BEYOND AIR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition

The Company recognizes revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligation(s). At contract inception, we assess the goods or services promised within each contract, assess whether each promised good or service is distinct and identify those that are performance obligations.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (continued)

The Company must useuses judgment to determine: a) the number of performance obligations based on the determination under step (ii) above and whether those performance obligations are distinct from other performance obligations in the contract; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. The Company uses judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price. The transaction price is allocated to each performance obligation on an estimated stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied, see, Note 9.10.

Where a portion of non-refundable up-front fees or other payments received are allocated to continuing performance obligations under the terms of a license arrangement, they are recorded as contract liabilities and recognized as revenue when (or as) the underlying performance obligation is satisfied.

Segment reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, we have viewed our operations and managed our business as one segment.

Income TaxesResearch and Development

The Company accounts for income taxes using the assetResearch and liability method. Accordingly, deferred tax assets and liabilitiesdevelopment expenses 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 December 31, 2019, and March 31, 2019, the Company recorded a valuation allowancecharged 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.

BEYOND AIR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (continued)

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 statementsstatement of operations as incurred. Research and comprehensive loss. The Company has a liabilitydevelopment expenses include salaries, benefits, stock-based compensation and costs incurred by outside laboratories, manufacturers, consultants, accredited facilities in accrued expenses of $154,300 for uncertain tax positionsconnection with clinical trials and preclinical studies. Research and development projects that have no alternative uses have been expensed as of December 31, 2019 and March 31, 2019. Tax returns that are open for examination for Beyond Air are from 2015 and for BA Ltd. from 2013.incurred.

Foreign Exchange Transactions

BA Ltd.’s

The Company’s subsidiaries have operations are in Israel, Ireland, and in Australia. Beyond Air’s operations are in the United States. The Company’s management believes thatStates and the U.S. dollar is the currency of the primary economic environment in which the Company operates and expects to continue to operate in the foreseeable future. Thus, the functional and reporting currency of the Company is the U.S. dollar. The Company’s transactionsCompany translated its non-U.S. operations’ assets and balancesliabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations as of September 30, 2020 were not material. Gains or losses from foreign currency transactions are presented at their original amounts. Non-dollar transactions and balances have been re-measured to U.S. dollarsincluded in accordance withother income (loss) apart of the Accounting Standards Board Codification Topic 830, “Foreign Currency Matters”statement of operations. foreign currency exchange gains/(losses).

Stock-Based Compensation

The Company measures the cost of employee and non-employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Fair value for restricted stock awards is valued using the closing price of the Company’s stock on the date of grant. That costThe grant date fair value is recognized over the period during which an employee and non-employee is required to provide service in exchange for the award - the requisite service period. The grant-date fair value of employee share options is estimated using the Black-Scholes option pricing model. The risk-free interest rate assumptions were based upon the observed interest rates appropriate for the expected term of the equity instruments. The expected dividend yield was assumed to be zero as the Company has not paid any dividends since its inception and does not anticipate paying dividends in the foreseeable future. TheDue to the Company’s limited trading history, the Company does not have enough history to establishutilizes an implied volatility based uponon an aggregate of guideline companies. In 2020, the Company began to incorporate and weight its own stock trading. Therefore,historical volatility with the peer group in order to obtain expected volatility was basedvolatility. The peer companies selected have similar publicly traded peer companies.characteristics, including industry and market capitalization. The Company routinely reviews its calculation of volatility based on, the Company’s life cycle, its peer group, and other factors. The Company uses the simplified method for share-based compensation to estimate the expected term.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (continued)

Investment in Marketable Securities

Investments in equity marketable securities classified available-for-sale are carried at fair value with the changes in unrealized gains and losses recognized in the Company’s results in operations. Realized gains and (losses) from the sale of marketable securities are recognized in the statement of operations using the specific identification method on a trade date basis.Additionally, we assess our marketable debt securities for potential other-than-temporary impairment. If the cost of an investment exceeds its fair value, we evaluate, among other factors, the magnitude and duration of the decline in fair value.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and accumulated amortization. Depreciation and amortization is calculated using the straight-line method over the estimated useful life of the assets as follows:

Licensed Right to Use Technology

Licensed right to use technology that is considered platform technology with alternative future uses is recorded as an intangible asset resulting from the NitricGen transaction, see Note 11. The intangible asset was valued based upon the fair value of the options issued to NitricGen and the cash paid for this transaction. The license contains two future milestone additional payments aggregating $1,800,000. The intangible asset is being amortized on a straight-line method over its estimated useful life, ofdetermined to be thirteen years. See Note 13.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Long Lived Assets

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.

BEYOND AIR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)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 September 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.

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (continued)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.

Net LossIncome (Loss) Per Share

Basic and diluted net loss per share attributable to common stockholders is computed by dividing the net 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) includes a deemed dividend from a warrant modification attributable to common stockholders 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, see Note 8.9.

Recently Adopted Accounting Pronouncements

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. The weighted average discount rate 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 and research and development expenses, while interest expense for finance leases is recognized using the effective interest method.

Recent Accounting Pronouncements Not Yet Adopted

There have been no recent accounting pronouncements or changes in accounting standard during the three and nine months ended December 31, 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. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently Issued Accounting Standards Not Yet Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company does not anticipate the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

In August 2020, the FASB issued Accounting Standard Updates “ASU” ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. The ASU is effective for the Company on December 1, 2022, Early adoption is permitted, but no earlier than December 1, 2021. The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and related disclosures.

NOTE 3 FAIR VALUE MEASUREMENT

The Company’s financial instruments primarily include cash, cash equivalents, restricted cash, marketable securitiesaccounts 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:

Net gains recognized during the three months ended December 31, 2019 and December 31, 2018 from marketable equity securities were $314,899 and $18,234 respectively. Net losses and gains from marketable equity securities for the nine months ended December 31, 2019 and December 2018 were $(1,849,624) and $13,142, respectively.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4 PROPERTY AND EQUIPMENT

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

Depreciation and amortization expense related to fixed assets for the three months ended December 31,September 30, 2020 and September 30, 2019 was $39,958 and December 31, 2018 was $23,190 and $15,638,$15,917, respectively. Depreciation and amortization expense related to fixed assets for the ninesix months ended December 31,September 30, 2020 and September 30, 2019 was $73,608 and December 31, 2018 was $57,009 and $46,222,$33,819, respectively.

NOTE 5 SHAREHOLDER’SSHAREHOLDERS’ EQUITY

In August 2018,On May 14, 2020, the Company entered into thea $40 million New Stock Purchase Agreement with LPC, for $20 million. The Company may sell and issue LPC and LPC is obligated to purchase up tothat replaced the former $20 million in value of shares of common stock from time to time overpurchase agreement. Under the former purchase agreement, for the 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 Purchase Agreement. For the nine months ended December 31, 2019,June 30, 2020, the Company received net proceeds of $1,981,994$1,958,845 from the sale of 410,000243,605 shares of common stock. The New Stock Purchase Agreement provides for the issuance of up to $40 million of the Company’s common stock or an averagewhich the Company may sell from time to time in its sole discretion to LPC over 36 months, provided that the closing price is not below $0.25 per share of $4.83. There is $16,673,821 remaining underand subject to conditions and limitations in the New Stock Purchase Agreement. Pursuant to the New Stock Purchase Agreement, asthe Company received net proceeds of December 31, 2019.$1,682,835 from the sale of 325,000 shares of common stock. Under these agreements, for the six months ended September 30, 2020, the Company received net proceeds of $3,641,680 from the sale of 568,605 shares of common stock. As of September 30, 2020, there is a balance of $37,211,500 available.

On JulyApril 2, 2019,2020, the SEC declared effective,Company entered into an ATM for $50 million utilizing the Company’s Form S-3 shelf registration statement which allowsand 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, subject to the conditions and limitations in the agreement. If shares are sold, there is a three percent fee paid to the sales agent. For the three and six months ended September 30, 2020, the Company to sell up to $100 millionreceived net proceeds of equity securities.$1,536,247 and $2,435,787 from the sale of 227,527 and 341,239 shares of the Company’s stock, respectively. As of September 30, 2020, there is a balance of $47,434,213 available under the ATM.

On June 3, 2019, the Company entered into a purchase agreementStock Purchase Agreement with investors for the issuance of 1,583,743 shares of common stock, resulting instock. The Company raised net proceeds ofwas $7,839,495. The Company’s CEO participated in this offering and invested $300,000 and received 58,253 shares of common stock, ator $5.15 per share. In addition, certain directors and employees invested $610,000 for an aggregate of 118,254 shares of common stock, representingat a purchase price of $5.15 per share. The Company registered the shares sold in June 2019 in a registration statement on Form S-3 that was declared effective in September 2019.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On December 12, 2019, the Company closed on an underwritten offering and concurrent private placement of 3,152,985 shares of common stock at $3.66 per share for net proceeds of $10,169,343. The underwritten offering shares were registered under the Company’s Form S-3 shelf registration statement. There were 532,786 common stock that were sold in a private placement and subsequently registered under an effective Form S-1 on January 23, 2020. In addition, the Company’s CEO invested $699,999 and receiving 190,437 shares of common stock at $3.66 per share. In addition, certain employees participated in this offering by investing $475,000 and receiving 129,781 shares of common stock at $3.66 per share.NOTE 5 SHAREHOLDERS’ EQUITY (continued)

Stock to be Issued to a Vendor

As of March 31, 2019,2020, the Company was obligated to issue 30,000 shares to a vendor for services related to investor relations. The Company recorded stock-based compensation of $144,000 for the shares to be issued, or $4.80 per share, the fair market value for the fiscal year ended March 31, 2019. The Company recorded this obligation as a liability for shares to be issued. For the three months and nine months ended December 31, 2019, the Company recorded stock-based compensation of $18,900 and $12,900, respectively, which was due to the change in the fair market value of the stock to be issued. The fair market value of the liability as of DecemberMarch 31, 20192020 was $156,900.

BEYOND AIR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5 SHAREHOLDER’S EQUITY (continued)$240,000. In May 2020, 30,000 shares were issued at the fair value of $242,100. Such amount was transferred to shareholders’ equity.

Issuance of Restricted Shares

On December 26, 2018, and December 31, 2019, the Board of directors approved the issuance of 340,000 and 390,000, shares of restrictedRestricted stock respectively,was issued to officers, employees and consultants and theconsultants. The fair value for the restricted stock awards was valued at the closing price of the Company’s stock on the date of grant. Restricted stock vests annually over five years.

(a) Shares vested in December 2019 and common stock was issued in January 2020

Stock-based compensation expense related to restricted stock awards was $84,477$377,315 and $432,756$219,269 for the three and nine months ended December 31,September 30, 2020 and September 30, 2019, respectively. Stock-based compensation expense related to restricted stock awards was $771,176 and $348,279 for the six months ended September 30, 2020 and September 30, 2019, respectively.

Stock Option Plan

The Company has anCompany’s amended and restated Equity Incentive Option Plan (the “2013 Plan”), pursuantallows for awards to which the Company may award officers, directors, employees, and non-employees withof stock options, restricted stock units and restricted shares of the Company’s common stock. The 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 of common stock authorized under theThe 2013 Plan respectively, resulting in a total of 3,100,000has 4,100,000 shares eligibleauthorized for issuance under the 2013 Plan.issuance. As of December 31, 2019,September 30, 2020, there are 5,0477,059 shares available under the 2013 Plan.

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5 SHAREHOLDERS’ EQUITY (continued)

A summary of the Company’schange in options for the ninesix months ended December 31, 2019,September 30, 2020, is as follows:

As of December 31, 2019,September 30, 2020, the Company has unrecognized stock-based compensation expense of approximately $1,900,348$3,407,300 related to unvested stock options and is expected to be expensed over the weighted average remaining service period of two1.5 years. TheFor the six months ended September 30, 2020 and September 30, 2019, the weighted average fair value of options granted was $5.13 and $3.49 per share duringshare. The following was utilized to calculate the ninefair value of options 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 and six months ended December 31, 2019. There were no options granted during the three months ended December 31, 2019.September 30, 2020 and September 30, 2019, respectively

BEYOND AIR, INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5 SHAREHOLDER’SSHAREHOLDERS’ EQUITY (continued)

The following was utilized on the date of grant for the nine months ended:

The following summarizes all stock-based compensation expense, including options and restricted stock for the three and nine months ended December 31, 2019 and December 31, 2018, respectively

Warrants

Amodification of the exercise price to the January 2017 and March 2017 investor warrants from $4.25 per share to $3.66 per share was triggered by the December 2019 equity offering described above. As a result, the Company recognized the incremental value of $522,478, as a deemed dividend using the Black-Scholes pricing model with the following assumptions:

A summary of the Company’s outstanding warrants as of December 31, 2019September 30, 2020 are as follows:

For the three and six months ended September 30, 2020, there were 83,332 and 153,870 warrants exercised for $304,995 and $598,106, respectively. There were 83,332 and 153,870 shares of common stock issued for the three and six months ended September 30, 2020, respectively. For the six months ended September 30, 2019, no warrants exercised during any periods presented.were exercised.

BEYOND AIR, INC.

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 December 31, 2019September 30, 2020 and March 31, 20192020 is as follows: