Incannex Healthcare Inc

Note 1 – Re-domiciliation and Business

Incannex Healthcare Inc. (the “Company”) is a corporation formed under the laws of Delaware in July 2023. In November 2023, Incannex Healthcare Inc. acquired all the outstanding ordinary shares of Incannex Healthcare Limited, an Australian corporation (“Incannex Australia”), pursuant to a scheme of arrangement under Australian law (the “Re-domiciliation”). As a result of the Re-domiciliation, Incannex Australia became a wholly-owned subsidiary of Incannex Healthcare Inc., which is the new ultimate parent company.

Until the Re-domiciliation, Incannex Australia’s ordinary shares were listed on the Australian Securities Exchange (“ASX”) and American Depositary Shares (“ADSs”), each representing 25 ordinary shares of Incannex Australia, traded on Nasdaq. Following completion of the Re-domiciliation, Incannex Australia’s ordinary shares were delisted from the ASX and Incannex Healthcare Inc. assumed Incannex Australia’s listing on Nasdaq.

Pursuant to the Re-domiciliation, holders of Incannex Australia’s ordinary shares receivedone share of common stock in Incannex Healthcare Inc. for every 100 ordinary shares held in Incannex Australia and holders of ADSs in Incannex Australia receivedone share of common stock of Incannex Healthcare Inc. for every 4 ADSs held in Incannex Australia.

The issued and outstanding shares of the Company’s common stock as shown in this report have been adjusted in the consolidated financial statements to reflect the 100:1 exchange ratio as if it had occurred on July 1, 2022.

Incannex Healthcare Inc. and its subsidiaries are referred to as “the Company” unless the text otherwise requires.

The Company’s fiscal year end is June 30. References to a particular “fiscal year” are to the Company’s fiscal year ended June 30 of that calendar year.

The unaudited condensed consolidated financial statements of the Company are presented in United States dollars and consist of Incannex Healthcare Inc. and the following wholly-owned subsidiaries:

Note 2 – Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

On November 28, 2023, the Company implemented the transaction to redomicile from Australia to United States and became the parent of Incannex Australia and the wholly owned subsidiaries listed in Note 1. The historical financial statements of Incannex Australia became the historical financial statements of the combined company upon consummation of the Re-domiciliation. As a result, the financial statements included in this report reflect (i) the historical operating results of Incannex Australia and subsidiaries prior to the Re-domiciliation; (ii) the combined results of the Company, Incannex Australia, and subsidiaries following the completion of the Re-domiciliation; and (iii) the Company’s equity structure for all periods presented, including adjusting the issued and outstanding shares of common stock to reflect the 100:1 exchange ratio as if it had occurred on July 1, 2022.

Note 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)

The Company’s unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and pursuant to the rules and regulations of the SEC. Prior to the Re-domiciliation, Incannex Australia reported its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). Following the Re-domiciliation, the Company transitioned to US GAAP and applied US GAAP retrospectively for all prior periods presented.

Reference is frequently made herein to the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”). This is the source of authoritative US GAAP recognized by the FASB to be applied to non-governmental entities.

Unaudited Interim Financial Information

In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2024, and its results of operations for the three months ended September 30, 2024, and 2023, and cash flows for the three months ended September 30, 2024, and 2023. The Company has condensed or omitted certain information and note disclosures normally included in financial statements prepared in accordance with GAAP pursuant to the applicable required disclosures and regulations of the SEC. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2024.

Going Concern Basis

The Company believes there is substantial doubt about its ability to obtain additional capital when and as needed to continue as a going concern aspreviously disclosed in the 2024 Annual Report. The Company has not yet established an ongoing source of revenue sufficient to cover its operating and capital expenditure requirements and to cover any potential payments that may become due and payable pursuant to any debentures to provide sufficient certainty that the Company will continue as a going concern. Historically, the Company has financed its operations to date primarily through partnerships, funds received from public offerings of common stock, a debt financing facility, as well as funding from governmental bodies. The Company plan to address this condition through the sale of common stock in public offerings and/or private placements, debt financings, or through other capital sources, including collaborations with other companies or other strategic transactions, but there is no assurance these plans will be completed successfully or at all. Pursuant to the requirements of ASC 205-40,* Presentation of Financial Statements - Going Concern*, and as a result of the financial condition and other factors described herein, there is substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the date of this Quarterly Report.

Based on the Company’s unrestricted cash and cash equivalents as of September 30, 2024, the Company anticipates that it will be able to fund its planned operating expenses and capital expenditure requirements into March 2025. The Company believes that its current cash and cash equivalents and anticipated cash flows from the financing activities contemplated by the September 2024 Purchase Agreement (as defined below) and the ELOC Purchase Agreement (as defined below) will be sufficient to meet the Company’s anticipated working capital requirements and capital expenditures in the ordinary course of business until March 2026. However, there can be no assurance that the Company will continue to comply with the terms of these agreements or that these issuances will occur. The Company has based these estimates on assumptions that may prove to be wrong, and the Company could use its capital resources sooner than it currently expects.

The Company’s independent auditor also included in its audit report, which is part of the 2024 Annual Report, a going concern opinion raising substantial doubt about the Company’s ability to continue as a going concern. This substantial doubt as to the Company’s ability to continue as a going concern may adversely impact its ability to obtain any additional financing the Company may need to continue its business operations and may materially and adversely affect its ability to enter into contractual relations with third parties. Uncertainty about the Company’s ability to continue as a going concern could materially and adversely affect its liquidity, financial condition and business prospects.

Note 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Details of all controlled entities are set out in Note 1. All intercompany balances and transactions have been eliminated on consolidation.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the Company’s unaudited condensed consolidated financial statements and accompanying notes.

The most significant estimates and assumptions in the Company’s unaudited condensed consolidated financial statements include the valuation of equity-based instruments issued for other than cash accrued research and development expense, and the research and development tax credit. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ materially from those estimates.

Risks and Uncertainties

The Company is subject to risks and uncertainties common to companies in the biopharmaceutical industry. The Company believes that changes in any of the following areas could have a material adverse effect on future financial position or results of operations: ability to obtain future financing; regulatory approval and market acceptance of, and reimbursement for, product candidates; performance of third-party clinical research organizations and manufacturers upon which the Company relies; protection of the Company’s intellectual property; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors; the Company’s ability to attract and retain employees.

There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained or maintained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid technological change and substantial competition from other pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees, consultants and other third parties.

Significant Accounting Policies

There have been no changes to the Company’s significant accounting policies disclosed in Note 2 to the consolidated financial statements described in the Company’s 2024 Annual Report that have had a material impact on the Company’s unaudited condensed consolidated financial statements and related notes.

Note 3 – Prepaid expenses and other current assets

Note 4 – R&D tax incentive receivable

Due to multiple years of tax incentives being granted and successful lodgment of overseas findings on the Company’s lead assets, the Company changed its estimates for the R&D tax incentive receivable, primarily based on historical experience of claims.

Note 5 – Property, Plant and Equipment, net

Depreciation expense is recorded within general and administrative in the unaudited condensed consolidated statements of operations and comprehensive loss and amounted to $66,184 and $12,046 for the three months ended September 30, 2024 and 2023, respectively.

Note 6 – Trade and other payables, accrued expenses and other current liabilities

Trade and other payables are unsecured, non-interest bearing and are normally settled within 30 days. The carrying amounts are a reasonable approximation of fair value.

Note 7 – Leases

During fiscal year 2023, the Company entered into three new lease agreements for its corporate head office in Sydney, Melbourne office and Clarion Clinic site. The leases have four, five and three-year terms respectively. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases also include renewal options at the election of the Company to renew or extend the lease for an additional three to five years. These optional periods have not been considered in the determination of the right-of-use assets or lease liabilities associated with these leases as the Company did not consider it reasonably certain it would exercise the options.

The following table summarizes the weighted-average remaining lease term and discount rates for the Company’s operating leases:

The following table summarizes the lease costs pertaining to the Company’s operating leases:

Cash paid for amounts included in the measurement of operating lease liabilities during the three months ended September 30, 2024 and fiscal year June 30, 2024 was $54,000 and $172,000, respectively, and was included within net cash used in operating activities in the cash flows.

The following table summarizes the future minimum lease payments due under operating leases as of September 30, 2024, (in thousands):

As of September 30, 2024, the Company’s operating lease has a weighted-average remaining lease term of 2.07 years and a discount rate of 9.18%.

Note 8 – Commitments and contingencies

The Company records a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company also discloses material contingencies when it believes a loss is not probable but reasonably possible. Accounting for contingencies requires the Company to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Although the Company cannot predict with assurance the outcome of any litigation or tax matters, it does not believe there are currently any such actions that, if resolved unfavorably, would have a material impact on the Company’s operating results, financial position or cash flows.

Note 9 – Stockholder’s equity/Issued capital

Common Stock

The Company has one class of common stock. In connection with the re-domiciliation, the Company’s amended and restated certificate of incorporation became effective, which provides for authorized the issuance of 100,000,000 authorized shares of common stock with a par value of $0.0001 per share, withone vote per share. Holders of common stock are entitled to receive any dividends as may be declared from time to time by the Company’s board of directors.

On November 28, 2023, the Company effected the Re-domiciliation. All references in these unaudited condensed consolidated financial statements to the Company’s outstanding common stock, including per share information, have been retrospectively adjusted to reflect this Re-domiciliation.

Note 10 – Stock-based payments

Restricted stock units

A summary of the changes in the Company’s restricted stock activity for the period ended September 30, 2024, are as follows:

Note 10 – Stock-based payments (continued)

Stock options

A summary of the changes in the Company’s stock options activity for the period ended September 30, 2024, are as follows:

The aggregate intrinsic value of share options is calculated as the difference between the exercise price of the share options and the fair value of the Company’s shares of common stock for those share options that had exercise prices lower than the fair value of the Company’s shares of common stock.

As of September 30, 2024, there was $85,091 of unrecognized compensation cost related to unvested share options, which is expected to be recognized over a weighted-average period of 0.75 years.

Note 11 – Income Tax

For the three months ended September 30, 2024, and September 30, 2023, respectively, the Company did not recognize a provision or benefit for income taxes as it incurred net losses. In addition, the net deferred tax assets generated from net operating losses were fully offset by a valuation allowance as the Company believes it is not more likely than not that the benefit will be realized.

Note 12 – Loss per share

All share and earnings per share amounts presented below reflect the impact of the Re-domiciliation as if it had taken effect on July 1, 2022.

Basic and diluted net loss per share attributable to stockholders was calculated as follows (in thousands, except share and per share amounts):

The Company notes that the diluted loss per share is the same as basic loss per share.

Note 13 – Related Party Transactions

Transactions between related parties are on commercial terms and conditions, no more favorable than those available to other parties unless otherwise stated.

There wereno amounts payable to any related parties as of September 30, 2024 and June 30, 2024.

Note 14 – Subsequent Events

Facility Agreement

On October 9, 2024, the Company entered into a Facility Agreement (the “Facility Agreement”) with FC Credit Pty Ltd (“FC Credit”), pursuant to which FC Credit will provide a term loan facility for up to $4.7 million (the “Loan Facility”). On October 10, 2024, the Company received approximately $4.6 million as the initial drawdown amount, after deducting certain fees payable by the Company under the Facility Agreement. The Loan Facility has a term of 12 months from the date of the initial drawdown (the “Final Repayment Date”). Interest under the Loan Facility will accrue at the rate of 14.5% per annum and is payable on the last date of each calendar month and on the Final Repayment Date.

This facility provides the Company with immediate access to funds based on research and development expenses incurred during the 2023 and 2024 financial years, aligning with the end of the Australian financial year. The Research and Development Tax Incentive (“RDTI”) program is a key program under the Australian government's innovation framework, designed to encourage companies to undertake research and development activities that benefit Australia. It offers a tax rebate, currently at 48.5%, for eligible research and development expenses, allowing companies to recoup almost half of their research and development spending.

Equity Line of Credit Agreement

On September 6, 2024, the Company entered into an equity line of credit Purchase Agreement (the “ELOC Purchase Agreement”) with Arena Business Solutions Global SPC II, Ltd (“Arena Global”). Under the ELOC Purchase Agreement, Arena Global has committed to purchase up to $50 million of common stock (the “ELOC Shares”), at the Company’s direction from time to time, subject to the satisfaction of the conditions in the ELOC Purchase Agreement. In connection with the ELOC Purchase Agreement the Company agreed, among other things to issue to Arena Global, as a commitment fee (the “Commitment Shares”), that number of shares of common stock equal to 250,000 divided by the simple average of the daily volume weighted average price of common stock during thefive trading days immediately preceding the effectiveness of a “shelf” registration statement on Form S-3 on which the estimated number of shares of the Company’s common stock are registered.

As additional consideration for Arena Global’s execution and delivery of the ELOC Purchase Agreement, the Company issued on October 31, 2024, a five-year warrant exercisable for 585,000 shares of common stock (the “ELOC Warrant Shares”) with an exercise price equal to $1.66 per share.

Note 14 – Subsequent Events (continued)

Pursuant to the ELOC Purchase Agreement, the Company agreed to (i) register the resale of the ELOC Shares, Commitment Shares and ELOC Warrant Shares within 30 calendar days following the ELOC Purchase Agreement and (ii) file one or more additional registration statements for the resale by Arena Global of other Registrable Securities (as defined in the ELOC Purchase Agreement) if necessary. On November 6, 2024, the Company filed a registration statement on Form S-3 (333-283025) (the “Resale Registration Statement”) of up to 61,389,758 shares of common stock, including up to 50,000,000 shares of common stock for issuances to be made under the ELOC Purchase Agreement, up to 250,000 Commitment Shares, and up to 585,000 ELOC Warrant Shares.

First Tranche Debenture

On October 17, 2024, the Company completed the closing of the first tranche for the issuance of a 10% original issue discount secured convertible debenture (the “First Tranche Debenture”) in the principal amount of $3,333,333 at an aggregate purchase price of $3 million, with 10% original issue discount and payment-in-kind interest rate at 5%, to Arena Special Opportunities (Offshore) Master II LP (“Arena Opportunities”) pursuant to the Securities Purchase Agreement, dated September 6, 2024 (the “September 2024 Purchase Agreement”), by and between the Company and Arena Investors, LP (“Arena Investors”). The First Tranche Debenture matures on April 14, 2026. In addition, the Company issued a warrant to Arena Investors exercisable for up to 453,749 shares of common stock (the “First Tranche Warrant”). The exercise price of the First Tranche Warrant is $1.89 per share.

The net proceeds received from the issuance of the First Tranche Debenture, after deduction of expenses reimbursable to the Arena Investors, amounted to $2,877,588.

Pursuant to the September 2024 Purchase Agreement, the Company and Arena Opportunities entered into a registration rights agreement (the “Registration Rights Agreement”), pursuant to which the Company agreed to file with the SEC a registration statement on Form S-3 after the closing of each tranche of the debenture to register for resale the shares of common stock issued upon conversion of the applicable debenture and the shares issuable upon exercise of any warrants issued in the applicable closing, within 20 calendar days after the closing date of the first tranche (the “Filing Deadline”) and to have such registration statement declared effective within 60 days after the Filing Deadline (or in the event of full review by the SEC, within 90 calendar days after the Filing Deadline). On November 6, 2024, the Company filed with the SEC the Resale Registration Statement, registering for resale up to 61,389,758 shares of common stock, including up to 10,101,009 shares of common stock issuable upon conversion of the First Tranche Debenture and up to 453,749 shares of common stock issuable upon the exercise of the First Tranche Warrant.

In addition, pursuant to the September 2024 Purchase Agreement, the Company; Incannex Healthcare Pty Ltd, Incannex Pty Ltd and Psychennex Pty Ltd (the “Subsidiaries”); and Arena Opportunities entered into a security agreement effective as of October 14, 2024 (the “Security Agreement”), pursuant to which the Company (i) pledged the equity interests in the Subsidiaries and (ii) granted to Arena Opportunities a security interest in, among other items, all of the Company’s owned assets, whether currently owned or later acquired, and all proceeds therefrom (the “Assets”), as set forth in the Security Agreement. In addition, the Company’s subsidiary, Incannex Healthcare Pty Ltd (IHPL) entered into a patent security agreement (the “Patent Security Agreement”) and a trademark security agreement (the “Trademark Security Agreement”), each effective as of October 14, 2024, pursuant to which IHPL granted to the investors a security interest in its patents, patent applications, and all proceeds therefrom and a security interest in its trademarks, trademark applications, and all proceeds therefrom, respectively. In addition, pursuant to the Security Agreement, the Subsidiaries granted to Arena Opportunities a security interest in its Assets and, pursuant to a Subsidiary Guarantee effective as of October 14, 2024 (the “Subsidiary Guarantee”), jointly and severally agreed to guarantee and act as surety for the Company’s obligation to repay the September 2024 Debentures and other obligations under the other transaction documents.