The accompanying notes are an integral part of these condensed financial statements.

VITALITY BIOPHARMA, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)

THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

See accompanying notes to the condensed consolidated financial statements.

VITALITY BIOPHARMA, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

The fair value of the award,Company’s stock options and warrants are estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recognized as expense overrecorded based upon the requisite service period.

In prior periods up to March 31, 2019,value derived from the Company accounted for share-based compensation issued to non-employeesBlack-Scholes-Merton Option Pricing model and consultants in accordance with the provisions of FASB ASC 505-50,Equity - Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on actual experience. The assumptions used in 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 share-based payment transaction is determined at the performance completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to that estimate to determine the cumulativeBlack-Scholes-Merton Option Pricing model could materially affect compensation 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 result, nonemployee share-based transactions will be measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of 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 six months ended September 30, 2019 or the previously reported financial statements.recorded in future periods.

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 during the 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.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13,Credit Losses - Measurement of Credit Losses on Financial Instruments (Topic 326), which replaces the incurred-loss impairment methodology and (“ASC 326”). ASU 2016-13 requires immediate recognition of estimatedentities to use a forward-looking approach based on current expected credit losses expected(“CECL”) to occur for mostestimate credit losses on certain types of financial assets,instruments, including trade receivables. Credit losses on available-for-sale debt securities with unrealized losses will be recognized asThis may result in the earlier recognition of allowances for credit losses limited to the amount by which fair value is below amortized cost.losses. ASU 2016-13 is effective for the Company beginning JanuaryApril 1, 20202023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.

In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective January 1, 2024, for the Company. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements, but currently does not believe ASU 2020-06 will have a significant impact on the Company’s accounting for its convertible debt instruments. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.

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. DISCONTINUED OPERATIONSOPERATING LEASE

In October 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 1,450,000 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 closeAt September 30, 2020, 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 amongwholly-owned subsidiary, 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 issued to Dr. Karim were cancelled. 

The following table presents the summarized components of loss from discontinued operations for the Company’s clinical and test kit operations:

3. OPERATING LEASE

The Company(“TCC”) has an operating lease agreement for its office space withthat began in December 2012, which was amended in December 2015 and December 2019, and expires February 28, 2021. In addition, at September 30, 2020, TCC has a remainingsublease agreement in place for the office space that began in September 2019 and expires February 28, 2021. TCC remains the primary obligor on the office space lease term of 20 months. agreement. Sublease income was not significant during the three and six months ended September 30, 2020 and 2019.

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 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:follows (in thousands):

Lease expenses were $46,388$48,485 and $7,800$94,369 during the three and six months ended September 30, 20192020, respectively.

3. NOTE PAYABLE

On May 6, 2020, the Company was granted a loan (the “PPP loan”) from U.S. Bank for $96,988, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act.

The PPP loan matures on May 6, 2022, bears interest at a rate of 1% per annum, with the first six months of interest deferred, is payable monthly commencing December 2020, and is unsecured and guaranteed by the U.S. Small Business Administration. The loan term may be extended to May 6, 2025, if mutually agreed to by the Company and lender. The Company applied ASC 470, Debt, to account for the PPP loan. The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties. Funds from the PPP loan may only be used for qualifying expenses as described in the CARES Act, including qualifying payroll costs, qualifying group health care benefits, qualifying rent and debt obligations, and qualifying utilities. The Company intends to use the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses. The Company intends to apply for forgiveness of the PPP loan with respect to these qualifying expenses, however, we cannot provide assurance that such forgiveness of any portion of the PPP loan will occur. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. The terms of the PPP loan provide for customary events of default including, among other things, payment defaults and breach of representations and warranties. The Company was in compliance with the terms of the PPP loan as of September 30, 2018, respectively.2020.

4. ADVANCE

In July 2018, we received a payment from a third party in the amount of $296,653. The purposeTo date, the Company has not confirmed the nature 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.payment. We have recorded this payment as an advance and at September 30, 2019,2020 and March 31, 2020, 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. As such the Company determined that the warrant fundamental transaction provision and exercise price created a derivative instrument. In accordance with the FASB authoritative guidance, the fair value of the warrants was recognized as a derivative 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, 2019, the balance of the derivative liabilities was $35,710. During the six months ended September 30, 2019, the Company recorded a decrease in derivative liability of $33,914. At September 30, 2019, the balance of the derivative liabilities was $1,796.

At September 30, 2019 and March 31, 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.

6. STOCK OPTIONS

During the six months ended September 30, 2019, the Company granted to directors and employees options to purchase an aggregate of 3,250,000 shares 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 their grant dates was approximately $1,026,000.

A summary of the Company’s stock option activity during the six months ended September 30, 20192020 is as follows:

A summary of the Company’s stock options outstanding and exercisable as of September 30, 20192020 is as follows:

During the six months ended September 30, 2019,2020, we expensed total stock-based compensation related to stock options of $325,272,$237,237, and the remaining unamortized cost of the outstanding stock-based awards at September 30, 20192020 was approximately $926,000.$271,000. The remaining unamortized cost will be amortized on a straight-line basis over a weighted average remaining vesting period of one year. At September 30, 2019,2020, the 6,546,7106,030,044 outstanding stock options had no intrinsic value.

7.6. WARRANTS

A summary of warrants to purchase common stock during the six months ended September 30, 2020 is as follows:

At September 30, 2019, warrants to purchase common shares were2020, the 613,335 outstanding as follows:

At September 30, 2019, the 1,135,003 outstandingstock warrants had no intrinsic value.

7. DISCONTINUED OPERATIONS

In October 2018, the Company acquired Summit Healthtech, Inc. (renamed Vitality Healthtech, Inc.), a specialty healthcare clinic. In addition to Summit Healthcare, the Company sold research diagnostic testing kits (collectively, the Company’s clinical and test kit operations). In May 2019 the Company decided to close its clinical and test kit operations. The 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.

The following table presents the summarized components of loss from discontinued operations for the clinical and test kit operations:

8. COMMITMENTS AND CONTINGENCIES

SEC SubpoenaInvestigation

On August 19, 2016, we filed a resale registration statement on Form S-1 (“Form S-1”) with the SEC 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 aboutWe received a letter from the Washington D.C. office of the SEC dated December 10, 2016, we were advisedstating that the staff of 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 amended (the “Exchange Act”) and (ii) an examination under Section 8(e) of the Securities Act (a “Section 8(e) Examination”)examination with respect to this Form S-1. The Company has been cooperating fully withS-1 and that the Division of Corporate Finance would not take any further action on the Form S-1 while the examination was pending. On May 12, 2020, our outside legal counsel received a letter from the staff of the SEC’s Enforcement Division stating that it has concluded the investigation as to the Company, and that it did not intend to recommend an enforcement action by the SEC against the Company. We may be required to reimburse certain former officers and directors for legal fees related to this matter, but at September 30, 2020, management determined that the liability for those fees is not probable and we could not reasonably estimate those fees.

9. SUBSEQUENT EVENTS

In October 2020, we received $34,000 from the subtenant of the SEC in connection with these matters. On or about November 14, 2018, we were advisedoffice space leased by the staffour subsidiary, The Control Center, Inc. This payment was recorded as a reduction of the Enforcement Division that, based on the information the staff had as of such date, it was terminating the Section 8(e) Examination but that the Private Investigation would remain open. The Company continues to cooperate in such investigation.rent expense and accounts payable.

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, 20192020 filed on July 15, 2019,June 29, 2020, 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 ability to have freely-traded stock;intended products; poor growing conditions for the stevia plant; 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 July 15, 2019.

June 29, 2020.

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

We areVitality Biopharma is a company focused on the advancement of pharmaceuticals and innovative technologies that improve the lives of patients. We seek to achieve this objective through the development of novel cannabinoid pharmaceutical prodrugs, knownwhich we refer to as cannabosides. We will conduct our operations using our own personnel and facilities through subsidiaries establishedwith the support of third-party resources as necessary 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 capital or equipment or personnel resources, or other arrangements designed to support the operations ofadvance our Company.drug development programs.

Our cannabosides are cannabinoid-glycoside prodrugs, which we refer to as cannabosides, were discovered through application of the Company’s proprietary enzymatic bioprocessing technologies, that are converted within the body after administration from an inactive molecule into a pharmacologically active drug. Currently, the Company has produced more than 25 novel cannabosides, including glycosylated tetrahydrocannabinol (THC), cannabidiol (CBD), cannabidivarin (CBDV) and cannabinol (CBN), that are covered by worldwide patent applications in the United States and various other countries for composition of matter, method of production and method of use.

Our corporate headquarters is located in Los Angeles, California. As of November 13, 2019,12, 2020, we employed sixthree full-time employees, including fourone research professionalsprofessional working in our office and laboratory space in Yuba City,Rocklin, California. We alsoIn the past, we have engaged the services of outside 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 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 lesseningthereby avoiding the psychoactive and intoxicating properties that hinder the broader pharmaceutical use of THC.

We are developing our THC-glycoside prodrugs for the treatment of gastrointestinal diseases, including inflammatory bowel disease (IBD) and irritable bowel syndrome (IBS) because of the targeted release described previously.above. IBD is a 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 and may require surgery to remove affected areas of the intestine. Two major forms of the disease are Crohn’s disease, which can affect any part of the 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 disorder that commonly affects the large intestine and is characterized by abdominal cramping, diarrhea, constipation, and pain. Currently, patients suffering from IBD are frequently prescribed anti-inflammatory drugs such as steroids, biologics and immunosuppressants, and patients suffering from IBS are prescribed antibiotics, antidepressants and gastrointestinal motility compounds, all of which often result in unwanted side effects.

Our most promising THC-glycoside (VBX-100) is being developed as an oral prodrug for the treatment of IBD and IBS. VBX-100 was selected from our THC-glycoside portfolio fordue to its compatibility with commercial production techniques and the optimal prodrug delivery profile that maximizes intestinal anti-inflammatory properties while minimizing psychoactive or intoxicating effects. Initial preclinicalpre-clinical 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 preclinicalpre-clinical development plan, which includes dose range finding studies, GLP toxicology studies, pharmacokinetic studies and other preclinicalpre-clinical research, is anticipated to be completed during the 2^nd half of calendar year 2020,2021, 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.partnership. After our satisfactory completion of all of the prerequisite preclinicalpre-clinical in 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 trial, subject to the Company securing sufficient additional funding or entering into athe above-referenced strategic partnership described above.partnership.

In addition to our research and development activities related to our THC-glycoside compounds, we are expanding and diversifying 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 targeted and concentrated delivery of CBD in the gastrointestinal tract. Currently we are evaluating the optimal CBD-glycoside delivery mechanism, which may include an aqueous drink formulation since our glycosylation process greatlysignificantly improves the water solubility of the CBD molecule.

Enzymatic Processing Methods

The Company originally developed its proprietary enzymatic 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 CBD. 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 are bringing innovative products and services to 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 providing 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 strengthen and complement our drug development initiatives. We will target strategic partnerships that provide unique technological or human capital attributes that are well-positioned to provide us with a more diversified cash flow profile that complements our capital-intensive drug development operations.

Results of Operations

Three Months Ended September 30, 20192020 and September 30, 20182019

Our net loss during the three months ended September 30, 20192020 was $1,227,450$472,932 compared to a net loss of $1,220,797$1,227,450 for the three months ended September 30, 2018.2019. Included in net loss during the three months ended September 30, 2019, was our loss from discontinued operations incurred aof $216,031. There was no such loss of $216,031, compared to a loss of $32,726recorded in the 2018corresponding 2020 period. We had no revenue from continuing operations during either the 20192020 or 20182019 period.

During the three months ended September 30, 2019,2020, we incurred general and administrative expenses in the aggregate amount of $726,881$374,290 compared to $643,274$726,881 incurred during the three months ended September 30, 2018 (an increase2019 (a decrease of $83,607)$352,591). General and administrative expenses generally include corporate overhead, salaries and other compensation costs, financial and administrative contracted services, marketing, consulting costs and travel expenses. The majority of the increasedecrease in general and administrative costs in the period relates to legal fees, most of which were related to the Private Investigation and Section 8(e) Examination, which increaseddecreased to $40,828 in the period ending September 30, 2020, as compared to $290,523 in the period ending September 30, 2019, as compared to $30,193 in the period ending September 30, 2018.2019.

In addition, during the three months ended September 30, 2019,2020, we incurred research and development costs of $294,521,$98,829, compared to $492,041$294,521 during the three months ended September 30, 20182019 (a decrease of $197,520)$195,692). This decrease resulted from decreased consulting expenses duringa reduction in staff in the 20192020 period.

Our discontinued operations incurred a loss of $216,031 during the three months ended September 30, 2019, compared to a2019. No loss of $32,726from discontinued operations was 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. We did not incur any related party rent in the 2019 period.2020.

During the three months ended September 30, 2019,2020, we recorded total net other income in the amount of $9,983,$187, compared to total net other expenseincome recorded during the three months ended September 30, 20182019 in the amount of $44,956.$9,983. During the three months ended September 30, 2019, we recorded a gain related to the change in fair value of derivatives of $9,366, compared to an expense of $44,956$0 during the 20182020 quarter. During

This resulted in a net loss of $472,932 during the three months ended September 30, 2019, we also recorded other income of $617.

This resulted in2020 compared to 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, 2018.2019.

Six Months Ended September 30, 20192020 and September 30, 20182019

Our net loss during the six months ended September 30, 20192020 was $2,818,729$1,213,170 compared to a net loss of $2,356,016$2,818,729 for the six months ended September 30, 2018.2019. Included in net loss during the six months ended September 30, 2019, was our loss from discontinued operations incurred aof $666,058. There was no loss of $666,058, compared to a loss of $88,421from discontinued operations recorded in the 2018 period as result of the shutting down of the Company’s clinical and test kit operations.2020 period. We had no revenue from continuing operations during either the 2020 or 2019 or 2018 period.

During the six months ended September 30, 2019,2020, we incurred general and administrative expenses in the aggregate amount of $1,587,100$947,543 compared to $1,123,975$1,587,100 incurred during the six months ended September 30, 2018 (an increase2019 (a decrease of $463,125)$639,557). General and administrative expenses generally include corporate overhead, salaries and other compensation costs, financial and administrative contracted services, marketing, consulting costs and travel expenses. The majority of the increasedecrease in general and administrative costs in the period relates to legal fees, most of which were related to the Private Investigation and Section 8(e) Examination, which increaseddecreased to $80,585 in the period ending September 30, 2020, as compared to $563,944 in the period ending September 30, 2019, as comparedwell as a decrease in stock-based compensation costs which decreased to $113,135$237,237 in the period ending September 30, 2018 offset by stock-based compensation costs which increased2020, as compared to $350,272 in the period ending September 30, 2019, as compared to $997,431 in the period ending September 30, 2018. 

2019.

In addition, during the six months ended September 30, 2019,2020, we incurred research and development costs of $623,009,$266,293, compared to $1,065,671$623,009 during the six months ended September 30, 20182019 (a decrease of $442,662)$356,716). This decrease resulted from decreased laboratory and consulting expensesa reduction in staff during the 20192020 period.

Our discontinued operations incurred a loss of $666,058 during the six months ended September 30, 2019, compared to a2019. No loss of $88,421from discontinued operations was 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.2020.

During the six months ended September 30, 2018, we incurred related party rent and other costs totaling $15,600. We did not incur any related party rent in the 2019 period.

During the six months ended September 30, 2019,2020, we recorded total net other income in the amount of $57,438,$666, compared to total net other expenseincome recorded during the six months ended September 30, 20182019 in the amount of $62,349.$57,438. During the six months ended September 30, 2019, we recorded a gain related to the change in fair value of derivatives of $33,914, compared to an expense of $62,349$0 during the 2018 period. This resultedcomparable period 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, 2018.2020.

The net loss during the six months ended September 30, 20192020 compared to the net loss for the six months ended September 30, 20182019 is attributable primarily to the higherlower legal fees, offset by lower stock-based compensation costs and a reduction in staff in the 20192020 period.

Liquidity and Capital Resources

We have incurred losses since inception resulting in an accumulated deficit of $45,000,232$47,760,028 as of September 30, 2019,2020, and further losses are anticipated in the development of our business.

As of September 30, 2019,2020, we had total current assets of $3,977,553.$1,367,635. Our total current assets as of September 30, 20192020 were comprised primarily of cash in the amount of $3,958,464.$1,354,440. Our total current liabilities as of September 30, 20192020 were $1,575,195,$1,110,752, represented primarily by accounts payable and accrued liabilities of $1,157,914,$702,202 and the June 2018 payment of $296,653 recorded as an advance in that period. Onof $296,653. As a result, on September 30, 2019,2020, we had a working capital of $2,402,358.$256,883.

On November 7, 2018, the SEC suspended the trading of our common stock. Our common stock resumed trading with limited liquidity on the grey 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 websites. 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 resumption of ordinary course trading status on the OTCQB or a national exchange.

The continuationIn September 2020, we retained DelMorgan & Co., an internationally recognized investment banking firm, to advise us on our strategic alternatives, including potential financings, asset divestitures or strategic partnerships.

While we believe that our existing cash balances will be sufficient to fund our currently planned level of operations and investment activity, we may require additional financing to fund our business is dependent upon us raising additional capital and eventually attaining and maintaining profitableplanned future operations. We do not have any firm commitments for future 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. 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, 2019,2020, net cash used in operating activities-continuing operations was $1,358,163$1,134,773 compared to net cash used in operating activities-continuing operations of $974,967$1,358,163 for the six months ended September 30, 2018.2019. This increasedecrease was primarily attributable to an increasea decrease in personnel costs andaccounts payable, partially offset by a decrease in the expenses recorded for stock-based compensation related to stock options. Net cash used in operating activities-continuing operations during the six months ended September 30, 2020 consisted primarily of a net loss of $1,213,170, and a decrease in accounts payable of $160,326 offset by $237,237 related to stock-based compensation. Net cash used in operating activities-continuing operations during the six months ended September 30, 2019 consisted primarily of a net loss of $2,818,729,$2,152,671, 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 an increase in accounts payable of $114,198. For the six months ended September 30, 2019, net cash used in operating activities-discontinued operations was $666,114 compared to net$666,114. No cash was used in operating activities-discontinued operations of $94,643 for the six months ended September 30, 2018. This difference was caused by2020. The losses incurred in the 2019 period were attributed to the losses incurred by the Company’s clinical operations.

Net Cash Used in Investing Activities

During the six months ended September 30, 20192020 and September 30, 2018,2019, no net cash was used in or provided by investing activities.

Net Cash Provided By Financing Activities

During the six months ended September 30, 2020 net cash provided from financing activities was $96,988, from the issuance of a note payable. 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 an advance from 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.

Share-Based Payments

The Company periodically issues stock options, warrants, and warrants, shares of common stock and equity interests as share-based compensation to employees and non-employees.non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for its share-based compensation to employees in accordance withsuch grants issued and vesting based on FASB ASC 718,Compensation – Stock Compensation (Topic 718). Stock-based compensation cost whereby the value of the award is measured at the grant date, based on the estimateddate of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered.

The fair value of the award,Company’s stock options and warrants are estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recognized as expense overrecorded based upon the requisite service period.

In prior periods up to March 31, 2019,value derived from the Company accounted for share-based compensation issued to non-employeesBlack-Scholes-Merton Option Pricing model and consultants in accordance with the provisions 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.actual experience. The final fair value of the share-based payment transaction is determined at the performance 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 result, nonemployee share-based transactions will be measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of 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 changesassumptions used in the fair value reportedBlack-Scholes-Merton Option Pricing model could materially affect compensation expense recorded 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 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. 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.future periods.

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 ourWe have established disclosure controls and procedures as such term is defined in Rule 13a-15(e) under 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, 2019, these disclosure controls and procedures were not effectiveare designed to ensure that the information required to be disclosed byin our Company in reports we filefiled or submitsubmitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, includingand that such information relating to the Company is accumulated and communicated to our management, including our principal executive officer and our principal financial officer,officers, as appropriate to allow timely decisions regarding required disclosures. The conclusiondisclosure. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2020, and have concluded 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, 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, 2019 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, 2019:

Insufficient segregation of duties in our finance and accounting functions due to limited personnel. We do not have sufficient segregation of duties within accounting functions. During the year ended March 31, 2019, we had 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, this creates a lack of review over the financial reporting process that would 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. These 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.2020.

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, 2019. As a result, other than the ongoing remediation efforts identified above, thereThere were no changes in our internal control over financial reporting during the three monthsquarter ended September 30, 2019,2020, that havehas materially affected, or areis 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 July 15, 2019.June 29, 2020.

COVID-19 Considerations

The global outbreak of COVID-19 has led to significant disruptions in the global economy, including the curtailment of activities by businesses and consumers in much of the world as governments and others seek to limit the spread of the disease. The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration and severity of the outbreak, the length of restrictions and business closures imposed by domestic and foreign governments, the impact on capital and financial markets, all of which are highly uncertain and cannot be predicted. In the quarter ended September 30, 2020, the COVID-19 pandemic did not have a material net impact on our operating results. We have also not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic. While it is not possible at this time to estimate the full impact that COVID-19 will have on our business, restrictions resulting from COVID-19 on general economic conditions could, among other things, impair our ability to raise capital when needed. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.

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.