| 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. 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. Currently, we do not have any commercial products and have not yet generated any revenues from
our cannabinoid prodrug pharmaceuticals. In October 2018, the Company
acquired Summit Healthtech, Inc., now known as Vitality Healthtech, Inc. and its subsidiary The Control Center, Inc. (collectively,
“Summit Healthtech”). Summit Healthtech was formed to establish specialty healthcare clinics focused on treating patients
suffering from addiction and dependency issues. In May 2019 the Company decided to close Summit Healthtech due to poor financial
and operating performance. Summit Healthtech ceased all operations and closed on June 14, 2019 (See Note 2). Liquidity We are currently engaged
in the development of cannabinoid prodrug pharmaceuticals, we do not have any commercial products, and have not yet generated significant
revenues from sales of products or services. As reflected in the accompanying financial statements, during the year ended March
31, 2019, the Company incurred a net loss of $13,121,567 and used $3,665,094 of cash in our operating activities. During the year
ended March 31, 2019, the Company sold a total of 6,000,000 units of common stock and warrants at a purchase price of $1.50 per
unit, resulting in net proceeds to the Company of $8,850,000 after deducting fees and expenses of the offering. As of March 31,
2019, we had $5,982,741 of cash on hand, stockholders’ equity of $5,021,076 and had working capital of $4,998,414. Our total expenditures
for the fiscal year ending March 31, 2020, are expected to be approximately $4,900,000, which is comprised of approximately $3,400,000
of research and development and general operating expenses, and approximately $1,500,000 of strategic partnership investments.
Given that we have discretion over the amount of cash that we will invest in any strategic partnership or investment and the funds
we had available on March 31, 2019, we believe that we have sufficient capital to fund our anticipated operating expenses and investment
activity for at least one year from the date that the financial statements are issued. 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 planned future operations. Further, these estimates could differ if we encounter unanticipated
difficulties, or if our estimates of the amount of cash necessary to operate our business prove to be wrong, and we use our available
financial resources faster than we currently expect. No assurance can be given that any future financing, if needed, will be available
or, if available, that it will be on terms that are satisfactory to the Company. Principles of Consolidation The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary, Vitality Healthtech, Inc. Intercompany balances
and transactions have been eliminated in consolidation. 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, estimates inherent
in recording purchase price allocation, 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 Prior to April 1, 2018,
the Company recognized its revenue in accordance with Accounting Standards Codification (ASC) 605, Revenue Recognition Effective
April 1, 2018, the Company adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update
(“ASU”) No. 2014-09, Revenue from Contracts with Customers The
Company’s revenue is comprised of the following:
● Pharmaceutical operations - Revenue from products, generally from the sale of diagnostic testing kits and chemicals are recognized when the performance obligation of delivering the product is completed, which usually occurs when the Company ships the products. Revenue from the sale of these products was $107,369 and $102,419 during the years ended March 31, 2019 and 2018, respectively.
● Clinical Operations - Revenue generated from fees for outpatient counselling and services are recognized when patients receive the service. Our contracts with patients generally cover periods ranging from one week to four weeks. Revenue from these services was $150,919 during the year ended March 31, 2019. There were no such revenues during the year ended March 31, 2018. Cash and cash equivalents The Company considers all
highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents.
From time to time, the Company’s cash account balances exceed the balances as covered by the Federal Deposit Insurance System.
The Company has never suffered a loss due to such excess balances. 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,
2019 and 2018, the allowance for doubtful accounts and returns and discounts was $30,850 and $30,850, respectively. Business Combinations The Company accounts for
its business combinations using the purchase method of accounting where the cost is allocated to the underlying net tangible and
intangible assets acquired, based on their respective fair values. The excess of the purchase price over the estimated fair values
of the net assets acquired is recorded as goodwill. Identifiable assets acquired, liabilities assumed and any noncontrolling interest
in the acquiree are recognized and measured as of the acquisition date at fair value. Additionally, contingent consideration, if
any, is recorded at fair value on the acquisition date and classified as a liability. Goodwill is recognized to the extent by which
the aggregate of the acquisition-date fair value of the consideration transferred and any noncontrolling interest in the acquiree
exceeds the recognized basis of the identifiable assets acquired, net of assumed liabilities. Determining the fair value of assets
acquired, liabilities assumed and noncontrolling interests requires management’s judgment and often involves the use of significant
estimates and assumptions. Goodwill and intangible assets The Company follows ASC
350 in accounting for intangible assets, which requires impairment losses to be recorded when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by the assets are less than the assets’ carrying amounts. Goodwill is the excess
of cost of an acquired entity over the fair value of amounts assigned to assets acquired and liabilities assumed in a business
combination. Under the guidance of ASC 350, goodwill is not amortized, rather it is tested for impairment annually, and will be
tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may
be impaired. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets
exceeds the estimated fair value of the reporting unit and would be measured as the excess carrying value of goodwill over the
derived fair value of goodwill. For the year ended March
31, 2019, the Company recorded impairment of goodwill and intangible assets of $7,550,000 (See Note 2). For the year ended March
31, 2018, the Company did not record any impairment of goodwill and intangible assets. 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 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 March 31, 2019 and
March 31, 2018, the Company’s balance sheet includes Level 3 liabilities comprised of the fair value of embedded derivative
liabilities of $35,710 and $153,042, respectively (see Note 3). These embedded 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 embedded derivative
during the years ended March 31, 2019 and 2018:
Year ended March 31, 2019
Year ended March 31, 2018
Fair value at beginning of period $ 153,042 $ 240,791
Net change in the fair value of derivative liabilities (117,332 ) (87,749 )
Fair value at end of period $ 35,710 $ 153,042 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 model to
value the derivative instruments at inception and on subsequent valuation dates through the March 31, 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. 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 a 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,
2019 2018
Options 3,456,710 3,316,710
Warrants 1,135,003 1,164,422
Total 4,591,713 4,481,132 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. Segments As of March 31, 2019, the
Company operated 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 11 of the accompanying consolidated financial statements. Concentrations For the fiscal year ended
March 31, 2019, 14%, 11% and 10% of revenue were generated from our three largest customers. For the fiscal year ended March 31,
2018, 10% of revenue was generated from one customer. Recent Accounting Pronouncements In February 2016, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases 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. In June 2018, the FASB
issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to nonemployee share-based payment
accounting Compensation – Stock Compensation 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. |
