Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
You should read the following discussion and
analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes
included elsewhere in this Annual Report. This discussion and analysis contains forward looking statements and involves numerous risks
and uncertainties, including, but not limited to, those described in the “Risk Factors” section of this Annual Report. Actual
results may differ materially from those contained in any forward-looking statements. For a discussion on forward-looking statements,
see the information set forth in the introductory note to this Annual Report under the caption “Special Note Regarding Forward
Looking Statements,” which information is incorporated herein by reference.
Overview
We are a clinical-stage biopharmaceutical development
company dedicated to developing innovative medicines for patients living with serious chronic diseases and significant unmet needs. Our
lead drug candidates include IHL-42X for the treatment of OSA; PSX-001, our psilocybin treatment in combination with psychological therapy
in development to treat patients with GAD; and IHL-675A for rheumatoid arthritis. Each of these programs target conditions that currently
have limited, inadequate, or no approved pharmaceutical treatment options.
Recent Developments
ATM Program Increase
On July 24, 2025, we filed a prospectus supplement
to increase the capacity of our existing “at-the-market” offering program (the “ATM”) by up to an additional
$100 million. While this filing increases the available capacity under the ATM, we are under no obligation to issue any shares of our
commons stock pursuant to the program. The expanded facility is intended to enhance our financial flexibility, providing an efficient
mechanism to access capital if, and when, deemed appropriate. Any utilization of the ATM will be at our discretion, taking into account
prevailing market conditions and strategic priorities.
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As previously disclosed,
the ATM is conducted pursuant to the Amended and Restated Sales Agreement, dated May 28, 2025 (the “Amended and Restated Sales Agreement”)
by and among us, A.G.P./Alliance Global Partners (“A.G.P.”) and Curvature Securities, LLC (“Curvature,” and together
with A.G.P, the “Sales Agents”). Accordingly, pursuant to the prospectus supplement, the amount of shares of our common stock
that we may issue under the Amended and Restated Sales Agreement has been increased by up to an aggregate of $100 million of shares of
our common stock. There can be no assurance that the Sales Agents will be able to complete future placements pursuant to the Amended and
Restated Sales Agreement, even if instructed to do so. The number of shares of our common stock that we may ultimately sell under the
Amended and Restated Sales Agreement will fluctuate based on a number of factors, including the market price of our common stock during
the sales period, the limits it may set in any instruction to sell Shares, and the demand for our common stock during an applicable sales
period.
Results of Operations
Comparison of Fiscal Years Ended June 30, 2025 to June 30, 2024
The following tables summarize our results of
operations for the periods presented (in thousands):
For the Years Ended June 30 $ %
Operating expenses:
Other income/(expense):
Change in fair value of convertible rights 299 - 299 100
Change in fair value of warrant liabilities (21,925 ) - (21,925 ) 100
Income tax expense - (30 ) 30 (100 )
Other comprehensive income/(loss):
Currency translation adjustment, net of tax 208 (77 ) 285 (370 )
Revenue from Customers
During the fiscal year
ended June 30, 2025, we generated revenue from clinic patients for rehabilitation services. This figure reflects the consideration to
which the Company expects to be entitled in exchange for those services. Revenue increased approximately 617% when compared to revenues
generated during the fiscal year ended June 2024 primarily as a result of our expansion of these services. We have not generated any revenue
from the sale of products. We do not expect to generate material revenues unless and until our drug candidates are approved.
Operating Expenses
Our operating expenses consist of (i) R&D
expenses, (ii) acquisition of in-process research and development (“IPR&D”) expense and (iii) general and administrative
expenses.
R&D Expenses
R&D expenses consist
primarily of external and internal costs incurred in performing clinical and preclinical development activities.
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Our R&D expenses
include:
We expense R&D costs
as incurred.
R&D expenses decreased by $2.1 million for
the fiscal year ended June 30, 2025 compared to the fiscal year ended June 30, 2024. The decrease was primarily due to a pause in our
development activities that occurred during the fiscal year ended June 30, 2025 for resource conservation reasons. We have since resumed
development activities for all of our lead drug candidates.
Although R&D activities
are central to our business model, the successful development of our drug candidates is highly uncertain. There are numerous factors
associated with the successful development of our drug candidates, including future trial design and various regulatory requirements,
many of which cannot be determined with accuracy at this time based on our stage of development. In addition, future regulatory factors
beyond our control may impact our clinical development programs. Drug candidates in later stages of clinical development generally have
higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later
stage clinical trials. As a result, we expect our R&D expenses will increase substantially in connection with our ongoing and planned
clinical and preclinical development activities in the near term and in the future to the extent our development activities are successful.
At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the
preclinical and clinical development of our drug candidates. Our R&D expenses have varied, and our future R&D expenses may vary,
significantly based on a wide variety of factors such as:
● per patient trial costs;
● the number of trials required for approval;
● the number of sites included in the trials;
● the countries in which the trials are conducted;
● the length of time required to enroll eligible patients;
● the number of patients that participate in the trials;
● the number of doses that patients receive;
● the drop-out or discontinuation rates of patients;
● the potential additional safety monitoring requested by regulatory agencies;
● the duration of patient participation in the trials and follow-up;
● the cost and timing of manufacturing of our drug candidates;
● the extent of changes in government regulation and regulatory guidance;
● the efficacy and safety profile of our drug candidates;
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A change in the outcome of any of these variables
with respect to the development of our drug candidates could significantly change the costs and timing associated with the development
of that drug candidate. We may never succeed in obtaining regulatory approval for any drug candidate.
In addition, we are obligated under our contracts
with CROs to reimburse these CROs for certain expenses incurred by them in the performance of the services they provide to us. The precise
timing and amounts of these expenses and our corresponding reimbursement obligations are and may continue to be uncertain and outside
of our control. We incur the costs for these reimbursement obligations when invoiced by the CRO. We often receive invoices long after
the CRO has performed the services that are the subject of the invoice. As a result, our related operating expenses have and may continue
to vary significantly period-to-period and are not necessarily indicative of the expenses associated with the activities of the CRO conducted
during the period covered by the periodic report in which these expenses are disclosed.
Acquisition of IPR&D
Acquisition of IPR&D expense was recorded in the fiscal year ended
June 30, 2024, in connection with the acquisition of APIRx Pharmaceutical USA, LLC (“APIRx”) in August 2022. We concluded
that the acquisition of APIRx did not meet the definition of business under Accounting Standards Codification (“ASC”) 805,
Business Combinations as APIRx did not have outputs present and a substantive process was not acquired and recorded the transaction as
an asset acquisition as a result. We determined that drug candidates pertaining to APIRx had no alternative future use at the time of
acquisition and charged $35.3 million, including transaction costs of $2.43 million, to the acquisition of IPR&D expense as of the
date of acquisition.
General and Administrative
General and administrative
expenses consist primarily of personnel-related expenses finance and accounting, human resources and other administrative functions,
including salaries, stock-based compensation and benefits for employees, legal fees, expenses relating to patent and corporate matters
and professional fees paid for accounting, auditing, consulting and tax services, as well as facilities-related costs not otherwise included
in R&D expenses and other costs such as insurance costs and travel expenses.
General and administrative expenses decreased by
$4.0 million for the fiscal year ended June 30, 2025 compared to the fiscal year ended June 30, 2024. The decrease was mainly due to a
decrease of $6.3 million (from $8.9 million to $2.6 million) in equity compensation and benefits for employees and directors, primarily
driven by less amortization expense incurred as the equity compensation was issued in May 2025 (compared to the prior period the equity
compensation was issued in December 2024). This decrease was partially offset by an increase of $1.4 million (from $2.8 million to $4.2
million) in salaries, and other employee benefits, which resulted from the appointment of Chief Medical Officer and additional middle
management positions during the period. Additionally, compliance, legal and regulatory expenses increased by $0.8 million (from $3.1 million
to $3.9 million) primarily due to enhanced reporting obligations.
We anticipate our general
and administrative expenses will increase substantially in the future as we expand our operations, including increasing our headcount
to support our continued R&D activities and preparing for potential commercialization of our drug candidates. We also anticipate
we will incur increased accounting, audit, legal, regulatory, compliance, director and officer insurance, and investor and public relations
expenses associated with operating as a U.S. public company.
Other Income (Expense)
Benefit from R&D Tax Credit
We receive tax incentives
from the Australian government for R&D activities. Subject to certain exclusions, the Australian Government tax incentives provide
benefits for eligible R&D activities. Entities are entitled to either (i) a 48.5% refundable tax offset for eligible companies with
an aggregated turnover of less than A$20 million per annum or (ii) a non-refundable 38.5% tax offset for all other eligible companies.
As our aggregated turnover is less than A$20 million and we are not controlled by one or more income tax exempt entities, we anticipate
being entitled to a claim of 48.5% refundable tax offset for costs relating to eligible R&D activities during the year.
Benefit from R&D tax credit decreased by $9.7
million (from $11.4 million to $1.8 million) for the fiscal year ended June 30, 2025 compared to the fiscal year ended June 30, 2024.
The decrease primarily due to the multiple years of tax incentives being granted and successful lodgement of overseas findings on the
Company’s lead assets, which we revised the estimates for the R&D tax incentive receivable, primarily based on historical experience
of claims in the fiscal year ended June 30, 2024.
Foreign Exchange Losses
Foreign exchange losses increased by $0.3 million
for the fiscal year ended June 30, 2025 compared to the fiscal year ended June 30, 2024, primarily due to unfavorable currency exchange
rates during the period.
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Change in fair value of convertible rights
On October 17, 2024, we issued a convertible debenture
as part of a financing arrangement. The convertible debenture was repaid in full on March 13, 2025, and the convertible rights associated
with the convertible debenture were derecognized along with the debt repayment. The changes in the fair value of the convertible rights
amounted to $0.3 million for the fiscal year ended June 30, 2025.
Change in fair value of warrant liabilities
In 2024 and 2025 we issued warrants in connection
with our equity line of credit financing, convertible debenture financing and private investment in public equity financing. These warrants
were subsequently exercised or cancelled later during the year. The changes in the fair value of warrant liabilities amounted to $21.9
million for the fiscal year ended June 30, 2025.
Loss on extinguishment
As mentioned above, the convertible debenture was
repaid in full on March 13, 2025, and the associated convertible rights were derecognized along with the debt repayment. This resulted
in a total loss on extinguishment of $1.5 million, comprising a $1.0 million loss on the debt host contract and $0.5 million related to
the associated convertible rights.
ELOC commitment fee
We entered into an equity line of credit purchase
agreement in September 2024 and as part of that arrangement, we issued shares as commitment fee to secure the equity line of credit facility.
The commitment fee expense incurred for the fiscal year ended June 30, 2025 as a result of these share issuances was $1.1 million.
Currency Translation Adjustment Losses
Currency translation adjustment, net of tax increased
by $0.3 million for the fiscal year ended June 30, 2025 compared to the fiscal year ended June 30, 2024. The increase resulted primarily
from the translation of financial statements from the functional currency to U.S. dollars. For certain of our international subsidiaries,
the local currency is the functional currency, and their financial statements are then translated into U.S. dollars for reporting purposes.
See Note 2 to our financial statements included in this Annual Report for further information, under the heading “Foreign Currency
Translation.”
Liquidity and Capital Resources
We have incurred net losses since inception and
expect to incur substantial and increasing losses in the future as we expand our R&D activities in an effort to move our drug candidates
into later stages of development. Historically, we have funded our operations primarily through the sale of equity securities, proceeds
from the exercise of options, tax grants from R&D activities and interest income.
We incurred total comprehensive losses of $46.7
million and $18.5 million for the fiscal years ended June 30, 2025 and 2024, respectively. The increase in net loss is attributable to
a $24.3 million increase driven by financing activities, including changes in the fair value of warrants and convertible debt, as well
as loss on extinguishment of debt during the fiscal year ended June 30, 2025. As of June 30, 2025, we had accumulated comprehensive losses
of $157.6 million.
As of June 30, 2025, we had cash and cash equivalents
of $15.0 million. Although we expect our negative cash flows from operating activities to continue, we believe our current cash balances,
together with anticipated cash flows and available financing arrangements, provide sufficient resources to meet our obligations and sustain
operations for at least one year from the issuance date of the financial statements in this Annual Report.
For the fiscal year ended June 30, 2025, we
experienced net cash outflows from operating activities of $12.5 million, a decrease of $3.3 million compared to the fiscal year ended
June 30, 2024. As of June 30, 2025, we had cash and cash equivalents of $15.0 million, an increase of $9.2 million compared to our cash
and cash equivalents as of June 30, 2024 of $5.9 million. As of June 30, 2025, our current assets exceed our current liabilities by $13.0
million, a $2.4 million increase compared to the difference between our current assets and current liabilities as of June 30, 2024 of
$10.6 million.
Going Concern
As of the date of this Annual Report, we believe
there is no longer substantial doubt about our ability to continue as a going concern. Although we have not yet established an ongoing
source of revenue sufficient to cover all operating and capital expenditure requirements, including any potential payments pursuant to
debentures, recent improvements in our financial position provide reasonable assurance that we will continue as a going concern for at
least twelve months from the date of the financial statements.
88
Historically, we have financed our 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. We continue to plan for additional capital through the sale of common stock in public offerings and/or private
placements, debt financings, or through other capital sources, including pursuant to the ATM, collaborations with other companies or
other strategic transactions. While there can be no assurance that these plans will be completed successfully or at all, our current
financial position and resources mitigate prior concerns related to going concern uncertainties.
During the three months ended June 30, 2025, we sold 163,283,465 shares
of common stock for aggregate gross proceeds of $40.2 million and net proceeds of approximately $38.7 million after deducting $1.5 million
in commissions payable to the sales agent. As of September 29, 2025, our unrestricted cash and cash equivalents were $73.4 million. Based
on our unrestricted cash and cash equivalents as of September 29, 2025, we anticipate that we will be able to fund our planned operating
expenses and capital expenditure requirements for at least twelve months from the date of the financial statements included in this Annual
Report. We have based these estimates on assumptions that may prove to be wrong, and we could use our capital resources sooner than we
currently expect.
Off-Balance Sheet Arrangements
We did not have, during the periods presented,
and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Cash Flows
Comparison of Cash Flows for the Fiscal Year ended June 30, 2025,
with June 30, 2024
The following table summarizes our cash flows
for the periods presented:
Year Ended June 30,
Net cash used in operating activities $ (12,513 ) $ (15,845 )
Net cash provided by/(used in) investing activities (8 ) (277 )
Net cash provided by financing activities 21,396 -
Net cash flows from operating activities
Net cash used in operating activities decreased
by $3.3 million in the fiscal year ended June 30, 2025 compared to the fiscal year ended June 30, 2024. The decrease was primarily driven
by a $6.3 million reduction in share-based compensation expense (from $8.9 million to $2.6 million) and a decrease in cash paid related
to trade and other payables of $1.6 million (from $3.0 million to $1.4 million), partially offset by an increase in R&D tax incentive
received of $15.4 million (from outflow of $9.8 million to inflow of $5.6 million).
Net cash flows from investing activities
Net cash used in investing activities decreased
by $0.3 million in the fiscal year ended June 30, 2025 compared to fiscal year ended June 30, 2024. The decrease was due to less spending
on property, plant and equipment.
Cash flows from financing activities
Cash provided by financing activities increased
by $21.4 million in the fiscal year ended June 30, 2025, compared to the fiscal year ended June 30, 2024. This increase was primarily
driven by share issuance proceeds of $48.3 million, partially offset by cash outflows related to financing arrangements entered into
during the year, including the cancellation of warrants amounting to $24.8 million and the repayment of convertible debt totaling $3.8
million.
89
Critical Accounting Estimates
Our financial statements
are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our financial statements
and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and
expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience,
known trends and events, and various other factors we believe are reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate
our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or
conditions.
While our significant
accounting policies are described in more detail in Note 2 to our financial statements included elsewhere in this Annual Report, we believe
the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
Acquisitions
We evaluate acquisitions under the accounting
framework in ASC 805, Business Combinations, to determine whether the transaction is a business combination or an asset acquisition.
In determining whether an acquisition should be accounted for as a business combination or an asset acquisition, we first perform a screen
test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset
or a group of similar identifiable assets. If this is the case, the acquired set is not deemed to be a business and is instead accounted
for as an asset acquisition. If this is not the case, we further evaluate whether the acquired set includes, at a minimum, an input and
a substantive process that together significantly contribute to the ability to create outputs. If so, we conclude that the acquired set
is a business.
We measure and recognizes asset acquisitions that
are not deemed to be business combinations based on the cost to acquire the assets, which includes pre-acquisition direct costs recorded
in accrued professional and consulting fees. Goodwill is not recognized in asset acquisitions.
Stock-Based Compensation
We account for stock-based compensation arrangements
with employees and non-employees using a fair value method which requires the recognition of compensation expense for costs related to
all stock-based payments including share options. The fair value method requires us to estimate the fair value of stock-based payment
awards on the date of grant using an option-pricing model. We use either the trinomial pricing or Black-Scholes option-pricing model
(“BSOPM”) to estimate the fair value of options granted. Stock-based compensation awards are expensed using the graded vesting
method over the requisite service period, which is generally the vesting period, for each separately vesting tranche. We have elected
a policy of estimating forfeitures at grant date. Option valuation models, including the trinomial pricing and BSOPM, require the input
of several assumptions. These inputs are subjective and generally require significant analysis and judgment to develop.
R&D Costs
R&D costs are expensed as incurred. R&D
costs consist of salaries, benefits and other personnel related costs including equity-based compensation expense, laboratory supplies,
preclinical studies, clinical trials and related clinical manufacturing costs, costs related to manufacturing preparations, fees paid
to other entities to conduct certain R&D activities on our behalf and allocated facility and other related costs.
Nonrefundable advance payments for goods or services
that will be used or rendered for future R&D activities are deferred and capitalized as prepaid expenses until the related goods
are delivered or services are performed.
We record accrued liabilities for estimated costs
of R&D activities conducted by third-party service providers, which include the conduct of preclinical studies and clinical trials,
and contract manufacturing activities. We record the estimated costs of R&D activities based upon the estimated amount of services
provided but not yet invoiced and includes these costs in trade and other payables on the consolidated balance sheets and within R&D
expenses on the consolidated statements of operations and comprehensive loss.
We accrue for these costs based on factors such
as estimates of the work completed and in accordance with agreements established with its third-party service providers. We make significant
judgments and estimates in determining the accrued liabilities balance at the end of each reporting period. As actual costs become known,
we adjust our accrued liabilities. We have not experienced any material differences between accrued costs and actual costs incurred.
90
Benefit from R&D Tax Incentive
Benefit from R&D tax credit consists of the
R&D tax credit received in Australia, which is recorded within other income (expense), net. The Company recognizes grants once both
of the following conditions are met: (i) the Company is able to comply with the relevant conditions of the grant and (ii) the grant is
received.
Emerging Growth Company Status and Smaller
Reporting Company Status
We are an emerging growth
company, as defined in the Jumpstart Our Business Startups Act (“JOBS Act”). The JOBS Act permits an emerging growth company
such as us to take advantage of an extended transition period to comply with new or revised accounting standards. We have elected to
avail ourselves of such extended transition period, which means that when a standard is issued or revised and it has different application
dates for public or private companies, we can adopt the new or revised standard at the time private companies adopt the new or revised
standard and may do so until such time that we either (i) irrevocably elect to opt out of such extended transition period or (ii) no
longer qualify as an emerging growth company. We may choose to early adopt any new or revised accounting standards whenever such early
adoption is permitted for private companies.
We will continue to remain
an emerging growth company until the earliest of the following:
We are also a smaller reporting company as defined
in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may
take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these
scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured
on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed
fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business
day of our second fiscal quarter.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
We are a smaller reporting company as defined
by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
91
Item 8. Financial Statements and Supplementary
Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 02233) F-2
Consolidated Balance Sheets as of June 30, 2025 and 2024 F-3
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Board of Directors and Shareholders
Incannex Healthcare Inc.
Opinion on the financial statements
We have audited the accompanying consolidated
balance sheets of Incannex Healthcare Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of June 30, 2025,
the related consolidated statements of operations and comprehensive loss, changes in shareholders’ equity (deficit), and cash flows
for each of the two years in the period ended June 30, 2025, and the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company as of June 30, 2025 and 2024, and the results of its operations and its cash flows for each of the two years in
the period ended June 30, 2025, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation
of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON AUDIT PTY LTD
We have served as the Company’s auditor since 2023.
Perth, Australia
September 29, 2025
F-2
INCANNEX HEALTHCARE INC.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(expressed in U.S. Dollars, unless otherwise stated)
Assets
Current assets:
Prepaid expenses and other assets 791 507
Property, plant and equipment, net 227 472
Operating lease right-of-use assets, net 258 373
Liabilities and stockholders’ equity
Current liabilities:
Trade and other payables $ 6,104 $ 612
Accrued expenses and other current liabilities 696 4,845
Operating lease liabilities, current 184 163
Operating lease liabilities, non-current 74 210
Commitments and contingencies (Note 8)
Stockholders’ equity:
Foreign currency translation reserve (3,124 ) (3,332 )
Total liabilities and stockholders’ equity $ 20,447 $ 17,047
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
INCANNEX HEALTHCARE INC.
Consolidated Statements of Operations and Comprehensive
Loss
(in thousands, except share and per share amounts)
(expressed
in U.S. Dollars, unless otherwise stated)
For the fiscal year ended June 30,
Revenue from customers 86 12
Operating expenses:
Other income, net:
Foreign exchange expense (289 ) (28 )
Interest expense (303 ) -
Change in fair value of convertible rights 299 -
Change in fair value of warrant liabilities (21,925 ) -
Warrant issuance costs (129 ) -
Loss on extinguishment (1,472 ) -
ELOC commitment fee (1,095 ) -
Income tax expense - (30 )
Other comprehensive income/ (loss):
Currency translation adjustment, net of tax 208 (77 )
Net loss per share: Basic and diluted $ (1.35 ) (1.15 )
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
INCANNEX HEALTHCARE INC.
Consolidated Statements of Stockholders’
Equity (Deficit)
(in thousands, except share amounts)
(expressed
in U.S. Dollars, unless otherwise stated)
Share Amount Amount Amount Amount Amount
# $ $ $ $ $
Stock-based compensation - - 8,928 - - 8,928
Convertible note conversion - - - - - -
Share issuance costs - - - - - -
Currency translation adjustment, net of tax - - - - (77 ) (77 )
Stock-based compensation - - 2,609 - - 2,609
Share issuance costs - - (2,279 ) - - (2,279 )
Currency translation adjustment, net of tax - - - - 208 208
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
INCANNEX HEALTHCARE INC.
Consolidated Statements of Cash Flows
(in thousands, except share and per share amounts)
(expressed
in U.S. Dollars, unless otherwise stated)
For the fiscal year ended June 30,
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 246 103
Stock-based compensation expense 2,609 8,928
Unrealized losses/(gains) on foreign currency remeasurement 294 28
Non-cash expense of ELOC commitment 1,048 -
Change in fair value of warrant liabilities 21,925 -
Change in fair value of convertible rights (299 ) -
Non-cash interest expense 302 -
Loss on extinguishment 1,472 -
Change in operating assets and liabilities:
Prepaid expenses and other current assets (189 ) 369
R&D tax incentive receivable 5,579 (9,837 )
Net cash used in operating activities (12,513 ) (15,845 )
Cash flows from investing activities:
Purchase of property, plant and equipment (8 ) (277 )
Net cash used in investing activities (8 ) (277 )
Cash flows from financing activities:
Proceeds received from facility agreement 4,282 -
Repayment of facility agreement (4,459 ) -
Proceeds share issuance 48,343 -
Share issuance costs (747 ) -
Warrant issuance costs (125 ) -
Proceeds from issuance of convertible debt 2,779 -
Cancellation of warrants (24,769 ) -
Repayment of convertible debt (3,795 ) -
Debt issuance costs (113 ) -
Net cash provided by financing activities 21,396 -
Effect of exchange rate changes on cash and cash equivalents 306 (140 )
Net (decrease)/increase in cash and cash equivalents 8,875 (16,122 )
Cash and cash equivalents at beginning of period 5,858 22,120
Cash and cash equivalents at end of period 15,039 5,858
Non-cash investing and financing activities
Issuance of ELOC warrants at initial fair value 806 -
Issuance of convertible note warrants at initial fair value 341 -
Issuance of convertible rights at initial fair value 282 -
Issuance of Series A warrants at initial fair value 2,843 -
Partial conversion of convertible note 100 -
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
INCANNEX HEALTHCARE INC.
Notes To Audited Consolidated Financial Statements
June 30, 2025 and 2024
Note 1 – Company Overview
Incannex Healthcare Inc. (“Incannex”)
is a corporation formed under the laws of the State of Delaware in July 2023. Incannex 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 consolidated financial statements of the Company
are presented in U.S. dollars and consist of Incannex and the following wholly-owned subsidiaries:
Subsidiary Jurisdiction
Incannex Healthcare Pty Ltd Victoria, Australia
Incannex Pty Ltd Victoria, Australia
Psychennex Pty Ltd Victoria, Australia
APIRx Pharmaceutical USA, LLC Delaware
APIRx Pharmaceuticals Holding BV IJsselstein, Netherlands
Clarion Clinics Group Pty Ltd Victoria, Australia
Clarion Model Clinic Pty Ltd Victoria, Australia
Psychennex Licensing and Franchising Pty Ltd Victoria, Australia
Description of Business
The Company is a clinical-stage biopharmaceutical
development company dedicated to developing innovative medicines for patients living with serious chronic diseases and significant unmet
needs. The Company’s lead drug candidates include IHL-42X for the treatment of obstructive sleep apnea (“OSA”); PSX-001,
the Company’s psilocybin treatment in combination with psychological therapy in development to treat patients with generalized anxiety
disorder (“GAD”); and IHL-675A for rheumatoid arthritis. Each of these programs target conditions that currently have limited,
inadequate, or no approved pharmaceutical treatment options.
Note 2 - Basis of Presentation and Summary of Significant Accounting
Policies
Basis of Presentation
The Company’s consolidated financial statements
included in this report 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 Securities and Exchange Commission (“SEC”).
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.
Going concern basis
The financial report has been prepared on the going
concern basis, which assumes continuity of normal business activities and the realization of assets and the settlement of liabilities
in the ordinary course of business.
The Company has incurred total comprehensive losses
of $46.7 million and $18.5 million for the fiscal years ended June 30, 2025 and 2024, respectively, and experienced net cash outflows
from operating activities of $12.5 million and $15.8 million for the fiscal years ended June 30, 2025 and 2024, respectively.
As of June 30, 2025 and 2024, the Company had cash
and cash equivalents of $15.0 million and $5.9 million, respectively, and current assets exceeded its current liabilities by $13.0 million
and $10.6 million, respectively.
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 continues to plan for additional capital through the sale of common stock in public offerings and/or
private placements, debt financings, or through other capital sources, including pursuant to the ATM, collaborations with other companies
or other strategic transactions.
F-7
Based on
the Company’s unrestricted cash and cash equivalents as of June 30, 2025, the Company anticipates that it will be able to fund its
planned operating expenses and capital expenditure requirements into for at least twelve months from the date of these financial statements.
Principles of Consolidation
The accompanying 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 - “Company
Overview.” 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 consolidated financial statements and accompanying notes.
The most significant estimates and assumptions
in the Company’s consolidated financial statements include the valuation of equity-based instruments issued for other than cash,
accrued research and development (“R&D”) expense, R&D 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, drug 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
R&D 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.
Concentration of Credit Risk
Financial instruments that potentially subject
the Company to concentration of credit risk consist primarily of cash and cash equivalents. The Company has not experienced any losses
in such accounts, and management believes that the Company is not exposed to significant credit risk due to the financial position of
the depository institutions in which those deposits are held. As of June 30, 2025 and 2024, all deposits are held in banks outside of
the United States.
Cash and Cash Equivalents
Cash and cash equivalents, which includes cash
and deposits held at call with financial institutions with original maturities of three months or less that are readily convertible to
known amounts of cash, are carried at cost, which approximates fair value.
Property, Plant and Equipment, Net
Recognition and Measurement
All property, plant and equipment is recognized
at historical cost less depreciation.
F-8
Depreciation
Depreciation is calculated using the straight-line
method to allocate their cost, net of their residual values, over their estimated useful lives or, in the case of leasehold improvements
and certain leased plant and equipment, the shorter lease term as follows:
● Machinery 10-15 years
● Vehicles 3-5 years
● Furniture, fittings and equipment 3-8 years
Furniture, fittings and equipment include assets
in the form of office fit outs. These assets and other leasehold improvements are recognized at their fair value and depreciated over
the shorter of their useful life or the lease term, unless the entity expects to use the assets beyond the lease term.
Impairment of Long-Lived Assets
Long-lived assets consist primarily of property,
plant and equipment, net, and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If circumstances require that a long-lived asset be tested for possible impairment, the Company compares
the undiscounted cash flows expected to be generated by the asset group to the carrying amount of the asset group. If the carrying amount
of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying
amount exceeds its fair value. Fair value is generally determined using the asset’s expected future discounted cash flows or market
value, if readily determinable.
During the fiscal years ended June 30, 2025 and
2024, the Company did not record any impairment charges on its long-lived assets.
Leases
The Company determines if an arrangement is, or
contains, a lease at inception and then classifies the lease as operating or financing based on the underlying terms and conditions of
the contract. Leases with terms greater than one year are initially recognized on the consolidated balance sheets as right-of-use assets
and lease liabilities based on the present value of lease payments over the expected lease term. The Company has also elected to not apply
the recognition requirement to any leases within its existing classes of assets with a term of 12 months or less and does not include
any options to purchase the underlying asset that the Company is reasonably certain to exercise.