of adopting this guidance on our consolidated financial statements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

 22 
 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

RedHawk Holdings Corp.

June 30, 2018

 

Index  
   
Report of Independent Registered Public Accounting Firms F-1
   
Consolidated Balance Sheets F-2
   
Consolidated Statements of Operations F-3
   
Consolidated Statements of Cash Flows F-4
   
Consolidated Statements of Stockholders’ Equity F-5
   
Notes to the Consolidated Financial Statements F-6

 

 23 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

of RedHawk Holdings Corp.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of RedHawk Holdings Corp. (the Company) as of June 30, 2018 and 2017, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended June 30, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s recurring losses from operations raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Postlethwaite & Netterville, APAC  
   
We have served as the Company’s auditor since 2016.  
   
Lafayette, Louisiana  
   
October 15, 2018  

 

 F-1 
 

 

REDHAWK HOLDINGS CORP.

Consolidated Balance Sheets

as of June 30,

 

   2018   2017 
         
ASSETS          
           
Current Assets:          
Cash  $19,034   $53,939 
Certificate of deposit   100,073    - 
Receivables   17,946    548,992 
Inventory, at cost   218,538    364,331 
Investment in real estate limited partnership   625,000    - 
Prepaid expenses   120,709    44,626 
Total Current Assets   1,101,300    1,011,888 
           
Property and Improvements:          
Land   110,000    110,000 
Building and improvements   670,000    670,000 
    780,000    780,000 
Less, accumulated depreciation   (81,146)   (34,146)
    698,854    745,854 
           
Other Assets          
Investment in real estate limited partnership   -    625,000 
Intangible asset, net of amortization of $292,072 and $243,408, respectively   415,163    528,583 
    415,163    1,153,583 
           
Total Assets  $2,215,317   $2,911,325 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current Liabilities:          
Accounts payable and accrued liabilities  $774,568   $860,104 
Current maturities of long-term debt   9,450    8,963 
Line of credit   100,553    - 
Insurance notes payable   7,786    7,225 
           
Total Current Liabilities   892,357    876,292 
           
Long-Term Debt:          
Due to related parties   118,924    35,000 
Real estate note payable, net of current maturities   233,772    242,289 
Convertible notes payable, net of $60,420 and $42,914  in deferred loan costs and unamortized beneficial conversion of $59,042 and $80,842, respectively   861,189    462,384 
    1,213,885    739,673 
Total Liabilities   2,106,242    1,615,965 
           
Commitments and Contingencies   -    - 
           
Stockholders' Equity (Deficit):          
Preferred stock, 5,000 authorized shares and 2,723 issued and outstanding 5% Series A, 2,750 shares designated, $1,127 and $1,072 stated value,  and 1,473 issued and outstanding at June 30, 2018 and June 30, 2017, respectively   1,659,889    1,579,425 
5% Series B, 1,250 shares designated, $1,126 and $1,071 stated value, and 1,250 issued and outstanding at June 30, 2018 and June 30, 2017, respectively   1,407,342    1,339,120 
Common Stock, par value of $0.001 per share, 1,000,000,000 authorized shares and 398,410,762 and 379,070,562 issued, respectively   398,411    379,071 
Additional paid-in capital   1,311,076    1,254,889 
Accumulated deficit   (4,302,291)   (3,243,543)
    474,427    1,308,962 
Less, Treasury stock 35,471,535 and 18,021,535 shares, respectively, at cost   (365,352)   (76,102)
Total RedHawk Holdings Corp. Stockholders' Equity   109,075    1,232,860 
Noncontrolling interest in foreign limited liability company   -    62,500 
Total Stockholders' Equity   109,075    1,295,360 
           
Total Liabilities and Stockholders' Equity  $2,215,317   $2,911,325 

 

The accompanying notes are an integral part of these financial statements

 

 F-2 
 

 

REDHAWK HOLDINGS CORP.

Consolidated Statements of Operations

For the Year Ended June 30,

 

   2018   2017 
         
Revenues  $384,279   $1,670,488 
Less, discounts   (108,434)   (740,629)
    275,845    929,859 
           
Operating Expenses:          
Costs of goods sold   181,763    191,881 
Sales and marketing expenses   108,758    79,163 
Professional fees   48,464    392,310 
Management fees   -    60,000 
Operating expenses   33,718    133,655 
Depreciation and amortization   138,554    112,729 
General and administrative   202,252    288,036 
           
Total Operating Expenses   713,509    1,257,774 
           
Net Loss from Operations   (437,664)   (327,915)
           
Other Income (Expense):          
Amortization of discount on convertible debentures   (21,800)   (24,250)
Settlement loss   (62,425)   - 
Litigation expense   (250,000)   - 
Loss on the sale of assets   -    (4,052)
Dividend income   -    9,968 
Interest expense   (138,173)   (68,084)
    (472,398)   (86,398)
           
Net Loss   (910,062)   (414,313)
           
Other comprehensive gain (loss):          
Effect of foreign currency translation   -   6,651 
    -   6,651 
           
Consolidated Net Income (Loss)   (910,062)   (407,681)
           
Other comprehensive loss          
Reclassification adjustment for sale of marketable securities   -    38,860 
Consolidated Comprehensive Income (Loss)   (910,062)   (368,821)
Less, Net income attributable to noncontrolling interest   -    62,500 
Net Loss attributable to RedHawk Holdings Corp.   (910,062)   (437,321)
           
Preferred Stock Dividends   (148,686)   (127,336)
           
Comprehensive Loss Available for Common Stockholders  $(1,058,748)  $(558,657)
           
Net Loss Per Share          
Basic  $-   $- 
Diluted  $-   $- 
           
Weighted Average Shares Outstanding          
Basic   357,250,050    359,650,168 
Diluted   357,250,050    359,650,168 

 

The accompanying notes are an integral part of these financial statements

 

 F-3 
 

 

REDHAWK HOLDINGS CORP.

Consolidated Statements of Cash Flows

 

   Year Ended June 30, 
   2018   2017 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(910,062)  $(407,681)
Adjustments to reconcile net loss to net cash used in continuing operations:          
Amortization of intangibles   91,554    88,664 
Amortization of discount on convertible debentures   21,800    24,250 
Amortization of deferred loan costs   49,989    11,784 
Depreciation   47,000    15,667 
Loss on sale of marketable securities   -    10,318 
Share-based compensation   35,417    - 
Non-cash interest expense   30,271    36,139 
Non-cash settlement loss   62,475    - 
Changes in operating assets and liabilities:          
Accounts receivable   175,354    279,412 
Inventory   151,147    (249,933)
Prepaid expense and deposits   (75,783)   (23,030)
Accounts payable and accrued liabilities   (90,430)   59,770 
Net Cash Used in Operating Activities   (411,268)   (154,640)
CASH FLOWS FROM INVESTING ACTIVITIES          
Certificate of deposit purchase   (100,073)   - 
Net proceeds from the sale of marketable securities   -    367,575 
Investment in foreign limited liability company   -    (356,152)
Net Cash Provided by (used in) Investing Activities   (100,073)   11,423 
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from related parties, net   54,674    285,000 
Proceeds from issuance of convertible notes   473,000    210,000 
Proceeds from sale of stock, net   19,350    5,950 
Proceeds from exercise of warrants   -    18,632 
Deferred loan costs, net   (67,495)   (19,907)
Proceeds from line of credit   100,553    - 
Principal payments on bank line of credit   -    (1,000,495)
Net proceeds from (payments on) insurance notes payable   561    (6,953)
Principal payments on convertible notes   (88,000)   - 
Principal payments on long-term debt   (8,030)   (8,451)
Net Cash Provided by (Used in) Financing Activities   484,613    (516,224)
Effect of exchange rate on cash   (8,177)   (14,251)
Decrease in cash   (34,905)   (673,692)
Cash, Beginning of Period   53,939    727,631 
Cash, End of Period  $19,034   $53,939 
           
Non-Cash Investing and Financing Activities:          
Beneficial conversion discount on convertible notes  $-   $42,500 
Related party line of credit converted into Series A Preferred Stock  $-   $250,000 
Preferred stock dividends paid-in-kind  $148,686   $158,462 
Convertible debt issued in exchange for treasury shares  $29,250   $- 
Conversion of debt to common stock  $20,760   $- 
Reduction in equity from share exchange to acquire 100% interest in Ecogen   311,590    - 
           
Supplemental Disclosures:          
Interest paid  $39,715   $56,300 
Income tax paid  $-   $- 

 

The accompanying notes are an integral part of these financial statements

 

 F-4 
 

 

REDHAWK HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

                                                     
   SERIES A   SERIES B               ACCUMULATED                     
   PREFERRED STOCK   PREFERRED STOCK   COMMON STOCK  

ADDITIONAL

PAID-IN

  

OTHER

COMPREHENSIVE

   NONCONTROLLING   ACCUMULATED   TREASURY STOCK     
   SHARES   AMOUNT   SHARES   AMOUNT   SHARES   AMOUNT   CAPITAL   LOSS   INTEREST   DEFICIT   SHARES   AMOUNT   TOTAL 
                                                     
BALANCE, JUNE 30, 2016   1,240   $1,240,000    1,250   $1,250,000    375,094,082   $375,094   $1,192,283   $(38,860)  $-   $(2,646,026)   18,021,535   $(76,102)  $1,296,389 
                                                                  
Fair value of beneficial conversion feature on convertible notes   -    -    -    -    -    -    42,000    -         -    -    -    42,000 
Preferred stock dividends declared   -    -    -    -    -    -    -    -         (127,336)   -    -    (127,336)
PIK Dividends        89,425         89,120              -                             178,545 
Conversion of line of credit   233    250,000                                                      250,000 
Sale of marketable securities   -    -    -    -    -    -    -    38,860         -    -    -    38,860 
Milito shares issued                       250,000    250    5,700                             5,950 
Warrant exercise                       3,726,480    3,727    14,906                             18,633 
Re-purchase of securities   -    -    -    -    -    -    -         -    -         -    - 
Net loss   -    -    -    -    -    -    -    -    62,500    (470,181)   -    -    (407,681)
                                                                  
BALANCE, JUNE 30, 2017   1,473   $1,579,425    1,250   $1,339,120    379,070,562   $379,071   $1,254,889   $-   $62,500   $(3,243,543)   18,021,535   $(76,102)  $1,295,360 
                                                                  
Non-controlling interest acquired   -    -    -    -    -    -    -    -    (62,500)   -    10,000,000    (260,000)   (322,500)
Preferred stock dividends declared   -    -    -    -    -    -    -    -         (148,686)   -    -    (148,686)
PIK Dividends        80,464         68,222              -              -              148,686 
Stock sales   -    -    -    -    7,450,000    7,450    21,800    -         -    -    -    29,250 
Stock grants                       5,000,000    5,000    30,417                             35,417 
Conversion of convertible notes to stock                       6,890,200    6,890    3,970    -                        10,860 
Shares acquired   -    -    -    -    -    -    -         -    -    7,450,000    (29,250)   (29,250)
Net loss   -    -    -    -    -    -    -    -    -    (910,062)   -    -    (910,062)
                                                                  
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 

 

The accompanying notes are an integral part of these financial statements

 

 F-5 
 

 

REDHAWK HOLDINGS CORP.

Notes to the Consolidated Financial Statements

June 30, 2018

 

1. NATURE OF OPERATIONS AND CONTINUANCE OF BUSINESS

 

RedHawk Holdings Corp. (formerly Independence Energy Corp.) was incorporated in the State of Nevada on November 30, 2005 under the name “Oliver Creek Resources Inc.” At inception, we were organized to acquire, explore and develop natural resource properties in the United States. Effective August 12, 2008, we changed our name from “Oliver Creek Resources Inc.” to “Independence Energy Corp.” and opened for trading on the Over-the Counter Bulletin Board under the symbol “IDNG.” Effective October 13, 2015, by vote of a majority of the Company’s stockholders, the Company’s name was changed from “Independence Energy Corp.” to “RedHawk Holdings Corp.”

 

On March 31, 2014, the Company acquired the exclusive right to distribute certain medical devices and changed the focus of its operations to include medical device distribution. We have expanded our business focus to include other operations.

 

Currently, we are a diversified holding company which, through our subsidiaries, is engaged in sales and distribution of medical devices, sales of branded generic pharmaceutical drugs, commercial real estate investment and leasing, sales of point of entry full-body security systems, and specialized financial services. Through its medical products business unit, the Company sells WoundClot Surgical - Advanced Bleeding Control, the SANDD™ Insulin Needle Destruction Unit (formerly known as the Disintegrator™), the Carotid Artery Digital Non-Contact Thermometer and Zonis®. Through our United Kingdom based subsidiary, we manufacture and market branded generic pharmaceuticals, certain other generic pharmaceuticals known as “specials” and certain pharmaceuticals outside of the United Kingdom’s National Health Service drug tariff referred to as NP8’s. Centri Security Systems LLC, a wholly-owned subsidiary of the Company, holds the exclusive U.S. manufacturing and distribution rights for the Centri Controlled Entry System, a unique, closed cabinet, nominal dose transmission full body x-ray scanner. Our real estate leasing revenues are generated from a commercial property under a long-term lease. Additionally, the Company’s real estate investment unit holds a limited liability company interest in a commercial restoration project in Hawaii.

 

Going Concern

 

These financial statements have been prepared on a going concern basis, which implies that the Company will be able to continue as a going concern without further financing. The Company must continue to realize its assets to discharge its liabilities in the normal course of business. The Company has generated limited revenues to date and has never paid any dividends on its common stock and is unlikely to pay any common stock dividends or generate significant earnings in the immediate or foreseeable future.

 

For the year ended June 30, 2018, the Company had gross revenues of $384,279, net revenues of $275,845, a consolidated net loss of $910,062 and cash used in operating activities of $411,268. For the year ended June 30, 2017, the Company had $1,670,488 in gross revenue, $929,859 in net revenue, a consolidated net loss of $407,681 and cash of $154,640 used in operating activities. As of June 30, 2018, the Company had cash of $19,034 and a certificate of deposit of $100,073, working capital of $208,943 and an accumulated deficit of $4,302,291. The continuation of the Company as a going concern is still dependent upon the continued financial support from its stockholders, the ability to raise equity or debt financing, cash proceeds from the sale of assets and the attainment of profitable operations from the Company’s businesses in order to discharge its obligations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The consolidated financial statements of the Company as of June 30, 2018 and 2017 included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (which we refer to as “GAAP”) pursuant to the rules and regulations of the SEC.

 

 F-6 
 

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries in which we have a greater than 50% ownership. All material intercompany accounts have been eliminated upon consolidation. Certain prior year amounts are sometimes reclassified to be consistent with the current year financial statement presentation. Equity investments, which we have an ownership greater than 20% but less than 50% through which we exercise significant influence over but do not control the investee and we are not the primary beneficiary of the investee’s activities, are accounted for using the equity method of accounting. Equity investments, which we have an ownership less than 20%, are recorded at cost.

 

Use of Estimates

 

The financial statements and related notes are prepared in conformity with GAAP which requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to valuation and impairment of investments and long-lived assets, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

Revenue Recognition

 

We derive revenue from several types of activities – medical device sales, branded generic pharmaceutical sales, commercial real estate leasing and financial services. Our medical device sales include the marketing and distribution of certain professional and consumer grade digital non-contact thermometers, needle destruction unit and advanced bleeding control, non-compression hemostasis. Through our United Kingdom based subsidiary, we manufacture, and market, branded generic pharmaceuticals, and certain other generic pharmaceuticals known as “specials”. Our real estate leasing revenues are from certain commercial properties under lease. The financial service revenue is from brokerage services. The Company offers customer discounts in certain cases. Such discounts are estimated at time of product sale and deducted from gross revenues.

 

Cash and Cash Equivalents

 

We consider highly liquid investments with an original maturity of 90 days or less to be cash equivalents. The Company did not have any cash equivalents as of June 30, 2018 or 2017.

 

Accounts Receivable

 

Accounts receivables are amounts due from customers of our pharmaceutical, medical device and financial services divisions. The amount is reported at the billed amount, net of any expected allowance for bad debts. There was no allowance for doubtful accounts as of June 30, 2018 and June 30, 2017.

 

Inventory

 

Inventory consist of purchased thermometers, an advanced bleeding control, non-compression hemostasis, a patented antimicrobial ionic silver calcium catheter dressing, needle destruction devices and certain branded generic pharmaceuticals held for resale. All inventories are stated at the lower of cost or net realizable value utilizing the first-in, first-out method.

 

 F-7 
 

 

Property and Improvements

 

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

 

During the year ended June 30, 2017, we decided to sell our Louisiana real estate holdings, which includes our former corporate headquarters on Chemin Metairie Road in Youngsville, Louisiana and a property on Jefferson Street in Lafayette, Louisiana that we are leasing to a third party. As a result of that decision, the net book value of those properties along with related mortgage notes were reflected as assets and liabilities held for sale in the balance sheets. At that time, we also ceased depreciating such assets. All such amounts are included in the land and hospitality segment. A sale of these properties did not occur in the fiscal year ended June 30, 2018 and, as such, the Company has returned these properties to assets held for use and depreciation expenses has been recorded in 2018 for the period the properties were included in assets held for sale. We will continue to list these properties for sale, but it is uncertain if the sales will occur during the next twelve months. As such, these real estate assets, and related liabilities, have been reclassified in the 2018 and 2017 balance sheets. Based on the present real estate market and discussions with brokers, no impairment of the recorded amounts has occurred as of June 30, 2018.

 

We are also pursuing the sale of our remaining investment in the real estate limited partnership investment. Subsequent to year end, based on stability of operations of the underlying real estate property and recent valuations, the partnership refinanced the property. We received a distribution of approximately $370,000 from the real estate limited partnership following this refinancing. This distribution will be recorded as a reduction of our investment in the limited partnership, which is recorded at cost. We are currently in negotiations to sell our interest in the partnership and anticipate such a transaction will close prior to June 30, 2019. Thus, our investment is shown as a current liability as of June 30, 2018 in the accompanying consolidated balance sheet.

 

Effective July 1, 2017, the Chemin Metairie Road property was leased under a one-year term at a rent of $1,500 per month. The lessee had an option to purchase the property during the lease for the lesser of $300,000 or the average of two independent appraisals. On June 30, 2018, the tenant did not exercise his option to purchase the property. The Company has returned the property to service and currently uses this property as offices for our medical products unit. Effective August 1, 2017, the tenant that leases the Jefferson Street property has renewed that lease through December 31, 2022 at a rent of $3,250 per month. We continue to offer these two properties for sale. Since we are not certain a sale will occur during our 2019 fiscal year, we reflect these assets as non-current.

 

Income Taxes

 

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

 

Basic and Diluted Net Loss Per Share

 

The Company computes net loss per share in accordance with ASC 260, Earnings Per Share, which requires presentation of both basic and diluted earnings per share (EPS) on the face of the statements of operations. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and the convertible notes and the convertible preferred stock using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. During the year ended June 30, 2017, 3,726,480 warrants were exercised, and the remaining warrants expired. There were no outstanding warrants as of June 30, 2018.

 

 F-8 
 

 

At June 30, 2018, including accrued but unpaid interest, there were 41,427,384 shares issuable upon conversion of the notes. There are $359,240 in convertible notes that are convertible at a variable conversion rate and not included in the issuable share amount in the preceding sentence. Also, at June 30, 2018, including accrued but unpaid dividends, there were potentially 110,659,289 shares issuable upon the conversion of the Series A Preferred Stock and, including accrued but unpaid dividends, there were potentially 140,734,170 shares issuable upon the conversion of the Series B Preferred stock. The shares to be issued upon conversion of the warrants and the shares issuable from the conversion of the notes and the Series A and Series B Preferred stock have been excluded from earnings per share calculations because these shares are anti-dilutive.

 

Comprehensive Income (Loss)

 

ASC 220, Comprehensive Income, establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. All of our accumulated other comprehensive income as of June 30, 2018 and 2017 relate to foreign currency translation.

 

Financial Instruments

 

Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into the following three levels that may be used to measure fair value:

 

Level 1. Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2. Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

Level 3. Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

The Company’s financial instruments consist principally of cash, accounts receivable, accounts payable and accrued liabilities, debt, and amounts due to related parties.

 

We believe that the recorded values of all of our other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.

 

 F-9 
 

 

Reclassification

 

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

 

Recent Accounting Pronouncements

 

Going Concern

 

In August 2014, the FASB issued guidance on disclosures of uncertainties about an entity’s ability to continue as a going concern. The guidance requires management’s evaluation of whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. This assessment must be made in connection with preparing financial statements for each annual and interim reporting period. Management’s evaluation should be based on the relevant conditions and events that are known and reasonably knowable at the date the financial statements are issued. If conditions or events raise substantial doubt about the entity’s ability to continue as a going concern, but this doubt is alleviated by management’s plans, the entity should disclose information that enables the reader to understand what the conditions or events are, management’s evaluation of those conditions or events and management’s plans that alleviate that substantial doubt. If conditions or events raise substantial doubt and the substantial doubt is not alleviated, the entity must disclose this in the footnotes. The entity must also disclose information that enables the reader to understand what the conditions or events are, management’s evaluation of those conditions or events and management’s plans that are intended to alleviate that substantial doubt. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The adoption of this guidance in the current year did not have an impact on our financial position, results of operations, cash flows or disclosures.

 

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (which we refer to as the “FASB”) issued new guidance intended to change the criteria for recognition of revenue. The new guidance establishes a single revenue recognition model for all contracts with customers, eliminates industry specific requirements and expands disclosure requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following five steps: (1) identify contracts with customers, (2) identify the performance obligations in the contracts, (3) determine the transaction price, (4) allocate the transaction price to the performance obligation in the contract, and (5) recognize revenue as the entity satisfies performance obligations. In July 2015, the FASB permitted early adoption and deferred the effective date of this guidance one year; therefore, it will be effective for the Company in the first quarter of fiscal 2019 and may be implemented retrospectively to all years presented or in the period of adoption through a cumulative adjustment. We do not believe that the adoption of this guidance will significantly affect our financial position, results of operations, cash flows and disclosures.

 

Leases

 

In February 2016, the FASB issued ASU 2016-02, Leases, which amended guidance for lease arrangements in order to increase transparency and comparability by providing additional information to users of financial statements regarding an entity’s leasing activities. The revised guidance requires reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. The new guidance is effective for the Company in the first quarter of fiscal year 2020 and will be applied on a modified retrospective basis beginning with the earliest period presented. The Company is currently evaluating the impact of adopting this guidance on our consolidated financial statements.

 

 F-10 
 

 

3. OTHER ASSETS

 

On December 31, 2015, RedHawk Land & Hospitality, LLC, a wholly-owned subsidiary of the Company, acquired from Beechwood Properties, LLC 280,000 Class A Units (approximately a 2.0% membership interest) of fully paid, non-assessable units of limited liability company interest in Tower Hotel Fund 2013, LLC, a real estate development limited liability company formed in the state of Hawaii for acquisition, restoration and development of the Naniloa Hilo Resort in Hilo, Hawaii. The $625,000 purchase price was paid by the issuance of 625 shares of the Company’s Series A Preferred Stock. The purchase price was determined by an independent third-party valuation. Beechwood Properties, LLC is a real estate limited liability company owned and controlled by G. Darcy Klug, a stockholder and Chief Financial Officer and Chairman of the board of directors of the Company. This investment in real estate limited partnership is recorded at cost and the Company is not aware of any indicator of impairment as of June 30, 2018. It is not practicable for the Company to estimate fair value of this investment.

 

On March 23, 2016, one of our wholly-owned subsidiaries, RedHawk Pharma UK Ltd (which we refer to herein as “Pharma”), initially acquired a 25% equity interest in EcoGen Europe Ltd (which we refer to as “EcoGen”) from Scarlett Pharma Ltd (which we refer to herein as “Scarlett”). On September 12, 2017 we completed a share transfer agreement wherein we increased our ownership in EcoGen to 75%. On December 19, 2017 we completed another share transfer agreement wherein we increased our ownership in EcoGen to 100%. In connection with the December share transfer the non-controlling interest was eliminated. Under the terms of an agreement we reached with Scarlett and its affiliate related to these share exchanges, they surrendered ten (10) million shares of RedHawk common stock and transferred to RedHawk approximately $300,000 of EcoGen preferred stock and other consideration. In exchange, RedHawk assumed approximately $370,000 of obligations due to EcoGen by Scarlett and its affiliates. The RedHawk Shares were originally issued to Scarlett in connection with the Company’s March 2016 investment of 25% into EcoGen. As of December 31, 2017, Pharma now owns approximately $635,000 of EcoGen’s preferred stock and 100% of EcoGen’s common stock. The exchange agreements also settled numerous outstanding disputes between the Company, Scarlett, Warwick and the noncontrolling owners of the Company. A non-cash settlement loss of $62,425 resulted and is included in our results for the year ended June 30, 2018.

 

During the fiscal year ended June 30, 2017, we began to consolidate the accounts of EcoGen in our financial statements under the variable interest entity model. In the quarter ended September 30, 2017, we became the majority owner of EcoGen and as of December 31, 2017, we now own 100% of the common stock of EcoGen. As of June 30, 2018, we have approximately $371,894 ($331,894 net of accumulated amortization) in intangible assets related to licenses held by EcoGen. Such intangible assets are being amortized over an estimated useful life of 20 years.

 

In September 2018, the Company acquired the exclusive license rights to certain medical device technology. Under the terms of the license agreement, the Company paid $25,000 at closing plus the first of a total twenty quarterly payments of $21,250 each.

 

4. LOAN AND INSURANCE NOTE PAYABLE

 

We finance a portion of our insurance premiums. At June 30, 2018, there was a $7,786 outstanding balance due on our premium finance agreements. The policies related to these premiums expire May 31, 2019.

 

5. RELATED PARTY TRANSACTIONS

 

Effective December 1, 2016, the Company entered into a $250,000 Commercial Note Line of Credit (which we refer to as the “Line of Credit”) with a stockholder and officer of the Company to evidence prior indebtedness and provide for future borrowings. The advances are used to fund our operations. The Line of Credit accrues interest at 5% per annum and matures on March 31, 2019. At maturity, or in connection with a pre-payment, subject to the conditions set forth in the Line of Credit, the stockholder has the right to convert the amount outstanding (or the amount of the prepayment) into the Company’s Series A Preferred Stock at the par value of $1,000 per share. During the year ended June 30, 2017, $250,000 of the amounts loaned under this line of credit were converted to preferred stock. At June 30, 2018, the principal balance totaled $22,674. The amount is included in noncurrent liabilities based on the expectation that either the Line of Credit maturity date will be extended, the outstanding amount will be refinanced through other long-term debt, or the amount outstanding will be converted to preferred stock as allowed for in the agreement.

 

This same stockholder and officer also holds $29,250 of 5% convertible notes, which mature in December 2020 and are convertible into common stock at a rate of $0.015 per share or 1,950,000 shares.

 

In the quarter ended June 30, 2018, certain stockholders of the Company made $67,000 in interest free advances to the Company.

 

All of the above liabilities are included in Due to Related Parties in the accompanying consolidated balance sheet as of December 31, 2017.

 

 F-11 
 

 

During the year ended June 30, 2017, EcoGen had sales to customers which are controlled by individuals which are shareholders of EcoGen and are the noncontrolling interests in our consolidated financial statements. These sales totaled $1,241,000 on a gross basis and had discounts of $968,000. A portion of these discounts were at levels that exceeded discounts offered to unaffiliated customers. During the quarter ended March 31, 2017, management of RedHawk and these noncontrolling shareholders of EcoGen reached an agreement whereby $370,000 of such discounts were to be considered an account receivable due to EcoGen by this affiliated customer. Subsequent to June 30, 2017, the Company assumed the obligations of these noncontrolling shareholders in connection with the share exchanges discussed in Note 3.

 

Beginning in the quarter ended March 31, 2017, certain members of management agreed to forego management fees in consideration of the operating cash flow needs of the Company. There is not a set timeline to reinstitute such management fees. As of June 30, 2018 and 2017, $60,000 in such fees remain unpaid and are recorded in accounts payable and accrued liabilities in the accompanying balance sheet.

 

6. LONG-TERM DEBT, DEBENTURES AND LINE OF CREDIT

 

On November 12, 2015, we acquired certain commercial real estate from a related party that is an entity controlled by a stockholder and officer of the Company for $480,000 consisting of $75,000 of land costs and $405,000 of buildings and improvements (see Note 3). The purchase price was paid by through the assumption by the Company of $265,000 of long-term bank indebtedness (which we refer to as “Note”) plus the issuance of 215 shares of the Company’s newly designated Series A Preferred Stock. The purchase price also included the cost of specific security improvements requested by the lessee.

 

The Note is dated November 13, 2015 and has a principal amount of $265,000. Monthly payments under the Note are $1,962 including interest accruing at a rate of 5.95% per annum. The Note matures in June 2021 and is secured by the commercial real estate, guarantees by the Company and its real estate subsidiary and the personal guarantee of a stockholder who is also an officer of the Company.

 

We have authorized the issuance of up to $1 million in principal amount of convertible promissory notes (which we refer to as the “Fixed Rate Convertible Notes”). The Fixed Rate Convertible Notes are secured by certain Company real estate holdings.

 

The Fixed Rate Convertible Notes issued mature on March 15, 2021, the fifth anniversary of the date of issuance and are convertible into shares of our common stock at a price of $0.015 per share. Interest accrues at a rate of 5% per annum and is payable semi-annually. The Company has the option to issue a notice of its intent to redeem, for cash, an amount equal to the sum of (a) 120% of the then outstanding principal balance, (b) accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect of the Fixed Rate Convertible Notes. The Company may only issue the notice of its intent to redeem the Fixed Rate Convertible Notes if the trading average of the Company’s common stock equals or exceeds 300% of the conversion price during each of the five business days immediately preceding the date of the notice of intent to redeem. The holder of the Fixed Rate Convertible Notes has the right to convert all or any portion of the Fixed Rate Convertible Notes at the conversion price at any time prior to redemption.

 

At June 30, 2018, there were $621,411 ($537,757 net of deferred financing costs and beneficial conversion option) of Fixed Rate Convertible Notes outstanding, including $71,441 of interest paid in kind. The Fixed Rate Convertible Notes (plus accrued interest) are convertible into our common stock at a conversion rate of $0.015 per share or 41,427,384 shares. During the years ended June 30, 2018 and 2017, we paid-in-kind $29,943 and $28,347, respectively, of interest on these convertible notes.

 

 F-12 
 

 

During the twelve months ended June 30, 2018, we also issued $468,000 of convertible notes to third parties with variable conversion rates (“Variable Rate Convertible Notes”). The Variable Rate Convertible Notes mature at various dates between November 2018 and 2019. We received, net of financing costs incurred, $403,350 in cash from the issuance of these notes. These Variable Rate Convertible Notes have interest accruing at rates ranging between 8% - 12%, and redemption. These notes issued to third parties have a variable conversion rate based on the price of the Company’s common stock. $326,240 of the convertible notes are currently convertible into our common stock beginning in the quarter ending June 30, 2018 at a variable conversion rate. We also paid in full two convertible note in the amount of $88,000 and notes totaling $20,760 were converted into equity. At June 30, 2018, there were $359,240 ($323,432 net of deferred financing costs) of Fixed Rate Convertible Notes outstanding

 

The Variable Rate Convertible Notes have maturity dates prior to June 30, 2019 and are, therefore, classified as a current liability. It is the Company’s expectation that we will either repay these notes before the conversion period commences, re-finance these convertible notes to longer terms or permit a limited amount of conversions. If we do not re-finance these convertible notes to longer terms, however, the holders of the convertible notes have the option to convert these notes into equity or hold the convertible notes to maturity.

 

Also, during the year ended June 30, 2018, we issued $29,250 of convertible notes to our majority stockholder in exchange for 7,450,000 shares of our common stock. The note matures in December 2020 and is convertible into 1,950,000 shares, or $0.015 per share. (See Note 5.)

 

In February 2018, we obtained a $100,000 line of credit from a bank. The line of credit matures in February 2021 and is collateralized by a $100,000 certificate of deposit at the bank. As of June 30, 2018, approximately $100,000 was drawn under the line of credit. The interest rate on the line of credit is 7.0% per annum.

 

7. COMMITMENTS AND CONTINGENCIES

 

On January 31, 2017, the Company and a stockholder filed a complaint (the “Complaint”) in the United States District Court for the Eastern District of Louisiana (RedHawk Holdings Corp. and Beechwood Properties, LLC Case No. 2:17-cv-819). The Complaint names Daniel J. Schreiber (“Schreiber”) and the Schreiber Living Trust – DTD 2/08/96 (the “Schreiber Trust”) as defendants. Schreiber is the former Chief Executive Officer and director of RedHawk. The Schreiber Trust, of which Schreiber is the Trustee, is a shareholder of the Company. The Complaint lodged claims on behalf of RedHawk for securities fraud, fraud, and Schreiber’s breach of fiduciary duties.

 

On April 24, 2017, RedHawk and its shareholder filed an amended complaint (“Amended Complaint”) naming Schreiber as the only proper defendant in the suit, individually and as Trustee of the Schreiber Trust.

 

On May 22, 2017, Schreiber filed a motion to dismiss, or in the alternative to transfer, the suit on the grounds of lack of personal jurisdiction and improper venue. After the parties filed an opposition and reply, on August 16, 2017 the court denied Schreiber’s motion to dismiss.

 

On September 13, 2017, Schreiber filed an answer to the Amended Complaint, as well as counterclaims against RedHawk, Beechwood, and a director of RedHawk for actions allegedly taken in the course of his duty as a director. The counterclaims against RedHawk and its director are for alleged violation of UCC § 8-401, breach of fiduciary duty, negligence, and unfair trade practices.

 

 F-13 
 

 

The legal remedies sought in these counterclaims were the subject of a lawsuit filed previously by Schreiber in the United States District Court for the Sothern District of California on April 24, 2017 (Case No. 3:17-cv-8824). At the time of the answer of the Louisiana lawsuit, the California action was still pending, and the answer asked that the counterclaim filed in Louisiana be stayed until the California case was adjudicated. On September 26, 2017, the court in the California action granted RedHawk’s motion to dismiss that suit.

 

On October 24, 2017, a scheduling conference was held. The parties agreed to, among other matters, to exchange documents and conduct other discovery, and, at this time, to schedule a bench trial starting November 5, 2018.

 

RedHawk plans to vigorously contest the claims against it in this matter and to pursue the claims against Schreiber, individually and as Trustee of the Schreiber Trust.

 

While we are insured for our legal defense costs in this matter, we have a $250,000 self-insured retention. During the year ended June 30, 2018, we recorded a charge of $250,000 for uinsured costs incurred in connection with this matter. We believe the ultimate resolution of this matter will not significantly adversely affect our financial position, operations or cash flows, other than the uninsured costs referred to above.

 

8. STOCKHOLDERS’ EQUITY

 

Effective on October 13, 2015, we amended and restated our articles of incorporation as previously adopted by a majority vote of our stockholders. The amended and restated articles of incorporation, among other things, changed our name to RedHawk Holdings Corp., authorized 5,000 shares of Preferred Stock, and increased the number of authorized shares of common stock from 375,000,000 to 450,000,000. On December 26, 2018, by a vote of the majority of our stockholders, we increased the number of our authorized shares from 450,000,000 to 1,000,000,000. On August 20, 2018, by a vote of the majority of our stockholders, we increased the number of our authorized shares from 1,000,000,000 to 2,000,000,000.

 

Preferred Stock

 

Pursuant to a certificate of designation filed with the Secretary of State of the State of Nevada, effective November 12, 2015, 2,750 shares of our authorized Preferred Stock have been designated as Series A 5% Convertible Preferred Stock, originally with a $1,000 stated value (which we refer to as “Series A Preferred Stock”). The holders of the Series A Preferred Stock are entitled to receive cumulative dividends at a rate of 5% per annum, payable quarterly in cash, or at the Company’s option, such dividends shall be accreted to, and increase, the stated value of the issued Series A Preferred Stock (which we refer to as “PIK”). Holders of the Series A Preferred Stock are entitled to votes on all matters submitted to stockholders at a rate of ten votes for each share of common stock into which the Series A Preferred Stock may be converted. After six months from issuance, each share of Series A Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock equal to the quotient of the stated value, as adjusted for PIK dividends, by $0.015, as adjusted for stock splits and dividends.

 

Pursuant to a certificate of designation filed with the Secretary of State of the State of Nevada, effective February 16, 2016, 1,250 shares of our authorized Preferred Stock have been designated as Series B 5% Convertible Preferred Stock, originally with a $1,000 stated value (which we refer to as “Series B Preferred Stock”). The holders of the Series B Preferred Stock are entitled to receive cumulative dividends at a rate of 5% per annum, payable quarterly in cash, or at the Company’s option, such dividends shall be accreted to, and increase, the stated value of the issued Series B Preferred Stock (which we refer to as “PIK”). Holders of the Series B Preferred Stock are entitled to votes on all matters submitted to stockholders at a rate of ten votes for each share of common stock into which the Series B Preferred Stock may be converted. After six months from issuance, each share of Series B Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock equal to the quotient of the stated value, as adjusted for PIK dividends, by $0.01, as adjusted for stock splits and dividends.

 

During the year ended June 30, 2018 and 2017, we paid-in-kind $148,686 and $178,545, respectively, of related preferred stock dividends.

 

Warrants

 

During November 2014, we completed a private equity sale of 14,905,918 shares of common stock generating proceeds of $49,900. As a component of this private equity sale, 7,452,959 warrants to acquire common stock of the Company were also issued with an exercise price of $0.005 per share. During the year ended June 30, 2017, 3,726,480 warrants were exercised, and the remaining warrants expired.

 

 F-14 
 

 

9. INCOME TAXES

 

As of June 30, 2018, the Company had approximately $3,600.000 of U.S. net operating losses (NOLs) carried forward to offset taxable income in future years which expire commencing in fiscal 2026 and run through 2038. As a result of the numerous common stock transactions that have occurred, the amount of these NOLs which is actually available to offset future income may be severely limited due to change-in-control tax provisions. The Company has not estimated the effect of such change-in-control limitation. The related deferred income tax asset of these NOLs, without consideration of any change-of-control limitation, was estimated to be approximately $750,000 as of June 30, 2018. As a result of the enactment of the Tax Cuts and Jobs Act (The Act) in December 31, 2017, the estimated deferred income tax asset related to U.S. NOL carry forwards is based on the reduced 21% corporate income tax rate. Due to our history of operating losses and the uncertainty surrounding the realization of the deferred tax assets in future years, our management has determined that it is more likely than not that the deferred tax assets will not be realized in future periods. Accordingly, the Company has recorded a valuation allowance against its net deferred tax assets.

 

Thus, there is no net tax asset recorded as of June 30, 2018 or June 30, 2017 as a 100% valuation allowance has been established for any tax benefit. EcoGen also has a net operating loss as of June 30, 2018 and June 30, 2017 for which no deferred tax asset has been provided. Similarly, there is no income tax benefit recorded on the net loss of the Company for the years ended June 30, 2018 and 2017.

 

The Company did not have any accumulated foreign earnings for which taxes were deferred and subject to the one-time transition tax under The Act.

 

The Company accounts for interest and penalties relating to uncertain tax provisions in the current period statement of operations, as necessary. The Company’s tax years from inception are subject to examination. There are no income tax examinations currently in progress.

 

10. 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 & Hospital and Other Services business units operate in the United States. Our Medical Device and Pharmaceutical business unit currently operates primarily in the United Kingdom. All remaining assets, primarily our corporate offices and investment portfolio, are located in the United States. The segment classified as Corporate includes corporate operating activities that support the executive offices, capital structure and costs of being a public registrant. These costs are not allocated to the operating segments when determining profit or loss. The following table reflects our segments as of June 30, 2018 and 2017 and for the twelve month periods then ended.

 

       MEDICAL             
Year ended  LAND &   DEVICE &   OTHER         
June 30, 2018  HOSPITALITY   PHARMA   SERVICES   CORPORATE   TOTAL 
                     
Operating revenues, gross  $67,160   $317,119   $-   $-   $384,279 
Operating revenues, net  $67,160   $208,685  $-   $-    275,845 
Operating income (loss)   (22,443)  $(217,174)  $(1,791)  $(196,256)  $(437,664)
Interest expense  $15,760   $(5)  $-   $122,418   $138,173 
Depreciation and amortization  $47,000   $91,554   $-   $-   $138,554 
Identifiable assets  $1,347,446   $702,516   $26   $165,329   $2,215,317 

 

       MEDICAL             
Year ended  LAND &   DEVICE &   OTHER         
June 30, 2017  HOSPITALITY   PHARMA   SERVICES   CORPORATE   TOTAL 
                     
Operating revenues, gross  $39,000   $1,631,488   $

-

   $

-

   $1,670,488 
Operating revenues, net  $39,000   $890,859   $

-

   $

-

   $929,859 
Operating income (loss)  $(2,223)  $191,291   $(32,732)  $(484,251)  $(327,915)
Interest expense  $27,221   $769   $

-

   $40,094   $68,084 
Depreciation and amortization  $15,666   $97,063   $

-

   $

-

   $112,729 
Identifiable assets  $1,381,622   $739,567   $240   $789,896   $2,911,325 

 

11. SUBSEQUENT EVENTS

 

The Company evaluates subsequent events through the time of our filing on the date we issue our financial statements, which was on October 15, 2018. The following are matters which occurred subsequent to June 30, 2018:

 

  In September 2018, we received a distribution from our real estate limited partnership investment of approximately $370,000;
  In September 2018, RedHawk Medical Products, LLC, a wholly-owned subsidiary of the Company, acquired the world-wide exclusive manufacturing and distribution rights to certain intellectual properties which the Company believes will significantly expand the current market capabilities of its SANDD mini needle destruction unit;
  In August 2018, we increased our authorized shares from 1,000,000,000 to 2,000,000,000.
  In August 2018, we received notice from holders of the Variable Rate Convertible Notes of their intent to convert such notes into common stock. The conversion process is still in progress as of the filing date.

 

 F-15 
 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

In accordance with Rules 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (our principal executive officer, principal financial officer and principal accounting officer), of the effectiveness of our disclosure controls and procedures as of June 30, 2018 which is the end of the period covered by this Form 10-K. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls over financial reporting, our chief executive officer and chief financial officer (our principal executive officer, principal financial officer and principal accounting officer) concluded that our disclosure controls and procedures were not effective.

 

Management’s Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Our company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Under the supervision and with the participation of our management, including the chief executive officer and chief financial officer (our principal executive officer, principal financial officer and principal accounting officer), our management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2018 using the criteria established in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (which we refer to as “COSO”).

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of June 30, 2018, our management determined that there were control deficiencies that constituted material weaknesses, as described below.

 

  We do not have an Audit Committee – While not being legally obligated to have an audit committee, it is our management’s view that such a committee, including a financial expert member, is an utmost important entity level control over the Company’s financial statements. Currently, the board of directors acts in the capacity of the audit committee.
     
 

We have limited personnel and do not have adequate segregation of duties, including over cash controls – As of June 30, 2018, the Company had not maintained sufficient internal control over financial reporting as it has limited personnel and does not have an adequate segregation of duties. This includes internal controls over certain cash processes, including failure to segregate cash handling and accounting functions, and did not require dual signature on the Company’s bank accounts. The lack of such controls over cash were mitigated by the fact that the Company had limited transactions in its bank accounts and significant cash transactions are reviewed by the board of directors. This also means there is limited review of accounting and financial reporting conclusions made by the Company’s chief financial officer.

 

Accordingly, our management concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s internal controls.

 

As a result of the material weaknesses described above, our management has concluded that the Company did not maintain effective internal control over financial reporting as of June 30, 2018 based on criteria established in Internal Control—Integrated Framework issued by COSO.

 

 24 
 

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting identified in connection with our evaluation we conducted of the effectiveness of our internal control over financial reporting as of June 30, 2018, that occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Continuing Remediation Efforts to address deficiencies in Company’s Internal Control over Financial Reporting

 

Once the company is engaged in a business of merit and has sufficient personnel available, then our board of directors, in particular and in connection with the aforementioned deficiencies, will establish the following remediation measures:

 

  We will nominate an audit committee which will include an independent director who is a financial expert.
     
 

When we have adequate financial resources, we will employ 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.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

All directors of our company hold office until the next annual meeting of the security holders or until their successors have been elected and qualified. The officers of our company are appointed by our board of directors and hold office until their death, resignation or removal from office. Our directors and executive officers, their ages, positions held, and duration as such, are as follows:

 

Name   Age   Position Held with the Company  
Thomas J. Concannon   64   Chief Executive Officer and Director  
G. Darcy Klug   66   Chief Financial Officer and Chairman of the board of directors  
Felix C. Spizale   72   Director  
Phillip Harris IV   74   Director  
Robert H. Rhyne Jr.   64   Director  

Andre F. Toce Sr.

Steven C. Bader

 

59

54

 

Director

Director

 

 

Thomas J. Concannon. Mr. Concannon has been a director of the Company since February 1, 2016 and serves as our Chief Executive Officer since July 11, 2016. Mr. Concannon has over 30 years of energy industry experience. From 2013 to February 2016, Mr. Concannon provided consulting services to certain private companies in the services sector of the oil and gas industry. Between 2009 and 2013, Mr. Concannon was Senior Vice President and Secretary of Wolfpack Energy Services, LLC, a Texas based provider of rental equipment and tubular services to the oil and natural gas industry. Prior to joining Wolfpack, Mr. Concannon held a similar senior financial position with RedHawk Energy Corp., LLC, an oilfield services company owned by Beechwood Properties, LLC. Beechwood is the beneficial owner of approximately 52% of the Company’s common stock and is owned by G. Darcy Klug, the Company’s Chairman and Chief Financial Officer. From 1996 to 2006, Mr. Concannon served as Vice President and Chief Financial Officer of Geokinetics, Inc., a Nasdaq listed provider of seismic acquisition and data processing services to the oil and natural gas industry. Between 1992 and 1996, Mr. Concannon worked as a private financial consultant for various energy companies. Prior to 1992, Mr. Concannon served as President of NJR Energy, an oil and natural gas exploration and production company and as a director of its parent company, New Jersey Resources, a New York Stock Exchange Company. Mr. Concannon holds a Juris Doctorate from St John’s University School of Law and earned a Bachelor of Science degree in accounting from Manhattan College and was a member of the audit staff of PricewaterhouseCoopers. Mr. Concannon is qualified to serve as a director because of his extensive corporate, legal, and financial management experience.

 

 25 
 

 

G. Darcy Klug. Mr. Klug has been our Chief Financial Officer since February 27, 2015 and was named Chairman of our board of directors on April 20, 2016. Mr. Klug is the founder and sole owner of Beechwood Properties, LLC. This company focuses on acquiring, renovating and leasing select commercial and residential real estate. Mr. Klug is also the owner of several other investment companies, including Beechwood Capital Corporation and RedHawk Capital, LLC. From May 2008 until he joined RedHawk, Mr. Klug was engaged in various private investments including real estate and oilfield service companies. Between May 2001 and May 2008, Mr. Klug was Executive Vice President (formerly Chief Financial Officer) of OMNI Energy Services Corp., a Nasdaq listed company. From 1987 through May 2001, he was engaged in several private investments in the oilfield service, medical litigation support and manufacturing industries. Between 1983 and 1987, Mr. Klug held various positions with a private oil and gas fabrication company, including the position of Chief Operating Officer and Chief Financial Officer. Prior to 1983, he held various positions with Galveston-Houston Company, a New York Stock Exchange listed manufacturer of oil and gas equipment and held the position of Chief Financial Officer of First Matagorda Corporation, a Nasdaq listed oil and gas exploration company and affiliate of Galveston-Houston Company. Between 1973 and 1979, he was a member of the audit staff of Coopers & Lybrand (now PricewaterhouseCoopers). Mr. Klug is a 1973 accounting graduate of Louisiana State University and, in 1974, was admitted as a member of the Louisiana State Board of Certified Public Accountants, the Texas State Board of Certified Public Accountants and the American Institute of Certified Public Accountants. Mr. Klug is qualified to serve as a director because of his extensive financial experience with both public and private companies.

 

Felix C. Spizale. Mr. Spizale has been a director of the Company since February 1, 2015. Mr. Spizale brings over 45 years of experience in the energy industry. During the past 14 years, Mr. Spizale has been serving as a consultant to energy companies specializing in oil and natural gas exploration and petroleum pipeline operations. Prior to his consulting work, Mr. Spizale held various engineering, general manager and executive level positions over his 32-year career at Texaco. Mr. Spizale was appointed General Manager/President of Texaco Pipeline, International, LLC in 1998, which was responsible for identifying and optimizing Texaco’s worldwide pipeline opportunities. Mr. Spizale retired from Texaco at the end of December 2001. Mr. Spizale holds a Bachelor of Science degree in petroleum engineering from the University of Louisiana – Lafayette and is a graduate of the Columbia University Program for Executive Management Development. Mr. Spizale is a member of the American Petroleum Institute and the Society of Petroleum Engineers. Mr. Spizale is qualified to serve as a director because of his extensive management experience in various aspects of the energy industry.

 

Phillip Harris IV. Mr. Harris has been a director of the Company since April 20, 2016. Mr. Harris held a number of positions with United Parcel Service during a 25-year career. Mr. Harris joined United Parcel Service in 1975 and at the time of his retirement in 2000, he held the position of Vice President of Corporate Compliance. Since his retirement from United Parcel Service, Mr. Harris has been involved in private investments in various industries. Mr. Harris is a veteran and during his service he was assigned to the Navy’s “Fast Attack” submarine naval forces. Mr. Harris attended Wake Forest University and received a degree in accounting from the University of North Carolina – Greensboro in 1976. Mr. Harris is qualified to serve as a director because of his extensive managerial experience in commercial transportation, corporate governance and corporate compliance.

 

Robert H. Rhyne Jr. Mr. Rhyne has been a director of the Company since April 20, 2016. Mr. Rhyne brings over 25 years of business experience spent in a number of business sectors with particular emphasis in the oilfield service industry. Mr. Rhyne also brings international business experience garnered through activities conducted in Hong Kong and Indonesia. Mr. Rhyne has spent his career making private investments. In 1987, Mr. Rhyne cofounded Preheat, Inc. which provided services to the energy industry. Mr. Rhyne served as Preheat’s President and Chief Executive Officer until the company was acquired in February of 2006 by Omni Energy Services Corp. Mr. Rhyne was appointed their Vice President of Sales upon the acquisition of Preheat by Omni Energy Services Corp. and served in that capacity until 2008. During 2008, Mr. Rhyne returned to private investing including investments in oilfield service equipment and rentals and commissary operations for various state and parish correctional facilities in Louisiana. Mr. Rhyne received a degree in business from Nichols State University in 1977. Mr. Rhyne is qualified to serve as a director because of his extensive entrepreneurial background and managerial experience in the oilfield services, corrections and real estate industries.

 

Andre F. Toce Sr. Mr. Toce has been a director of the Company since April 20, 2016. Mr. Toce has been a trial attorney since 1987 and currently serves as the owner and Senior Trial Attorney at The Toce Law Firm. In his capacity at his firm, Mr. Toce represents oilfield service companies, independent oil and gas producers, mineral rights owners, royalty owners and landowners. Mr. Toce is the Founder and President of the Andre Toce Sr. Family Foundation which distributes money to many of those in the world less fortunate including homes for battered single mothers and their children, alcohol and addiction recovery centers, schools and orphanages in Uganda. Mr. Toce holds an undergraduate degree in Microbiology from Louisiana State University and earned a Juris Doctorate degree in 1985 also from Louisiana State University. Mr. Toce is qualified to serve as a director because of his extensive experience in legal matters, including various aspects of the medical, pharmaceutical and oil and gas industries.

 

Steven C. Bader. Mr. Bader has been a director of the Company since November 16, 2017. Mr. Bader currently serves as President and owner of I-44 Express, a Missouri-based provider of log-haul interstate trucking. Mr. Bader has over 13 years of experience in the interstate trucking industry. Mr Bader is also the owner of Spencer Office Cleaning and Sundance Janitorial Supply Co. and has more than 25 years of experience in the janitorial supply and service industry. Mr Bader attended the University of Missouri, St Louis. Mr. Bader is qualified to serve as a director because of his extensive entrepreneurial background and managerial experience in the interstate trucking and janitorial supply and service industries.

 

 26 
 

 

Audit Committee and Audit Committee Financial Expert

 

Our board of directors does not have an audit committee, but we believe all of our directors qualify as financial experts. In addition, we have determined that Messrs. Spizale, Harris, Rhyne, and Toce are “independent directors” as the term is defined in the Nasdaq Listing Rule 5605(a)(2).

 

We believe that all of the members of our board of directors are capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting.

 

Committees and Procedures

 

We have no standing nominating, compensation or audit committees or committees performing similar functions nor do we have a written nominating, compensation or audit committee charter. Our directors do not believe that it is necessary to have such committees at this stage of the Company’s development because they believe the functions of such committees can be adequately performed by the members of our board of directors.

 

Code of Ethics

 

We have adopted a Code of Business Conduct and Ethics that applies to, among other persons, members of our board of directors, officers including our chief executive officer and chief financial officer, employees, consultants and advisors. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:

 

  honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
     
  full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications made by us;
     
  compliance with applicable governmental laws, rules and regulations;
     
  the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and
     
  accountability for adherence to the Code of Business Conduct and Ethics.

 

Our Code of Business Conduct and Ethics requires, among other things, that all of the Company’s executive officers commit to timely, accurate and consistent disclosure of information, that they maintain confidential information, and that they act with honesty and integrity.

 

In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly executive officers, have a responsibility for maintaining financial integrity within the Company, consistent with generally accepted accounting principles, and federal and state securities laws. Any executive officer, who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to the Company. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against the Company policy to retaliate against any individual who reports in good faith the violation or potential violation of our Code of Business Conduct and Ethics by another.

 

Our Code of Business Conduct and Ethics was filed with the SEC as Exhibit 14.1 to our annual report on Form 10-K filed on May 15, 2012. We will provide a copy of the Code of Business Conduct and Ethics to any person without charge upon written request to RedHawk Holdings Corp., Post Office Box 53929, Lafayette, Louisiana 70505.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors, executive officers, and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Executive officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

 

To our knowledge, based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(e) during the fiscal year ended June 30, 2018, Forms 5 and any amendments thereto furnished to us with respect to the fiscal year ended June 30, 2018, and the representations made by the reporting persons to us, we believe that during the fiscal year ended June 30, 2018, our executive officers and directors and all persons who own more than ten percent of a registered class of our equity securities complied with all Section 16(a) filing requirements.

 

 27 
 

 

ITEM 11. EXECUTIVE COMPENSATION

 

The particulars of the compensation paid to the following persons:

 

  (a) our principal executive officers;
     
  (b) each of our two most highly compensated executive officers who were serving as executive officers at the end of the years ended June 30, 2018 and June 30, 2017.

 

who we will collectively refer to as the named executive officers of our company, are set out in the following summary compensation table, except that no disclosure is provided for any named executive officer, other than our principal executive officers, whose total compensation did not exceed $100,000 for the respective fiscal year:

 

SUMMARY COMPENSATION TABLE

 

                          

Change in

         
                          Pension Value         
                       Non-   and         
                       Equity   Nonqualified         
Name and Principal              Stock   Option  

Incentive

Plan

  

Deferred

Compensation

   All Other     
Position  Year   Salary   Bonus   Awards   Awards   Comp.   Earnings   Comp.   Total 
       ($)   ($)   ($)   ($)   ($)   ($)   ($)   ($) 
G. Darcy Klug   2018    -    Nil    Nil    Nil    Nil    Nil    Nil    - 
Chairman, CFO and   2017    -    Nil    Nil    Nil    Nil    Nil    Nil    - 
Director                                             
                                              
Thomas J. Concannon   2018    -    Nil    Nil    Nil    Nil    Nil    Nil    - 
CEO and Director   2017    -    Nil    Nil    Nil    Nil    Nil    Nil    - 
                                              
Daniel J. Schreiber (1)   2017    -    Nil    Nil    Nil    Nil    Nil    Nil    - 
Chairman and CEO                                             

 

  (1) Mr. Schreiber resigned as the Chairman of the board of directors and as a director on April 20, 2016. He resigned his position as Chief Executive Officer on July 5, 2016.

 

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Narrative Disclosure to Summary Compensation Table

 

There are no compensatory plans or arrangements, including payments to be received from the Company with respect to any current executive officer, that would result in payments to such person because of his or her resignation, retirement or other termination of employment with our company, or its subsidiaries, any change in control, or a change in the person’s responsibilities following a change in control of our company.

 

Stock Option Plan

 

Currently, we do not have a stock option plan in favor of any director, officer, consultant or employee of the Company.

 

Stock Options/SAR Grants

 

During our fiscal year ended June 30, 2018, there was no options granted to our executive officers or directors.

 

Outstanding Equity Awards at Fiscal Year End

 

No equity awards were outstanding as of the year ended June 30, 2018.

 

Option Exercises

 

During our fiscal year ended June 30, 2018, there were no options exercised by our executive officers.

 

Compensation of Directors

 

During the year ended June 30, 2018 and by consent of shareholders holding a majority of our voting shares, the Company issued to each Non-Executive Director a compensation grant of three million shares of the Company’s common stock. This grant of common stock vests in the following manner, i. one million shares at the time of the grant, ii. one million shares to vest one year from the date of the grant and iii. One million shares to vest two years from the date of the grant. Vesting is contingent on the Non-Executive Director continuing to serve on the Company’s Board or the Company removing the Non-Executive Director from serving on the Board without cause. The Company currently has no other agreements in place for compensating its Board of Directors.

 

Pension, Retirement or Similar Benefit Plans

 

There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the board of directors or a committee thereof.

 

Indebtedness of Directors, Senior Officers, Executive Officers and Other Management

 

None of our directors or executive officers or any associate or affiliate of the Company during the last two fiscal years is or has been indebted to the Company by way of guarantee, support agreement, letter of credit or other similar agreement or understanding currently outstanding.