RTSL Rapid Therapeutic Science Laboratories Inc (PK)

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RAPID THERAPEUTIC SCIENCE LABORATORIES, INC.

(formerly, Holly Brothers Pictures,  Inc.)

Consolidated Balance Sheets

RAPID THERAPEUTIC SCIENCE LABORATORIES, INC.

(formerly, Holly Brothers Pictures,  Inc.)

Notes to Consolidated Financial Statements

Inventory - Inventory as of September 30, 2020, consists of inhalers and related products and supplies delivered to a location near the Company’s offices, and held for sale to wholesale or retail customers.  Inventory is stated at the lower of weighted average cost or market.

Property and Equipment - Property and equipment, consisting of office furniture and fixtures, laboratory equipment and leasehold improvements, is depreciated on a straight-line basis over their useful lives ranging from two to five years.

Intangible Assets - The Company amortizes the costs of any renewable license or sub-license agreements over the contractual terms of such renewable agreements. For any license or sub-license agreements which do not require any renewal payments to be made, the Company performs periodic assessments in order to determine whether there has been any impairment in the carrying value of such intangible assets (see Note 4).

Revenue recognition - We account for revenue from contracts with customers in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." The unit of account in Topic 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided at a point in time or over a period of time. Topic 606 requires that a contract’s transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when (point in time) or as (over time) the performance obligation is satisfied.

Earnings per Share - The basic earnings (loss) per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the weighted average number of common shares issued and outstanding during the year. The diluted earnings (loss) per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted as of the first year for any potentially dilutive debt or equity. The Company has not issued any options or warrants or similar securities that are presently exercisable.

Income Taxes - The provision for income taxes is the total of the current taxes payable and the net of the change in the deferred income taxes. Provision is made for the deferred income taxes where differences exist between the period in which transactions affect current taxable income and the period in which they enter into the determination of net income in the financial statements. A valuation allowance is provided for the amount of deferred assets that, based on available evidence, are not expected to be realized.

Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.

Fair Value of Financial Instruments - Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as further noted below.

Level 1: The preferred inputs to valuation efforts are “quoted prices in active markets for identical assets or liabilities,” with the caveat that the reporting entity must have access to that market. Information at this level is based on direct observations of transactions involving the same assets and liabilities, not assumptions, and thus offers superior reliability. However, relatively few items, especially physical assets, actually trade in active markets.

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Level 2: FASB acknowledged that active markets for identical assets and liabilities are relatively uncommon and, even when they do exist, they may be too thin to provide reliable information. To deal with this shortage of direct data, the board provided a second level of inputs that can be applied in three situations.

Level 3: If inputs from levels 1 and 2 are not available, FASB acknowledges that fair value measures of many assets and liabilities are less precise. The board describes Level 3 inputs as “unobservable,” and limits their use by saying they “shall be used to measure fair value to the extent that observable inputs are not available.” This category allows “for situations in which there is little, if any, market activity for the asset or liability at the measurement date”. Earlier in the standard, FASB explains that “observable inputs” are gathered from sources other than the reporting company and that they are expected to reflect assumptions made by market participants.

Recently Issued Accounting Pronouncements - In the three months ended September 30, 2020, the Financial Accounting Standards Board issued several new Accounting Standards Updates which the Company believes will have no material impact to the Company.

Subsequent Events - Management has evaluated any subsequent events occurring in the period from September 30, 2020 through the date the financial statements were issued, to determine if disclosure in this report is warranted (see Note 9).

(3)Going Concern 

The Company's consolidated financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has generated minimal revenues and has suffered recurring losses totaling $4,808,335 since inception. These factors, among others, indicate that there is substantial doubt about the Company’s ability to continue as a going concern within one year from the issuance date of this filing.

In order to obtain the necessary capital to sustain operations, management’s plans include, among other things, the possibility of pursuing new equity sales and/or making additional debt borrowings. There can be no assurances, however, that the Company will be successful in obtaining such additional financing, or that such financing will be available on favorable terms, if at all. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from the outcome of this uncertainty.

(4)Intangible Assets 

Effective November 15, 2019, the Company entered into a sublicense agreement (the “Agreement”) with Texas MDI, Inc., a Texas corporation, which is controlled by Donal R. Schmidt, Jr., the Chief Executive Officer and Director of the Company (“TMDI”), whereby the Company acquired a sublicense from TMDI to use certain technology regarding metered dose inhalers (MDI) that TMDI has licensed from EM3 Methodologies, LLC (“EM3”) and the right to use the RxoidTM brand name owned by TMDI. TMDI has exclusive rights to research, develop, make, have made, use, offer to sell, sell, export and/or import and commercialize, the ‘Desirick Procedure’, which is a proprietary process owned by EM3 for producing MDI using hemp (and other) derivatives in the States of Texas, California, Florida and Nevada, pursuant to an Exclusive License Agreement dated October 1, 2019, by and between TMDI and EM3 (the “EM3 Exclusive License”). Pursuant to the Agreement, the Company obtained substantially the same rights that TMDI had under the EM3 Exclusive License, as to the use of the ‘Desirick Procedure’ for the manufacturing of pressured MDI’s (pMDI) containing cannabis, hemp or a combination thereof in any legal jurisdiction in consideration for 140,000,000 shares of the Company’s common stock (issued in November 2019). Such rights obtained by the Company pursuant to the Agreement were transferred as a result of extensive third party negotiations between the Company and TMDI and have been recorded as the acquisition of an intangible asset in the amount of $140,000, based on the par value of the shares issued.

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During the term of the Agreement, the Company is required to advance payments to TMDI that TMDI is required to make to EM3, pursuant to the EM3 Exclusive License Agreement. The Company’s obligation to make such advancements to TMDI is conditioned upon TMDI providing the Company with an advance notice requesting such payments, along with an accounting showing the calculations for such payments. Accordingly, the Company has an obligation to advance TMDI an amount of $200,000 as a license fee covering the first two years of the Agreement and to pay an additional $200,000 each 2 years thereafter (unless at least 100,000 MDI consumables are purchased from EM3 for use in such states during the preceding year). The Company has partially satisfied this obligation by making an equipment purchase on behalf of TMDI in the amount of $135,000, and has agreed to pay the remaining license fee of $65,000 in cash within a 24-month period (for which, the Company has recorded a liability of $44,925 for the unpaid portion of this amount in accounts payable as of September 30, 2020). The Company has recorded the entire $200,000 license fee as an intangible asset and is amortizing such expense on a straight-line basis over a 24 month period (of which, $50,000 was amortized in the six month period ended September 30, 2020).

(5)Notes Payable 

As of September 30, 2020 and March 31, 2020, the Company had the following note payable obligations:

Future maturities of notes payable as of September 30, 2020 are as follows:

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During the three months ended September 30, 2020, the Company reached the necessary milestone to trigger the conversion of certain notes payable issued to the holders on various dates in 2018 and 2019, as amended, in the total principal amount of $732,835 into shares of the Company’s common stock, subject to a 4.99% ownership limitation for each beneficial owner of such notes. In conjunction with this conversion, holders of notes in the principal amount of $404,601, plus an additional accrued interest amount of $96,536, converted their notes into 10,022,749 shares of common stock effective as of August 31, 2020.  As of September 30, 2020, notes in the amount of $328,234, plus accrued interest in the amount of $76,028, remain outstanding and are available to be subsequently converted into 8,085,221 shares of common stock, subject to the ownership limitation (see Note 6).

During the six months ended September 30, 2020, the Company entered into three identical Securities Purchase Agreements with an accredited investor (the “Buyer”) with respect to Convertible Promissory Notes (the “Notes”) issued by the Company to the Buyer in the total amount of $125,000. The Notes have a maturity date of one year after the date of each issuance and bear interest at a rate of 12% per annum, which is not due until maturity. At the option of the Buyer, the Notes may be converted into shares of the Company’s common stock, beginning one hundred eighty (180) days following the date of each issuance. Under this option, the conversion price is equal to a discount of 42% of the average of the three (3) lowest closing bid prices for the Common Stock during the prior fifteen (15) trading day period. The Buyer will be limited to a 4.99% beneficial ownership limitation in connection with such conversion right under the note. The Company determined that the conversion feature of the Notes required the recognition of a derivative liability upon each issuance. Accordingly, the Company calculated the fair value of these derivative liabilities, using the Black Scholes model, and has recognized a derivative liability for each Note in that amount offset by a debt discount. The Company is amortizing the debt discount on a straight-line basis over the one year term of each of these Notes.

Effective November 15, 2019, the following transactions took place in the Company’s notes payable:

·The Company entered into new promissory notes with two accredited investors under which the Company borrowed a total of $300,000, with such notes maturing in five years, accruing interest at 5% per annum, and being convertible into common stock at the option of the holders, at a conversion price of $0.05 per share. 

·The two holders of outstanding convertible notes payable elected to exercise their existing rights to convert a portion of their notes into shares of common stock, at the stated conversion ratio of $0.13 per share.  The two holders converted a total principal amount of $2,034,760 in notes into a total of 15,652,000 shares of common stock leaving the remaining total principal balance of $165,240 unconverted. 

·The Company entered into an amendment with the holders of existing non-convertible notes in the total principal amount of $732,835 (out of a total of $756,535) whereby such notes will remain outstanding and continue to accrue interest with deferral of the maturity dates being extended for one year or until the Company has raised an additional $500,000 of new equity securities, at which time, the principal and accrued interest shall be converted into common stock at a conversion price of $0.05 per share (as indicated above, such notes in the amount of $404,601 were converted into common stock during the three months ended September 30, 2020, as a result of such $500,000 equity raise threshold being met). 

The Company performed an analysis of both the newly issued convertible notes and the newly amended existing notes, which were formerly non-convertible, to determine whether there was a beneficial conversion feature and noted none.

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(6)Stockholders’ Equity 

Effective January 13, 2020, the Company filed a Certificate of Amendment to its Amended and Restated Articles of Incorporation (the “Certificate of Amendment”) with the Secretary of State of the State of Nevada to increase the total authorized shares of common stock of the Company from 200 million shares to 750 million shares and to authorize 100 million shares of “blank check” preferred stock of the Company.

During the three months ended September 30, 2020, the Company reached the necessary milestone to trigger the conversion of certain notes payable issued to the holders on various dates in 2018 and 2019, as amended, in the total principal amount of $732,835 into shares of the Company’s common stock, subject to a 4.99% ownership limitation for each beneficial owner of such notes.  In conjunction with this conversion, holders of notes in the principal amount of $404,601, plus an additional accrued interest amount of $96,536, converted their notes into 10,022,749 shares of common stock effective as of August 31, 2020. As of September 30, 2020, notes in the amount of $328,234, plus accrued interest in the amount of $76,028, remain outstanding and are available to be subsequently converted into 8,085,221 shares of common stock, subject to the ownership limitation (see Note 5).

During the six months ended September 30, 2020, the Company entered into private stock subscription agreements with various accredited investors whereby the Company sold a total of 4,940,000 shares of restricted common stock to these investors at an offering price of $0.25 per share, resulting in gross proceeds to the Company of $1,235,000.

Additionally, the Company awarded 1,363,334 shares of restricted common stock to a total of 12 consultants during the six months ended September 30, 2020 as compensation for services. Based on the timing of these awards in relation to the private offering of common stock noted above, the Company valued the shares at a price of $0.25 per share, for total non-cash compensation expense of $340,834.

In March 2018, the Board approved the establishment of a new 2018 Stock Option Plan with an authorization for the issuance of up to 20,000,000 shares of common stock. The Plan is designed to provide for future discretionary grants of stock options, stock awards and stock unit awards to key employees and non-employee directors. The Company has made no awards under this Plan.

(7)Related Party Transactions 

Office services have been provided without charge by a director. Such costs are immaterial to the consolidated financial statements and, accordingly, have not been reflected therein. The officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities. If a specific business opportunity becomes available, such persons may face a conflict in selecting between the Company and their other business interests. The Company has not formulated a policy for the resolution of such conflicts.

(8)Commitments and Contingencies 

From time to time in the ordinary course of our business, the Company may be involved in legal proceedings, the outcomes of which may not be determinable. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources. We are not able to estimate an aggregate amount or range of reasonably possible losses for those legal matters for which losses are not probable and estimable, primarily for the following reasons: (i) many of the relevant legal proceedings are in preliminary stages, and until such proceedings develop further, there is often uncertainty regarding the relevant facts and circumstances at issue and potential liability; and (ii) many of these proceedings involve matters of which the outcomes are inherently difficult to predict. We currently have no insurance policies covering such potential losses.

We are not at this time involved in any legal proceedings.

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(9)Subsequent Events 

Since December 31, 2019 and through the date of this report, the entire global economy has been substantially impacted by the coronavirus pandemic which began in China and has spread to the United States and most other parts of the world. As disclosed in Note 1, the Company has adopted a new business strategy focused on developing potential commercial opportunities which will involve the rapid application of therapeutics using proprietary metered dose inhaler technology that the Company has recently sublicensed from a third party. The range of possible impacts on the Company’s business from the coronavirus pandemic could include: (i) changing demand for the Company’s products; (ii) rising bottlenecks in the Company’s supply chain; and (iii) increasing contraction in the capital markets. At this time, the Company believes that it is premature to determine the potential impact on the Company’s business prospects from these or any other factors that may be related to the coronavirus pandemic.

On October 15, 2020, the Company entered into a private stock subscription agreement with an accredited investor whereby the Company agreed to sell the investor 2,640,000 shares of restricted common stock and 6,000,000 “out of the money” common stock purchase warrants, in exchange for a cash payment to the Company in the amount of $100,000, and the performance of certain other obligations. Based on previous negotiations between the Company and the investor prior to the execution of this agreement, the investor had made a provisional payment of $90,000, which was reflected by the Company as a liability as of September 30, 2020. Upon execution of the agreement, the investor paid the remaining $10,000 to the Company. The resale of the shares held by the purchaser is subject to a lock-up agreement.

On October 23, 2020, the Company entered into an Asset Purchase and Sales Agreement with Razor Jacket, LLC (“Razor Jacket”), an Oregon based supplier of isolate and related products, to acquire all of Razor Jacket’s equipment and know-how relating to the manufacture of cannabinoid isolates and related products (the “Assets”). The purchase price for the Assets is (a) $300,000 in cash, payable at closing; (b) 625,000 shares of restricted common stock, payable at closing; and (c) the right for the sellers to earn up to 16.5 million shares of a to-be designated series of preferred stock of the Company, which will be convertible into common stock on a one-for-one basis, subject to certain conditions. The acquisition of the Assets is subject to customary closing conditions and the transaction is expected to close in November 2020, with an effective date of November 1, 2020. In conjunction with the closing of the acquisition, the Assets and the two principals of Razor Jacket are expected to be relocated to the Company’s facilities in Texas.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information for this Item is not required as the Registrant is a “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.

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