BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Impairment of Long-Lived AssetsNOTE 2 SIGNIFICANT ACCOUNTING POLICIES (continued)

The Company assess the impairment of long-lived assets on an ongoing basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider that could trigger an impairment review include the following:

Recoverability of assets that will continue to be used in our operations is measured by comparing the carrying value to the future net undiscounted cash flows expected to be generated by the asset or asset group. Future undiscounted cash flows include estimates of future revenues, driven by market growth rates, and estimated future costs. There were no events during the reporting periods that were deemed to be a triggering event that would require an impairment assessment.

Income Taxes

The Company accounts for income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change is effective. Tax benefits are recognized when it is probable that the deduction will be sustained. A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain. As of June 30, 2020, and March 31, 2020, the Company recorded a valuation allowance to the full extent of our net deferred tax assets since the likelihood of realization of the benefit does not meet the more likely than not threshold.

The Company files a U.S. Federal, various state, and International income tax returns. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances. Such adjustment is reflected in the tax provision when appropriate. The Company will recognize interest and penalties, if any, related to unrecognized tax benefits in income taxes in the statements of operations. Tax years 2016 through 2020 remain open to examination by federal and state tax jurisdictions. The Company files tax returns in Israel for which tax years 2014 through 2020 remain open. In addition, the Company files tax returns in Ireland and Australia and the tax year 2020 remains open.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (continued)

Net Income (Loss) Per Share

Basic and diluted net income (loss)loss per share attributable to common stockholders is computed by dividing the net income (loss)loss and a deemed dividend from a warrant modification attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. The dilutive effect of outstanding options, warrants, restricted stock and other stock-based compensation awards is reflected in diluted net income (loss) per share by application of the treasury stock method. The calculation of diluted net income (loss) attributed to common shareholders per share excludes all anti-dilutive common shares. For periods in which the Company has reported net losses, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, because such common shares are not assumed to have been issued if their effect is anti-dilutive.anti-dilutive, see Note 9.

New Accounting Standards

There are no recently issued accounting standards that have been adopted in the current period or will be adopted in future periods that have had or are expected to have a material impact on our consolidated financial position or results of operations.

Recently AdoptedIssued Accounting PronouncementsStandards Not Yet Adopted

On April 1,In December 2019, the Company adoptedFinancial Accounting Standards UpdateBoard (“FASB”) issued ASU No. 2016-02, Leases2019-12, “Income Taxes (Topic 842) (ASU 2016-02),740): Simplifying the Accounting for Income Taxes.” as amended, which generally requires lesseespart of its initiative to recognize operating and financing lease liabilities and corresponding right-of-use (ROU) assets onreduce complexity in the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements.accounting standards. The Company early adopted the new guidance using the modified retrospective transition approach and practical expedients to all leases existing at the date of initial application and not restating comparative periods, see Note 11).

Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustmentsstandard eliminates certain exceptions related to the right-of-use asset may be requiredapproach for items such as prepaid or accrued rent. The interest rate implicitintraperiod tax allocation, the methodology for calculating income taxes in our leases is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. In transition to ASC 842, the Company utilized the remaining lease term of its leases in determining the appropriate incremental borrowing rates. The weighted average discount ratean interim period and remaining term on lease obligation is approximately 8.3% and 3.7 years. Operating lease expense is recognized on a straight-line basis over the lease term and is included in general and administrative expenses. Amortization expense for finance (capital) leases is recognized on a straight-line basis over the lease term and is included in general and administrative expenses, while interest expense for finance leases is recognized using the effective interest method.

As of the April 1, 2019, the adoption date, the Company has identified three operating lease arrangements. The adoption of ASC 842 resulted in the recognition of operating leasedeferred tax liabilities for outside basis differences. The standard also clarifies and right-of-use assetssimplifies other aspects of approximately of $266,600the accounting for income taxes. The standard is effective for fiscal years, and $258,600, respectively.interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company does not anticipate the adoption of the standard did notthis guidance to have a material effectimpact on the Company’s unaudited condensedits consolidated financial statements of operation and comprehensive loss or unaudited condensed consolidated statements of cash flows.related disclosures.

Recent Accounting Pronouncements Not Yet Adopted

There have been no recent accounting pronouncements or changes in accounting standard during the three months ended June 30, 2019, as compared to the recent accounting standards described in the Company’s Annual Report on Form 10-K for the year ended March 31, 2019, that are of significance or potential significance to the Company.

BEYOND AIR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3 FAIR VALUE MEASUREMENT

The Company’s financial instruments primarily include cash, cash equivalents, restricted cash, marketable securities, accounts payable, loan payable and accounts payable.credit facility loan. Due to the short-term nature of cash cash equivalents and accounts payable, the carrying amounts of these assets and liabilities approximate their fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value. A fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3 FAIR VALUE MEASUREMENT (continued)

Net losses recognized during the three months ended June 30, 2019 in marketable equity securities were approximately $2.3 million. Unrealized net losses recognized during the quarter on marketable equity securities held as of June 30, 2019 were approximately $2.1 million. There were no gains or losses from marketable securities during the three months ended June 30, 2018. 

NOTE 4 PROPERTY AND EQUIPMENT

Property and equipment consist of the following as of June 30, 20192020 and March 31, 2019,2020, respectively:

Depreciation and amortization expense related to fixed assets for the three months ended June 30, 20192020 and June 30, 20182019 was $17,902$33,650 and $13,816.$17,902.

BEYOND AIR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5 SHAREHOLDER’S EQUITY

In August 2018, the Company entered into a Stock Purchase Agreement with Lincoln Park CorporationLPC for $20 million. The Company may sell and issue LPC and LPC iswas obligated to purchase up to $20 million in value of shares of common stock from time to time over three years. The Company may direct LPC, at its sole discretion, and subject to certain conditions, to purchase up to 10,000 to 30,000 shares of common stock on any business day, provided that at least one business day has passed since the most recent purchase. The amount of a purchase may be increased under certain circumstances provided, however that LPC cannot make any single purchase that exceeds $750,000. The purchase price of shares of common stock related to the future funding will be based on the then prevailing market prices of such shares at the time of sales as described in the StockUnder this Purchase Agreement. ForAgreement, for the three months ended June 30, 2020 and June 30, 2019, the Company received proceeds of $ 1,958,845 and $1,173,810 from the sale of 243,605 and 250,000 shares of the Company’s stock, or anrespectively. The average price per share of $4.70. There is $17,482,005 remaining undersold for the three months ended June 30, 2020 and June 30, 2019 was $8.04 per share and $4.70 per share, respectively. On May 14, 2020, the Company entered into a $40 million New Purchase Agreement aswith LPC, that replaced the existing $20 million purchase agreement. The New Purchase Agreement provides for the issuance of up to $40 million of the Company’s common stock which we may sell from time to time in our sole discretion to LPC over the next 36 months, provided that the closing price is not below $0.25 per share and conditions and limitations in the New Purchase Agreement. Pursuant to the New Purchase Agreement, the Company received net proceeds of $1,682,835 from the sale of 325,000 share of common stock at $8.58 per share. The Company incurred a 2.5% fee for this transaction. At June 30, 2019.2020, there is $37,211,500 available under this Purchase Agreement. The Company filed a prospectus supplement for this Purchase Agreement.

On April 2, 2020, the Company entered into an At-The-Market Equity Offering (“ATM”) for $50 million utilizing the Company’s shelf registration statement and filed on Form S-3. The Company may sell shares of our common stock having aggregate sales proceeds of up to $50,000,000 from time to time in this offering, subject to the conditions and limitations in the agreement. If shares are sold, there is a three 3 percent fee paid to the sales agent. For the three months ended June 30, 2020, the Company received net proceeds of $899,540 from the sale of 113,712 shares of the Company’s stock. At June 30, 2020, there is $48,985,459, available under this ATM.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5 SHAREHOLDER’S EQUITY (continued)

On June 3, 2019, the Company entered into a Stock Purchase Agreement (“Offering”) with investors for the issuance of 1,583,743 unregistered shares of common stock. The Company raised net proceeds was $7,839,494.$7,839,495. The Company’s CEO participated in this offering and invested $300,000 and received 58,253 shares of common stock, or $5.15 per share.

On July 2, 2019, the SEC declared effective, the Company’s Form S3 shelf registration statement which allows the Company to sell up to $100 million of equity securities. In addition, certain directors and employees invested $610,000 for an aggregate of 118,254 shares of common stock, representing a purchase price of $5.15 per share. The Company registered these shares in June 2019 on Form S-3 and was declared effective on September 11, 2019.

Stock to be Issued to a Vendor

During the year endedAs of March 31, 2019,2020, the Company iswas obligated to issue 30,000 shares to a vendor for services related to investor relations. The Company recorded stock-based compensationIn May 2020, the 30,000 shares were issued and the fair value of $144,000 for the sharesliability amount was transferred to be issued, or $4.80 per share, at fair market value. The Company recorded this obligation as a liability for shares to be issued.shareholders’ equity. For the three months ended June 30, 2020 and June 30, 2019 the Company recorded the fair market value of the shares to be issued and recorded stock-based compensation of $2,100 and $22,500, and increased the liability torespectively. The fair market value sinceof the stock has not been issued.liability as of June 30, 2020 and March 31, 2020 was $0 and $240,000, respectively.

Issuance of Restricted Shares

On December 26, 2018, and December 31, 2019, the Board of directors approved the issuance of 304,000340,000 and 36,000390,000, shares of restricted stock, respectively, to the board of directors, officers, employees and consultants to be grantedand the fair value for the restricted stock awards was valued at the closing price of the Company’s stock on December 31, 2018 and January 1, 2019, respectively. The restrictedthe date of grant. Restricted stock vests annually over five years. The Company recordedfair market value of the restricted shares for stock-based compensation expense is equal to the closing pricing of $151,131the Company’s stock at the date of grant. Stock based compensation for the three months ended June 30, 2020 and June 30, 2019 associatedwas $393,861 and $151,131, respectively. As of June 30, 2020, there are 646,800 unvested shares with this grant.an average grant date fair value of $4.99 per share.

Stock Option Plan

The Company has anCompany’s amended and restated Equity Incentive Option Plan (the “2013 Plan”), that grantsallows for awards to officers, directors, employees, and non-employees of stock options, restricted stock units and restricted shares to officers, directors, employees, and non-employees for shares of the Company’s common stock. The options vesting terms of the options issued under the 2013 Plan are generally between two to four years and expire up to ten years after the grant date. On December 26, 2018 and February 13, 2019, the Board of Directors authorized the increase of an additional 600,000 and 1,000,000 shares to a total of 3,100,000 shares for issuance under theThe 2013 Plan respectively.has 4,100,000 shares eligible for issuance. As of June 30, 2019,2020, there are 313,639 options69,047 shares available for future grants.under the 2013 Plan.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5 SHAREHOLDER’S EQUITY (continued)

A summary of the Company’s options for the three months ended June 30, 2019,2020, is as follows:

As of June 30, 2019,2020, the Company has unrecognized stock-based compensation expense of approximately $3,167,000$3,845,100 related to unvested stock options and is expected to be expensed over the weighted average remaining service period of 1.62.6 years. The weighted average fair value of options granted was $4.10$5.09 per share during the three months ended June 30, 2019.2020. The following were utilized on the date of grant:

The following summarizes the components of stock-based compensation expense which includes stock options and restricted stock for the three months ended June 30, 20192020 and June 30, 2018,2019, respectively

BEYOND AIR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5 SHAREHOLDER’S EQUITY (continued)

Warrants

A summary of the Company’s outstanding warrants as of June 30, 20192020 are as follows:

There were no warrants exercised duringFor the three months ended June 30, 2019 or2020, there were 70,538 warrants exercised for $293,111 and 70,538 shares of common stock were issued at an average price per share of $4.16 per share. For the year three months ended June 30, 2018.2019, no warrants were exercised.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6 OTHER CURRENT ASSETS AND PREPAID EXPENSES

A summary of current assets and prepaid expenses as of June 30, 20192020 and March 31, 20192020 is as follows:

NOTE 7 ACCRUED EXPENSES

A summary of the accrued expenses as of June 30, 20192020 and March 31, 20192020 is as follows:

NOTE 8 LEASES

On April 1, 2019, the Company adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company early adopted the new guidance using the modified retrospective transition approach and practical expedients to all leases existing at the date of initial application and not restating comparative periods. In June, the Company entered into a new lease and cancelled a lease, which resulted recognition of operating lease liabilities and right-of-use assets of approximately of $236,700 and $236,900, respectively The cancellation of the lease resulted in a derecognition of operating lease liabilities and right-of-use assets of approximately of $17,600 and $20,500. As a result of the cancellation, the Company recorded a gain of $1,900. The right-of use assets and operating lease liability is as follows as of June 30, 2020 and March 31, 2020.

Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as prepaid or accrued rent. The interest rate implicit in our leases is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. In transition to ASC 842, the Company utilized the remaining lease term of its leases in determining the appropriate incremental borrowing rates. At June 30, 2020 and March 31,2020, the weighted average discount rate and remaining term on lease obligation is approximately, 8.3%, 8.3%, 4.7 and 3.0 years respectively at. Operating lease expense is recognized on a straight-line basis over the lease term and is included in general and administrative expenses. Amortization expense for finance (capital) leases is recognized on a straight-line basis over lease term and is included in general and administrative expenses and research and development expenses, while interest expense for finance leases is recognized using the effective interest method.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 9 BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE

The following potentially dilutive securities were not included in the calculation of diluted net income (loss) per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented:

NOTE 910 LICENSE AGREEMENT

On January 23, 2019, the Company entered into an agreement for commercial rights (“the License(the “License Agreement”) with Circassia Pharmaceuticals plc, (located in the United Kingdom)Limited and its affiliates (collectively, “Circassia”) for persistent pulmonary hypertension of the newborn (PPHN)(“PPHN”) and future related indications at concentrations of< 80 ppm in the hospital setting in the United States and China. On December 18, 2019, the Company terminated the License Agreement, see Note 13. The Company may receivewould have received payments up to $32.5$32.55 million in up front and regulatory milestones, of which $31.5 million iswas associated with the U.S. market. All such payments arewere payable in cash or ordinary shares of Circassia, Pharmaceuticals plc, at the discretion of Circassia, Pharmaceuticals, Inc., with payments in cash discounted by approximately 5%. Royalties are payable only in cash.

This contract was evaluated under ASC 606, which was adopted by the Company during fiscal 2019. Based upon the evaluation, it was determined that the contract consists of five performance obligations as follows:with only the following two obligations required prior to the termination of the License Agreement.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 910 LICENSE AGREEMENT (continued)

In consideration of the rights and licenses granted to Circassia by the Company, Circassia shall payfive milestones were included. The Company received the Company the followingfirst two milestone amountspayments in US dollars orordinary shares of Circassia shares:

In addition, Circassia shall pay the Company the following royalty amounts until expiration of all of the applicable patents:

Thereafter, running royalty amounts of 15% of annual gross profit (United States & China combined) up to and including $100 million and 20% of annual gross profit (United States & China combined) exceeding $100 million.

Following expiration of the patents, Circassia shall pay the Company a 14% royalty on annual gross profits up to and including $100 million and a 19% royalty on annual gross profits exceeding $100 million.

Due to the consideration constraints associated with milestones 3, 4, and 5, only the amounts associated with milestone 1 and 2 have been allocated. During the three months ended March 31, 2019, the Company met the first two milestones under the license agreement and received 17,572,815 ordinary shares valued at $9,987,295. This consideration was allocated to the first two performance obligations. one being the transfer of the intellectual property to Circassia, which was recognized at a point in time and was valued at $7,116,232 and the other being the ongoing support associated with the PMA submission and regulatory approval by the FDA, which was valued at $2,871,063 and recorded as deferred revenue to be recognized over a period of time from the commencement of the agreement to when management expects to submit the PMA. For the three months ended June 30, 2019,2020 and June 30, 2018,2019, $229,161 and $627,469, and $0, respectively of such revenue associated with this second performance obligation has been recognized. As of June 30, 20192020, and March 31, 2019,2020, deferred revenue was $1,635,825$644,029 and $2,263,294.$873,190, respectively.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(UNAUDITED

NOTE 1011 FACILITY AGREEMENT LOAN

On March 17, 2020, the Company entered into a facility agreement with certain lenders pursuant to which the lenders shall loan to up to $25,000,000 in five tranches of $5,000,000 per tranche at the option of the Company (“Tranches”), provided however that the Company may only utilize tranches three through five following FDA approval of our the LungFit™ PH product. The loan(s) are unsecured with interest at 10% per year which is to be paid quarterly. The loans may be prepaid with certain prepayment penalties. The effective interest rate for this loan is 13.3% per year. Each tranche shall be repaid in installments commencing June 15, 2023 with all amounts outstanding under any tranche due on March 17, 2025. A lender who is over a five percent shareholder, loaned the Company $3,160,000 and interest expense associated with this debt for the three months ended June 30, 2020 was $79,000 (not including amortization of debt discount and deferred offering costs). In connection with the first tranche, the Company issued, in March 2020, warrants to the lenders for the purchase of 172,826 shares of the Company’s common stock at $7.26 per share. The warrants expire in five years. There are additional warrant issuances associated with each tranche. If the second tranche of $ 5 million is utilized by the Company, the warrants that will be issued is up to twenty five percentage of its commitment value divided by the five day the volume weighed average price “(VWAP”) prior to utilization date. For tranches three to five, if any of these tranches are utilized by the Company, the warrants that will be issued is up to ten percentage of its commitment value divided by the five day the VWAP. As a result, the Company allocated the fair market value at the date of grant of the warrant to stockholders’ equity and reflected a debt discount valued at $594,979 using the Black Scholes pricing model. 

As a result, the Company allocated the fair market value at the date of grant of the warrant to stockholders’ equity and debt discount valued at $594,979. The Black-Scholes pricing model was used with the following assumptions:

A summary of the facility agreement loan balance as of June 30, 2020 and March 31, 2020 is as follows:

NOTE 12 LOAN PAYABLE

In January 2019,As of June 30, 2020, and March 31, 2020, in connection with the Company’s insurance policy, a loan of $292,500 was used to finance part of the premium. There are tenThe loan is due within the year with monthly payments of $29,687 and the$42,366 bearing interest rate is 3.3% per annum.at 4.3%. The outstanding balance as of June 30, 20192020 and March 31, 20192020 was $147,238$209,579 and $263,604,$335,358, respectively.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1113 COMMITMENTS AND CONTINGENCIES

License Agreements

On October 22, 2013, the Company entered into a patent license agreement with a third party,CareFusion, pursuant to which AITit agreed to pay to the third party a non-refundable upfront fee of $150,000 and is obligated to pay 5% royalties of any licensed product net sales, but at least $50,000 per annum through the term of the agreement and the advance is credited against future royalties payments. As of June 30,December 31, 2019, the Company did not pay any royalties since the Company did not have any revenues from this license. The term of the agreement extends through the life of applicable patents and may be terminated by either party with 60 days’ prior written notice in the event of a breach of the agreement, and may be terminated unilaterally by CareFusion with 30 days’ prior written notice in the event that we do not meet certain milestones.

In August 2015, BA LtdLtd. entered into an Option Agreement (the “Option Agreement”) with a third partyPulmonox whereby AITBA Ltd. acquired the Optionoption to purchase certain intellectual property assets and rights (the “Option”) on September 7, 2016 for $25,000. On January 13, 2017, the Company exercised the Option and paid $500,000. The Company becamebecomes obligated to make certain one-time development and sales milestone payments to Pulmonox, commencing with the date on which we receive regulatory approval for the commercial sale of the first product candidate qualifying under the agreement. These milestone payments are capped at a total of $87 million across three separate and distinct indications that fall under the agreement, with the majority of them, approximately $83 million, being sales related based on cumulative sales milestones for each of the three products.

On January 31, 2018 the Company entered into an agreement (“Agreement”) with NitricGen, Inc. (“NitricGen”) acquire a global, exclusive, transferable license and associated assets including intellectual property, know-how, trade secrets and confidential information from NitricGen related to NO delivery systems (“Delivery System”).the LungFit™ The Company acquired the licensing right to use the technology and agreed to pay NitricGen a total of $2,000,000 in future payments based upon achieving certain milestones, as defined in the Agreement, and royalties on sales of the Delivery System.LungFit™. The Company paid NitricGen $100,000 upon the execution agreement, $100,000 upon achieving the next milestone and issued 100,000 options to purchase the Company’s stock valued at $295,000 upon executing the agreement. The remaining future milestone payments are $1,800,00$1,800,000 of which $1,500,000 in due after six months after the first approval of the eNOGeneratorLungFit™ by the FDAFood and Drug Administration or EMEA.the European Medicine Evaluation Agency. 

Employment Agreements

Certain officer agreements contain a change of control provision for payment of severance arrangements.

Operating Leases

The Company cancelled a lease in May 2020 for its location in Madison, Wisconsin. In March 2018,June 2020, the Company entered into an operatinga lease for office space and research facility in Madison, Wisconsin. The lease commenced in March 2018, with the Company providing a security deposit of $1,728, which is recorded as restricted cash in the unaudited condensed consolidated balance sheets. The lease agreement expires in April 2021, at which point the Company has the option to renew the lease for one additional five-year term. The renewal period was not included the lease term for purposes of determining the lease liability or right-of-use asset.May 2026.

In May 2018, the Company entered into an operating lease for office space in Garden City, New York. The lease commenced in July 2018, with the Company providing a security deposit of $9,771, which is recorded as restricted cash in the unaudited consolidated balance sheets. The lease agreement expires in June 2023, at which point the Company has the option to renew the lease for one additional three-year term. The renewal period was not included the lease term for purposes of determining the lease liability or right-of-use asset.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1113 COMMITMENTS AND CONTINGENCIES (continued)

The Company has other operating lease agreements with commitments of less than one year or that are not significant. The Company elected the practical expedient option and as such these lease payments are expensed as incurred.

BEYOND AIR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11 COMMITMENTS AND CONTINGENCIES (continued)

Litigation Contingencies

On March 16, 2018, Empery Asset Master, Ltd., Empery Tax Efficient, LP and Empery Tax Efficient II, LP, (collectively, “Empery”), filed a complaint in the Supreme Court of the State of New York, relating to the notice of adjustment of both the exercise price of and the number of warrant shares issuable under warrants issued to Empery in January 2017. The Empery Suit alleges that, as a result of certain circumstances in connection with theour February 2018 Offering,offering, the January 2017 Warrants166,672 warrants issued to Empery in January 2017 provide for adjustments to both the exercise price of the warrants and the number of warrant shares issuable upon such exercise. Empery seeks monetary damages and declaratory relief under theories of breach of contract or contract reformation predicated on mutual mistake. The Company intends to vigorously defend all claims. TheWhile the Company believes they metthat it has complied with the contractual requirementsapplicable protective features of the contract2017 Warrants and properly adjusted the applicable warrantsexercise price, if Empery were to prevail on all claims, the new adjusted total number of warrant shares could be as follows: 319,967 warrant shares for Empery Master, 159,869 warrant shares for Empery I and 252,672 warrant shares for Empery II and the exercise price could be reduced from $3.66 to $1.57 per share. While the Company has several meritorious defenses against the claims, the ultimate resolution of the matter, if unfavorable, could result in accordancea material loss. On March 9, 2020, we filed a motion for summary judgment, which remains pending.

On December 18, 2019, the Company terminated the License Agreement with Circassia pursuant to which the Company had granted Circassia an exclusive royalty-bearing license to distribute, market and sell the Company’s nitric oxide generator and delivery system in the United States and China. As previously described in Note 9, Circassia had agreed to pay the Company certain milestone and royalty payments, with the protection features.

Givenremaining milestone and royalty payments payable in cash or ordinary shares of Circassia at Circassia’s option. The Company terminated the early stageAgreement pursuant to section 13.3(b) of the litigation, itAgreement, which provides for termination by either party upon the other party’s material breach or default. The Company is not possibleevaluating other options for the commercialization of its generator and delivery system. In connection the termination of the license with Circassia, we may be subject to determinea variety of claims. Adverse outcomes in some or assess the probabilityall of any particular outcome.

Certain officer agreements contain a changethese claims, if filed, may adversely affect our ability to conduct business and our financial condition and results of control provision for payment of severance arrangements.operations.

NOTE 1214 SUBSEQUENT EVENTS

From July 1, 2019 throughOn August 13, 2019,6, 2020, the Company issuedentered into a supply agreement expiring on December 31, 2024. The agreement will renew automatically for successive three year period(s) unless and sold 160,000 sharesuntil the Company provides twelve months’ notice of common stockintent not to renew. In July 2020, the Company placed a non-cancellable purchase order for proceeds of $808,184 representing an average price of $5.05 per share to LPC, (see Note 5).approximately $1,300,000 with this supplier.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements.” Forward-looking statements include statements about our expectations, beliefs or intentions regarding our product offerings, business, financial condition, results of operations, strategies or prospects. You can identify such forward-looking statements by the words “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “likely,” “goal,” “assumes,” “targets” and similar expressions and/or the use of future tense or conditional constructions (such as “will,” “may,” “could,” “should” and the like) and by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date such statements are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially and results anticipated in forward-looking statements. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance. We undertake no obligation to update, and we do not have a policy of updating or revising, these forward-looking statements, except as required by applicable law. Please see Item 1A “Risk Factors” contained in our most recently filed TransitionalAnnual Report on Form 10-KT, and in this Quarterly Report on Form 10-Q10-K for important factors that could cause actual results to differ materially from those in the forward-looking statements.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

We are an emerging medical device and biopharmaceutical company developing a nitric oxide (“NO”) generator and delivery system (the “Beyond Air NOGDS”“LungFit™ system”) that is capable of generating NO from ambient air. The Beyond Air NOGDSLungFit™ can generate NO up to 400 parts per million (“ppm”) for delivery to a patient’s lungs. The Beyond Air NOGDSLungFit™ can deliver NO either continuously or for a fixed amount of time at various flow rates and has the ability to either titrate dose on demand or maintain a constant dose. We believe that the Beyond Air NOGDSThe LungFit™ can be used to treat patients on ventilators that require NO, as well as patients with chronic lung disease or acute severe lung infections via delivery through a breathing mask or similar apparatus. Furthermore, we believe that there is a high unmet medical need for patients suffering from certain severe lung infections that our Beyond Air NOGDSthe LungFit® can potentially address. Our initialcurrent areas of focus with the LungFit™ are persistent pulmonary hypertension of the newborn (“PPHN”), severe acute respiratory syndrome coronavirus 2 (SARS CoV-2), bronchiolitis (“BRO”) and nontuberculous mycobacteria (“NTM”). lung infection. Our current product candidates will be subject to premarket reviews and approvals by the U.S. Food and Drug Administration, or the FDA, as well as similar regulatory agencies in other countries or regions. If approved, our system will be marketed as a medical device in the U.S.United States.

An additional focus of the Company is solid tumors. For this indication the LungFit™ system is not utilized due to the ultra-high concentrations of NO used. We have developed a delivery system that can safely deliver NO concentrations in excess of 10,000 ppm directly to a solid tumor. This program is in pre-clinical development and will require FDA, or similar agency in another country, approval to enter human studies.

With respect to PPHN, our novel Beyond Air NOGDS the LungFit™ is designed to deliver a dosage of NO to the lungs that is consistent with current guidelines for delivery of 20 ppm NO with a range of 0.5 ppm – 80 ppm (low-concentration NO). We believe our Beyond Air NOGDSthe LungFit™ has many competitive advantages over the current approved NO delivery systems in the U.S., European Union, Japan and other markets. For example, our Beyond Air NOGDSthe LungFit™ does not require the use of a high-pressure cylinder, utilizes less space than other similar devices, does not require cumbersome purging procedures and places less burden on hospital staff in carrying out safety procedures.

Our novel Beyond Air NOGDSLungFit™ system can also deliver a high concentration of NO to the lungs, which we believe has the potential to eliminate microbial infections, including bacteria, fungi and viruses, among other benefits. We believe current FDA approvedFDA-approved NO vasodilation treatments would have limited success in treating microbial infections given the low concentrations of NO being delivered. Given that NO is produced naturally by the body as an innate immunity mechanism at a concentration of 200 ppm, supplemental high dose NO should aid in the body’s fight against infection. Based on our clinical studies, we believe that 160150 ppm is the minimum therapeutic dose to achieve the desired pulmonary antimicrobial effect of NO. To date, neither the FDA nor equivalent regulatory agencies in other countries or regions have approved any NO formulation and/or delivery system for the delivery of a dosage of NO at 160150 ppm or higher to the lungs.

We plan to submit for premarket approval or (“PMA”) to the FDA towards the end of the third calendar quarter of 2020 for the use of the LungFit™ in PPHN. We also expect to make certain regulatory filings outside of the U.S. later in 2020. According to the 2019 year-end report from Mallinckrodt Pharmaceuticals, aggregate sales of low concentration NO in the U.S. were in excess of $500 million in 2019. Sales outside of the U.S., where there are multiple market participants, sales were considerably lower than in the U.S. We believe the U.S. sales potential of the LungFit™ in PPHN to be greater than $300 million and worldwide sales potential to be greater than $600 million. If regulatory approval is obtained, we anticipate a product launch in both the U.S. and Israel in 2021 and will continue to launch globally throughout 2021 and beyond.

SARS CoV-2 is a global pandemic with a widespread impact across many countries. We have received an approval from the FDA to run a study in COVID-19 (the disease caused by SARS CoV-2 infections) patients using our the LungFit™ system. We have also received approval from Health Canada to run a similar study to the one approved by the FDA. We look forward to results from both of these studies in the summer/fall of 2020. The fact that our system does not need cylinders allows us to potentially provide a practical solution to this crisis. We have applied for grants related to COVID-19 in the United States and other countries. However, no external funding is required to perform the clinical studies recently approved by FDA and Health Canada.

With respect to bronchiolitis, we initiated in the fourth quarter of 2019 a double blind, controlled trial in infants hospitalized due to bronchiolitis with three arms and 89 subjects randomized 1:1:1 to standard supportive therapy (SST), SST plus 85 ppm NO and SST plus 150 ppm NO. The trial is complete and we recently released top line data. There were no SAE’s related to NO therapy. With respect to efficacy, the 150 ppm arm was statistically significant when compared to both the control arm and the 85 ppm arm on the primary endpoint of fit for discharge from the hospital and the key secondary endpoint of hospital length of stay. The 85 ppm was no different from control on both endpoints. We believe this is an exceptional result given the low number of patients and provides compelling evidence of the value of 150 ppm in achieving the desired efficacy. The pivotal study for bronchiolitis was originally set to be performed in the 2020/21 winter, but due to the SARS CoV-2 pandemic, hospitals will not be considering any new study proposals not related to SARS CoV-2 or COVID-19. We anticipate commencing a pivotal study in the United States in the fourth quarter of 2021 and completing it late in the second quarter of 2022, depending on the pandemic situation. We expect that we will submit a PMA to the FDA about 6 months after trial completion. Regulatory filings outside of the U.S. would begin after our review process is completed in the U.S. as long as no additional trials are required. For this indication, we believe U.S. sales potential to be greater than $500 million and worldwide sales potential to be greater than $1.2 billion.

Over 3 million new cases of bronchiolitis are reported worldwide each year. In the U.S., there are approximately 130,000 annual bronchiolitis hospitalizations among children two years of age or younger and approximately 177,000 annual hospitalizations among the elderly population related to RSV infection only with the number rising higher due to other viruses similar to those that cause bronchiolitis in very young children.

Currently, there is no approved treatment for bronchiolitis. The treatment for acute viral lung infections that cause bronchiolitis in infants is largely supportive care and is based primarily on prolonged hospitalization during which the infant receives a constant flow of oxygen to treat hypoxemia, a reduced concentration of oxygen in the blood. In addition, systemic steroids and inhalation with bronchodilators are sometimes utilized until recovery, but we believe these treatments do not successfully reduce hospital length of stay.

Our NTM program has produced data from four compassionate use subjects and nine patients from a multi-center pilot study completed in 2018. All patients suffered from NTM abscessus infection and had underlying cystic fibrosis. One compassion patient was treated with our nitric oxide generator at the National Heart, Lung and Blood Institute (“NHLBI”). All others were treated with our NO cylinder-based delivery system. All patients were treated with 160 ppm NO at intermittent 30-minute dosing over 21 days, except one patient who was treated over 26 days and another patient who was treated with 250 ppm NO over 28 days. We expected to begin a study by the end of 2020 (delayed about 6 months by the COVID-19 pandemic) where patients would self-administer high concentration NO at home over a period of 12 weeks with the LungFit™ We now anticipate preliminary data for this study will be available during the first half of 2021 and that a full dataset will be available in the second half of 2021. If the trial is successful, we would commence a pivotal study in 2022. For this indication, we believe U.S. sales potential to be greater than $1 billion and worldwide sales potential to be greater than $2.5 billion.

NTM lung infection is a rare and serious pulmonary disease associated with increased morbidity and mortality. There is an increasing rate of lung disease caused by NTM, which is an emerging public health concern worldwide. There are approximately 50,000 patients diagnosed with NTM in the U.S., and there are an estimated additional 100,000 patients in the U.S. that have not yet been diagnosed. In Asia, the number of patients suffering from NTM surpasses what is seen in the U.S. To date we have treated only the abscessus form of NTM which comprises approximately 20-25% of all NTM. We will be treating both the abscessus and mycobacterium avium complex (MAC) forms of NTM.

Patients with NTM lung disease may experience a multitude of symptoms such as fever, weight loss, cough, lack of appetite, night sweats, blood in the sputum and fatigue. Patients with NTM lung disease, specifically abscessus and other forms of NTM that are refractory to antibiotic therapy, frequently require lengthy and repeated hospital stays to manage their condition. There are no treatments specifically indicated for the treatment of NTM abscessus lung disease in North America, Europe or Japan. There is one inhaled antibiotic approved in the U.S. for the treatment of refractory NTM MAC. Current guideline-based approaches to treat NTM lung disease involve multi-drug regimens of anti-biotics that may cause severe, long lasting side effects, and treatment can be as long as 18 months or more. Median survival for NTM MAC patients is approximately 13 years while median survival for patients with other variations of NTM is typically 4.6 years. The prevalence of human disease attributable to NTM has increased over the past two decades. In a study conducted between 1997 and 2007, researchers found that the prevalence of NTM in the U.S. is increasing at approximately 8% per year and that NTM patients on Medicare over the age of 65 are 40% more likely to die over the period of the study than those who did not generated revenuehave the disease (Adjemian et al., 2012). NTM abscessus treatment costs are estimated to be more than double that of NTM MAC. In total, a 2015 publication from co-authors from several U.S. government departments stated that prior year statistics led to a projected 181,037 national annual cases in 2014 costing the U.S. healthcare system approximately $1.7 billion (Strollo et al., 2015).

For our solid tumor program, we released pre-clinical data at the virtual American Academy of Cancer Research (AACR) showing the promise of delivering NO at concentrations of 25,000 ppm – 200,000 ppm directly to tumors. Results showed local tumor ablation with complete eradication in 5 of 30 mice. Additionally, regardless of whether the tumor was completely or partially cleared, all colon tumor bearing mice were resistant to a second challenge of colon cancer. Breast tumor bearing mice showed a 7-10 day delay in the uptake of breast cancer post challenge. Pre-clinical work will continue throughout the rest of 2020 and most of 2021.

Our program in chronic obstructive pulmonary disease is in the pre-clinical stage and will remain there, subject to our obtaining additional financing.

The development of our product candidates could be further disrupted and adversely affected by the recent outbreak of COVID-19. The spread of SARS CoV-2 from China to other countries has resulted in the Director General of the World Health Organization declaring COVID-19 a pandemic on March 11, 2020. We have addressed the impact COVID-19 may have on our business plans and our ability to conduct the preclinical studies and clinical trials as well as on our reliance on third-party manufacturing and our supply chain. However, there can be no assurance that this analysis will enable us to avoid part or all of any impact from the salespread of any product,COVID-19 or its consequences. The extent to which the COVID-19 pandemic and we do not expectglobal efforts to generate revenue unlesscontain its spread will impact our operations will depend on future developments, which are still uncertain and until we obtain marketing approvalcannot be predicted at this time. As a consequence of the global pandemic, Beyond Air experienced significant delays in the supply chain for LungFit™ due to the redundancy in parts and commercialize,suppliers with ventilator manufacturing. Our bronchiolitis program will experience at least a one year delay and our product candidates. AsPPHN and NTM programs are estimated to experience a delay of June 30, 2019, we had an accumulated deficit of $43,825,393. Our financing activities are described below under “Liquidity and Capital Resources.”4-6 months.

Critical Accounting Policies

The accounting policies followed in the preparation of our condensed consolidated financial statements appearing at the beginning of this Quarterly Report on Form 10-Q are consistent in all material respects with those included in Note 2 of our Annual Report on the Form 10-K for the year ended March 31, 2019.2020. The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required to be presented for complete financial statements. The accompanying condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The accompanying condensed consolidated Balance Sheet as of March 31, 20192020 has been derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2019.2020. The condensed consolidated financial statements and related disclosures have been prepared with the assumption that users of the interim financial information have read or have access to the audited consolidated financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Annual Report on Form 10-K for the year ended March 31, 20192020 which was filed with the United States Securities and Exchange Commission, (“SEC”), on June 28, 2019.23, 2020.

Off-Balance Sheet Arrangements

As of June 30, 2019,2020, we did not have any off-balance sheet arrangements as defined in the rules and regulations of the Securities and Exchange Commission.

Results of Operations

Below are the results of operations for the three months ended June 30, 20192020 and June 30, 2018:2019:

Comparison of Three Months Ended June 30, 20192020 with the Three Months Ended June 30, 20182019

Revenue

License revenue for the three months ended June 30, 20192020 was $229,161 as compared to $627,469 and $0 for the three months ended June 30, 2018.

2019. On January 23, 2019, the Company entered into an agreement for commercial rights (“the License(the “License Agreement”) with Circassia Pharmaceuticals plc,Limited and its affiliates (collectively, “Circassia”) for persistent pulmonary hypertension of the newborn (“Circassia”PPHN”) (located in the United Kingdom) for PPHN and future related indications at concentrations of < 80 ppm in the hospital setting in the United States and China. The Company may receive payments up to $32.5 million in up front and regulatory milestones, of which $31.5 million is associated with the U.S. market. All such payments are payable in cash or ordinary shares of Circassia Pharmaceuticals plc, at the discretion of Circassia Pharmaceuticals, Inc., with payments in cash discounted by approximately 5%. During the three monthsyear ended March 31, 2019, the Company met the first two milestones under the license agreement and received 17,572,815 ordinary shares valued at $9,987,295. This consideration was allocated to the first two separate identified performance obligations,obligations. one being the transfer of the intellectual property to Circassia, which was recognized at a point in time and was valued at $9,987,295,$7,116,232 and the other being the ongoing support associated with the PMA submission and regulatory approval by the FDA, which was valued at $2.4 million$2,871,063 and recorded as deferred revenue to be recognized over a period of time from the commencement of the agreement to when management expects to submit the PMA. DuringFor the three months ended June 30, 2020, and June 30, 2019, $627,000$229,161 and $627,469, respectively of such deferred revenue associated with this second performance obligation has been recognized with $1.2 million being cumulatively recognized throughrecognized. As of June 30, 2019.2020, and March 31, 2020, deferred revenue was $644,029 and $1,635,825, respectively. On December 18, 2019, the Company terminated the License Agreement with Circassia pursuant to which the Company had granted Circassia an exclusive royalty-bearing license to distribute, market and sell the Company’s nitric oxide generator and delivery system in the United States and China.

Research and development expenses

Research and development expenses for the three months ended June 30, 20192020 was $2,323,513$4,331,813 as compared to $1,063,145$2,323,513 for the three months ended June 30, 2018.2019. The increase of $1,260,368$2,008,300 was primarily attributed to developmentdevelopment of NO Generatorthe LungFit™ System for PPHN, clinical trial for COVID-19, completion of the Bronchiolitis trial, an increase in salaries and Delivery System and pre-clinical studies of $1,152,800employee benefits and an increase in stock-based compensation of $80,500.expense.

General and administrative expenses

General and administrative expense for the three months ended June 30, 2019,2020, was $2,182,558$2,494,014 as compared to the three months June 30, 20182019 of $693,005.$2,182,558. The differenceincrease of $1,489,553$311,456 was primarily attributed to an increase stock-based compensation expense of $760,000, an increase in professional fees of $330,000 and $106,900 in salary and benefits due to the hiring of employees.$209,090.