NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1 ORGANIZATION AND BUSINESS
Beyond
Air, Inc. (together with its subsidiaries, “Beyond Air” or the “Company”) was incorporated on April 28, 2015
under Delaware law. On June 25, 2019, the Company’s name was changed to Beyond Air, Inc. from AIT Therapeutics, Inc.
The
Company is a commercial stage medical device and biopharmaceutical company
developing a platform of nitric oxide (“NO”) generators and delivery systems (the “LungFit® platform”)
capable of generating NO from ambient air. The Company’s first device, LungFit® PH (“LungFit® PH”)
received premarket approval from the U.S. Food and Drug Administration (the “FDA”), for the treatment of term and near-term
neonates with hypoxic respiratory failure, commonly referred to as persistent pulmonary hypertension of the newborn (“PPHN”),
in June 2022. The NO generated by the LungFit® PH system is indicated to improve oxygenation and reduce the need for extracorporeal
membrane oxygenation in term and near-term (>34 weeks gestation) neonates with hypoxic respiratory failure associated with clinical
or echocardiographic evidence of pulmonary hypertension in conjunction with ventilatory support and other appropriate agents. The LungFit®
platform can generate NO up to 400 parts per million (“ppm”) for delivery to a patient’s lungs directly or via a ventilator.
LungFit® 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.
The
Company believes that LungFit® can be used to treat patients
on ventilators that require NO, as well as patients with chronic or acute severe lung infections via delivery through a breathing mask
or similar apparatus. Furthermore, the Company believes that there is a high unmet medical need for patients suffering from certain severe
lung infections that the LungFit® platform can potentially address. The Company’s current areas of focus with LungFit®
are PPHN, viral community-acquired pneumonia (“VCAP”) including COVID-19, bronchiolitis and nontuberculous mycobacteria
(“NTM”) lung infection and those with various severe lung infections with underlying chronic obstructive pulmonary disease
(“COPD”). The Company’s current product candidates will be subject to premarket reviews and approvals by the FDA, certification
through the conduct of a conformity assessment by a notified body in the European Union (the “EU”), as well as comparable
foreign regulatory authorities’ reviews or approvals in other countries or regions. The Company’s system will be marketed
as a medical device in the U.S.
On
November 4, 2021, Beyond Air reorganized its oncology business into a new private company called Beyond Cancer,
Ltd (“Beyond Cancer”). Beyond Air’s preclinical oncology team and the exclusive right to the intellectual property
portfolio utilizing ultra-high concentration of gaseous nitric oxide (“UNO”) for the treatment of solid tumors now reside with Beyond
Cancer. The new subsidiary secured $30 million in private placement of common shares, including $4.8 million in conjunction with the
retirement of long-term debt, providing investors with 20% equity ownership in Beyond Cancer. Beyond Air retained 80% ownership in Beyond
Cancer (see Note 15).
BEYOND
AIR, INC. AND ITS SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
2 SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim
financial information and with the instructions to the Form 10-Q. Accordingly, they do not include all of the information and footnotes
required to be presented for complete financial statements. The accompanying unaudited 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 unaudited condensed consolidated balance sheet as of March 31, 2022
(the “2022 Annual Report”), filed with the U.S. Securities and Exchange Commission (the “SEC”) on June 28, 2022.
The unaudited condensed consolidated financial statements and related disclosures should be read in conjunction with the Company’s
audited consolidated financial statements and the related notes thereto included in the 2022 Annual Report on Form 10-K.
Principles
of Consolidation
These
consolidated financial statements include the accounts of the Company and the accounts of all of the Company’s subsidiaries and
a variable interest entity (“VIE”) for which the Company is the primary beneficiary. As the Company has both the power to
direct activities of Beyond Cancer that most significantly impact Beyond Cancer’s economic performance and the right to receive
benefits and losses that may potentially be significant, these financial statements are fully consolidated with those of the Company.
The non-controlling owners’ 20% interest in Beyond Cancer’s net assets and result of operations is reported as “non-controlling
interest” on the Company’s consolidated balance sheets and as “net income (loss) attributable to non-controlling interest”
in the Company’s consolidated statement of operations and comprehensive income (loss). All intercompany balances and transactions
have been eliminated in the accompanying financial statements.
Reclassifications
Certain prior period amounts have been reclassified
to conform to the current period presentation. These reclassifications had no effect on the reported results of operations.
Use
of Estimates
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 for the reporting period.
Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its significant estimates including accruals
for expenses under consulting, licensing agreements, and clinical trials, stock-based compensation, contingency recognition and the determination
of deferred tax attributes and the valuation allowance thereon.
Liquidity
Risks and Uncertainties
The
Company used cash in operating activities of $6.8
million for the three months ended June 30, 2022, and has accumulated losses attributable to the stockholders of Beyond Air of
$134.6
million. The Company had cash and cash equivalents of $72.8
million as of June 30, 2022 ($46.7 million excluding Beyond Cancer (see Note 2)). Based on management’s current business plan, and taking into consideration cash designated for the Beyond Cancer program, the Company estimates that its cash and liquidity are sufficient to finance its operating requirements for at least one year from
the date of filing these financial statements.
The
Company’s future capital needs and the adequacy of its available funds will depend on many factors, including, but not necessarily
limited to the success and costs of commercialization of the Company’s approved product and the actual cost and time necessary
for current and anticipated preclinical studies, clinical trials and other actions needed to obtain certification or regulatory approval
of the Company’s product candidates.
The
Company’s access to capital and liquidity currently includes a $40 million stock purchase agreement with Lincoln Park Capital Fund,
LLC (“LPC”) dated as of May 14, 2020 (the “New Stock Purchase Agreement”), of which approximately $18.1 million
remains available as of June 30, 2022. The New Stock Purchase Agreement provides for issuances through May 2023 at the Company’s
discretion as long as certain requirements are met (see Note 5).
The
Company entered into an At-The-Market Offering Sales Agreement, dated February 4, 2022 (the “2022 ATM”) for $50
million, of which $50
million in funds are available under this agreement as of June 30, 2022 (see Note 5).
The
Company may be required to raise additional funds through equity or debt securities offerings or strategic collaboration and/or licensing
agreements in order to fund operations until it is able to generate enough product or royalty revenues, if any. Such financing may not
be available on acceptable terms, or at all, and the Company’s failure to raise capital when needed could have a material adverse
effect on its strategic objectives, results of operations and financial condition.
Other
Risks and Uncertainties
The
Company is subject to risks common to development and early stage medical device companies including, but not limited to, new technological
innovations, certifications or regulatory approval, dependence on key personnel, protection of proprietary technology, compliance with
government regulations, product liability, uncertainty of market acceptance of approved products and the potential need to obtain additional
financing. The Company is also dependent on third-party suppliers and, in some cases single-source suppliers.
The
Company’s products require approval or clearance from the FDA prior to commencement of commercial sales in the United States. There
can be no assurance that the Company’s products beyond LungFit® PH in the U.S. will receive all of the required
approvals or clearances. Certifications, approvals or clearances are also required in foreign jurisdictions in which the Company may
license or sell its products. If the Company is denied such certifications or approvals or clearances or such certifications, approvals
or clearances are delayed, such denial or delay may have a material adverse impact on the Company’s results of operations, financial
position and liquidity. Further, there can be no assurance that the Company’s product will be accepted in the marketplace, nor
can there be any assurance that any future products can be developed or manufactured at an acceptable cost and with appropriate performance
characteristics, or that such products will be successfully marketed, if at all.
BEYOND
AIR, INC. AND ITS SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
2 SIGNIFICANT ACCOUNTING POLICIES (continued)
The
development of the Company’s product candidates or commercialization of its approved product could be further disrupted and
adversely affected by a resurgence of the COVID-19 pandemic. The Company experienced significant delays in the supply chain for
LungFit® due to the redundancy in parts and suppliers with ventilator manufacturing which has since been remedied.
Residual effects from the COVID-19 pandemic on the global supply chain having an effect on our ability to manufacture have been
addressed, but the stability of the situation is unclear. The Company continuously assesses the impact COVID-19 may have on the
Company’s business plans and its ability to conduct the preclinical studies and clinical trials as well as on the
Company’s reliance on third-party manufacturing and global supply chains. However, there can be no assurance that the Company
will be able to avoid part or all of any impact from COVID-19 or its consequences if a resurgence occurs.
Cash
and Cash Equivalents and Concentration of Credit Risk
The
Company considers all highly liquid investments with original maturities of three months or less at the date of purchase and an investment
in a U.S. government money market fund to be cash equivalents. The Company maintains its cash and cash equivalents in highly rated financial
institutions in Israel, Ireland and the U.S., the balances of which, at times, may exceed federally insured limits.
As
of June 30, 2022, restricted cash was unchanged from March 31, 2022 at $10.0 million. $2.6 million
was designated for a contract manufacturer to be used for materials and parts that require long lead times and $7.4 million
was held as collateral to secure a supersedeas bond for an appeal of a lawsuit (see Note 14).
The
following table is the reconciliation of the presentation and disclosure of cash, cash equivalents and restricted cash as shown on the
Company’s consolidated statements of cash flows (in thousands):
SCHEDULE OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
| |
| | | |
| | |
| |
June 30, 2022 | | |
March
31, 2022 | |
Cash and cash equivalents | |
$ | 72,773 | | |
$ | 80,242 | |
Restricted cash | |
| 9,989 | | |
| 9,988 | |
Total | |
$ | 82,762 | | |
$ | 90,230 | |
BEYOND
AIR, INC. AND ITS SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
2 SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue
Recognition
The
Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to
which the Company expects to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with
customers, the Company performs 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) the Company satisfies the performance obligation(s). At contract inception, the
Company assesses the goods or services promised within each contract, assesses whether each promised good or service is distinct and
identifies those promised goods or services that are performance obligations.
The
Company uses 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 the transaction
price in step (iv) above. The Company also 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 contract are satisfied.
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, such fees or other payments are recorded as contract liabilities and recognized as revenue when (or
as) the underlying performance obligation is satisfied.
Grant
Receivable
Under
a collaboration arrangement with the Cystic Fibrosis Foundation (“CFF”), grant milestones are achieved subject to certain
performance steps and requirements under a development program. Grant milestones are recorded as reimbursements against the applicable
portion of the Company’s research and development expenses. Such reimbursements are reflected as a reduction of research and development
expenses in the Company’s consolidated statements of operations and comprehensive income (loss), as the performance of research
and development services for reimbursement is not considered to be an ongoing component or central to the Company’s operations.
See Note 11.
Segment
Reporting
Commencing
with the creation of Beyond Cancer in November 2021 (see Note 15), the Company’s operations became classified into two segments,
Beyond Air and Beyond Cancer. Each segment has its own Management team, Board of Directors, Corporate Officers and legal entities. As
of June 30, 2022, Beyond Air, Inc. owns 80% of the common stock of Beyond Cancer. The segment reporting is based on the manner in which
the Company’s CEO as chief operating decision maker assesses performance and allocates resources across the organization. The Beyond
Air segment includes unallocated corporate expenses associated with the public company fees as well as all corporate related assets and
liabilities.
The
following table summarizes segment financial information by business segment for the three months ended June 30, 2022:
SCHEDULE
OF SEGEMENT FINANCIAL INFORMATION BY BUSINESS SEGMENT
(in thousands) | |
Beyond Air | | |
Beyond Cancer | |
Net loss for the three months ended June 30, 2022 | |
$ | (8,053 | ) | |
$ | (3,601 | ) |
Operating activities included in net loss: | |
| | | |
| | |
Depreciation and amortization | |
| 120 | | |
| 2 | |
Stock-based compensation expense | |
| 2,370 | | |
| 2,254 | |
| |
| | | |
| | |
Cash and cash equivalents | |
$ | 46,671 | | |
$ | 26,101 | |
All other assets | |
| 18,551 | | |
| 580 | |
Total liabilities | |
| (20,028 | ) | |
| (525 | ) |
Net assets – net liabilities | |
$ | 45,194 | | |
$ | 26,156 | |
Non-controlling interests | |
$ | - | | |
$ | 5,230 | |
| |
| | | |
| | |
Cash used in operations | |
$ | (5,512 | ) | |
$ | (1,328 | ) |
Research
and Development
Research
and development expenses are charged to the statement of operations as incurred. Research and development expenses include salaries,
benefits, stock-based compensation and costs incurred by outside laboratories, manufacturers, clinical research organizations,
consultants, and accredited facilities in connection with preclinical studies and clinical trials. Research and development expenses
are partially offset by the benefit of tax incentive payments for qualified research and development expenditures from the
Australian tax authority (“AU Tax Rebates”). The Company does not record AU Tax Rebates until payment is received due to
the uncertainty of receipt. In the three months ended June 30, 2022 and June 30, 2021, the Company received an AU Tax Rebate in the amount of $182
thousand and $0, respectively.
BEYOND
AIR, INC. AND ITS SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
2 SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign
Exchange Transactions
The
Company’s subsidiaries transact in U.S. dollars, Euros, New Israeli Shekels and Australian dollars. The Company’s main operations
are in the United States 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. The Company translated its non-U.S. operations’ assets and liabilities 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. Gains or losses from foreign currency transactions are included in other income (expense)
in the statement of operations as foreign currency exchange gain/(loss).
In
consolidating international subsidiaries, balance sheet currency effects are recorded as a component of accumulated other
comprehensive income. The other current and non-current assets line within the Statement of Cash Flows includes the impact of
foreign currency translation. This equity account includes the results of translating certain balance sheet assets and liabilities
at current exchange rates and some accounts at historical rates. For the three months ended June 30, 2022 and June 30, 2021, the Company recorded a
gain of $172
thousand and $0, respectively in accumulated other comprehensive income.
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 unit awards is valued using the closing price of the Company’s
common stock on the date of grant. The grant date fair value is recognized over the requisite service period during which an employee
and non-employee is required to provide service in exchange for the award. The grant date fair value of employee and non-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. Due to the
Company’s limited trading history, the Company utilizes weighting of its historical volatility and the implied volatility based
on an aggregate of guideline companies. The Company uses the simplified method to estimate the expected term.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and accumulated amortization. Depreciation and amortization are calculated
using the straight-line method over the estimated useful life of the assets as follows:
SCHEDULE OF PROPERTY AND EQUIPMENT USEFUL LIFE OF ASSETS
Computer
equipment |
Three
years |
Furniture
and fixtures |
Seven
years |
Clinical
and medical equipment |
Five
or Fifteen years |
Leasehold
improvements |
Shorter
of term of lease or estimated useful life of the asset |
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 and is
amortized on a straight-line method over its estimated useful life, determined to be thirteen years (see Note 14).
The
expected amortization expense for the next five fiscal years and thereafter is as follows for the year ended March 31 (in thousands):
SCHEDULE OF FUTURE EXPECTED AMORTIZATION EXPENSE
| |
| | |
2023 | |
$ | 156 | |
2024 | |
| 208 | |
2025 | |
| 208 | |
2026 | |
| 208 | |
2027 | |
| 208 | |
Thereafter | |
| 798 | |
Total | |
$ | 1,785 | |
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 that the Company considers as potential triggers of an impairment review include the
following:
● |
significant
underperformance relative to expected historical or projected future operating results, |
● |
significant
changes in the manner of the Company’s use of the acquired assets or the strategy for its overall business, |
● |
significant
negative regulatory or economic trends, and |
● |
significant
technological changes, which would render the platform technology, equipment, and manufacturing processes obsolete. |
BEYOND
AIR, INC. AND ITS SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
2 SIGNIFICANT ACCOUNTING POLICIES (continued)
Recoverability
of assets that will continue to be used in the Company’s 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 estimates of 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, 2022, the Company recorded a valuation allowance to the full extent of the Company’s
net deferred tax assets since the likelihood of realization of the benefit does not meet the more-likely-than-not threshold.
The
Company’s reserves related to taxes are based on a determination of whether and how much of a tax benefit taken by the Company
in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related
to the tax benefit. As of June 30, 2022, the Company had no unrecognized tax benefits or related interest and penalties accrued. The
Company has not, as yet, conducted a study of research and development (“R&D”) credit carryforwards. This study may result in an adjustment
to the Company’s R&D credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are
being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s R&D credits
and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be
no impact to the balance sheet or statement of operations if an adjustment were required. The Company would recognize both accrued interest
and penalties related to unrecognized benefits in income tax expense. The Company’s uncertain tax positions are related to years
that remain subject to examination by relevant tax authorities. Since the Company is in a loss carryforward position, the Company is
generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward
is available.
Net
Income (Loss) Per Share
Basic
and diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to Beyond Air, Inc.,
by the weighted average number of shares of common stock outstanding for 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 stockholders per share excludes all anti-dilutive
shares of common stock. 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 shares of common stock are not assumed to have
been issued if their effect is anti-dilutive (see Note 9).
Recently
Issued Accounting Standards Adopted
The
Financial Accounting Standards Board (“FASB”) recently issued Accounting Standards Update (“ASU”) 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,
to reduce complexity in applying U.S. GAAP to certain financial instruments with characteristics of liabilities and equity. The
guidance in Accounting Standards Codification (“ASU”) 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the
existing guidance that requires entities to account for beneficial conversion features and cash conversion features in equity,
separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for
which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. In
addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments
and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by
removing certain criteria required for equity classification. These amendments are expected to result in more freestanding financial
instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded
features requiring separate accounting from the host contract. The amendments in ASU 2020-06 further revise the guidance in ASC 260,
Earnings Per Share, to require entities to calculate diluted earnings per share (“EPS”) for convertible instruments by using the
if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument
may be settled in cash or shares. The amendments in ASU 2020-06 are effective for public entities, excluding smaller reporting
companies, for fiscal years beginning after December 15, 2021. For all other entities, the amendments are effective for fiscal years
beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.
The adoption of ASU 2020-06 did not have a material impact on the Company’s condensed consolidated financial statements or
disclosures.
Recently
Issued Accounting Standards, Not Yet Adopted
In
September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The ASU sets forth a “current
expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held
at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing
incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies
to some off-balance sheet credit exposures. In February 2020, the FASB issued ASU 2020-02, Financial Instruments – Credit Losses
(Topic 326), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments
will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company are currently
assessing the impact of the adoption of this ASU on its financial statements.
BEYOND
AIR, INC. AND ITS SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
3 FAIR VALUE MEASUREMENT
The
Company’s financial instruments primarily include cash, cash equivalents, restricted cash, accounts payable, and a short-term loan.
Due to the short-term nature of these financial instruments, the carrying amounts of these assets and liabilities approximate their fair
value. The long-term debt approximates fair value due to the prevailing market conditions for similar debt with remaining maturity and
terms.
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 give 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:
|
Level
1 - |
quoted
prices in active markets for identical assets or liabilities; |
|
|
|
|
Level
2 - |
inputs
other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets
or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or |
|
|
|
|
Level
3 - |
unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
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:
SCHEDULE OF PROPERTY AND EQUIPMENT
| |
| | | |
| | |
(IN THOUSANDS) | |
June 30, 2022 | | |
March
31,
2022 | |
| |
| | |
| |
Clinical and medical equipment | |
$ | 1,782 | | |
$ | 1,682 | |
Computer equipment | |
| 464 | | |
| 364 | |
Furniture and fixtures | |
| 349 | | |
| 311 | |
Leasehold improvements | |
| 427 | | |
| 404 | |
Property and equipment, gross | |
| 3,022 | | |
| 2,762 | |
Accumulated depreciation and amortization | |
| (890 | ) | |
| (767 | ) |
Property and equipment,
net | |
$ | 2,132 | | |
$ | 1,995 | |
Depreciation
and amortization expense for the three months ended June 30, 2022 and June 30, 2021 was $121 thousand and $58 thousand, respectively.
NOTE
5 STOCKHOLDERS’ EQUITY
On
May 14, 2020, the Company entered into the New Stock Purchase Agreement with LPC (the “New Stock Purchase Agreement”),
which provides for the issuance of up to $40
million of its common stock which the Company may sell from time to time in its sole discretion to LPC over 36 months, provided that
the closing price of the Company’s common stock is not below $0.25
per share and subject to certain other conditions and limitations set forth in the New Stock Purchase Agreement. For the three
months ended June 30, 2022 and June 30, 2021, the Company received net proceeds of $0
and $1.0
million from the sale of 0
and
200,000 shares of common stock, respectively. As of June 30, 2022, there was a balance of approximately $18.1
million available under the New Stock Purchase Agreement.
On
February 4, 2022, the Company entered into the “2022 ATM”, allowing the
Company to sell its common stock for aggregate sales proceeds of up to $50 million from time to time and at various prices, subject to
the conditions and limitations set forth in the 2022 ATM. If shares of the Company’s common stock are sold, there is a 3% fee paid
to the sales agent. As of June 30, 2022, there were $50.0 million in funds available under the 2022 ATM.
BEYOND
AIR, INC. AND ITS SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
5 STOCKHOLDERS’ EQUITY (continued)
Restricted
Stock Units
The
fair value for the restricted stock unit awards was valued at the closing price of the Company’s common stock on the date of grant.
Restricted stock units vest annually over five years.
A
summary of the Company’s restricted stock unit awards for the three months ended June 30, 2022 is as follows:
SCHEDULE
OF RESTRICTED STOCK AWARDS
| |
Number Of Shares | | |
Weighted Average Grant Date Fair Value | |
| |
| | |
| |
Unvested as of April 1, 2022 | |
| 949,600 | | |
| 6.92 | |
Granted | |
| - | | |
| - | |
Vested | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | |
Unvested as of June 30, 2022 | |
| 949,600 | | |
$ | 6.92 | |
Stock
Option Plans
The
Company’s Fourth Amended and Restated 2013 Beyond Air Equity Incentive Plan (the “2013 BA Plan”) allows for awards to
officers, directors, employees, and consultants of stock options, restricted stock units and restricted shares of the Company’s
common stock. The vesting terms of the options issued under the 2013 BA Plan are generally four years and expire in ten years from the
grant date. The 2013 BA Plan has 7,600,000 shares authorized for issuance. As of June 30, 2022, 402,636 shares were available under the
2013 BA Plan.
A
summary of the change in options for the 3 months ended June 30, 2022 is as follows:
SCHEDULE
OF OPTION ACTIVITY
| |
Number Of Options | | |
Weighted Average Exercise Price Options | | |
Weighted Average Remaining Contractual Life- Options | | |
Aggregate Intrinsic Value (in
thousands) | |
| |
| | |
| | |
| | |
| |
Options outstanding as of April 1, 2022 | |
| 5,508,631 | | |
$ | 5.60 | | |
| 8.1 | | |
$ | 6,831 | |
Granted | |
| 31,000 | | |
| 5.58 | | |
| - | | |
| - | |
Exercised | |
| (8,000 | ) | |
| 5.35 | | |
| - | | |
| - | |
Forfeited | |
| (23,875 | ) | |
| 5.98 | | |
| - | | |
| - | |
Outstanding as of June 30, 2022 | |
| 5,507,756 | | |
$ | 5.60 | | |
| 7.8 | | |
$ | 6,875 | |
Exercisable as of June 30, 2022 | |
| 2,521,506 | | |
$ | 4.71 | | |
| 6.5 | | |
$ | 5,002 | |
The
Company’s 2021 Beyond Cancer Ltd Equity Incentive Plan (the “2021 BC Plan”) allows for awards to officers, directors,
employees, and consultants of stock options, restricted stock units and restricted shares of Beyond Cancer’s common stock.
The vesting terms of the options issued under the 2021 BC Plan are generally four years and expire in ten years from the grant date.
On December 1, 2021, the Company’s Board of Directors approved to reserve for issuance 2,000,000 shares of common stock. As of
June 30, 2022, 176,500 shares were available under the 2021 BC Plan.
SCHEDULE
OF OPTION ACTIVITY
| |
Number Of Options | | |
Weighted Average Exercise Price–- Options | | |
Weighted Average Remaining Contractual Life- Options | | |
Aggregate Intrinsic Value (thousands) | |
| |
| | |
| | |
| | |
| |
Options outstanding as of April 1, 2022 | |
| 1,763,500 | | |
$ | 2.76 | | |
| 9.4 | | |
$ | 12,768 | |
Granted | |
| 60,000 | | |
| 10.00 | | |
| 9.8 | | |
| - | |
Exercise | |
| - | | |
| - | | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | | |
| - | | |
| - | |
Outstanding as of June 30, 2022 | |
| 1,823,500 | | |
$ | 3.00 | | |
| 9.4 | | |
$ | 12,768 | |
Exercisable as of June 30, 2022 | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
BEYOND
AIR, INC. AND ITS SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
5 STOCKHOLDERS’ EQUITY (continued)
As
of June 30, 2022, the Company had unrecognized stock-based compensation expense in the 2013 BA Plan of approximately $9.0 million which
is expected to be expensed over the weighted average remaining service period of 1.6 years. For the three months ended June 30, 2022
and June 30, 2021, the weighted average fair value of options granted was $4.22 and $4.05 per share, respectively.
As
of June 30, 2022, the Company had unrecognized stock-based compensation expense in the 2021 BC Plan of approximately $12.4 million which
is expected to be expensed over the weighted average remaining service period of 2.5 years. For the three months ended June 30, 2022,
the weighted average fair value of options granted was $8.26 per share.
The
following was utilized to calculate the fair value of options on the date of grant:
SCHEDULE
OF FAIR VALUE OF OPTION
| |
June
30,
2022 | | |
June 30,
2021 | |
Risk-free interest rate | |
| 2.5 – 3.4 | % | |
| 1.1 | % |
Expected volatility (Beyond Air) | |
| 88.6 - 89.1 | % | |
| 91.1 – 91.8 | % |
Expected volatility (Beyond Cancer) | |
| 95.3-104.7 | % | |
| n/a | |
Dividend yield | |
| 0 | % | |
| 0 | % |
Expected terms (in years) | |
| 6.25 | | |
| 6.25 | |
The
following summarizes the components of stock-based compensation expense which included stock options and restricted stock for the three
months ended June 30, 2022 and June 30, 2021:
SCHEDULE
OF STOCK-BASED COMPENSATION EXPENSE
| |
2022 | | |
2021 | |
| |
Three Months Ended | |
(in thousands) | |
June 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Research and development | |
$ | 925 | | |
$ | 365 | |
General and administrative | |
| 3,699 | | |
| 851 | |
| |
| | | |
| | |
Total | |
$ | 4,624 | | |
$ | 1,216 | |
On
March 4, 2021, the stockholders approved the 2021 Employee Stock Purchase Plan (the “ESPP”). The purpose of the ESPP is
to encourage and to enable eligible employees of the Company, through after-tax payroll deductions, to acquire proprietary interests
in the Company through the purchase and ownership of shares of stock. The ESPP is intended to benefit the Company and its
stockholders by (a) incentivizing participants to contribute to the success of the Company and to operate and manage the
Company’s business in a manner that will provide for the Company’s long-term growth and profitability and that will
benefit its stockholders and other important stakeholders and (b) encouraging participants to remain in the employ of the Company.
As of June 30, 2022, no
shares were issued under the ESPP.
Warrants
A
summary of the Company’s outstanding warrants as of June 30, 2022 is as follows:
SUMMARY
OF COMPANY’S OUTSTANDING WARRANTS
Warrant Holders | |
Number Of Warrants | | |
Exercise Price | | |
Intrinsic Value (in
thousands) | | |
Date of Expiration |
Third-party license agreement | |
| 208,333 | | |
$ | 4.80 | | |
$ | 394 | | |
January 2024 |
March 2020 loan (see Note 12) | |
| 172,187 | | |
$ | 7.26 | | |
| - | | |
March 2025 |
NitricGen Agreement | |
| 80,000 | | |
$ | 6.90 | | |
| - | | |
January 2028 |
Total | |
| 460,520 | | |
$ | 6.08 | | |
$ | 394 | | |
|
BEYOND
AIR, INC. AND ITS SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
5 STOCKHOLDERS’ EQUITY (continued)
No
warrants were issued or exercised in either the three months ended June 30, 2022 or June 30, 2021.
NOTE
6 OTHER CURRENT ASSETS AND PREPAID EXPENSES
A
summary of current assets and prepaid expenses is as follows (in thousands):
SCHEDULE
OF CURRENT ASSETS AND PREPAID EXPENSES
| |
June 30, 2022 | | |
March 31, 2022 | |
Research and development | |
$ | 94 | | |
$ | 216 | |
Insurance | |
| 735 | | |
| 1,037 | |
Professional | |
| - | | |
| 3 | |
Value added tax receivable | |
| 135 | | |
| 282 | |
Other | |
| 534 | | |
| 505 | |
Total | |
$ | 1,497 | | |
$ | 2,044 | |
NOTE
7 ACCRUED EXPENSES
A
summary of the accrued expenses is as follows (in thousands):
SUMMARY
OF ACCRUED EXPENSES
| |
June 30, 2022 | | |
March 31, 2022 | |
Research and development | |
$ | 670 | | |
$ | 1,006 | |
Professional fees | |
| 542 | | |
| 442 | |
Employee salaries and benefits | |
| 428 | | |
| 409 | |
Accrual for contingent liabilities (Note 14) | |
| 2,475 | | |
| 2,435 | |
Accrued Circassia Settlement first payment due in 2022 (Note 10) | |
| 2,500 | | |
| 2,500 | |
Accrued NitricGen agreement post FDA approval (Note 14) | |
| 1,500 | | |
| 1,500 | |
Other | |
| 99 | | |
| 82 | |
Total short-term accrued expenses | |
$ | 8,213 | | |
$ | 8,374 | |
| |
| | | |
| | |
Accrued Circassia Settlement payments due in more than 12 months (Note 10) | |
$ | 8,000 | | |
$ | 8,000 | |
Total other long-term liabilities | |
$ | 8,000 | | |
$ | 8,000 | |
BEYOND
AIR, INC. AND ITS SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
8 LEASES
Lessees
are required to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and provide
disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. During the three months ended
June 30, 2022, the Company entered into one new lease, which resulted in the recognition of operating lease liabilities and right-of-use
assets of $299 thousand. The right-of-use assets and operating lease liability are as follows (in thousands):
SCHEDULE
OF OPERATING LEASE LIABILITY
| |
June 30, 2022 | | |
March 31, 2022 | |
| |
| | |
| |
Right-of-use assets | |
$ | 2,354 | | |
$ | 2,216 | |
| |
| | | |
| | |
Operating lease liability short-term | |
$ | 290 | | |
$ | 281 | |
Operating lease liability long-term | |
| 2,193 | | |
| 2,079 | |
Total | |
$ | 2,483 | | |
$ | 2,361 | |
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 the Company’s 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. Operating lease expense is recognized on a straight-line
basis over the lease term and is included in general and administrative and research development expenses. 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.
SCHEDULE
OF LEASE OTHER INFORMATION
Other Information For The Three Months Ended June 30, 2022 | |
| |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
Cash paid (thousands) | |
$ | 138 | |
Right-of-use assets obtained in exchange for new operating lease liabilities: | |
| | |
Weighted-average remaining lease term — operating leases | |
| 7.0 | |
Weighted-average discount rate — operating leases | |
| 8.3 | % |
SCHEDULE
OF MATURITY OF LEASE LIABILITIES
Maturity of Lease Liabilities | |
Operating Leases | |
Payments remaining for the year ended March 31 (in thousands): | |
| | |
2023 | |
$ | 351 | |
2024 | |
| 506 | |
2025 | |
| 499 | |
2026 | |
| 508 | |
2027 | |
| 360 | |
Thereafter | |
| 1,081 | |
Total lease payments | |
| 3,305 | |
Less: interest | |
| (822 | ) |
Present value of lease liabilities | |
$ | 2,483 | |
NOTE
9 BASIC AND DILUTED NET INCOME (LOSS) PER SHARE OF COMMON STOCK
The
following potentially dilutive securities were not included in the calculation of diluted net income (loss) per share attributable to
common stockholders of Beyond Air because their effect would have been anti-dilutive for the periods presented:
SCHEDULE
OF POTENTIAL ANTI-DILUTIVE SECURITIES
| |
June 30, 2022 | | |
June 30, 2021 | |
| |
| | |
| |
Common stock warrants | |
| 460,520 | | |
| 3,433,623 | |
Common stock options | |
| 5,507,756 | | |
| 4,224,222 | |
Restricted shares | |
| 949,600 | | |
| 546,200 | |
| |
| | | |
| | |
Total | |
| 6,917,876 | | |
| 8,204,045 | |
NOTE
10 LICENSE AGREEMENT
On
January 23, 2019, the Company entered into an agreement for commercial rights (the “Circassia Agreement”) with Circassia
Limited and its affiliates (collectively, “Circassia”) for 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 Circassia Agreement.
On
May 25, 2021, the Company and Circassia entered into a Settlement Agreement resolving all claims by and between both parties and
mutually terminating the Circassia Agreement. Pursuant to the terms of the Settlement Agreement, the Company agreed to pay Circassia
$10.5
million in three installments, the first being a payment of $2.5
million upon FDA approval (the “Initial Payment Due Date”). Thereafter, the Company will pay $3.5
million to Circassia on the first anniversary of the Initial Payment Due Date and $4.5
million on the second anniversary of the Initial Payment Due Date. Additionally, beginning in year three post-approval, Circassia
will receive a quarterly royalty payment equal to 5%
of LungFit® PH net sales in the US. This royalty will terminate once the aggregate payment reaches $6
million. The product candidate was approved by the FDA on June 28, 2022 and a liability of $10.5
million was recognized as of June 30, 2022.
BEYOND
AIR, INC. AND ITS SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
11 GRANT COLLABORATON AGREEMENT
On
February 10, 2021, the Company received a grant for up to $2.17
million from the CFF to advance the clinical development of high concentration NO for the treatment of Nontuberculous Mycobacteria,
or NTM pulmonary disease, which disproportionally affects cystic fibrosis patients. Under the terms of the agreement, the funding
will be allocated to the ongoing LungFit® GO NTM pilot study. The grant provides milestones based upon the
achievement of performance steps and requirements under a development program. The grant provides for royalty payments to CFF upon
the commercialization of any product developed under the grant program at a rate of 10%
of net sales. The cumulative royalties are capped at four times the grant actually paid to the Company. Since the beginning of the
pilot study, the Company has received two milestone payments of $425 thousand
each and accrued an additional $479
thousand as of June 30, 2022. A total of $1,329
thousand has been recognized as a reduction of R&D costs from this grant to date, including $157 thousand in the three months ended June 30, 2022.
NOTE
12 LONG-TERM LOAN
On
March 17, 2020, the Company entered into a Facility Agreement (the “Facility Agreement”) with certain lenders for up to
$25.0
million in five tranches of $5.0
million per tranche. The Company received proceeds from the first tranche in fiscal year 2020. During October 2021, the Company
amended the Facility Agreement to offer the lenders the ability to accept redemption of all amounts outstanding from the first
tranche of $5.0
million and to terminate the Facility Agreement without penalty. The Facility Agreement was terminated on November 10,
2021.
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.
In
connection with the termination of the Facility Agreement, on November 8, 2021, the Company entered into a modification of the Facility
Agreement for one lender to allow for repayment of $200 thousand on unchanged payment terms. The loan is unsecured with interest at 10%
per year which is to be paid quarterly. The loan will be repaid in installments commencing on June 15, 2023 with all outstanding amounts
due on March 17, 2025.
SCHEDULE
OF MATURITY OF LONG-TERM LOAN
Maturity of Long-Term Loan (in thousands) | |
June 30, 2022 | |
| |
| |
2022 | |
$ | - | |
2023 | |
| - | |
2024 | |
| 80 | |
2025 | |
| 120 | |
Total | |
$ | 200 | |
BEYOND
AIR, INC. AND ITS SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
13 LOAN PAYABLE
As
of June 30, 2022 in connection with the Company’s insurance policy, a loan was used to finance part of the premium. The details
concerning the loan are as follows:
SCHEDULE
OF LOAN PAYABLE
| |
June 30, 2022 | | |
March 31, 2022 | |
| |
| | |
| |
Amount outstanding (in thousands) | |
$ | 619 | | |
$ | 927 | |
Monthly payments (in thousands) | |
$ | 104 | | |
$ | 104 | |
Number of monthly payments | |
| 6 | | |
| 9 | |
Interest rate | |
| 1.3 | % | |
| 1.3 | % |
Due date | |
| December 2022 | | |
| December 2022 | |
NOTE
14 COMMITMENTS AND CONTINGENCIES
License
Agreements
On
October 22, 2013, the Company entered into a patent license agreement (the “CareFusion Agreement”) with SensorMedics Corporation,
a subsidiary of CareFusion Corp. (“CareFusion”), pursuant to which the Company agreed to pay to CareFusion a non-refundable
upfront fee of $150 thousand that is credited against future royalty payments, and is obligated to pay 5% royalties of any licensed product
net sales, but at least $50 thousand per annum during the term of the agreement. As of June 30, 2022, the Company has not paid any royalties
to CareFusion since the Company has not received any revenues from the technology associated with the license under the CareFusion Agreement.
The term of the CareFusion 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 CareFusion Agreement, and may be terminated unilaterally by CareFusion with 30 days’
prior written notice in the event that the Company does not meet certain milestones.
In
August 2015, BA Ltd. entered into an Option Agreement (the “Option Agreement”) with Pulmonox whereby BA Ltd. acquired the
option (the “Option”) to purchase certain intellectual property assets and rights. On January 13, 2017, the Company exercised
the Option and paid $500 thousand to Pulmonox. The Company becomes obligated to make certain one-time development and sales milestone
payments to Pulmonox, commencing with the date on which the Company receives regulatory approval for the commercial sale of the first
product candidate qualifying under the Option 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.
BEYOND
AIR, INC. AND ITS SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
14 COMMITMENTS AND CONTINGENCIES (continued)
On
January 31, 2018, the Company entered into an agreement (the “NitricGen Agreement”) with NitricGen, Inc.
(“NitricGen”) to acquire a global, exclusive, transferable license and associated assets including intellectual
property, know-how, trade secrets and confidential information from NitricGen related to the LungFit®. The Company
acquired the licensing right to use the technology and agreed to pay NitricGen a total of $2.0
million in future payments based upon achieving certain milestones, as defined in the NitricGen Agreement, and single-digit
royalties on sales of the LungFit®. The Company paid NitricGen $100
thousand upon executing the NitricGen Agreement, $100
thousand upon achieving the next milestone and issued 100,000
warrants to purchase the Company’s common stock valued at $295
thousand upon executing the NitricGen Agreement. The remaining future milestone payments are $1.8
million of which the amount of $1.5
million is due six months after approval of the LungFit® by the FDA, which was accrued in the fourth quarter of
fiscal year 2022.
Employment
Agreements
Certain
agreements between the Company and its officers contain a change of control provision for payment of severance arrangements.
Supply
Agreement and Purchase Order
In
August 2020, the Company entered into a supply agreement expiring on December 31, 2024. The agreement will renew automatically for
successive three-year periods unless and until the Company provides twelve months’ notice of its intent not to renew the agreement. The
Company has opened several non-cancellable purchase orders and the outstanding amount remaining under the purchase order as of June
30, 2022 was approximately $3.0
million with this supplier.
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 (the “Trial Court”) against the Company 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. Empery
alleges that, as a result of certain circumstances in connection with a February 2018 financing transaction, the 166,672 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.
On
August 20, 2020, the Trial Court denied the Company’s summary judgment motion as to the first and third claims for relief, but dismissed the second
claim for declaratory judgment as moot (the “August 20 Decision”). The Appellate Division First Department denied the Company’s appeal
of the August 20 Decision on September 30, 2021. Following a three-day bench trial, the Trial Court issued a decision on October 14,
2021, finding in favor of Empery on the two remaining claims, granting reformation of the Warrant Agreement, and awarding Empery damages
in the aggregate amount of approximately $5.8 million. On November 12, 2021, the Company filed a notice of appeal. Pending appeal, the Company is required
to use approximately $7.4 million of cash as collateral to secure a supersedeas bond for the full amount of damages and interest in case
the Company is unsuccessful in its appeal. On September 30, 2021, the Company recorded an estimate for a contingent loss of $2.4 million related to the
Empery litigation. In consultation with outside legal counsel, the Company believes that it has several meritorious defenses against the claims,
and the decision of the Trial Court including, but not limited to, the quantification of damages.
On
December 28, 2021 Hudson Bay Master Fund (“Hudson”) filed a lawsuit against us related to the notice of adjustment of the
exercise price of and the number of warrant shares issuable under warrants issued to Hudson in January 2017. Hudson received 83,334 warrants
in connection with the January 2017 offering.
Hudson’s
complaint alleges breach of contract and that Hudson is entitled to damages estimated at approximately $2.6 million as a result of certain
adjustments to the exercise price and number of warrant shares issuable following the February 2018 financing transaction. The fact pattern of these claims differs from the claims associated with
the initial Empery judgment and in consultation with outside legal counsel, the Company believes that it has several meritorious defenses
against Hudson’s claims. The Company believes that Hudson’s claims have no merit and we will vigorously defend such lawsuit.
BEYOND
AIR, INC. AND ITS SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
15 BEYOND CANCER
On
November 4, 2021, the Company announced that Beyond Air and Beyond Cancer, Ltd agreed to terms to which the Company, through its subsidiaries
would be licensing certain intellectual property and other assets related to, or necessary for the development, commercialization, manufacture
and distribution of certain cancer treatment products and/or technologies to a subsidiary of the Company (the “Transaction”).
In connection and concurrently with the closing of the Transaction, Beyond Cancer issued and sold common shares, par value $1.00 to certain
investors pursuant to a subscription agreement (the “Offering”). The Offering consisted of an aggregate of 3 million common
shares of Beyond Cancer at a purchase price of $10.00 per share. On November 18, 2021, the Company announced that the maximum amount
of shares offered had been purchased for a total of $30 million (including $4.8 million from the terminated Loan Facility and $1.1 million
from related parties) for 20% of the equity in Beyond Cancer. beyond Air retained 80% ownership of Beyond Cancer, which will have exclusive
right to the intellectual property portfolio utilizing UNO for the treatment of solid tumors. Beyond Cancer will pay Beyond Air a single
digit royalty on all future revenues.
Members
of the Board of Directors of Beyond Air who are also member of the Board of Directors of Beyond Cancer, and their families, are considered
related parties to the Offering. Related parties invested $1.1 million in the Offering.
Beyond
Cancer was created as a new company in which there were no pre-existing employees, and there was no organized workforce contributed
to Beyond Cancer; the only contributions were the rights to access certain intellectual property and access to certain employees of Beyond
Air, subject to a license agreement, and cash paid by the subscribers in the Offering. Any development work that was being performed
was being conducted pursuant to the license agreement by Beyond Air’s preclinical team. Therefore, Beyond Cancer did not have employees
constituting a workforce that would be able to create outputs and enable Beyond Cancer to become revenue producing. As such, it was concluded
that there was no substantive process and Beyond Cancer was deemed not to be a business under ASC 805-10 and the Company has not provided
any financial support to Beyond Cancer since it was established in November 2021.
Beyond Air concluded that it is the primary beneficiary of Beyond Cancer
because Beyond Air has the power to direct the activities of Beyond Cancer that most significantly impact the economic performance of
the entity, Beyond Air holds a majority interest in substantially all of the assets and certain liabilities of Beyond Cancer, as well
as a majority voting interest, and Beyond Cancer’s Board of Directors has the full power to direct all activities of Beyond Cancer,
including those specifically related to the ongoing research and development. Beyond Cancer’s Board of Directors is comprised of
four directors, for which Beyond Air holds two seats and a Board member of Beyond Air, a de facto agent of Beyond Air, holds one seat.
The other party does not have the substantive rights to veto or block decisions made by Beyond Air’s designees. Therefore, it was
determined that Beyond Air has the unilateral right to control all decisions related to the significant activities of Beyond Cancer. Although
Beyond Air is considered to have control over Beyond Cancer under ASC 810 as a result of its majority ownership interest, the assets of
Beyond Cancer can only be used to satisfy the obligations of Beyond Cancer. As a result of Beyond Air’s majority ownership interest
in the entity and its primary beneficiary conclusion, Beyond Air consolidated Beyond Cancer in its consolidated financial statements beginning
in November 2021.
The
carrying amount of net assets and net liabilities of the VIE included in the consolidated financial statements, after the elimination
of intercompany balances and transactions, was $26.2 million (including $26.1 million of cash) as of June 30, 2022, compared to $27.5 million (including $27.7 million of cash) at March
31, 2022. (See Note 2, Segment
Reporting for additional disclosure of the VIE assets and liabilities.) Beyond Cancer generated $3.6 million of losses (before elimination
of intercompany amounts) in the three months ended June 30, 2022. The Company’s attributed losses as the primary beneficiary was
proportional to its equity interest in Beyond Cancer (80%) for the period from inception until June 30, 2022.
NOTE
16 RELATED PARTY TRANSACTIONS
Members
of the Board of Directors of Beyond Air who are also members of the Board of Directors of Beyond Cancer, and their families, are
considered related parties to the Offering disclosed in Note 15. Related parties invested $1.1
million in the Offering in November 2021.