RedHawk Holdings Corp. - Quarter Report: 2018 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 31, 2018

or

Commission File Number 000-54323

(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 ☒   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 ☒  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.

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

On February 6, 2019, 541,993,867 shares of common stock, par value 0.001 per share, were outstanding.

REDHAWK HOLDINGS CORP.

Form 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. UNAUDITED Consolidated Financial Statements.

REDHAWK HOLDINGS CORP. 

Consolidated Balance Sheets 

(unaudited)

The accompanying notes are an integral part of these financial statements

REDHAWK HOLDINGS CORP. 

Consolidated Statements of Operations

(unaudited)

The accompanying notes are an integral part of these financial statements

REDHAWK HOLDINGS CORP. 

Consolidated Statements of Cash Flows

(unaudited)

The accompanying notes are an integral part of these financial statements

 REDHAWK HOLDINGS CORP.

 Notes to the Unaudited Consolidated Financial Statements

 December 31, 2018

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 three and six month periods ended December 31, 2018, the Company had gross and net revenues of $48,852 and $95,520, respectively, a consolidated net loss of $701,929 and $898,546, respectively, and cash of $304,406 used in operating activities for the six month period ended December 31, 2018. For the year ended June 30, 2018, the Company had $384,279 in gross revenue, $275,845 in net revenue, a consolidated net loss of $910,062 and cash of $ 411,268 used in operating activities. As of December 31, 2018, the Company had cash of $14,768, a certificate of deposit of $100,225, a working capital deficit of $352,114 and an accumulated deficit of $5,280,835. 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. 

Basis of Presentation

The unaudited interim condensed financial statements of the Company as of December 31, 2018 and for the three and six month periods ended December 31, 2018 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, 2018 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, 2018. 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 Company offers customer discounts in certain cases. Such discounts are estimated at time of product sale and deducted from gross revenues.

We adopted as of July 1, 2018, updated revenue recognition guidance (Topic 606). Topic 606 is an update to Topic 605, which was the revenue recognition standard in effect for all prior periods. Pursuant to Topic 605, revenue generally is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. Topic 606 changes the criteria for recognition of revenue. It establishes a single revenue recognition model for all contracts with customers, eliminates industry specific requirements and expands disclosure requirements. Revenue is recognized 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, we 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. The adoption of this standard did not affect our financial statements.

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 December 31, 2018 or June 30, 2018.

Accounts Receivable

Accounts receivables are amounts due from customers of our pharmaceutical and medical device 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, 2018 or June 30, 2018.

Inventory

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

Property and Improvements

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

During the year ended June 30, 2017, we decided to sell our Louisiana real estate holdings, which includes our former corporate headquarters on Chemin Metairie Road in Youngsville, Louisiana and a property on Jefferson Street in Lafayette, Louisiana that we are leasing to a third party. As a result of that decision, the net book value of those properties along with 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 was recorded in the fourth quarter of fiscal year 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. Based on the present real estate market and discussions with brokers, no impairment of the recorded amounts has occurred as of December 31, 2018.

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 subject to certain increase adjustments. 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.

We are also pursuing the sale of our remaining investment in the real estate limited partnership investment. In August 2018, based on stability of operations of the underlying real estate property and recent valuations, the partnership refinanced the property. In September 2018, we received a distribution of approximately $370,000 from the real estate limited partnership following this refinancing. This distribution is 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 asset as of December 31, 2018 and June 30, 2018 in the accompanying consolidated balance sheets.

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 December 31, 2018 or June 30, 2018.

At December 31, 2018, including accrued but unpaid interest, there were 42,471,729 shares issuable upon conversion of our fixed rate convertible notes. There are $270,978 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, 2018, including accrued but unpaid dividends, there were potentially 113,443,062 shares issuable upon the conversion of the Series A Preferred Stock and, including accrued but unpaid dividends, there were potentially 144,274,514 shares issuable upon the conversion of the Series B Preferred stock. 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 Loss

ASC 220, Comprehensive Income, establishes standards for the reporting and display of comprehensive loss and its components in the financial statements.

Financial Instruments

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

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

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

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

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

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

Reclassification

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

Recent Accounting Pronouncements Not Yet Adopted

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.

Additional Equity Disclosures in Quarterly Reports

On August 17, 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The amendments are effective on November 5, 2018.  Under the amendment, registrants must disclose (1) change in stockholders’ equity and (2) the amount of dividends per share for each class of share, as opposed to common stock only as previously required, on the Form 10-Q.  The SEC has allowed June 30 fiscal year end filers to omit these disclosures from its September 30, 2018 and December 31, 2018 Forms 10-Q; however, the disclosures are required in the March 31, 2019 Form 10-Q.  The Company elected to omit this disclosure in both the September 30, 2018 and December 31, 2018 Forms 10-Q.

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, less distributions, and the Company is not aware of any indicator of impairment as of December 31, 2018. It is not practicable for the Company to estimate fair value of this investment.

On March 23, 2016, one of our wholly-owned subsidiaries, RedHawk Pharma UK Ltd (which we refer to herein as “Pharma”), initially acquired a 25% equity interest in EcoGen Europe Ltd (which we refer to as “EcoGen”) from Scarlett Pharma Ltd (which we refer to herein as “Scarlett”). On September 12, 2017 we completed a share transfer agreement wherein we increased our ownership in EcoGen to 75%. On December 19, 2017 we completed another share transfer agreement wherein we increased our ownership in EcoGen to 100%. In connection with the December share transfer the non-controlling interest was eliminated. Under the terms of an agreement we reached with Scarlett and its affiliate related to these share exchanges, they surrendered ten (10) million shares of RedHawk common stock and transferred to RedHawk approximately $300,000 of EcoGen preferred stock and other consideration. In exchange, RedHawk assumed approximately $370,000 of obligations due to EcoGen by Scarlett and its affiliates. The RedHawk Shares were originally issued to Scarlett in connection with the Company’s March 2016 investment of 25% into EcoGen. As of December 31, 2017, Pharma now owns approximately $635,000 of EcoGen’s preferred stock and 100% of EcoGen’s common stock. The exchange agreements also settled numerous outstanding disputes between the Company, Scarlett, Warwick and the noncontrolling owners of the Company. A non-cash settlement loss of $62,425 resulted and was 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 December31, 2018 and June 30, 2018, we have approximately $383,019 and $371,894, respectively, ($328,629 and $331,894, respectively, net of accumulated amortization) in intangible assets related to licenses held by EcoGen. Such intangible assets are being amortized over an estimated useful life of 20 years.

In September 2018, the Company acquired the exclusive license rights to certain medical device technology for $450,000, plus a broker’s fee of $17,500. Under the terms of the license agreement, the Company has paid $25,000 plus the first of a total twenty quarterly payments of $21,250 each was paid in January 2019. Any remaining payments become immediately payable upon the receipt of final approval by the FDA of devices related to the technology. Additionally, the Company will pay a consulting fee of $1,000 per month for sixty months. The broker’s fee was paid through the issuance of 14 million shares of the Company’s common stock.

We finance a portion of our insurance premiums. At December 31, 2018, there was a $3,629 outstanding balance due on our premium finance agreements. The policies related to these premiums expire May 31, 2019.

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. At December 31, 2018 and June 30, 2018, the principal balance totaled $0 and $22,674, respectively.

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 fiscal year 2018, certain stockholders of the Company made $77,000 in advances to the Company, which is still outstanding as of December 31, 2018. In the three month period ended December 31, 2018, the Company agreed to issue 15.4 million shares of the Company’s common stock (cost of $19,250) in lieu of any interest, past or present, related to these advances.

All of the above liabilities are included in Due to Related Parties in the accompanying consolidated balance sheet as of December 31, 2018.

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, 2018 and June 30, 2018, $60,000 in such fees remain unpaid and are recorded in accounts payable and accrued liabilities in the accompanying balance sheets.

On November 12, 2015, we acquired certain commercial real estate from a related party that is an entity controlled by a stockholder and officer of the Company for $480,000 consisting of $75,000 of land costs and $405,000 of buildings and improvements. The purchase price was paid 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 December 31, 2018, there were $637,076 ($564,320 net of deferred financing costs and beneficial conversion option) of Fixed Rate Convertible Notes outstanding, including $87,076 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 42,471,729 shares. During the three and six month periods ended December 31, 2018, we paid-in-kind $7,898 and $15,665, respectively, of interest on these convertible notes.

In the year ended June 30, 2018, we also issued $576,000 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, $495,850 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. $127,978 of the convertible notes are currently convertible into our common stock at a variable conversion rate. During the quarter ended December 31, 2018, we issued new convertible notes of $35,000, paid in full three (3) convertible notes in the amount of $132,728, and notes, including accrued and unpaid interest, totaling $852 were converted into equity. At December 31, 2018, there were $270,978 ($257,303 net of deferred financing costs) of Variable Rate Convertible Notes outstanding.

The Variable Rate Convertible Notes have maturity dates prior to December 31, 2019. It is the Company’s expectation that we will either re-finance these convertible notes to longer terms or permit conversions and, therefore, have classified such notes as non-current.

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 December 31, 2018, approximately $100,000 was drawn under the line of credit. As of December 31, 2018. the interest rate on the line of credit is 7.0% per annum.

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 Southern 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.

October 24, 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 to originally start June 11, 2018. On March 12, 2018, the parties agreed to extend the discovery period to September 7, 2018.

On February 6, 2019, we agreed to settle this matter. The settlement is subject to final documentation and other terms and conditions. The settlement provides that approximately 52.4 million shares of the Company’s common stock currently held by the Schreiber Trust will be returned to the Company in exchange for a payment of $250,000 at closing, a $200,000 promissory note payable 18 months after closing, and a $200,000 promissory note payable 30 months after closing, and the dismissal of all claims and counter-claims against the parties in the suit. The promissory notes are secured with certain assets of an officer and director of the Company. At any time within 180 days of closing, the promissory notes can be paid in their entirety for $300,000. The amount by which the fair value of these settlement payments exceeds the current market price of the repurchased common stock at closing is considered to be related to the settlement of the claims and counter-claims. Accordingly, we have accrued an additional $396,500 as of December 31, 2018.

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 costs that may be uninsured that were incurred in connection with this matter. As of December 31, 2018, the remaining accrued liability related to the possible uninsured costs related to this matter is approximately $165,000.

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 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 three month periods ended December 31, 2018 and 2017, we paid-in-kind $38,820 and $36,938, respectively, of related preferred stock dividends. During the six month periods ended December 31, 2018 and 2017, we paid-in-kind $77,160 and $73,420, respectively, of related preferred stock dividends.

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. The only change during the six month period ended December 31, 2018 would be an increase to the NOL due to additional losses incurred.

Thus, there is no net tax asset recorded as of December 31, 2018 or June 30, 2018 as a 100% valuation allowance has been established for any tax benefit. EcoGen also has a net operating loss as of December 31, 2018 and June 30, 2018 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 three month and six month periods ended December 31, 2018 and 2017.

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

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

SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. Currently, we conduct our businesses in three operating segments – Land & Hospitality, Medical Device and Pharmaceutical, and Other Services. Our Land & Hospital and Other Services business units operate in the United States. Our Medical Device and Pharmaceutical business unit currently operates primarily in the United Kingdom. All remaining assets, primarily our corporate offices and investment portfolio, are located in the United States. The segment classified as Corporate includes corporate operating activities that support the executive offices, capital structure and costs of being a public registrant. These costs are not allocated to the operating segments when determining profit or loss. The following table reflects our segments as of September 30, 2018 and 2017 and for the three month periods then ended.

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:

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

RESULTS OF OPERATIONS

Operating Revenues

During the quarter ended December 31, 2015, we commenced operations in our 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 and six month periods ended December 31, 2018, net revenues from our pharmaceutical products, medical devices and commercial rentals totaled 48,852 and 95,520, respectively, as compared to net revenues of $126,237 and $194,130, respectively for the comparable periods ended December 31, 2017.

The primary reason for the decline in revenues was the discontinuation of certain pharmaceutical reimbursement programs by the United Kingdom National Health Service (“NHS”). In April 2017, the NHS discontinued reimbursement of the NP8 pharmaceuticals which represented a significant portion of our pharmaceutical sales in prior years. Since the discontinuation of reimbursement of NP8s, we have directed our focus solely on the marketing and sale of our branded generic pharmaceuticals and medical devices.

Revenues in the pharmaceutical and medical device business unit are expected to improve as market acceptance of our products increases and we begin sales of our SANDD medical devices. 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. Additionally, our medical devices are being offered for sale at very attractive profit margins.

Operating Expenses and Loss from Continuing Operations

For the three month period ended December 31, 2018, we report consolidated net loss of $701,929 on net revenues of $48,852 as compared to a net loss of $186,447 on net revenues of $126,237 for the comparable three month period ended December 31, 2017. For the six month period ended December 31, 2018, we report consolidated net loss of $898,546 on net revenues of $95,520 as compared to a net loss of $259,837 on net revenues of $194,130 for the comparable six month period ended December 31, 2017.The increase in the net loss for both periods was caused principally by the reduction in revenue, a litigation settlement loss of approximately $400,000 and higher professional fees and interest expense.

Professional fees for the three and six month periods ended December 31, 2018 totaled $133,751 and $166,767, respectively, a $81,934 and $107,893, respectively, increase from the $51,817 and $58,874, respectively, of professional fees for the comparable periods ended December 31, 2017. The increase in professional fess was primarily attributable to ongoing litigation against our former CEO during the current periods.

Liquidity and Capital Resources

As of December 31, 2018, we had cash of $14,768 and a certificate of deposit of $100,225 compared with cash of $19,034 and a certificate of deposit of $100,073 at June 30, 2018.

During the six month period ended December 31, 2018, we completed the funding of $143,000 of variable convertible notes (proceeds of $124,500 net of financing costs), we repaid $132,727 of the variable interest convertible notes and permitted conversion of an additional $98,534 of variable interest convertible notes.

Additionally, during the six month period ended December 31, 2018, we received a distribution of approximately $370,000 in connection with our real estate limited partnership investment in Hawaii. We used these cash inflows to fund current period operating activities and pay certain liabilities owed to creditors.

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

Cash Flows

Cash Flow from Operating Activities

During the six month period ended December 31, 2018, $304,406 of cash was used by our operating activities as compared to $168,734 used in our operating activities for the comparable six month period ended December 31, 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.

Cash Flows from Investing Activities

As discussed above, during the six month period ended December 31, 2018, we received approximately $370,000 in distributions from our limited liability real estate investment in Hawaii.

Cash Flows from Financing Activities

During the six month period ended December 31, 2018, we received net proceeds, after financing costs incurred, of approximately $124,500 from the issuance and sale of new variable interest convertible debentures. Additionally, during this same six month period ended December 31, 2018, we repaid approximately $133,000 of variable interest convertible notes.

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 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.

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

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. This also means there is limited review of accounting and financial reporting conclusions made by the Company’s chief financial officer.

Changes in Internal Control Over Financial Reporting

During the 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.

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 to schedule a bench trial to originally start June 11, 2018. On March 12, 2018, the parties agreed to extend the discovery period to September 7, 2018.

On February 6, 2019, we agreed to settle this matter. The settlement is subject to final documentation and other terms and conditions. We expect that the settlement will be completed during our 2019 fiscal year, although there is no assurance that will occur. The settlement provides that approximately 52.4 million shares of the Company’s common stock currently held by the Schreiber Trust will be returned to the Company in exchange for a payment of $250,000 at closing, a $200,000 promissory note payable 18 months after closing, and a $200,000 promissory note payable 30 months after closing, and the dismissal of all claims and counter-claims against the parties in the suit. The promissory notes are secured with certain assets of an officer and director of the Company. At any time within 180 days of closing, the promissory notes can be paid in their entirety for $300,000. The amount by which the fair value of these settlement payments exceeds the current market price of the repurchased common stock at closing is considered to be related to the settlement of the claims and counter-claims. Accordingly, we have accrued an additional $396,500 as of December 31, 2018.

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:

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.