3. OPERATING LEASE

The Company has an operating lease agreement for its office space with a remaining lease term of 20 months. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for the lease and non-lease components of its office lease as a single lease component. Lease expense is recognized on a straight-line basis over the lease term.

Under ASC 842, an operating lease right-of-use (“ROU”) asset and liability is recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in lease arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives. The adoption of ASC 842 did not have a significant impact on our liquidity.

The components of lease expense and supplemental cash flow information related to leases for the period are as follows:

The supplemental balance sheet information related to leases for the period is as follows:

Maturities of the Company’s lease liabilities are as follows:

Lease expenses were $46,388 and $7,800 during the three months ended September 30, 2019 and September 30, 2018, respectively.

4. ADVANCE

In July 2018, we received a payment from a third party in the amount of $296,653. The purpose of this payment was not specified at the time it was received, and the third party making such payment has failed to respond to our requests for additional information. We have recorded this payment as an advance and, at September 30, 2019, it is included in current liabilities on the accompanying financial statements.

5. DERIVATIVE LIABILITY

In May 2015, the Company issued certain warrants which included a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder. In addition, the warrants contained an anti-dilution provision that allows for the automatic reset of the exercise price of the warrants upon future sale of the Company’s common stock, warrants, options, convertible debt or any other equity-linked securities at an issuance, exercise or conversion price below the current exercise price of the warrants. In addition,As such the Company determined that the warrants can be settled for cash at the holders’ option in a futurewarrant fundamental transaction as defined. Asprovision and exercise price created a result ofderivative instrument. In accordance with the anti-dilution and fundamental transaction provisions,FASB authoritative guidance, the Company determined that the conversion featurefair value of the warrants should be separated from the host contract, bewas recognized as a derivative liability,instrument and is re-measured at the end of each reporting period with the change in value reported in the statement of operations.

At March 31, 2018,2019, the balance of the derivative liabilities was $153,042.$35,710. During the six months ended September 30, 2018,2019, the Company recorded an increasea decrease in derivative liability of $62,349.$33,914. At September 30, 2018,2019, the balance of the derivative liabilities was $215,391.$1,796.

At September 30, 20182019 and March 31, 2018,2019, the derivative liabilities were valued using a probability weighted Black-Scholes-Merton pricing model with the following assumptions:

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.

3. ADVANCE FROM UNRELATED PARTY

In July 2018, we received an advance from an unrelated party for $250,000 related to a potential investment in the Company. Negotiations for the potential investment are currently ongoing. The advance is unsecured, non-interest bearing, and due on demand.

4. STOCKHOLDERS’ EQUITY (DEFICIENCY)

Issuance of Common Stock and Warrants

On August 29, 2018, the Company sold 333,334 shares of its common stock and warrants to purchase 166,667 shares of the Company’s common stock, resulting in net proceeds to the Company of approximately $500,000 after deducting fees and expenses of the offering. The common stock and warrants were sold in units, consisting of a share of common stock and a warrant to purchase a share of common stock, at a price of $1.50 per unit, with an exercise price for the warrants of $2.00 per share.

Common stock issued to employees with vesting terms

The Company has issued shares of common stock to employees and directors that vest over time. The fair value of these stock awards is based on the market price of the Company’s common stock on the dates granted, and are amortized over vesting terms ranging up to three years.

During the six months ended September 30, 2018, we recorded expense related to the fair value of stock awards that vested of $213,761. At September 30, 2018, the amount of unvested compensation related to these awards is approximately $140,000, and will be recorded as expense over 1 year.

Shares of restricted stock granted above are subject to forfeiture to the Company or other restrictions that will lapse in accordance with a vesting schedule determined by our Board. In the event a recipient’s employment or service with the Company terminates, any or all of the shares of common stock held by such recipient that have not vested as of the date of termination under the terms of the restricted stock agreement are forfeited to the Company in accordance with such restricted grant agreement.

The following table summarizes restricted common stock activity:

Common stock issued for services6. STOCK OPTIONS

During the six months ended September 30, 2018,2019, the Company issued a totalgranted to directors and employees options to purchase an aggregate of 75,0003,250,000 shares of common stock to one consultant as payment for services and recorded expenses of $113,250 based on the fair value of the Company’s common stock with exercise prices of $0.30 to $0.35 per share, that expire ten years from the date of grant, and all have vesting periods of 24 months. The fair value of each option award was estimated on the date of grant using the Black-Scholes-Merton option pricing model based on the following assumptions: (i) volatility rate of 176.50%, (ii) discount rate of 1.73%, (iii) zero expected dividend yield, and (iv) expected life of 6 years, which is the average of the term of the options and their vesting periods. The total fair value of the option grants to employees at the issuance date.

5. STOCK OPTIONStheir grant dates was approximately $1,026,000.

A summary of the Company’s stock option activity during the threesix months ended September 30, 20182019 is as follows:

A summary of the Company’s stock options outstanding and exercisable as of September 30, 20182019 is as follows:

During the six months ended September 30, 2018,2019, we expensed total stock-based compensation related to stock options of $783,670,$325,272, and the remaining unamortized cost of the outstanding stock-based awards at September 30, 20182019 was approximately $869,000.$926,000. The remaining unamortized cost will be amortized on a straight linestraight-line basis over a weighted average remaining vesting period of one year. At September 30, 2018,2019, the 3,456,7106,546,710 outstanding stock options had anno intrinsic value of approximately $3,260,000.value.

6.7. WARRANTS

At September 30, 2018,2019, warrants to purchase common shares were outstanding as follows:

At September 30, 2018,2019, the 1,301,6701,135,003 outstanding warrants had anno intrinsic value or approximately $63,000.value.

7. RELATED PARTY OBLIGATIONS8. COMMITMENTS AND CONTINGENCIES

SEC Subpoena

On April 23, 2012,August 19, 2016, we filed a resale registration statement on Form S-1 (“Form S-1”) with the Company entered into a lease agreement with One World Ranches, which is jointly-owned by Dr. Avtar Dhillon, the Chairman of the Company’s Board of Directors, and his wife,SEC to rent the space being used as the Company’s principal office and laboratory facility. The original term of the lease was from May 1, 2012 to May 1, 2017. In May 2017, the Company extended the lease through May 1, 2020. Our rent payments thereunder were $2,300 per month until May 1, 2017 and increased to $2,600 per month on May 1, 2017. Aggregate payments under the lease for the six months ended September 30, 2018 and 2017 were $7,800 and $15,300, respectively.

8. SUBSEQUENT EVENTS

On October 19, 2018, the Company sold 5,666,666register 2,650,000 shares of itsour common stock and warrants to purchase 5,666,6667,950,000 shares of the Company’sour common stock resulting in net proceedsissuable upon exercise of certain warrants. On or about December 10, 2016, we were advised that the SEC staff was conducting (i) a private investigation (a “Private Investigation”) pursuant to the Company of approximately $8,350,000 after deducting fees and expensesSection 20(a) of the offering.Securities Act and Section 21(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and (ii) an examination under Section 8(e) of the Securities Act (a “Section 8(e) Examination”) with respect to this Form S-1. The common stock and warrants were sold in units, consisting of a share of common stock and a warrant to purchase a share of common stock, at a price of $1.50 per unit, with an exercise price for the warrants of $3.00 per share.

On October 19, 2018, the Company also entered into a share exchange agreementhas been cooperating fully with the shareholdersstaff of Summit Healthtech, Inc. (“Summit”), a company formedthe Enforcement Division of the SEC in connection with these matters. On or about November 14, 2018, we were advised by a teamthe staff of physicians and psychologists to develop innovative healthcare treatments and specialty healthcare centers focusedthe Enforcement Division that, based on the useinformation the staff had as of cannabinoid therapies as an alternative to opioid painkillers.such date, it was terminating the Section 8(e) Examination but that the Private Investigation would remain open. The Company agreedcontinues to issue 6,000,000 shares of the Company’s common stock,cooperate in exchange for all of the outstanding common stock of Summit. Following the closing of the exchange on October 22, 2018, the Company owned 100% of the capital stock of Summit and it was renamed Vitality Healthtech, Inc. Vitality Healthtech, Inc. will be operated as a wholly-owned subsidiary of the Company.such investigation.

On November 6, 2018, the U.S. Securities and Exchange Commission (the “SEC”) announced the temporary suspension of trading in the Company’s common stock. The suspension terminates on November 20, 2018. The Company is cooperating with the SEC.

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

As used in this discussion and analysis and elsewhere in this Quarterly Report, the “Company”, “we”, “us” or “our” refer to Vitality Biopharma, Inc., a Nevada corporation.

Cautionary Statement

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited Condensed Financial Statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the fiscal year ended March 31, 20182019 filed on June 28, 2018,July 15, 2019, and the related audited financial statements and notes included therein.

Certain statements made in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, which may cause our or our industry’s actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements. These risks and uncertainties include: general economic and financial market conditions; our ability to obtain additional financing as necessary; our ability to continue operating as a going concern; any adverse occurrence with respect to our business or; results of our research and development activities that are less positive than we expect ; our ability to bring our intended products to market; market demand for our intended products; shifts in industry capacity; product development or other initiatives by our competitors; fluctuations in the availability of raw materials and costs associated with growing raw materials for our intended products; poor growing conditions for the stevia plant;ability to have freely-traded stock; other factors beyond our control; and the other risks described under the heading “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on June 28, 2018.July 15, 2019.

Although we believe that the expectations and assumptions reflected in the forward-looking statements we make are reasonable, we cannot guarantee future results, levels of activity or performance. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those expressed by any forward-looking statements. As a result, readers should not place undue reliance on any of the forward-looking statements we make in this report. Forward-looking statements speak only as of the date on which they are made. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Company Overview

Vitality Biopharma, Inc. is unlockingWe are focused on the poweradvancement of cannabinoids forpharmaceuticals and innovative technologies that improve the treatmentlives of serious neurological and inflammatory disorders

patients. We hold exclusive worldwide intellectual property and commercialization rightsseek to a new classachieve this objective through the development of novel cannabinoid pharmaceutical candidatesprodrugs known as cannabosides. This classWe will conduct our operations using our own personnel and facilities, through subsidiaries established to conduct such operations, and, as appropriate, through strategic partnerships with other early stage companies that we believe are bringing innovative products and services to market but lack the necessary capital or resources to fully capitalize on their high growth potential. We may provide assistance to such strategic partners through management assistance, loans of compounds includes VBX-100, a prodrugcapital or equipment or personnel resources, or other arrangements designed to support the operations of tetrahydrocannabinol (THC), which enables targeted delivery of THC to the gastrointestinal tract without any resulting drug psychoactivity or intoxication.our Company.

CannabosidesOur cannabosides are cannabinoid glycoside “prodrugs,”cannabinoid-glycoside prodrugs, which meanswere discovered through application of the Company’s proprietary enzymatic bioprocessing technologies, that they are medications or compounds that, after administration, are converted within the body after administration from an inactive molecule into a pharmacologically active drug. Because there often already exists independent verification ofCurrently, the active drug’s safety and efficacy, as is the case with THC, whichCompany has been FDA-approved as a pharmaceutical since 1985, prodrugs may receive regulatory and marketing approvals more quickly than others. At the same time, a prodrug can have many commercial advantages, including that they can be proprietary and patentable compositions of matter, unlike cannabinoids themselves, or older pharmaceutical formulations where patent protection has already expired.

Our most advanced drug candidate, VBX-100, is a prodrug of THC, which was first approved as a pharmaceutical by the FDA in 1985 under the brand name MARINOL^TM and that is known by the generic drug name of dronabinol. VBX-100 enables targeting or restriction of THC to the gastrointestinal tract, thereby eliminating or avoiding the psychoactive or intoxicating effects that occur when THC enters the bloodstream and brain. VBX-100 may enable more widespread use of THC for treatment of gastrointestinal conditions as well as its use in many patient populations for whom treatment today with THC is not generally recommended, including children, patients who are pregnant or breastfeeding, and patients with a history or high risk of mental illness.

VBX-100 is being developed for treatment of inflammatory bowel disease (IBD),C. difficile-associated diarrhea and colitis (CDAC), irritable bowel syndrome (IBS), and narcotic bowel syndrome (NBS), a severe form of opiate-induced abdominal pain.

For IBD, which includes Crohn’s disease and ulcerative colitis, there have been independently-conducted preclinical and clinical studies that have demonstrated the benefit of cannabinoids. Independently-run retrospective clinical studies have found that in 56 patients who used cannabinoids with IBD that 83.9% of patients reported improvement in abdominal pain, and 76.8% of patients reported improvement in abdominal cramping. In addition, in a prospective trial that was independently-managed and placebo-controlled, it was found that 45% of Crohn’s disease patients achieved remission after 8 weeks of treatment. Patients reported improvements in sleep and appetite with no significant side effects and some patients were able to eliminate use of corticosteroids and opiate pain medications. Patients experienced benefits with cannabis treatment despite being non-responders to conventional therapies, such as corticosteroids, immunomodulators, and TNF-alpha inhibitors. VBX-100 may enable treatment of drug-resistant forms of IBD without any psychoactivity and also without the adverse effects of alternative IBD therapies, many of which today suppress the immune system throughout the body and can increase the risk of infections or cancer.

A key part of our strategy will be to take advantage of a more efficient Food & Drug Administration (FDA) review and approval process that is available for prodrugs, which reduces the need for large and expensive clinical trials. Expedited regulatory processes may be available for our cannabosides because in the U.S. and internationally there have already been many independent preclinical and clinical studies completed using THC, and so existing clinical data may be submitted to drug regulatory agencies as supporting evidence of our compounds’ safety.

We aim to develop and approve our pharmaceutical candidates using a low-risk regulatory strategy that is available for prodrugs, and to amplify the benefits that have been seen in independent, early-stage clinical trials and preclinical studies describing the use of cannabinoids for treatment of neurological and inflammatory conditions. Our focus is especially on eliminating well known side effects of existing therapies, and on treating conditions known to involve the endocannabinoid system and the gastrointestinal tract.

Our primary operations are based in Yuba City, California, where we originally developed our proprietary bioprocessing methods. The Company’s research and development facilities include laboratories and a manufacturing suite that will be used for pharmaceutical-grade production of drug material for clinical trials. These facilities and the company’s operations involving handling and use of controlled substances have been registered with and authorized by the Drug Enforcement Administration (DEA) as well as the Research Advisory Panel of California, a part of the State of California’s Department of Justice.

Product Pipeline

We have produced more than 25 novel cannabosides, so farincluding glycosylated tetrahydrocannabinol (THC), cannabidiol (CBD), cannabidivarin (CBDV) and havecannabinol (CBN), that are covered by worldwide patent applications that includefor composition of matter, claimsmethod of production and method of use.

As a complementary strategy, the Company plans to leverage its research and managerial expertise to enter into strategic partnerships with early-stage businesses that require capital and resources to drive innovation and bring new medicines, services and technologies to market to advance the health of patients. We plan to focus our energies on companies approaching key value inflection points where our unique capabilities can accelerate growth and provide solutions-oriented strategies to drive better performance and create value for our strategic partners and shareholders.

Our corporate headquarters is located in Los Angeles, California. As of November 13, 2019, we employed six full-time employees, including four research professionals working in our office and laboratory space in Yuba City, California. We also have engaged the services of scientific and regulatory consultants to assist in our research and development activities, which is an approach that provides us with flexible and highly-experienced resources to advance our clinical efforts while maintaining a relatively lower overhead cost structure.

Cannaboside Prodrugs

A prodrug is a compound that, after administration, is metabolized into a pharmacologically active drug. Prodrugs are often designed to improve drug properties and reduce known or expected toxicities and adverse side effects. By using our proprietary enzymatic bioprocessing technologies, our clinical research team has developed a novel family of prodrugs by combining cannabinoid and glucose molecules. The resulting compounds, known as cannabosides, have unique commercial applications and patentable compositions of matter, which are separate and distinct from ordinary cannabinoids. The advantages of cannabosides may include: (i) administration in a convenient oral formulation, (ii) targeted delivery with release in the colon or large intestine, (iii) improved stability with limited degradation or drug metabolism, and (iv) delayed release enabling longer-lasting effects and fewer administrations by patients.

Our proprietary glycosylation process, which results in adding one or more glucose molecules to compounds, may enable our new cannabosides to act as prodrugs that achieve targeted delivery of the bioactive compounds of cannabinoids to the gastrointestinal tract. Glycosylated compounds are generally more stable and are water soluble, so upon ingestion, we believe they will remain intact and transit through the esophagus, stomach and upper intestine with limited absorption or degradation from stomach acids. However, once the glycosylated compounds reach the lower intestine, we expect them to encounter glycoside hydrolase enzymes secreted by the human intestinal microbiota that will cleave the polar glucose residues and release the active cannabinoid compound primarily in the large intestine or colon.

We have focused our research and development activities on the glycosylation of cannabinoids given their well-known positive effects on the human endocannabinoid system. Our research and development activities originally focused on the glycosylation of CBD and then later expanded into the glycosylation of THC. The use of the cannabinoid THC has been studied extensively in clinical trials worldwide, includingshown to provide substantial anti-inflammatory benefits on the human body, among other benefits, but is limited as a pharmaceutical option given its psychoactive and intoxicating properties. However, by glycosylating THC, and cannabidiol (CBD). Upon successful patent prosecution, protection would extend until 2035 and be available in all major markets worldwide. In addition, we have filed patent applicationslearned through initial animal studies that seek to protect more broad claims on novel vanilloid glycoside compounds that target TRPV receptors for mediating pain relief, methodsthe binding of use for TRPV1 agonists to effect neural repair,glucose and based on findings in early 2017, for drug compositions and methods to use cannabinoids to treat gut dysbiosis and drug-resistantC.difficileinfections, which colonizeTHC molecules restricts the release of THC into the body’s digestive system until the prodrug reaches the large intestine.intestine, at which point the glycoside hydrolase enzymes cleave the glucose from the prodrug and the THC is released in a targeted and restricted manner. Further, we have learned through our initial animal studies that this targeted release of THC, which could be provided in very low doses to achieve physiologically beneficial results, serves as an anti-inflammatory agent in the lower gastrointestinal tract and minimizes the amount of THC absorbed into the blood stream, therefore lessening the psychoactive and intoxicating properties that hinder the broader pharmaceutical use of THC.

CannabosideWe are developing our THC-glycoside prodrugs may deliver a variety of benefits over existing cannabinoid therapies, including:

VBX-100 is an oral cannaboside and a prodrug of THC, or dronabinol, which was first approved by the US FDA in 1985. MARINOL^TM is an approved version of dronabinol that is indicated for treatment of anorexiagastrointestinal diseases, including inflammatory bowel disease (IBD) and chemotherapy-induced nausea and vomiting. VBX-100irritable bowel syndrome (IBS) because of the targeted release described previously. IBD is targeted or restricteda frequently chronic inflammatory condition where parts of the digestive system become inflamed from an overactive immune response. The disease can lead to irreversible damage to the gastrointestinal tract so it could eliminateand may require surgery to remove affected areas of the psychoactive effectsintestine. Two major forms of THC,the disease are Crohn’s disease, which may enable widespread adult usecan affect any part of THC for treatmentthe digestive system, and ulcerative colitis, which often affects the colon or large intestine. The disease is often unpredictable with periods of painful and debilitating symptoms followed by periods of remission with limited symptoms. IBS has similar symptoms to IBD, including abdominal pain, but the underlying disease process is quite different. IBS is a functional gastrointestinal conditions as well as use in patient populations where use of THCdisorder that commonly affects the large intestine and is currently limited or avoided, including for treatment of pediatric conditions or for treatment ofcharacterized by abdominal cramping, diarrhea, constipation, and pain. Currently, patients with a history of mental illness. VBX-100 is intended primarily for acute or short-term use,suffering from IBD are frequently prescribed anti-inflammatory drugs such as for treatment regimens to induce remissionsteroids, biologics and immunosuppressants, and patients suffering from IBS are prescribed antibiotics, antidepressants and gastrointestinal motility compounds, all of disease flares that occurwhich often result in pediatric Crohn’s disease or ulcerative colitis, or for use to relieve severe abdominal pain while narcotic bowel syndrome patients reduce or eliminate use of opioid painkillers.unwanted side effects.

VBX-210 is an oral cannaboside formulation being investigated in preclinical studies for treatment of gastrointestinal conditions. VBX-210 is intended primarily for chronic or long-term use (greater than 6 months per year), including long-term management of irritable bowel syndrome, chronic pain, prevention of colorectal cancer, or maintaining remission of inflammatory bowel disease. We are developing additional cannabinoid product formulations that are intended to provide relief of refractory pain in patients using cannabinoids as an alternative to opioid painkillers, as well as formulations intended to improve the symptoms of autism spectrum disorder.

For each of the pharmaceutical candidates in our pipeline, the active cannabinoid pharmaceutical agents have been independently approved by regulatory bodies and there is extensive clinical data already available related to drug safety and effectiveness. Because of this, we will in general benefit from the increased familiarity of clinical investigators and regulators with these compounds, which may enable abbreviated paths towards clinical testing and eventual approval of our pharmaceutical products.

Our Operations

We believe that our long-term commercial success and profit potential depends in large part on our ability to develop and advance proprietary cannabinoid prodrugs that are strongly differentiated from both medical cannabis and existing cannabinoid drugs, and to do this more quickly, efficiently and effectively than our competitors. Another critical factor that will determine our successmost promising THC-glycoside (VBX-100) is our ability to obtain and enforce patents, maintain protection of trade secrets, and operate our business without infringingbeing developed as an oral prodrug for the proprietary rights of third parties. As a result, we are dedicated to the continued development and protection of our intellectual property portfolio.

We developed internally and hold exclusive worldwide intellectual property rights related to two U.S. patent applications filed in September and October 2015, titled “Cannabinoid Glycoside Prodrugs and Methods of Synthesis.” In September 2016, an expanded international application was filed under the Patent Cooperation Treaty system, which includes 79 patent claims to almost 200 individual compounds, including but not limited to prodrugs of THC and CBD. In March and April 2018, applications were filed for national and regional prosecution in major pharmaceutical markets worldwide including the U.S., Europe, Japan, Canada, Mexico, Australia, New Zealand, China, and Brazil. For more information, see the “Intellectual Property” section below.

Short Term Development Targets

We plan to complete all necessary preclinical studies for VBX-100 and to complete a Phase 1 clinical trial in the first half of 2019. This first-in-man clinical study will focus primarily on evaluating the clinical pharmacokinetics, safety, and tolerability of VBX-100 in healthy volunteers. Additional endpoints may be analyzed to examine the effects of VBX-100 on GI motility, intestinal permeability, and on the human microbiome. The Phase 1 first-in-human trial is intended to provide safety data sufficient for us to initiate multiple Phase 2 proof-of-concept clinical studies in the second half of 2019, including for treatment of IBD and IBS. We plan to conduct additionalVBX-100 was selected from our THC-glycoside portfolio for compatibility with commercial production techniques and the optimal prodrug delivery profile that maximizes intestinal anti-inflammatory properties while minimizing psychoactive or intoxicating effects. Initial preclinical studies on the efficacy of VBX-100 in animal models have shown favorable outcomes, including reduced inflammation of the gastrointestinal tract and no measurable systemic THC found in tissue examined using highly-sensitive testing equipment. Our preclinical development plan, which includes dose range finding studies, GLP toxicology studies, pharmacokinetic studies and other preclinical research, is anticipated to be completed during the 2^nd half of calendar year 2020, subject to the Company securing sufficient additional funding or entering into a strategic partnership with a third party providing the Company with additional capital or research and development resources. After our other pharmaceutical candidates, as well as sponsor observationalsatisfactory completion of all of the prerequisite preclinicalin vitroandin vivo studies, an Investigational New Drug (IND) application would be filed with the FDA and, upon receiving FDA approval, we would initiate our Phase 1 clinical studies of cannabinoids for new treatment indications including prevention of colorectal cancer, treatment of refractory pain (opioid substitution therapy), and treatment of autism spectrum disorder.

Short-term development targets include:

Additional Operationstrial, subject to the Company securing sufficient additional funding or entering into a strategic partnership described above.

In October 2018,addition to our research and development activities related to our THC-glycoside compounds, we acquiredare expanding and initiateddiversifying our research and development activities to include the potential safety, efficacy and commercialization of our patented CBD-glycoside compounds. CBD has well-known anti-anxiety, anti-inflammatory and anti-microbial properties, but unlike THC, CBD is non-psychoactive and non-intoxicating. By glycosylating CBD, we can create CBD-glucose compounds that may enable a specialty health care business named Vitality Healthtech, Inc.,targeted and concentrated delivery of CBD in the gastrointestinal tract. Currently, we are evaluating the optimal CBD-glycoside delivery mechanism, which was founded and is led by a team of physicians and psychologists dedicated to use of cannabinoid therapies asmay include an alternative to opiate painkillers. Vitality Healthtech, Inc. is a wholly-owned subsidiaryaqueous drink formulation since our glycosylation process greatly improves the water solubility of the Company and the business is focused on the use of cannabinoids for opiate reduction. CBD molecule.

Enzymatic Processing Methods

The Company is developingoriginally developed its proprietary treatment regimensenzymatic bioprocessing technologies to attach glucose molecules to the molecules of stevia as part of our activities in the stevia processing industry. We then expanded the application of this proprietary technology to attach glucose molecules to cannabinoids, including THC and operating health care facilitiesCBD. We may pursue additional opportunities to develop new products or license this technology.

Strategic Partnerships

As a complement to our capital intensive and longer duration drug development business, we plan to expand and diversify our corporate strategy to include strategic partnerships with promising early-stage companies that enable provision of related health care services for opioid-dependent patients, targeting the more than 10 million Americans currently using opioids for treatment of chronic non-cancer pain. The Company intends to structure theare bringing innovative products and services offeredto market but lack the necessary capital or resources to fully realize their high-growth potential. Given the rapid advancements in science and technology, there are many early-stage life science companies that are approaching key value inflection points but lack the necessary managerial expertise, personnel, patents, funding or equipment to advance their efforts or to bring their medicines, services and technologies to market. Our strategy is to opportunistically fill those unmet needs, including by Vitality Healthtech, Inc. suchproviding funding and, equally important, to provide our strategic partners with the necessary resources and value-added support to help transform and improve their businesses.

Strategic partnerships may enable us to expand our network of researchers, clinicians, and medical professionals and provide us with an opportunity to allocate our cash, personnel, equipment, proprietary information and other resources into a diversified collection of assets that theystrengthen and complement our drug development initiatives. We will be federally-compliant, enabling accesstarget strategic partnerships that provide unique technological or human capital attributes that are well-positioned to patients located in all U.S. states. Expansion plans are being developed and the Company expects Vitality Healthtech, Inc. to operate onprovide us with a cashflow positive basis or better by 2020. The audited financial statements of Vitality Healthtech, Inc. will be filed publicly within 71 days after the date of the report of the acquisition on a Form 8-K, which was filed on October 26, 2018.more diversified cash flow profile that complements our capital-intensive drug development operations.

Results of Operations

Three Months Ended September 30, 20182019 and September 30, 20172018

Our net loss during the three months ended September 30, 20182019 was $1,220,797$1,227,450 compared to a net loss of $898,520$1,220,797 for the three months ended September 30, 2017. During2018. Included in net loss during the three months ended September 30, 2018, we generated $36,505 in revenue and $21,796 in gross profit,2019, our discontinued operations incurred a loss of $216,031, compared to $30,976a loss of $32,726 in revenue and $13,496 in gross profit for the 2017 period.Our revenue in each of the periods presented was earned from the sale of research diagnostic testing kits and chemicals.We expect such sales to continue at approximately the rate during the 2018 period. We had no revenue from continuing operations during either the 2019 or 2018 period.

During the three months ended September 30, 2018,2019, we incurred general and administrative expenses in the aggregate amount of $684,273$726,881 compared to $601,882$643,274 incurred during the three months ended September 30, 20172018 (an increase of $82,391)$83,607). General and administrative expenses generally include corporate overhead, salaries and other compensation costs, financial and administrative contracted services, marketing, consulting costs and travel expenses. A significant portion of these costs is related to the development of our organizational capabilities as a biotechnology company, including costs such as legal and advisory fees related to intellectual property development. The majority of the increase in general and administrative costs in the period relates to stock-based compensationlegal fees, most of which were related to the Private Investigation and Section 8(e) Examination, which increased to $250,790$290,523 in the period ending September 30, 2018,2019, as compared to $140,075$30,193 in the period ending September 30, 2017.2018.

In addition, during the three months ended September 30, 2018,2019, we incurred research and development costs of $505,564,$294,521, compared to $420,587$492,041 during the three months ended September 30, 2017 (an increase2018 (a decrease of $84,977.$197,520). This increasedecrease resulted from increased laboratory anddecreased consulting expenses during the 20182019 period.

Our discontinued operations incurred a loss of $216,031 during the three months ended September 30, 2019, compared to a loss of $32,726 incurred during the three months ended September 30, 2018 (an increase of $183,305). This increase was attributable to the losses incurred by the Company’s clinical operations in the 2019 period.

During the three months ended September 30, 2018, we incurred related party rent and other costs totaling $7,800 compared to $7,800 incurred during$7,800. We did not incur any related party rent in the three months ended September 30, 2017.

This resulted in a loss from operations of $1,175,841 during the three months ended September 30, 2018 compared to a loss from operations of $1,016,773 during the three months ended September 30, 2017.2019 period.

During the three months ended September 30, 2018,2019, we recorded total net other expenseincome in the amount of $44,956,$9,983, compared to total net other incomeexpense recorded during the three months ended September 30, 20172018 in the amount of $118,253.$44,956. During the three months ended September 30, 2018,2019, we recorded an expensea gain related to the change in fair value of derivatives of $44,956,$9,366, compared to a gainan expense of $118,253$44,956 during the 20172018 quarter. During the three months ended September 30, 2019, we also recorded other income of $617.

This resulted in a net loss of $1,227,450 during the three months ended September 30, 2019 compared to a net loss of $1,220,797 during the three months ended September 30, 2018 compared to a net loss of $898,520 during the three months ended September 30, 2017.2018.

The net loss during the three months ended September 30, 2018 compared to the net loss for the three months ended September 30, 2017 is attributable primarily to the higher stock-based compensation and research and development costs in the 2018 period.

Six Months Ended September 30, 20182019 and September 30, 20172018

Our loss during the six months ended September 30, 20182019 was $2,356,016$2,818,729 compared to a net loss of $2,004,873$2,356,016 for the six months ended September 30, 2017. During2018. Included in net loss during the six months ended September 30, 2018, we generated $62,833 in revenue and $22,376 in gross profit,2019, our discontinued operations incurred a loss of $666,058, compared to $58,019a loss of $88,421 in revenue and $20,053 in gross profit for the 2017 period.Our revenue in each2018 period as result of the periods presented was earnedshutting down of the Company’s clinical and test kit operations. We had no revenue from continuing operations during either the sale of research diagnostic testing kits and chemicals.We expect such sales to continue at approximately the rate during the2019 or 2018 period.

During the six months ended September 30, 2018,2019, we incurred general and administrative expenses in the aggregate amount of $1,207,457$1,587,100 compared to $1,275,671$1,123,975 incurred during the six months ended September 30, 2017 (a decrease2018 (an increase of $68,214)$463,125). General and administrative expenses generally include corporate overhead, salaries and other compensation costs, financial and administrative contracted services, marketing, consulting costs and travel expenses. A significant portion of these costs are related to the development of our organizational capabilities as a biotechnology company, including costs such as legal and advisory fees related to intellectual property development. The majority of the decreaseincrease in general and administrative costs in the period relates to professionallegal fees, most of which decreasedwere related to $129,760the Private Investigation and Section 8(e) Examination, which increased to $563,944 in the period ending September 30, 2018,2019, as compared to $315,929$113,135 in the period ending September 30, 20172018 offset by stock-based compensation costs which increased to $416,656$350,272 in the period ending September 30, 2018,2019, as compared to $323,468$997,431 in the period ending September 30, 2017.2018. 

In addition, during the six months ended September 30, 2018,2019, we incurred research and development costs of $1,092,986,$623,009, compared to $827,596$1,065,671 during the six months ended September 30, 2017 (an increase2018 (a decrease of $265,390)$442,662). This increasedecrease resulted from increaseddecreased laboratory and consulting expenses during the 20182019 period.

Our discontinued operations incurred a loss of $666,058 during the six months ended September 30, 2019, compared to a loss of $88,421 incurred during the six months ended September 30, 2018 (an increase of $577,637). This increase was attributable to the losses incurred by the Company’s clinical operations in the 2019 period.

During the six months ended September 30, 2018, we incurred related party rent and other costs totaling $15,600 compared to $15,300 incurred during$15,600. We did not incur any related party rent in the six months ended September 30, 2017.

This resulted in a loss from operations of $2,293,667 during the six months ended September 30, 2018 compared to a loss from operations of $2,098,514 during the six months ended September 30, 2017.2019 period.

During the six months ended September 30, 2018,2019, we recorded total net other expenseincome in the amount of $62,349,$57,438, compared to total net other incomeexpense recorded during the six months ended September 30, 20172018 in the amount of $93,641.$62,349. During the six months ended September 30, 2018,2019, we recorded an expensea gain related to the change in fair value of derivatives of $62,349,$33,914, compared to a gainan expense of $93,641$62,349 during the 2017 quarter.2018 period. This resulted in a net loss of $2,818,729 during the six months ended September 30, 2019 compared to a net loss of $2,356,016 during the six months ended September 30, 2018 compared to a net loss of $2,004,873 during the six months ended September 30, 2017.2018.

The net loss during the six months ended September 30, 20182019 compared to the net loss for the six months ended September 30, 20172018 is attributable primarily to the higher research and development costslegal fees offset by lower stock-based compensation costs in the 20182019 period.

Liquidity and Capital Resources

As of September 30, 2018, we had total current assets of $364,803, which was comprised mainly of cash of $336,680. Our total current liabilities as of September 30, 2018 were $787,864 and consisted of accounts payable and accrued liabilities of $314,673, accounts payable-related party of $7,800, subscriptions received of $250,000 and derivative liability of $215,391. The derivative liability is a non-cash item related to certain of our outstanding warrants as of September 30, 2018. As a result, on September 30, 2018, we had working capital deficit of $423,061.

We have not yet received significant revenues from sales of products or services, and have recurring losses from operations. We have incurred losses since inception resulting in stockholders’an accumulated deficit of $423,061$45,000,232 as of September 30, 2018,2019, and further losses are anticipated in the development of our business. These factors raise substantial doubt about

As of September 30, 2019, we had total current assets of $3,977,553. Our total current assets as of September 30, 2019 were comprised primarily of cash in the amount of $3,958,464. Our total current liabilities as of September 30, 2019 were $1,575,195, represented primarily by accounts payable and accrued liabilities of $1,157,914, and the June 2018 payment of $296,653 recorded as an advance in that period. On September 30, 2019, we had working capital of $2,402,358.

On November 7, 2018, the SEC suspended the trading of our ability to continue as a going concern. In addition, the Company’s independent registered public accounting firm, in its reportcommon stock. Our common stock resumed trading with limited liquidity on the Company’s March 31, 2018grey market on November 21, 2018. Grey market stocks are not traded or quoted on an exchange or inter-dealer quotation system, but are reported by broker-dealers to their self-regulatory organization (“SRO”) and the SRO distributes the trade data to market data vendors and financial statements, has raised substantial doubt aboutwebsites. Since grey market securities are not traded or quoted on an exchange or inter-dealer quotation system, investor’s bids and offers are not collected in a central spot, so market transparency is diminished and execution of orders is difficult. We are actively pursuing the Company’s ability to continue asresumption of ordinary course trading status on the OTCQB or a going concern within one year after the date that these financial statements are issued. Our financial statements included in this report have been prepared on a going concern basis, which assumes that we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. national exchange.

The continuation of our Company as a going concernbusiness is dependent upon our Companyus raising additional capital and eventually attaining and maintaining profitable operations and raising additional capital. The financial statements included in this report do not include any adjustments relating to the recovery and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should our Company discontinue operations.

We estimate that we will have sufficient funds to operate the business for the six months after September 30, 2018. These estimates could differ if we encounter unanticipated difficulties, in which case our current funds may not be sufficient to operate our business for that period. In addition, our estimates of the amount of cash necessary to operate our business may prove to be wrong, and we could spend our available financial resources much faster than we currently expect.

On October 19, 2018, the Company sold 5,666,666 shares of its common stock and warrants to purchase 5,666,666 shares of the Company’s common stock, resulting in net proceeds to the Company of approximately $8,350,000 after deducting fees and expenses of the offering. Additionally, on August 29, 2018, the Company issued and sold 333,334 shares of its common stock and warrants to purchase up to 166,667 shares of the Company’s common stock, at a price of $1.50 per unit, with an exercise price of $2.00 per share. Despite the amount of funds that we have raised, no assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company.

We do not have any firm commitments for future capital.capital and until the Company resumes ordinary course trading status on the OTCQB or a national exchange it will be difficult to obtain financing on commercially reasonable or acceptable terms. We do not presently have, nor do we expect in the near future to have, material revenue to fund our business from our operations, and we will need to obtain all of our necessary funding from external sources in the near term. Additional financing may be required to fund our planned operations in future periods, including research and development activities relating to our principal product candidate, seeking regulatory approval of that or any other product candidate we may choose to develop, commercializing any product candidate for which we are able to obtain regulatory approval or certification, seeking to license or acquire new assets or businesses, and maintaining our intellectual property rights and pursuing rights to new technologies. While at the present the Company is fully funded at least into 2020 to initiate and complete Phase 2 clinical trials of VBX-100, we do not presently have, nor do we expect in the near future to have, revenue to fund our business from our operations, and may need to obtain additional funding from external sources. We may seek to raise such funding from a variety of sources. If we raise additional funds by issuing equity or convertible debt securities, our existing stockholders’ ownership will be diluted, and obtaining commercial loans would increase our liabilities and future cash commitments. If we pursue capital through alternative sources, such as collaborations or other similar arrangements, we may be forced to relinquish rights to our proprietary technology or other intellectual property that could result in our receipt of only a portion of any revenue that may be generated from a partnered product or business. Further, we may not be able to obtain additional financing from any of these sources on commercially reasonable or acceptable terms when needed, or at all. If we cannot raise the money that we need in order to continue to operate and develop our business, we will be forced to delay, scale back or eliminate some or all of our operations. If any of these were to occur, there is a substantial risk that our business would fail and our stockholders could lose all of their investment.

Net Cash Used in Operating Activities

We have not generated positive cash flows from operating activities. For the six months ended September 30, 2018,2019, net cash used in operating activitiesactivities-continuing operations was $1,069,610$1,358,163 compared to net cash used in operating activitiesactivities-continuing operations of $1,332,280$974,967 for the six months ended September 30, 2017.2018. This increase was primarily attributable to an increase in personnel costs and a decrease in the fair value of vestedexpenses recorded for stock-based compensation related to stock options. Net cash used in operating activitiesactivities-continuing operations during the six months ended September 30, 2019 consisted primarily of a net loss of $2,818,729, offset by $350,272 related to stock-based compensation and an increase in accounts payable of $473,413. Net cash used in operating activities-continuing operations during the six months ended September 30, 2018 consisted primarily of a net loss of $2,356,016, offset by $997,431 related to stock-based compensation and changean increase in fair valueaccounts payable of derivative liability of $62,349. Net cash used in operating activities during$114,198. For the six months ended September 30, 2017 consisted primarily2019, net cash used in operating activities-discontinued operations was $666,114 compared to net cash used in operating activities-discontinued operations of a net loss of $2,004,873, offset$94,643 for the six months ended September 30, 2018. This difference was caused by $629,097 related to stock-based compensation.the losses incurred by the Company’s clinical operations.

Net Cash Used in Investing Activities

During the six months ended September 30, 20182019 and September 30, 2017,2018, no net cash was used in or provided by investing activities.

Net Cash Provided By Financing Activities

During the six months ended September 30, 2019, no net cash was used in or provided by financing activities. During the six months ended September 30, 2018, net cash provided by financing activities was $750,000, consisting of $500,000 in proceeds from the sale of common stock and warrants and $250,000 from subscriptions received. During the six months ended September 30, 2017, cash provided by financing activities was $995,001 in proceedsan advance from the sale of common stock and warrants.an unrelated party.

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 would be material to stockholders.

Critical Accounting Policies

Our financial statements and accompanying notes included in this report have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) applied on a consistent basis. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from the estimates made by management.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements included in this report:

Use of Estimates and Assumptions

The preparation of financial statements in conformity with U.S. GAAP 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 financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The more significant estimates and assumption by management include, among others, the fair value of shares issued for services, the fair value of options and warrants, and assumptions used in the valuation of our outstanding derivative liabilities.

Stock-Based CompensationShare-Based Payments

The Company periodically issues stock options and warrants, shares of common stock, and equity interests as share-based compensation to employees and non-employees in non-capital raising transactions, for services and for financing costs.non-employees. The Company accounts for its share-based payments under the guidance as set forth in the Share-Based Payment Topic of the Financial Accounting Standards Board (FASB”) Accounting Standards Codification (“ASC”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees officers, directors, and consultants, including employee stock options,in accordance with FASB ASC 718,Compensation – Stock Compensation. Stock-based compensation cost is measured at the grant date, based on the estimated fair values. The Company estimates the fair value of share-based payment awards to employees and directors on the date of grant using an option-pricing model, and the value of the portion of the award, that is ultimately expected to vestand is recognized as expense over the requiredrequisite service period inperiod.

In prior periods up to March 31, 2019, the Company’s statements of operations. The Company accountsaccounted for stock option and warrant grantsshare-based compensation issued and vesting to non-employees and consultants in accordance with the authoritative guidance whereasprovisions of FASB ASC 505-50,Equity - Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The final fair value of the stock compensationshare-based payment transaction is based upon the measurement date as determined at either (a) the date at whichperformance completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to that estimate to determine the cumulative expense recorded.

In June 2018, the FASB issued ASU No. 2018-07,Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The guidance was issued to simplify the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a performance commitment is reached, or (b)result, nonemployee share-based transactions will be measured by estimating the date at which the necessary performance to earnfair value of the equity instruments is complete. Stock-based compensation is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the timegrant date, taking into consideration the probability of grant and revised, as necessary, in subsequent periods if actual forfeitures differ from those estimates.satisfying performance conditions. The Company adopted ASU 2018-07 on April 1, 2019. The adoption of the standard did not have a material impact on our financial statements for the three months ended September 30, 2019 or the previously reported financial statements.

Derivative Financial Instruments

We evaluate our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, we use a probability weighted average Black-Scholes-Merton model to value the derivative instruments at inception and on subsequent valuation dates through the JuneSeptember 30, 20182019 reporting date. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Recent Accounting Pronouncements

Please refer to Footnote 1 of the accompanying financial statements for management’s discussion of recent accounting pronouncements

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act, of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer concluded that as of September 30, 2018,2019, these disclosure controls and procedures were not effective to ensure that the information required to be disclosed by our Company in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”),SEC, including that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosures ..disclosures. The conclusion that our disclosure controls and procedures were not effective was due to the presence of material weaknesses in our internal control over financial reporting, as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as previously disclosed in Item 9A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2018.2019. In light of the material weaknesses identified by management, we performed additional analyses and procedures in order to conclude that our condensed financial statements for the interim period ended September 30, 20182019 are fairly presented, in all material respects, in accordance with U.S. GAAP.

Description of Material Weaknesses and Management’s Remediation Initiatives

As of the date of this report, our remediation efforts continue related to each of the material weaknesses that we have identified in our internal control over financial reporting and additional time and resources will be required in order to fully address these material weaknesses. We have not been able to complete all actions necessary and test the remediated controls in a manner that would enable us to conclude that such controls are effective. We are committed to implementing the necessary controls to remediate the material weaknesses described below, as and when resources permit. These material weaknesses will not be considered remediated until (1) the new processes are designed, appropriately controlled and implemented for a sufficient period of time and (2) we have sufficient evidence that the new processes and related controls are operating effectively. The following is a list of the material weaknesses identified by management as of September 30, 2018:2019:

Insufficient segregation of duties in our finance and accounting functions due to limited personnel.personnel. We do not have sufficient segregation of duties within accounting functions. During the three monthsyear ended September 30, 2018,March 31, 2019, we internallyhad limited personnel that performed nearly all aspects of our financial reporting process, including, but not limited to, access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the financial statements. Due to the fact that these duties were often performed by the same person, there wasthis creates a lack of review over the financial reporting process that mightwould likely result in a failure to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures as filed with the SEC. ThisThese control deficiencies could result in a material misstatement to our interim or annual financial statements that would not be prevented or detected.

Lack of written documentation of the Company’s key internal control policies and procedures over financial reporting. The Company is required under Section 404 of the Sarbanes-Oxley Act to have written documentation of key internal controls over financial reporting.

Lack of documented policies and procedures for maintaining legal documents. The Company did not maintain effective controls over certain transactions during the fiscal year as they were not supported by fully executed legal documents.

Changes in Internal Control over Financial Reporting

We are currently considering adding additional independent members to our board of directors and adding accounting personnel to our staff in connection with the ongoing efforts to remediate the material weaknesses described above, but no specific progress has been made on these goals or other remediation efforts during the three months ended September 30, 2018.2019. As a result, other than the change described here and the ongoing remediation efforts identified above, there were no changes in our internal control over financial reporting during the three months ended September 30, 2018,2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Internal Control

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. In addition, projections of any evaluation of effectiveness to future periods are subject to risks that controls that are effective at one date may subsequently become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. The impact and outcome of litigation, if any, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are not currently a party to and our properties are not currently the subject of any material pending legal proceedings the adverse outcome of which, individually or in the aggregate, would be expected to have a material adverse effect on our financial position or results of operations.

Item 1A. Risk Factors

Please refer to the risks described under the heading “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on June 28, 2018.July 15, 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 6. Exhibits

*† Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EXHIBIT INDEX

*† Furnished herewith.