UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

 

For the quarterly period ended December 31, 2017

 

or

 

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

 

Commission File Number 000-54323

 

 

RedHawk Holdings Corp.

(Exact name of registrant as specified in its charter)

 

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

 

120 Rue Beauregard, Suite 206
Lafayette, Louisiana		70508
(Address of principal executive offices)		(Zip Code)

 

(337) 269-5933

(Registrant’s telephone number, including area code)

 

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 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.

 

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

 

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

 

On February 1, 2018, 351,049,027 shares of common stock, par value 0.001 per share, were outstanding.

 

 

 

REDHAWK HOLDINGS CORP.

Form 10-Q

 

TABLE OF CONTENTS

 

		Page No.
	PART I - FINANCIAL INFORMATION
Item 1.	Unaudited Consolidated Financial Statements	3
	Unaudited Consolidated Balance Sheets	3
	Unaudited Consolidated Statements of Operations	4
	Unaudited Consolidated Statements of Cash Flows	5
	Notes to the Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults Upon Senior Securities	21
Item 4.	Mine Safety Disclosures	21
Item 5.	Other Information	21
Item 6.	Exhibits	22
Signatures		23

 

  

PART I - FINANCIAL INFORMATION

 

Item 1. UNAUDITED Consolidated Financial Statements.

 

REDHAWK HOLDINGS CORP.

Consolidated Balance Sheets

(unaudited)

 

		December 31, 2017				June 30, 2017
ASSETS
Current Assets:
Cash		$	38,625			$	53,939
Receivables			252,370				594,745
Inventory, at cost			252,462				318,578
Assets held for sale			745,854				745,854
Prepaid expenses			35,435				44,626
Total Current Assets			1,324,746				1,757,742
Other Assets
Investment in real estate limited partnership			625,000				625,000
Intangible asset, net of amortization of $287,740 and $243,408, respectively			452,270				528,583
			1,077,270				1,153,583
Total Assets		$	2,402,016			$	2,911,325
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued liabilities		$	729,825			$	860,104
Liabilities on assets held for sale			246,837				251,252
Insurance notes payable			2,456				7,225
Total Current Liabilities			979,118				1,118,581
Long-Term Debt:
Due to related party			49,166				35,000
Convertible notes payable, net of $47,696 and $42,914 in deferred loan costs and unamortized beneficial conversion of $69,942 and $80,842, respectively			672,366				462,384
			721,532				497,384
Total Liabilities			1,700,650				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, $1,099 and $1,072 stated value, and 1,473 issued and outstanding at December 31, 2017 and June 30, 2017, respectively			1,619,157				1,579,425
5% Series B, 1,250 shares designated, $1,098 and $1,071 stated value, and 1,250 issued and outstanding at December 31, 2017 and June 30, 2017, respectively			1,372,807				1,339,120
Common Stock, par value of $0.001 per share, 1,000,000,000 authorized shares and 386,520,562 and 379,070,562 issued, respectively			386,521				379,071
Additional paid-in capital			1,272,174				1,254,889
Accumulated other comprehensive loss			(7,131	)			-
Accumulated deficit			(3,576,810	)			(3,243,543	)
			1,066,718				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			701,366				1,232,860
Noncontrolling interest in foreign limited liability company			-				62,500
Total Stockholders’ Equity			701,366				1,295,360
Total Liabilities and Stockholders’ Equity		$	2,402,016			$	2,911,325

 

The accompanying notes are an integral part of these financial statements

 

 

REDHAWK HOLDINGS CORP.

Consolidated Statements of Operations

(unaudited)

 

		Three Months Ended December 31,								Six Months Ended December 31,
		2017				2016				2017				2016
Revenues		$	232,204			$	718,337			$	300,097			$	1,217,617
Less, discounts			(105,967	)			(561,623	)			(105,967	)			(820,501	)
			126,237				156,714				194,130				397,116
Operating Expenses:
Costs of goods sold			93,529				59,457				105,012				125,105
Sales and marketing expenses			21,622				31,271				40,114				100,726
Professional fees			51,817				121,774				58,874				239,659
Management fees			-				50,869				-				49,072
Operating expenses			12,406				42,451				28,908				74,765
Depreciation and amortization			22,151				25,424				44,332				50,573
General and administrative			28,098				103,604				63,796				175,125
Total Operating Expenses			229,623				434,850				341,036				815,025
Net Loss from Operations			(103,386	)			(278,136	)			(146,906	)			(417,909	)
Other Income (Expense):
Amortization of discount on convertible debentures			(5,450	)			(5,450	)			(10,900	)			(13,350	)
Settlement loss			(62,425	)			-				(62,425	)			-
Gain (Loss) on the sale of assets			-				6,323				-				(3,995	)
Dividend income			-				10				-				9,976
Interest expense			(15,186	)			(13,250	)			(39,606	)			(43,411	)
			(83,061	)			(12,367	)			(112,931	)			(50,780	)
Net Loss			(186,447	)			(290,503	)			(259,837	)			(468,689	)
Other comprehensive income (loss):
Reclassification adjustment for sale of marketable securities			-				-				-				38,860
Effect of foreign currency translation			(26,207	)			8,476				(7,131	)			(513	)
			(26,207	)			8,476				(7,131	)			38,347
Comprehensive Loss			(212,654	)			(282,027	)			(266,968	)			(430,342	)
Less, income (loss) attributable to non-controlling interest			-				(11,970	)			-				33,276
Comprehensive loss attributable to RedHawk Holdings Corp.			(212,654	)			(270,057	)			(266,968	)			(463,618	)
Preferred Stock Dividends			(36,938	)			(26,125	)			(73,420	)			(62,250	)
Comprehensive Loss Available for Common Stockholders		$	(249,592	)		$	(296,182	)		$	(340,388	)		$	(525,868	)
Net Loss Per Share
Basic		$	-			$	-			$	-			$	-
Diluted		$	-			$	-			$	-			$	-
Weighted Average Shares Outstanding
Basic			362,006,364				359,502,860				362,963,701				358,287,704
Diluted			362,006,364				359,502,860				362,963,701				358,287,704

 

The accompanying notes are an integral part of these financial statements

 

 

REDHAWK HOLDINGS CORP.

Consolidated Statements of Cash Flows

(unaudited)

 

		Six Months Ended December 31,
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(259,837	)		$	(469,202	)
Adjustments to reconcile net loss to net cash used in continuing operations:
Amortization of intangibles			44,332				34,906
Amortization of discount on convertible debentures			10,900				13,350
Amortization of deferred loan costs			17,367				7,223
Depreciation			-				15,667
Loss on sale of marketable securities			-				10,318
Non-cash interest expense			14,785				21,844
Non-cash settlement loss			62,475				-
Changes in operating assets and liabilities:
Accounts receivable			(49,736	)			193,927
Inventory			122,466				(246,713	)
Prepaid expense and deposits			9,963				(36,016	)
Accounts payable and accrued liabilities			(141,449	)			126,925
Net Cash Used in Operating Activities			(168,734	)			(327,771	)
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from the sale of marketable securities			-				367,574
Investment in domestic limited liability company			-				(70,000	)
Net Cash Provided by Investing Activities			-				297,574
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party line of credit			14,166				100,470
Proceeds from issuance of convertible notes			154,500				210,000
Proceeds from sale of stock			24,735				18,634
Deferred loan costs, net			(21,800	)			(10,825	)
Principal payments on bank line of credit			-				(1,000,495	)
Net proceeds from insurance notes payable			(4,769	)			7,453
Principal payments on long-term debt			(4,415	)			(4,163	)
Net Cash Provided by (Used in) Financing Activities			162,417				(678,926	)
Effect of exchange rate on cash			(8,997	)			16,929
Decrease in cash			(15,314	)			(692,194	)
Cash, Beginning of Period			53,939				727,631
Cash, End of Period		$	38,625			$	35,437
Non-Cash Investing and Financing Activities:
Preferred stock dividends paid in kind		$	73,419			$	-
Convertible debt issued in exchange for treasury shares		$	29,250			$	-
Reduction in equity from share exchange to acquire 100% interest in EcoGen		$	311,590			$	-
Supplemental Disclosures:
Interest paid		$	-			$	-
Income tax paid		$	-			$	-

 

The accompanying notes are an integral part of these financial statements

 

 

REDHAWK HOLDINGS CORP.

Notes to the Unaudited Consolidated Financial Statements

December 31, 2017

 

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 six month period ended December 31, 2017, the Company had revenues of $300,097, net revenues of $194,130, a consolidated net loss of $259,837 and used $175,875 of cash from operating activities. For the year ended June 30, 2017, the Company had $929,859 in net revenue, a consolidated net loss of $407,681 and cash of $154,640 used in operating activities. As of December 31, 2017, the Company had cash of $38,625, working capital of $345,628 and an accumulated deficit of $3,576,810. The continuation of the Company as a going concern is still dependent upon the continued financial support from its stockholders, the ability to raise equity or debt financing, cash proceeds from the sale of assets and the attainment of profitable operations from the Company’s businesses in order to discharge its obligations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The unaudited interim condensed financial statements of the Company as of December 31, 2017 and for the six month and three month periods ended December 31, 2017 and 2016 included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The year-end condensed balance sheet dated as of June 30, 2017 is audited and is presented here as a basis for comparison. Although the financial statements and related information included herein have been prepared without audit, and certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, the Company believes that the note disclosures are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K as of June 30, 2017. In the opinion of our management, the unaudited interim financial statements included herein reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows for the periods presented. The results of operations for interim periods are not necessarily indicative of the results expected for the full year or any future period.

 

 

Principles of Consolidation

 

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

 

Use of Estimates

 

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

 

Revenue Recognition

 

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

 

Cash and Cash Equivalents

 

We consider highly liquid investments with an original maturity of 90 days or less to be cash equivalents.

 

Accounts Receivable

 

Accounts receivables are amounts due from customers of our pharmaceutical, medical device and financial services divisions. The amount is reported at the billed amount, net of any expected allowance for bad debts. There was no allowance for doubtful accounts as of December 31, 2017 and June 30, 2017.

 

Inventory

 

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

 

 

Property and Improvements

 

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

 

During the twelve-month period ended June 30, 2017, we decided to sell our Louisiana real estate holdings, which includes our former corporate headquarters on Chemin Metairie Road in Youngsville, Louisiana and a property on Jefferson Street in Lafayette, Louisiana that we are leasing to a third party. As a result of that decision, the net book value of those properties along with related mortgage notes are reflected as assets and liabilities held for sale in the balance sheets. At that time, we also ceased depreciating such assets. All such amounts are included in the land and hospitality segment. We expect the sale of those properties to occur in the fiscal year ending June 30, 2018 and have, accordingly, presented the held for sale assets and liabilities as current. Based on the present real estate market and discussions with brokers, no impairment of the recorded amounts has occurred as of December 31, 2017. We are also pursuing the sale of our real estate limited partnership investment, but we cannot conclude such a transaction would occur within one year and, therefore, have not reclassified related assets and liabilities as held for sale.

 

Effective July 1, 2017, the Chemin Metairie Road property is leased under a one-year term at a rent of $1,500 per month. The lessee has an option to purchase the property during the lease for the lesser of $300,000 or the average of two independent appraisals. Although, there is no certainty that such sale will occur, we do believe the lessee will exercise that purchase option. The tenant that leases the Jefferson Street property has renewed that lease through December 31, 2022 as a rent of $3,500 per month. We continue to offer that property for sale and expect a sale to occur in our 2018 fiscal year.

 

Income Taxes

 

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

 

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 statement of operations. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and the convertible notes and the convertible preferred stock using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. During the twelve-month period ended June 30, 2017, 3,726,480 warrants were exercised, and the remaining warrants expired. There were no outstanding warrants as of December 31, 2017.

 

 

At December 31, 2017, including accrued but unpaid interest, there were 40,416,960 shares issuable upon conversion of the notes. There are $154,500 in convertible notes that are convertible at a variable conversion rate and not included in the issuable share amount in the preceding sentence. Also at December 31, 2017, including accrued but unpaid dividends, there were potentially 107,943,827 shares issuable upon the conversion of the Series A Preferred Stock and, including accrued but unpaid dividends, there were potentially 137,280,702 shares issuable upon the conversion of the Series B Preferred stock. The shares to be issued upon conversion of the warrants and the shares issuable from the conversion of the notes and the Series A and Series B Preferred stock have been excluded from earnings per share calculations because these shares are anti-dilutive.

 

Comprehensive Income (Loss)

 

ASC 220, Comprehensive Income, establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. All of our accumulated other comprehensive income as of December 31, 2017 relates to foreign currency translation.

 

Financial Instruments

 

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

 

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

 

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

 

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

 

The Company’s financial instruments consist principally of cash, accounts receivable, accounts payable and accrued liabilities, debt, and amounts due to related parties. Pursuant to ASC 820 and ASC 825, the fair value of our cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets.

 

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

 

 

Reclassification

 

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

 

Recent Accounting Pronouncements

 

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (which we refer to as the “FASB”) issued new guidance intended to change the criteria for recognition of revenue. The new guidance establishes a single revenue recognition model for all contracts with customers, eliminates industry specific requirements and expands disclosure requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following five steps: (1) identify contracts with customers, (2) identify the performance obligations in the contracts, (3) determine the transaction price, (4) allocate the transaction price to the performance obligation in the contract, and (5) recognize revenue as the entity satisfies performance obligations. In July 2015, the FASB permitted early adoption and deferred the effective date of this guidance one year; therefore, it will be effective for the Company in the first quarter of fiscal 2019 and may be implemented retrospectively to all years presented or in the period of adoption through a cumulative adjustment. We are currently evaluating what impact the adoption of this guidance would have on our financial position, results of operations, cash flows and disclosures.

 

Going Concern

 

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

 

Leases

 

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

 

 

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 December 31, 2017. 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 three months ended December 31, 2017.

 

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 December 31, 2017, we have approximately $414,579 ($384,579 net of accumulated amortization) in intangible assets related to licenses held by EcoGen. Such intangible assets are being amortized over an estimated useful life of 20 years, except for approximately $50,000 in licenses associated with certain pharmaceutical products which do not expire and are considered to have an indefinite life. This allocation to intangible assets is preliminary and may be adjusted as we complete the evaluation of EcoGen assets.

 

4.	LOAN AND INSURANCE NOTE PAYABLE

 

We finance a portion of our insurance premiums. At December 31, 2017, the outstanding balance due on our premium finance agreements was $2,456.

 

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, 2018. 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 December 31, 2017, the principal balance totalled $49,166. The amount is included in noncurrent liabilities based on the expectation that either the Line of Credit maturity date will be extended or the amount outstanding will be converted to preferred stock as allowed for in the agreement.

 

 

During the year ended June 30, 2017, EcoGen had sales to customers which are controlled by individuals which are shareholders of EcoGen and are the noncontrolling interests in our consolidated financial statements. These sales totalled $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 are 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 December 31, 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. The Note is presented in the accompanying balance sheet as liabilities on assets held for sale (see “Property and Improvements” discussion in Note 1).

 

We have authorized the issuance of up to $1 million in principal amount of convertible promissory notes (which we refer to as the “Convertible Notes”). The Convertible Notes are secured by certain Company real estate holdings and real estate holdings of a stockholder. As of December 31, 2017, we have $790,004 in Convertible Notes outstanding, including the interest paid-in-kind on such notes.

 

Prior to June 30, 2017, the Convertible Notes issued mature on the fifth anniversary of the date of issuance and are convertible into shares of our common stock at a price of $0.015 per share. Interest accrues at a rate of 5% per annum and is payable semi-annually. Beginning 180 days after issuance of the Convertible Notes, the Company has the option to issue a notice of its intent to redeem, for cash, an amount equal to the sum of (a) 120% of the then outstanding principal balance, (b) accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect of the Convertible Notes. The Company may only issue the notice of its intent to redeem the Convertible Notes if the trading average of the Company’s common stock equals or exceeds 300% of the conversion price during each of the five business days immediately preceding the date of the notice of intent to redeem. The holder of the Convertible Notes has the right to convert all or any portion of the Convertible Notes at the conversion price at any time prior to redemption.

 

At December 31, 2017, there were $790,004 ($672,366 net of deferred financing costs and beneficial conversion option) of Convertible Notes outstanding, including $51,254 of interest paid in kind. $555,000 of the convertible notes (plus accrued interest) are convertible into our common stock at a conversion rate of $0.015 per share or 40,416,960 shares. $154,500 of the convertible notes are convertible into our common stock beginning in the quarter ended March 31, 2018 at a variable conversion rate.

 

During the six months ended December 31, 2017, we issued $154,500 of convertible notes which mature in December 2018 and February 2019. We received, net of financing costs incurred, $132,700 in cash from the issuance of these notes. Also during the six month period ended December 31, 2017, we issued $29,250 of convertible notes to our majority stockholder, which matures in December 2020 in exchange for 7,450,000 of common stock in the Company. These notes have interest accruing at rates ranging between 10% - 12%, and redemption and asset pledge terms similar to the other convertible notes. The notes issued to third parties in the six months ended December 31, 2017 have a variable conversion rate based on the price of the Company’s common stock. The notes issued to the majority stockholder are convertible at a conversion rate of $0.015 per share or 1,950,000 shares.

 

During the six month periods ended December 31, 2017, we paid-in-kind $14,787 of interest on these convertible notes.

 

We had a $1,000,000 line of credit with a bank of which $1,000,495 was outstanding as of June 30, 2016. The line of credit was due upon demand and was secured by marketable securities, a corporate guarantee and the guarantee of a stockholder who is also an officer of the Company. During the twelve-month period ended June 30, 2017, the outstanding balance on the line of credit was paid in full. This line of credit is no longer available to the Company.

 

7.	COMMITMENTS AND CONTINGENCIES

 

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

 

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

 

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

 

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

 

 

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

 

On October 10, 2017 a scheduling conference was held. The parties agreed to, among other matters, to exchange documents and conduct other discovery, and to schedule a bench trial starting June 11, 2018.

 

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

 

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, 2017, by a vote of the majority of our stockholders, we increased the number of our authorized shares to 1,000,000,000.

 

Preferred Stock

 

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

 

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

 

During the three and six month periods ended December 31, 2017, we paid-in-kind $36,938 and $73,420, respectively, of related preferred stock dividends.

 

Warrants

 

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

 

 

9.	INCOME TAXES

 

As of June 30, 2017, the Company had approximately $2,800,000 of U.S. net operating losses carried forward to offset taxable income in future years which expire commencing in fiscal 2026 and run through 2037. The related deferred income tax asset of these net operating losses was estimated to be approximately $1,000,000 as of June 30, 2017. The loss for the six months ended December 31, 2017 is expected to increase the net operating loss carry forward by an amount similar to the book income of its U.S. operations. As of December 31, 2017, the Company had approximately $3,050,000 of U.S. net operating loss carry forwards. As a result of the enactment of the Tax Cuts and Jobs Act (The Act) in December 31, 2017, the estimated deferred income tax asset related to the carry forwards as of December 31, 2017 is $640,000 which is based on the reduced 21% corporate income tax rate. There is no net tax asset recorded as of December 31, 2017 or June 30, 2017 as a 100% valuation allowance has been established for the tax benefit generated. EcoGen also has a net operating loss as of June 30, 2017 and December 31, 2017 for which no deferred tax asset has been provided. The Company did not have any accumulated foreign earnings for which taxes were deferred and subject to the one-time transition tax under The Act.

 

The Company accounts for interest and penalties relating to uncertain tax provisions in the current period statement of operations, as necessary. The Company has never filed a tax return. In order to utilize the available net operating loss carry forwards, the Company will need to prepare and file all tax returns since its inception. The Company’s tax years from inception are subject to examination.

 

Due to our history of operating losses and the uncertainty surrounding the realization of the deferred tax assets in future years, our management has determined that it is more likely than not that the deferred tax assets will not be realized in future periods. Accordingly, the Company has recorded a valuation allowance against its net deferred tax assets.

 

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 December 31, 2017 and 2016 and for the six and three month periods then ended.

 

						MEDICAL
Six months ended		LAND &				DEVICE &				OTHER
December 31, 2017		HOSPITALITY				PHARMA				SERVICES				CORPORATE				TOTAL
Operating revenues, gross		$	33,935			$	266,162			$	-			$	-			$	300,097
Operating revenues, net		$	33,935			$	160,195			$	-			$	-			$	194,130
Operating income (loss)		$	9,232			$	(54,827	)		$	(1,727	)		$	(99,584	)		$	(146,906	)
Interest expense		$	7,529			$	(3	)		$	-			$	32,080			$	39,606
Depreciation and amortization		$	-			$	44,332			$	-			$	-			$	44,332
Identifiable assets		$	1,380,809			$	264,326			$	90			$	756,791			$	2,402,016

 

						MEDICAL
Six months ended		LAND &				DEVICE &				OTHER
December 31, 2016		HOSPITALITY				PHARMA				SERVICES				CORPORATE				TOTAL
Operating revenues, gross		$	19,500			$	1,198,117			$	-			$	-			$	1,217,617
Operating revenues, net		$	19,500			$	377,616			$	-			$	-			$	397,116
Operating income (loss)		$	(13,257)			$	16,381			$	(3,846	)		$	(417,187	)		$	(417,909	)
Interest expense		$	-			$	-			$	-			$	43,411			$	43,411
Depreciation and amortization		$	15,697			$	34,876			$	-			$	-			$	50,573
Identifiable assets		$	1,374,987			$	1,285,724			$	-			$	42,804			$	2,703,515

 

						MEDICAL
Three months ended		LAND &				DEVICE &				OTHER
December 31, 2017		HOSPITALITY				PHARMA				SERVICES				CORPORATE				TOTAL
Operating revenues, gross		$	19,685			$	212,519			$	-			$	-			$	232,204
Operating revenues, net		$	19,685			$	106,552			$	-			$	-			$	126,237
Operating income (loss)		$	3,005			$	(37,220	)		$	(184	)		$	(68,988	)		$	(103,387	)
Interest expense		$	3,729			$	(1	)		$	-			$	11,458			$	15,186
Depreciation and amortization		$	-			$	22,151			$	-			$	-			$	22,151

 

						MEDICAL
Three months ended		LAND &				DEVICE &				OTHER
December 31, 2016		HOSPITALITY				PHARMA				SERVICES				CORPORATE				TOTAL
Operating revenues, gross		$	9,750			$	708,587			$	-			$	-			$	718,337
Operating revenues, net		$	9,750			$	146,964			$	-			$	-			$	156,714
Operating income (loss)		$	(8,759	)		$	16,421			$	17,891			$	(303,689	)		$	(278,136	)
Interest expense		$	-			$	-			$	-			$	13,250			$	13,250
Depreciation and amortization		$	7,834			$	17,590			$	-			$	-			$	25,424

 

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 February 14, 2018. There were no subsequent events which required adjustment or disclosure in the consolidated financial statements.

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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

 

	●	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 insurance coverage in the event we incur an unexpected liability.
	●	Our lack of a proven operating history and the possibility of future losses that are greater than we currently anticipate.
	●	The possibility that we may not be able to generate revenues or access other financing sources necessary to operate our business.
	●	Our inability to attract necessary personnel to run and market our business.
	●	The volatility of our stock price.
	●	Changes in the market prices for our products, or our failure to perform or renew the distribution agreement for our products.
	●	Our failure to execute our growth strategy or enter into other lines of business that we may identify as potentially profitable for our company.
	●	Changes in economic and business conditions.
	●	Changes in accounting policies and practices we may voluntarily adopt or that we may be required to adopt under generally accepted accounting principles in the United States.

 

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

 

 

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. Centri Security Systems LLC, a wholly-owned subsidiary of the Company, holds the exclusive U.S. manufacturing and distribution rights for the Centri Controlled Entry System, a unique, closed cabinet, nominal dose transmission full body x-ray scanner. Our real estate leasing revenues are generated from commercial properties under lease. Additionally, the Company’s real estate investment unit holds limited liability company interest in a commercial restoration project in Hawaii.

 

Working Capital

 

		December 31, 2017				June 30, 2017
Current Assets		$	1,324,746			$	1,757,742
Current Liabilities		$	979,118			$	1,118,581
Working Capital		$	345,628			$	639,161

 

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. During the three month period ended December 31, 2017, we increased our ownership in EcoGen to 100%. Sales efforts for our medical devices and branded generic pharmaceuticals commenced during the quarter ending September 30, 2016. Prior to the quarter ended September 30, 2016, we had earned minimal revenue.

 

For the three month period ended December 31, 2017, gross and net revenues from our pharmaceutical products, medical devices and commercial rentals totalled $232,204 and $126,237, respectively. Revenues in the pharmaceutical and medical device business unit are expected to improve as market acceptance of our products increases. Additionally, net profits are expected to improve as the Company’s pharmaceutical sales become more weighted to its branded generics which offer lower discounts than the discounts offered by the Company for its highly competitive “special” pharmaceuticals and require significantly lower operating costs.

 

 

Operating Expenses and Loss from Continuing Operations

 

For the three month period ended December 31, 2017, we report consolidated net loss of $186,448 on gross revenues of $232,204 (net revenues of $126,237) as compared to a net loss of $290,503 on gross revenues of $718,337 (net revenues of $156,714) for the comparable three month period ended December 31, 2016. The reduction in the net loss resulted from improved net revenues on lower discounts offered and lower operating expenses, offset by the non-cash settlement loss incurred discussed in Note 3 to our unaudited consolidated financial statements.

 

Operating expenses for the three month period ended December 31, 2017 totaled $229,624, a $205,226 reduction the $434,850 of operating expenses for the comparable three month period ended December 31, 2016. The reduction in operating expenses was primarily attributable to lower product costs, marketing expenses and professional and management fees during the current three month period.

 

Liquidity and Capital Resources

 

As of December 31, 2017, we had cash and cash equivalents of $38,625 compared with $53,939 at June 30, 2017.

 

During the six month period ended December 31, 2017, we completed the funding of $154,500 of new convertible notes. We used the net proceeds from the new convertible note and additional borrowings from a related party to fund current period operating activities and pay certain liabilities owed to creditors.

 

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

 

At December 31, 2017, we had total assets of $2,402,016 compared with $2,911,325 at June 30, 2017. We had total liabilities of $1,700,650 at December 31, 2017 compared with $1,615,965 at June 30, 2017. The decline in total assets resulting from the reduction in accounts receivable in connection with our completing the acquisition of 100% ownership interest in EcoGen Europe Limited.

 

Cash Flows

 

		Six months ended December 31,
		2017				2016
Cash Flows used in Operating Activities		$	(175,875	)		$	(327,771	)
Cash Flows provided by Investing Activities		$	-			$	297,574
Cash provided by (used in) Financing Activities		$	162,417			$	(678,926	)
Net Change in Cash During Period		$	(15,314	)		$	(692,194	)

 

Cash Flow from Operating Activities

 

During the six month period ended December 31, 2017, $175,875 of cash was used by our operating activities as compared to $327,771 used in our operating activities for the comparable six month period ended December 31, 2016. Changes to our operating activities are sporadic and result from the early stage of implementation of our business strategies that are supported by capital raising activities. During the six month period ended December 31, 2017, we settled certain receivables for non-cash consideration. In addition, the Company used cash from various financing activities to pay down outstanding payables.

 

 

Cash Flows from Investing Activities

 

During the six month period ended December 31, 2017, we did not have any cash investing transaction.

 

Cash Flows from Financing Activities

 

During the six month period ended December 31, 2017, we received $154,500 from the issuance and sale of new convertible debentures, $24,735 from the sale of common stock, and approximately $14,000 from advances from a related party under a line of credit agreement. The proceeds from the convertible debentures, common stock sale, combined with the proceeds from the line of credit advances, were used to fund current period operations and reduce outstanding trade debt as we continue to restructure our balance sheet.

 

Going Concern

 

We have not attained profitable operations and are dependent upon obtaining financing to maintain our operations or pursue any extensive acquisitions activities. For these reasons, there is substantial doubt that we will be able to continue as a going concern without further financing or asset sales.

 

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 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.

 

 

Recently Issued Accounting Pronouncements

 

We have implemented all new accounting pronouncements that are in effect and applicable to us. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations. Pending accounting pronouncements that are effective for future periods are discussed in Note 2 to our unaudited consolidated financial statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

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

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Management’s Report on Disclosure Controls and Procedures

 

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

 

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

 

Changes in Internal Control Over Financial Reporting

 

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

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

Other than as described below, we know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. Other than as described below, there are no proceedings in which our director, officer or any affiliates, or any registered or beneficial stockholder, is a party adverse to us or has a material interest adverse to our interest.

 

On August 5, 2015, the Company made application with the Financial Industry Regulatory Authority (“FINRA”) for permission to change the Company’s name and our ticker symbol from IDNG to HAWC. On October 13, 2015, we amended our articles of incorporation with the Secretary of State of the State of Nevada to change the Company’s name from “Independence Energy Corp.” to “RedHawk Holdings Corp.”

 

On November 5, 2015, we received a notice from FINRA that they declined our request as being “deficient and…necessary for the protection of investors.” The FINRA decision was based on previously resolved allegations against Daniel J. Schreiber, our former Chief Executive Officer. Mr. Schreiber continues to beneficially own approximately 8.5% of our common stock.

 

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 10, 2017 a scheduling conference was held. The parties agreed to, among other matters, to exchange documents and conduct other discovery, and to schedule a bench trial starting June 11, 2018.

 

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

 

 

ITEM 1A. RISK FACTORS.

 

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

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

 

ITEM 6. EXHIBITS.

 

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

 

Exhibit Number		Description of Exhibit
(3)		Articles of Incorporation and Bylaws
3.01		Articles of Incorporation (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form SB-2 filed on March 7, 2006)
3.02		Bylaws (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form SB-2 filed on March 7, 2006)
3.03		Certificate of Amendment filed on July 23, 2008 (incorporated by reference to Exhibit 3.02 to our Current Report on Form 8-K filed on August 14, 2008)
3.04		Certificate of Change filed on July 23, 2008 (incorporated by reference to Exhibit 3.01 to our Current Report on Form 8-K filed on August 14, 2008)
3.05		Certificate of Change filed on June 14, 2012 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on June 15, 2012)
3.06		Amended and Restated Articles of Incorporation of RedHawk Holdings Corp. filed October 12, 2015 (Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on October 16, 2015).
3.07		Certificate of Designation filed on November 12, 2015 (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 19, 2015).
3.08		Certificate of Designation filed on February 16, 2016 (Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on January 5, 2016).
(10)		Material Contracts
10.1		Assignment dated June 1, 2015 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 19, 2015).
(31)		Rule 13a-14(a) / 15d-14(a) Certifications
31.1*		Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of the Principal Financial Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32)		Section 1350 Certifications
32.1*		Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of the Principal Financial Officer and Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		Interactive Data File
101*		Interactive Data File (Form 10-Q for the quarter ended December 31, 2016 furnished in XBRL).
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

*	Filed herewith.

 

 

SIGNATURES

 

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

 

	REDHAWK HOLDINGS CORP.
	(Registrant)
Dated: February 14, 2018	/s/ Thomas J. Concannon
	Thomas J. Concannon
	Chief Executive Officer
	(Principal Executive Officer)
Dated: February 14, 2018	/s/ G. Darcy Klug
	G. Darcy Klug
	Chief Financial Officer and Director
	(Principal Financial Officer and Principal Accounting Officer)