| Business Operations and Summary of Significant Accounting Policies | 1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Vitality Biopharma, Inc.
(the “Company”, “we”, “us” or “our”), was incorporated in the State of Nevada on
June 29, 2007. The Company’s fiscal year end is March 31. In 2015, the Company developed
a new class of cannabinoids known as cannabosides, which were discovered through application of the Company’s proprietary
enzymatic bioprocessing technologies originally developed for stevia sweeteners. In 2016, the Company received approvals from the
U.S. Drug Enforcement Administration (the “DEA”) and the State of California to initiate studies and manufacturing
scale-up at its research and development facilities in order to develop cannabosides. In May 2016, we received
shareholder and board approval for a name change to Vitality Biopharma, Inc., an exchange of one (1) share of the Company’s
common stock for each 10 shares of common stock outstanding or exercisable under any outstanding warrants or option agreements,
and an increase in the number of shares of authorized common stock from 525,000,000 to 1,000,000,000. These corporate changes became
effective on July 20, 2016. All share and per share information contained in these financial statements has been adjusted to reflect
these changes as if it had occurred in the earliest period presented. Going Concern The accompanying financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. As reflected in the accompanying financial statements, for the year ended March
31, 2018, the Company incurred a net loss of $4,308,997 and used cash in operating activities of $2,886,476. These factors raise
substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial
statements are issued. The financial statements do not include any adjustments that might be necessary should the Company be unable
to continue as a going concern. The ability to continue
as a going concern is dependent on the Company attaining and maintaining profitable operations in the future and/or raising additional
capital to meet its obligations and repay its liabilities arising from normal business operations when they come due. We estimate
as of March 31, 2018 we will have sufficient funds to operate the business for the next [six] months. We will require additional
financing to fund our planned future operations, including the continuation of our ongoing research and development efforts, seeking
to license or acquire new assets, and researching and developing any potential patents and any further intellectual property that
we may acquire. Further, these estimates could differ if we encounter unanticipated difficulties, in which case our current funds
may not be sufficient to operate our business for that period. In addition, our estimates of the amount of cash necessary to operate
our business may prove to be wrong, and we could spend our available financial resources much faster than we currently expect. We do not have any firm
commitments for future capital. Significant additional financing will be required to fund our planned principal operations in the
near term and in future periods, including research and development activities relating to stevia extract production, developing
and seeking regulatory approval for any of our stevia product candidates, 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 do not presently have, nor do we expect in the near future
to have, significant revenue to fund our business from our operations, and will need to obtain most of our necessary funding from
external sources in the near term. Since inception, the Company has experienced recurring operating losses and negative operating
cash flows, and we have funded our operations primarily through equity and debt financings, and we expect to continue to rely on
these sources of capital in the future. However, 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 and could result in our receipt of
only a portion of any revenue that may be generated from a partnered product or business. Further, these or other sources of capital
may not be available 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 develop our business, we will be forced to delay, scale back or eliminate some or all of our proposed
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. Use of Estimates The preparation of financial statements in
conformity with generally accepted accounting principles in the United States 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 assumptions by management include, among others, reserves for accounts receivable,
the fair value of equity instruments issued for services, and assumptions used in the valuation of derivative liabilities and the
valuation allowance for deferred tax assets. Revenues Revenue represents
amounts receivable for products and/or services that have been delivered in the normal course of business, title has passed, the
selling price is both fixed and determinable, and collectability is reasonably assured, all of which generally occurs upon shipment
of the Company’s product or delivery of the product to the destination specified by the customer. The Company determines
whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer,
which usually occurs when the Company ships the products. The Company regularly reviews its customers’ financial positions
to ensure that collectability is reasonably assured. Except for warranties, the Company has no post-sales obligations. Accounts Receivable The Company evaluates the collectability of
its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s
inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces
the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer
identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall
assessment of past due trade accounts receivable outstanding. The allowance for doubtful accounts and returns
and discounts is established through a provision reducing the carrying value of receivables. At March 31, 2018 and 2017, the allowance
for doubtful accounts and returns and discounts was $30,850 and $50,500, respectively. 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:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3 Unobservable inputs based on the Company’s assumptions. The fair value of the derivative liabilities
of $153,042 and $240,791 at March 31, 2018 and 2017, 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. 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 models to value the derivative instruments
at inception and on subsequent valuation dates through the March 31, 2018, 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. Income Taxes The Company follows the asset and liability
method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the estimated
tax consequences attributable to differences between the financial statement carrying values and their respective income tax basis
(temporary differences). The effect on deferred income tax assets and liabilities of a change in tax rates is recognized as income
(loss) in the period that includes the enactment date. Stock-Based Compensation The Company periodically issues stock options
and warrants to employees and non-employees in non-capital raising transactions, for services and for financing costs. The Company
accounts for 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, based on 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 vest is recognized as expense over
the required service period in the Company’s statements of operations. The Company accounts for stock option and warrant
grants issued and vesting to non-employees in accordance with the authoritative guidance whereas the value of the stock compensation
is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) the
date at which the necessary performance to earn 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 time of grant and revised,
as necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company periodically
issues unvested (“restricted”) shares of its common stock to employees as equity incentives. The Company’s restricted
stock vests upon the satisfaction of a recipient’s service condition, which is satisfied over a period 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 share of the Company’s shares at the date of grant and recognizes the value as compensation expense
ratably over the vesting period. 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. Shares
of restricted stock are included in the basic weighted average number of common shares outstanding from the time they vest. 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. Shares of restricted stock are included in the diluted weighted average number of common shares outstanding from
the date they are granted unless they are antidilutive. 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:
March 31,
2018 2017
Options 3,316,710 2,820,489
Warrants 1,164,422 372,421
Total 4,481,132 3,192,910 Patents and Patent Application Costs Although the Company believes
that its patents and underlying technology have continuing value, the amount of future benefits to be derived from the patents
is uncertain. Accordingly, patent costs are expensed as incurred. 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 May 2014, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers.
ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance
under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. Under ASU 2014-09,
revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects
the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires
disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU
2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The standard
can be adopted either retrospectively to each prior reporting period presented (full retrospective method), or retrospectively
with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up
transition method). The Company has assessed the impact adoption of this standard will have on its financial statements and related
disclosures. Based on the Company’s assessment, the adoption of this standard will not have a material impact on its revenue
recognition policies. The Company will adopt the provisions of this statement in the quarter beginning April 1, 2018, using the
modified retrospective approach. In February 2016, the FASB
issued ASU No. 2016-02, Leases. This update 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. ASU 2016-02 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. The Company is currently evaluating the impact of the adoption of ASU 2016-02
on its financial statements and related disclosures. In July 2017, the FASB
issued ASU 2017-11, Earnings Per Share (Topic 260) and Derivatives and Hedging (Topic 815) - Accounting for Certain Financial
Instruments with Down Round Features. 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. |
