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, 2020 filed on 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: our ability to continue operating as a going concern; general economic and financial market conditions; our ability to obtain additional financing as necessary; any adverse occurrence with respect to our business or; results of our research and development activities that are less positive than we expect; our ability to bring our intended products to market; market demand for our intended products; shifts in industry capacity; product development or other initiatives by our competitors; fluctuations in the availability of raw materials and costs associated with growing raw materials for our intended products; other factors beyond our control; and the other risks described under the heading "Risk Factors" in our Annual Report on Form 10-K filed with the SEC on June 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

Vitality 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, which we refer to as cannabosides. We conduct our operations using our own personnel and facilities with the support of third-party resources as necessary to advance our drug development programs.

Our 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 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 January 28, 2021, we employed three full-time employees, including one research professional working in our office and laboratory space in Rocklin, California. In 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.





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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, thereby 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 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 due 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 pre-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 pre-clinical development plan, which includes dose range finding studies, GLP toxicology studies, pharmacokinetic studies and other pre-clinical research, is anticipated to be completed during the 1st half of calendar year 2022, subject to the Company securing sufficient additional funding or entering into a strategic research and development partnership. After our satisfactory completion of all of the prerequisite pre-clinical in vitro and in 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 the above-referenced strategic partnership.





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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 significantly 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.





Results of Operations

Three Months Ended December 31, 2020 and December 31, 2019

Our net income during the three months ended December 31, 2020, was $692,950 compared to a net loss of $795,295 for the three months ended December 31, 2019. This change was primarily attributable to a gain from a settlement of a vendor dispute. Included in net loss during the three months ended December 31, 2019, was our loss from discontinued operations of $48,769. There was no such loss recorded in the corresponding 2020 period. We had no revenue from continuing operations during either the 2020 or 2019 period.

During the three months ended December 31, 2020, we incurred general and administrative expenses in the aggregate amount of $394,567 compared to $506,926 incurred during the three months ended December 31, 2019 (a decrease of $112,359). 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 decrease in general and administrative costs in the period is primarily attributable to a decrease in employee benefits expense of approximately $37,000, as well as a decrease in travel expenses of approximately $21,000.

In addition, during the three months ended December 31, 2020, we incurred research and development costs of $71,975, compared to $241,840 during the three months ended December 31, 2019 (a decrease of $169,865). This decrease resulted from a reduction in staff in the 2020 period and corresponding decrease in research and development activities.

During the three months ended December 31, 2020, we recorded total net other income in the amount of $1,159,492, compared to total net other income recorded during the three months ended December 31, 2019 in the amount of $2,240. During the three months ended December 31, 2020, we recorded a gain from a settlement of a vendor dispute in the amount of $1,062,405 and a gain related to the forgiveness of our PPP loan of $97,516.





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Nine Months Ended December 31, 2020 and December 31, 2019

Our net loss during the nine months ended December 31, 2020 was $520,220 compared to a net loss of $3,614,024 for the nine months ended December 31, 2019. The decrease in net loss of $3,093,804 during the 2020 period is attributable primarily to operating expenses reduced by $1,278,497, elimination of loss from discontinued operations of $714,827, gain on settlement of $1,062,405 and the gain related to the forgiveness of our PPP loan of $97,516. Included in net loss during the nine months ended December 31, 2019, was our loss from discontinued operations of $714,827. There was no loss from discontinued operations recorded in the 2020 period. We had no revenue from continuing operations during either the 2020 or 2019 period.

During the nine months ended December 31, 2020, we incurred general and administrative expenses in the aggregate amount of $1,342,110 compared to $2,094,026 incurred during the nine months ended December 31, 2019 (a decrease of $751,916). 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 decrease in general and administrative costs in the period is attributable to a decrease in legal fees, most of which were incurred in connection with the Private Investigation and Section 8(e) Examination, which decreased by approximately $500,000 from the previous nine-month period, as well as a decrease in wages of approximately $152,000 from the previous nine-month period.

In addition, during the nine months ended December 31, 2020, we incurred research and development costs of $338,268, compared to $864,849 during the nine months ended December 31, 2019 (a decrease of $526,581). This decrease resulted from a reduction in staff during the 2020 period and corresponding decrease in research and development activities.

Our discontinued operations incurred a loss of $714,827 during the nine months ended December 31, 2019. No loss from discontinued operations was incurred during the nine months ended December 31, 2020.

During the nine months ended December 31, 2020, we recorded total net other income in the amount of $1,160,158 compared to total net other income recorded during the nine months ended December 31, 2019 in the amount of $59,678. During the nine months ended December 31, 2020, we recorded a gain from a settlement of a vendor dispute in the amount of $1,062,405 and a gain related to the forgiveness of our PPP loan of $97,516.

Liquidity and Capital Resources

We have incurred losses since inception resulting in an accumulated deficit of $47,067,078 as of December 31, 2020, and further losses are anticipated in the development of our business.

As of December 31, 2020, we had total current assets of $1,454,666, comprised primarily of cash in the amount of $1,441,471. Our total current liabilities as of December 31, 2020 were $391,925, represented primarily by accounts payable and accrued liabilities of $72,078 and an advance of $296,653. As a result, on December 31, 2020, we had working capital of $1,062,741.

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.

In 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. The Company is continuing to work closely with DelMorgan in support of their retention.





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While we believe that our existing cash balances will be sufficient to fund our currently planned level of operations, we may require additional financing to fund our planned 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 nine months ended December 31, 2020, net cash used in operating activities-continuing operations was $1,047,742 compared to net cash used in operating activities-continuing operations of $2,144,458 for the nine months ended December 31, 2019. Net cash used in operating activities-continuing operations during the nine months ended December 31, 2020 consisted primarily of a net loss of $520,220, and a decrease in accounts payable of $178,045 offset by $349,546 related to stock-based compensation and gain on settlement of $612,405 net of the cash received. Net cash used in operating activities-continuing operations during the nine months ended December 31, 2019 consisted primarily of a net loss of $3,614,024, offset by $492,554 related to stock-based compensation and an increase in accounts payable of $292,521. For the nine months ended December 30, 2019, net cash used in operating activities-discontinued operations was $714,883. No cash was used in operating activities-discontinued operations for the nine months ended December 31, 2020. 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 nine months ended December 31, 2020 and December 31, 2019, no net cash was used in or provided by investing activities.

Net Cash Provided By Financing Activities

During the nine months ended December 31, 2020, net cash provided from financing activities was $96,988 from the issuance of a note payable. During the nine months ended December 31, 2019, no net cash was used in or provided by financing activities.

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.





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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 shares of common stock as share-based compensation to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on FASB ASC 718, Compensation - Stock Compensation (Topic 718) whereby the value of the award is measured on the date 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 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 recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.

Recent Accounting Pronouncements

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

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