accumulated deficit (see Note 3).

Financial Assets and Liabilities Measured at Fair Value

The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Financial assets recorded at fair value in the balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. Authoritative guidance provided by FASB defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:

The fair value of the derivative liabilities of $52,483 and $153,042 at December 31, 2018 and March 31, 2018, respectively, were valued using Level 2 inputs.

The carrying value of cash and accounts payable and accrued liabilities approximates their fair value because of the short maturity of these instruments. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.

As of September 30, 2019 and March 31, 2019, the Company’s balance sheet includes Level 3 liabilities comprised of the fair value of derivative liabilities of $1,796 and $35,710, respectively (see Note 5). These derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. The following table sets forth a summary of the changes in the estimated fair value of our derivative liabilities during the six-month periods ended September 30, 2019 and 2018:

Derivative Financial Instruments

The Company evaluates its 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, the Company uses a probability weighted average Black-Scholes-Merton modelsmodel to value the derivative instruments at inception and on subsequent valuation dates through the December 31, 2018,September 30, 2019 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.

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 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 a Black-Scholes-Merton 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 periodically issues unvested (“restricted”) shares of its common stock to employees as equity incentives.adopted ASU 2018-07 on April 1, 2019. The Company’s restricted stock vests upon the satisfaction of a recipient’s service condition, which is satisfied over a period of number of years. The restricted shares vest over certain period and remain subject to forfeiture if vesting conditions are not met. The Company values the shares based on the price per shareadoption of the Company’s shares atstandard did not have a material impact on our financial statements for the date of grant and recognizessix months ended September 30, 2019 or the value as compensation expense ratably over the vesting period.previously reported financial statements.

Basic and Diluted Loss Per Share

Basic loss per share is computed by dividing the net loss applicable to common stockholders by the weighted average number of outstanding common shares outstanding forduring the period, excluding unvested restricted common stock. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from the time they vest.period. Diluted loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Diluted loss per share excludes all potential common shares if their effect is anti-dilutive. The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive:

Research and Development

Research and development costs consist primarily of fees paid to consultants and outside service providers, patent fees and costs, and other expenses relating to the acquisition, design, development and testing of the Company’s treatments and product candidates. Research and development costs are expensed as incurred.

Segments

The Company operates in two reportable business segments. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. All financial information required by “Segment Reporting” can be found in Note 9 of the accompanying condensed consolidated financial statements.

Recent Accounting Pronouncements

In FebruaryJune 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02,Leases, which was subsequently amended in 2018 by ASU 2018-10, ASU 2018-11 and ASU 2018-20 (collectively, Topic 842). Topic 842 will require the recognition of a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, for all leases with terms longer than 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. Topic 842 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. Topic 842 allows for a cumulative-effect adjustment in the period the new lease standard is adopted and will not require restatement of prior periods. The Company plans to adopt Topic 842 on April 1, 2019. The Company is in the process of evaluating the impact of Topic 842 on the Company’s financial statements and disclosures, though the adoption is expected to result in a material increase in the assets and liabilities reflected on the Company’s consolidated balance sheets.

In July 2017, the FASB issued ASU 2017-11,2016-13,Earnings Per Share (Topic 260) and Derivatives and Hedging (Topic 815) - Accounting for CertainMeasurement of Credit Losses on Financial Instruments (Topic 326), which replaces the incurred-loss impairment methodology and requires immediate recognition of estimated credit losses expected to occur for most financial assets, including trade receivables. Credit losses on available-for-sale debt securities with Down Round Features. ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexedunrealized losses will be recognized as allowances for credit losses limited to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize theamount by which fair value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to bebelow amortized to earnings. The guidance incost. ASU 2017-112016-13 is effective for fiscal yearsthe Company beginning after December 15, 2018,January 1, 2020 and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach. The Company plans to adopt ASU 2017-11 on April 1, 2019. The adoption of ASU 2017-11 is not expected to have an impact on the Company’s financial statements and related disclosures because the conversion feature of the Company’s warrants have features other than down round provisions that require the current accounting treatment and classification.

In June 2018, the FASB issued ASU 2018-07,“Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” The ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Earlyearly adoption is permitted. The Company plans to adopt ASU 2017-11 on April 1, 2019. The adoptiondoes not believe the potential impact of ASU 2018-07 is not expected to have an impact on the Company’s financial statementsnew guidance and related disclosures.codification improvements will be material to its financial position, results of operations and cash flows.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

2. ACQUISITION OF SUMMIT HEALTHTECHDISCONTINUED OPERATIONS

OnIn October 22, 2018, the Company acquired Summit Healthtech, Inc. (renamed Vitality Healthtech, Inc.), a specialty healthcare clinic. In connection with the acquisition of Summit Healthtech, Inc., the Company issued 6,000,0001,450,000 shares of its common stock to Dr. Arif Karim, the former owner of the specialty healthcare clinic. Dr. Karim had entered into an employment agreement with Summit Healthtech, Inc. prior to the acquisition. In addition to the clinical operations of Summit Healthcare, Inc., the Company was engaged in the business of selling research diagnostic testing kits (such business, collectively with the clinical operations of Summit Healthcare, Inc., referred to in this Quarterly Report as, the “Company’s clinical and test kit operations”)

In May 2019 the Company decided to close the Company’s clinical and test kit operations. The Company’s clinical and test kit operations meet the discontinued operations criteria and are reported as such in all periods presented on the accompanying condensed consolidated financial statements. During the six months ended September 30, 2019, costs to close the Company’s clinical and test kit operations, primarily made up of severance and related benefits, totaled approximately $165,000, and are included in loss from discontinued operations. On October 30, 2019, we reached a settlement with Dr. Arif Karim, whereby the Company and Dr. Karim released all claims against each other, including any claims under the Executive Employment Agreement between Vitality Healthtech, Inc. and Dr. Karim dated October 12, 2018, and the Share Purchase Agreement by and among The Control Center, Inc., Dr. Karim and Vitality Healthtech, Inc. dated October 12, 2018. In exchange for the releases, the Company paid Dr. Karim $120,000, which is included in the costs to close the Company’s clinical and test kit operations, and the 1,450,000 shares of the Company’s common stock valued at $9,000,000, in exchange for all of the outstanding common stock of Summit Healthtech, Inc. (“Summit”). Summit was formedissued to develop treatments and specialty healthcare centers focused on the use of cannabinoid therapies as an alternative to opioid painkillers. Summit owns 49% of The Control Center, Inc. which it purchased from Dr. Reef Karim, the founder of The Control Center. The remaining 51% of The Control Center is in the name of Dr. Karim and will be assigned to Summit upon the earlier of (i) the successful filing of a change of ownership for The Control Center’s facility’s license with the California Department of Health Care Services or (ii) October 12, 2019. The accompanying consolidated financial statements include the accounts of Summit and The Control Center after the acquisition of Summit was completed given that the assignment of Dr. Karim’s interest in The Control Center to the Company is considered perfunctory. The Control Center is in the business of behavioral health and addiction medicine treatment. On October 22, 2018, Summit was renamed Vitality Healthtech, Inc.were cancelled. 

The Company accounted for the transaction as a business combination in accordance ASC 805 “Business Combinations”. The Company is in the process of performing an allocation of the purchase price paid for the assets acquired and the liabilities assumed with the assistance of an independent valuation firm.The fair values of the assets acquired, as set forth below, are considered provisional and subject to adjustment as additional information is obtained through the purchase price measurement period (a period of up to one year from the closing date). The provisional allocation of the purchase price is based on management’s preliminary estimates. Once management completes its analysis to finalize the purchase price allocation with assistance from a third-party valuation firm, it is reasonably possible that there could be changes to the preliminary values. The primary areas of the purchase price allocation that are not yet finalized relate to identifiable intangible assets and goodwill.

The following unaudited pro forma informationtable presents the combined resultssummarized components of loss from discontinued operations for the Company’s clinical and test kit operations:

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 ifa single lease component. Lease expense is recognized on a straight-line basis over the share exchange agreement with Summit had been completedlease term.

Under ASC 842, an operating lease right-of-use (“ROU”) asset and liability is recognized at commencement date based on April 1, 2017, the beginningpresent 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 comparable prior annual reporting period. These unaudited pro forma resultsCompany’s lease liabilities are presented for informationalas 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 only and areof this payment was not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurredspecified at the beginning oftime it was received, and the period presented, nor are they indicative of future results of operations: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.

3.5. 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 resultderivative instrument. In accordance with the FASB authoritative guidance, the fair value of the anti-dilution and fundamental transaction provisions, the Company determined that the warrants should 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 ninesix months ended December 31, 2018,September 30, 2019, the Company recorded a decrease in derivative liability of $100,559.$33,914. At December 31, 2018,September 30, 2019, the balance of the derivative liabilities was $52,483.$1,796.

At December 31, 2018September 30, 2019 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.

4. ADVANCE PAYABLE6. STOCK OPTIONS

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

5. STOCKHOLDERS’ EQUITY

Issuance of Common Stock and Warrants

On August 29, 2018,six months ended September 30, 2019, the Company sold 333,334 shares of its common stockgranted to directors and warrantsemployees options to purchase 166,667an aggregate of 3,250,000 shares of the Company’s common stock resulting in proceedswith exercise prices of $0.30 to $0.35 per share, that expire ten years from the Companydate of $500,000. The common stockgrant, and warrants were sold in units, consistingall have vesting periods 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.

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 $8,350,000 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 $3.00 per share.

On October 19, 2018, the Company also entered into a share exchange agreement with the shareholders of Summit (See Note 2) and issued 6,000,000 shares of the Company’s common stock, in exchange for all of the outstanding common stock of Summit.

Common stock issued to employees with vesting terms

The Company has issued shares of common stock to employees and directors that vest over time.24 months. The fair value of these stock awards iseach option award was estimated on the date of grant using the Black-Scholes-Merton option pricing model based on the market pricefollowing 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 Company’s common stock on the dates granted, and are amortized over vesting terms ranging up to three years.

During the nine months ended December 31, 2018, we recorded expense related to the fair value of stock awards that vested which amounted to an aggregate of $320,642. At December 31, 2018, the amount of unvested compensation related to these awards is approximately $33,000, and will be recorded as expense over the next three months.

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 allterm 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.

options and their vesting periods. The following table summarizes restricted common stock activity:

Common stock issued for services

During the nine months ended December 31, 2018, the Company issued a total of 205,000 shares of common stock to two consultants as payment for services and recorded expenses of $316,050 based on the fair value of the Company’s common stockoption grants to employees at the issuance date.

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

A summary of the Company’s stock option activity during the ninesix months ended December 31, 2018September 30, 2019 is as follows:

A summary of the Company’s stock options outstanding and exercisable as of December 31, 2018September 30, 2019 is as follows:

During the ninesix months ended December 31, 2018,September 30, 2019, we expensed total stock-based compensation related to vested stock options of $624,011,$325,272, and the remaining unamortized cost of the outstanding stock-based awards at December 31, 2018September 30, 2019 was approximately $570,000.$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 December 31, 2018,September 30, 2019, the 3,456,7106,546,710 outstanding stock options had anno intrinsic value of $250,000.value.

7.7. WARRANTS

At December 31, 2018,September 30, 2019, warrants to purchase common shares were outstanding as follows:

In August 2018 and October 2018, we issued warrants to purchase an aggregate of 5,833,333 shares of the Company’s common stock with exercise prices ranging from $2.00 to $3.00 per share (see Note 5). These warrants were cancelled in January 2019 (see Note 10).

At December 31, 2018,September 30, 2019, the 6,968,3361,135,003 outstanding warrants had no intrinsic value.

8. RELATED PARTY OBLIGATIONS8. COMMITMENTS AND CONTINGENCIES

In May 2017, the Company extended a lease with One World Ranches, which is jointly-owned by Dr. Avtar Dhillon, the Chairman of the Company’s Board of Directors, and his wife, to rent the space being used as the Company’s office and laboratory facility through May 1, 2020. Rent payments are $2,600 per month. Aggregate payments under the lease for the nine months ended December 31, 2018 and 2017 were $23,400 and $23,100, respectively.

9. SEGMENT INFORMATIONSEC Subpoena

ASC 280, “Segment Reporting” establishes standards for reporting information about operating segmentsOn August 19, 2016, we filed a resale registration statement on a basis consistentForm S-1 (“Form S-1”) with the Company’s internal organization structureSEC to register 2,650,000 shares of our common stock and 7,950,000 shares of our common stock issuable 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 Section 20(a) of the Securities Act and Section 21(a) of the Securities Exchange Act of 1934, as well as information about services categories, business segmentsamended (the “Exchange Act”) and major customers in financial statements.(ii) an examination under Section 8(e) of the Securities Act (a “Section 8(e) Examination”) with respect to this Form S-1. The Company has two reportable segmentsbeen cooperating fully with the staff of the Enforcement Division of the SEC in connection with these matters. On or about November 14, 2018, we were advised by the staff of the Enforcement Division that, are based on the following business units: Research & Development and Clinical Operations. In accordance withinformation the “Segment Reporting” Topicstaff had as of such date, it was terminating the ASC,Section 8(e) Examination but that the Company’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes.Private Investigation would remain open. The Company operates two reportable business segments:

The Company had no inter-segment sales for the periods presented. Summarized financial information concerning the Company’s reportable segments is shown as below:

By Categories

10. SUBSEQUENT EVENTS

In August 2018 and October 2018, the Company entered into securities purchase agreements with certain investors and issued a total of 6 million shares of common stock and warrantscontinues to purchase 5.8 million shares of the Company’s common stock for net proceeds of approximately $8.4 million (See Note 5). On January 18, 2019, the Company entered into an amendment to these securities purchase agreements. Pursuant to the amendment, the warrants to purchase the 5.8 million shares of the Company’s common stock were cancelled, and the investors were issued an additional 16,750,000 shares of the Company’s common stock for no additional consideration.  The fair value of the additional shares is estimated to be approximately $9.7 million, and will be recorded as a deemed dividend to the investors.cooperate in such investigation.

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.

In October 2018, we acquired and initiated a specialty health care business named Vitality Healthtech, Inc.,Our cannabosides are cannabinoid-glycoside prodrugs, which was founded and is led by a team of physicians and psychologists dedicated to use of cannabinoid therapies as an alternative to opiate painkillers. Vitality Healthtech, Inc. is a wholly-owned subsidiarywere discovered through application of the Company and the business is focused on the use of cannabinoids for opiate reduction.

Cannabosides are cannabinoid glycoside “prodrugs,” which meansCompany’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 prodrugsour strategic partners and shareholders.

Our corporate headquarters is located in Los Angeles, California. As of cannabinoidsNovember 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 have been studied extensively inprovides us with flexible and highly-experienced resources to advance our clinical trials worldwide, including 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 applications that seek to protect more broad claims on novel vanilloid glycoside compounds that target TRPV receptors for mediating pain relief, methods of use for TRPV1 agonists to effect neural repair, and based on findings in early 2017, for drug compositions and methods to use cannabinoids to treat gut dysbiosis and drug-resistantC.difficileinfections, which colonize the large intestine.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.

Cannaboside

Our proprietary glycosylation process, which results in adding one or more glucose molecules to compounds, may enable our new cannabosides to act as prodrugs may deliver a varietythat achieve targeted delivery of benefits over existingthe 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 therapies, including: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 shown 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, we have learned through initial animal studies that the binding of glucose and THC molecules restricts the release of THC into the body’s digestive system until the prodrug reaches the large 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.

VBX-100 is an oral cannaboside and a prodrug of THC, or dronabinol, which was first approved byWe are developing our THC-glycoside prodrugs for 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.

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.

unwanted side effects.

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 initiate a Phase 1 clinical trial in 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 a Phase 2 proof-of-concept clinical study in the second half of 2019, or immediately upon completion of the Phase 1 trial, 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.