Incannex Healthcare Inc.: Form 10-Q for the period ended Dec 31, 2024

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”). This Quarterly Report contains forward-looking statements. This discussion and analysis contain forward looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended June 30, 2024, as filed with the Securities and Exchange Commission (the “SEC”) on September 30, 2024 (the “2024 Annual Report”) and this Quarterly Report. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Quarterly Report. We undertake no obligation to update forward-looking statements, which reflect events or circumstances occurring after the date of this Quarterly Report.

Our accounting policies under U.S. GAAP are referred to in Note 1 of the unaudited condensed consolidated financial statements in this Quarterly Report. All amounts are in United States dollars, unless otherwise indicated.

Overview

We are a clinical-stage biopharmaceutical development company dedicated to developing combination medicines that target the underlying biological pathways associated with chronic conditions, including obstructive sleep apnea (“OSA”), rheumatoid arthritis and generalized anxiety disorder. We are advancing novel oral fix-dosed treatments and therapeutic regimens based on evidence-based innovation. Our lead Phase 2/3 and Phase 2 clinical programs include IHL-42X for the treatment of OSA; IHL-675A for the treatment of inflammatory conditions, including rheumatoid arthritis, and PSX-001, our oral synthetic psilocybin treatment, in combination with psychotherapy, for the treatment of generalized anxiety disorder. Our programs target disorders that have limited, inadequate, or no approved pharmaceutical treatment options.

Recent Developments

Topline Results from Pharmacokinetics (“PK”) Study of IHL-42X

In January 2024, we released positive topline results from a completed PK and safety study of IHL-42X, a novel, oral fixed-dose combination of acetazolamide and dronabinol for the treatment of OSA. The study confirmed bioavailability of IHL-42X, demonstrating delivery of both dronabinol and acetazolamide. The PK profile of IHL-42X was observed to be similar to those established for the respective reference listed drugs (“RLDs”), including equivalent total exposure levels observed for the drug molecules. Furthermore, administration of IHL-42X with food, in contrast to fasted conditions, indicated no substantial food effect on overall exposure to acetazolamide. Consistent with what is known for the RLD, an increase in overall exposure to delta-9-tetrahydrocannabinol was observed when IHL-42X was administered with food, compared to fasted state. No serious adverse events were reported during the study. All but one Treatment-Emergent Adverse Event (“TEAE”) was reported to be mild or moderate. The proportion of subjects reporting at least one TEAE on the IHL-42X fasted period (57.4%) was similar to the dronabinol fasted period (52.1%). Fewer subjects reported TEAEs during the acetazolamide fasted treatment period (37.8%). Food did not have a substantial effect on the number of subjects reporting TEAEs for IHL-42X, with 57.4% fasted vs 58.8% fed. We believe this data establishes a scientific bridge to the RLD, potentially enabling us to leverage existing safety and toxicology data in an FDA 505(b)(2) new drug application for IHL-42X, and assist in the analysis of the global Phase 2/3 RePOSA trial.

Update on Australian IHL-675A clinical trial in patients with rheumatoid arthritis

In November 2024, we decided to pause the Australian Phase 2 clinical trial investigating IHL-675A in rheumatoid arthritis patients with pain and reduced function regardless of current treatment due to slower than anticipated patient recruitment. The Company intends to re-allocate use of resources to a larger U.S. Phase 2 IHL-675A clinical study. Adaptations to the study design will be implemented in the U.S. Phase 2 study, investigating safety and efficacy of IHL-675A in patients with rheumatoid arthritis.

Equity-Line of Credit Purchase Agreement

On September 6, 2024, we 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 at our direction from time to time, subject to the satisfaction of the conditions in the ELOC Purchase Agreement. The purchase price per share of the Common Stock is obtained by multiplying by 96% the daily volume weighted average price (“VWAP”) on The Nasdaq Global Market (“Nasdaq”) for the trading day specified in the sale notice (same trading day or one trading day following such notice) delivered to Arena Global. The ELOC Purchase Agreement will terminate automatically upon the earliest to occur of (i) the first day of the month following the 36-month anniversary of the date of the ELOC Purchase Agreement; or (ii) the date on which Arena Global shall have purchased shares of Common Stock under the ELOC Purchase Agreement for an aggregate gross purchase price equal to the Commitment Amount (as defined in the ELOC Purchase Agreement). In connection with the ELOC Purchase Agreement we agreed, among other things to issue to Arena Global, as a commitment fee, that number of shares of our Common Stock equal to 250,000 divided by the simple average of the daily VWAP of our Common Stock during the five trading days immediately preceding the effectiveness of a “shelf” registration statement on Form S-1 on which the estimated number of shares of our Common Stock are registered. As additional consideration for Arena Global’s execution and delivery of the ELOC Purchase Agreement, we issued on October 31, 2024, a five-year warrant (the “ELOC Warrant”) exercisable for 585,000 shares of our Common Stock with an exercise price equal to $1.66 per share. However, we may not sell Common Stock to Arena Global under the ELOC Purchase Agreement if (i) a shelf registration statement on Form S-1 that registers the Common Stock issuable under the ELOC Purchase Agreement has not been declared effective by the SEC; (ii) the number of shares of our Common Stock issuable to Arena Global pursuant to a sale notice causes the aggregate number of shares of our Common Stock beneficially owned by Arena Global and its affiliates would exceed 9.99% of the number of shares of our Common Stock then outstanding; (iii) the Shareholder Approval (as defined in the ELOC Purchase Agreement) to issue Common Stock in excess of the Exchange Cap (a cap limiting the issuance of shares pursuant to the ELOC Purchase Agreement and ELOC Warrant to 19.99% of the Company’s issued and outstanding shares on the date of the ELOC Purchase Agreement (3,526,802 shares of Common Stock) to the extent such prior stockholder approval would be required for compliance with the rules and regulations of Nasdaq); or (iv) such sale of shares of our Common Stock would exceed, during any 12-month period, one-third of the Company’s public float under the SEC’s “baby shelf” rule for SEC-registered transactions by an issuer with a public float under $75 million when using a “shelf” registration statement on Form S-1. On November 6, 2024, we filed a registration statement on Form S-1/A (File No. 333-283025) registering for resale up to 61,389,758 shares of our Common Stock (the “Resale Registration Statement”), including the issuances to be made under the ELOC Purchase Agreement which was declared effective on December 6, 2024. On December 11, 2024, our stockholders approved, for purposes of complying with Nasdaq Listing Rule 5635(d), the issuances of shares pursuant to the ELOC in excess of the Exchange Cap. Our ability to make advances under the ELOC Purchase Agreement will also depend on the trading volume of our Common Stock. If trading of our Common Stock fails to achieve or maintain the requisite volume levels, we will be limited in our ability to use the ELOC Purchase Agreement and/or advances we make pursuant to the ELOC Purchase Agreement may adversely affect the trading price of our Common Stock.

Convertible Debenture Financing

On September 6, 2024, we entered into a Securities Purchase Agreement (the “September 2024 Purchase Agreement”) with Arena Investors, LP (“Arena Investors”), which provides for the issuance of convertible debentures in an aggregate principal amount of up to $10 million at an aggregate purchase price of up to $9 million (a 10% original issue discount), divided into three separate tranches subject to closing conditions for each tranche. Pursuant to the September 2024 Purchase Agreement, the conversion price of each secured convertible debenture is to equal to 115% of the closing price of our Common Stock on the trading day preceding the date of the issuance of the respective secured convertible debenture, subject to subsequent adjustments and alternative conversion prices related to the then-current trading price of our Common Stock on Nasdaq as further described in the September 2024 Purchase Agreement. For each secured convertible debenture purchased under the September 2024 Purchase Agreement, the Company will also issue to the purchaser a warrant exercisable to purchase up to that number of shares of Common Stock equal to 25% of the total principal amount of the related secured convertible debenture purchased by the purchaser on the applicable closing date divided by 115% of the closing price of the Company’s Common Stock on the trading day immediately preceding such closing date. The Company is not obligated to issue warrants with respect to any tranche that does not close. The exercise price of each warrant issued pursuant to the September 2024 Purchase Agreement will be 115% of the closing price of the Common Stock on its issuance date and the warrants will have a five-year term.

As described in Note 16 of the Financial Statements included in this Quarterly Report, on October 17, 2024, we completed the closing of the first tranche under the September 2024 Purchase Agreement 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 (a 10% original issue discount) to Arena Special Opportunities (Offshore) Master II LP (“Arena Opportunities”). The First Tranche Debenture provides for a payment-in-kind interest rate at 5% and matures on April 14, 2026. In addition, we 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, were $2,877,588. The Company did not meet the closing conditions for the second and third tranche closings set forth in the September 2024 Purchase Agreement, but the Company and Arena Investors may conduct additional closings under the September 2024 Purchase Agreement as they may agree and subject to the closing conditions set forth therein. There can be no assurance that the parties will reach such an agreement for additional tranche closings.

Pursuant to the September 2024 Purchase Agreement, we, certain of our subsidiaries (the “Subsidiaries”), and Arena Opportunities entered into a security agreement, effective as of October 14, 2024 (the “Security Agreement”), under which we (i) pledged the equity interests in the Subsidiaries and (ii) granted to Arena Opportunities a security interest in, among other items, all of our owned assets, whether currently owned or later acquired, and all proceeds therefrom (the “Assets”), as described in the Security Agreement. In addition, our 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, under which IHPL granted 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, under a Subsidiary Guarantee, effective as of October 14, 2024 (the “Subsidiary Guarantee”), jointly and severally agreed to guarantee and act as surety for our obligation to repay the September 2024 Debentures and other obligations under the related transaction documents.

We are required to register the shares of our Common Stock issuable upon conversion of the September 2024 Debentures and upon exercise of the September 2024 Debenture Warrants. However, the issuance of the common stock underlying the September 2024 Debentures and the September 2024 Debenture Warrants are subject to stockholder approval to the extent the issuance would exceed 19.99% of the number of shares of our common stock outstanding as of the date of the September 2024 Purchase Agreement. On December 11, 2024, our stockholders approved, for purposes of complying with Nasdaq Listing Rule 5635(d), the issuance of 20% or more of our issued and outstanding Common Stock pursuant to the September 2024 Purchase Agreement, including upon the conversion of September 2024 Debentures and September 2024 Warrants.

On November 6, 2024, pursuant to our agreements in connection with the First Tranche Debenture, the Company filed a resale Registration Statement on Form S-1/A with the SEC, 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. This registration statement was declared effective on December 6, 2024.

Facility Agreement

On October 9, 2024, we entered into a Facility Agreement (the “Facility Agreement”) with FC Credit Pty Ltd (“FC Credit”), under which FC Credit will provide a term loan facility for up to $4.7 million (the “Loan Facility”). On October 10, 2024, we received approximately $4.6 million in an initial drawdown, after deducting certain fees payable by us under the Facility Agreement. The Facility Agreement has a term of 12 months from the date of the initial drawdown (the “Final Repayment Date”). Interest 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.

Subject to its terms, this facility provides us 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, when the Research and Development Tax Incentive program (“RDIT”) rebates are paid. The RDIT is a key initiative 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.

Results of Operations

Comparison of the Three and Six Months Ended December 31, 2024 and 2023

The following tables summarize our results of operations for the periods presented (in thousands):

18

Revenue from Customers

We have generated revenue from Clarion Clinics for patient services for the three and six months ended December 31, 2024. However, we do not expect to generate material revenues unless and until our drug candidates are approved.

Operating Expenses

Research and development

Research and development expenses consist primarily of external and internal costs incurred in performing clinical and preclinical development activities.

Our R&D expenses include:

• external costs associated with services provided by contract research organizations, contract manufacturers, consultants and other third parties to conduct and support our clinical trials and preclinical studies; and
• internal costs, including R&D personnel-related expenses such as salaries, and benefits, as well as allocated facilities costs and dues and subscriptions.

We expense research and development costs as incurred.

Research and development expenses decreased by $1.2 million for the three months ended December 31, 2024 compared to the three months ended December 31, 2023. The decrease was primarily due to the completion of the IHL-42X safety and pharmacokinetics clinical trial and the pausing of patient recruitment in the Australian Phase 2 clinical trial for IHL-675A in rheumatoid arthritis. This decision was made to reallocate resources for the IHL-675A program and focus on expanding research efforts in the United States, where an expedited regulatory pathway may be available. The primary R&D expense for the period was the Phase 2/3 RePOSA clinical trial investigating IHL-42X in patients with OSA.

Research and development expenses decreased by $1.1 million for the six months ended December 31, 2024 compared to the six months ended December 31, 2023. The decrease was primarily due to the completion of the IHL-42X safety and pharmacokinetics clinical trial and the pausing of patient recruitment in the Australian Phase 2 clinical trial for IHL-675A in rheumatoid arthritis. This decision was made to reallocate resources for the IHL-675A program and focus on expanding research efforts in the United States, where an expedited regulatory pathway may be available. The primary R&D expense for the period was the Phase 2/3 RePOSA clinical trial investigating IHL-42X in patients with OSA.

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:

• the number and scope, rate of progress, expense and results of our clinical trials and preclinical studies, including any modifications to clinical development plans based on feedback that we may receive from regulatory authorities;
• 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 costs, if any, of obtaining third-party drugs for use in our combination trials;
• the extent of changes in government regulation and regulatory guidance;
• the efficacy and safety profile of our drug candidates;
• the timing, receipt, and terms of any approvals from applicable regulatory authorities; and
• the extent to which we establish additional collaboration, license, or other arrangements.

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.

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 research and development expenses and other costs such as insurance costs and travel expenses.

General and administrative expenses decreased by $1.7 million for the three months ended December 31, 2024, compared to the three months ended December 31, 2023. The decrease was primarily attributable to a decrease in employee benefits, resulting from a reduction in the amount of restricted stock issued to our directors and officers.

General and administrative expenses decreased by $0.3 million for the six months ended December 31, 2024, compared to the six months ended December 31, 2023. The decrease was primarily attributable to a decrease in employee benefits, resulting from a reduction in the amount of restricted stock issued to our directors and officers.

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 research and development 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. If our aggregated turnover is less than A$20 million and is 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 incentive decreased by $2.0 million for the three months ended December 31, 2024 compared to the three months ended December 31, 2023. The decrease was due to a lower estimate of our R&D tax incentive receivable for the three months ended December 31, 2024.

Benefit from R&D tax incentive decreased by $5.1 million for the six months ended December 31, 2024 compared to the six months ended December 31, 2023. The decrease was due to a lower estimate of our R&D tax incentive receivable for the six months ended December 31, 2024.

Foreign exchange losses and Interest Income

Foreign exchange losses increased by $0.3 million for the three months ended December 31, 2024, compared to the three months ended December 31, 2023, due to unfavorable currency exchange rates. Interest income increased over the same period, reflecting higher interest received from cash deposits.

Foreign exchange losses also increased by $0.3 million for the six months ended December 31, 2024 compared to the six months ended December 31, 2023, due to unfavorable currency exchange rates. Interest income increased over the same period, reflecting higher interest received from cash deposits.

Currency translation adjustment, net of tax

Currency translation adjustment, net of tax, decreased by $1.3 million for the three months ended December 31, 2024, compared to the three months ended December 31, 2023. The decrease was due to the depreciation of the Australian dollar against the U.S. dollar. We maintain our consolidated financial statements in Australian dollars, our functional currency, while our financial statements are translated into U.S. dollars for reporting purposes.

Currency translation adjustment, net of tax decreased by $0.5 million for the six months ended December 31, 2024, compared to the six months ended December 31, 2023. The decrease was due to the depreciation of the Australian dollar against the U.S. dollar.

Liquidity and Capital Resources

Sources of Liquidity

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 advance 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 $11.4 million and $5.6 million for the six months ended December 31, 2024 and six months ended December 31, 2023, respectively. We incurred net losses of $5.9 million and $11.3 million for the six months ended December 31, 2024 and six months ended December 31, 2023, respectively. As of December 31, 2024, we had accumulated deficit of $122.0 million.

As of December 31, 2024, we had cash and cash equivalents of $2.1 million. We expect our negative cash flows from operating activities to continue and thus have determined that the losses and negative cash flows from operations and uncertainty in generating sufficient cash to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern for at least one year from the issuance date of the financial statements included in this Quarterly Report. We do not currently have an update to our previously disclosed cash runway estimate. We have based our cash runway estimates on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we currently expect.

For the six months ended December 31, 2024, we experienced net cash used in operating activities of $7.9 million, an increase of $0.1 million compared to the six months ended December 31, 2023. As of December 31, 2024, we had cash and cash equivalents of $2.1 million, a decrease of $3.8 million compared to our cash and cash equivalents as of June 30, 2024 of $5.9 million. As of December 31, 2024, our current assets exceed our current liabilities by $4.7 million, a $5.9 million decrease compared to the difference between our current assets and current liabilities as of June 30, 2024 of $10.6 million.

Going Concern

Refer to Note 2 – Basis of Presentation and Summary of Significant Accounting Policies – Going Concern Basis

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 for the six months ended December 31, 2024 and six months ended December 31, 2023

The following table summarizes our cash flows for the periods presented (in thousands):

Net cash flows from operating activities

Net cash used in operating activities increased an insignificant amount for the six months ended December 31, 2024, compared to the six months ended December 31, 2023. The increase was due to a decrease in in R&D tax incentive received.

Net cash flows from investing activities

Net cash used in investing activities decreased by $0.3 million for the six months ended December 31, 2024 compared to the six months ended December 31, 2023. The decrease was due to reduced spending on property, plant and equipment.

Net cash flows from financing activities

Net cash provided by financing activities increased by $4.1 million for the six months ended December 31, 2024, compared to the three months ended December 31, 2023. The increase was due to the issuance of the FC Credit Facility Agreement and the issuance of the First Tranche Debenture.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited interim condensed consolidated financial statements as of December 31, 2024, which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these unaudited interim condensed consolidated financial statements requires our management to make judgments and estimates that affect the reported amounts of assets, liabilities, costs, and expenses, and the disclosure of contingent assets and liabilities during the reporting periods. 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 these 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 consolidated financial statements described in the 2024 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.

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 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 Black-Scholes option-pricing model, require the input of several assumptions. These inputs are subjective and generally require significant analysis and judgment to develop.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development 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 research and development 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 based on estimated services to be conducted by third-party service providers, which include preclinical studies and clinical trials, and contract manufacturing activities. We record these estimated costs based upon the estimated amount of services provided, but not yet invoiced, and include 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 these costs based on factors such as estimates of the work completed and in accordance with agreements established with our third-party service providers. We make significant judgments and estimates when determining the accrued liabilities balance at the end of each reporting period. As actual costs become known, we adjust our accrued liabilities accordingly. To date, we have not experienced any material differences between the accrued costs and actual costs incurred.

Benefit from R&D Tax Incentive

Benefit from the 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.

Warrants

We determine whether to classify contracts, such as warrants, that may be settled in our own stock as equity of the entity or as a liability. An equity-linked financial instrument must be considered indexed to the Company’s own stock to qualify for equity classification. The Company classifies warrants as liabilities for any contracts that may require a transfer of assets. Warrants classified as liabilities are accounted for at fair value and remeasured at each reporting date until exercise, expiration or modification that results in equity classification. Any change in the fair value of the warrants is recognized in the Consolidated Statements of Operations and Comprehensive Loss.

Derivative Financial Instruments

The Company evaluates its convertible instruments and warrants to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC 815, Derivatives and Hedging. The classification of derivative instruments, including whether such instruments should be recorded as assets, liabilities, or equity, is reassessed at the end of each reporting period. For equity-linked financial instruments, the Company must determine whether the underlying instrument is indexed to its own Common Stock in order to classify the derivative instrument as equity. Otherwise, the derivative asset or liability, including embedded derivatives, is recognized at fair value with subsequent changes in fair value recognized in the consolidated statements of operations and comprehensive income (loss).

For hybrid instruments, ASC 815-15 requires bifurcation of embedded features if (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. The nature of the host instrument is therefore evaluated to determine if it is more akin to a debt-like or equity-like host. In this assessment, the Company considers the stated and implied substantive features of the contract as well as the economic characteristics and risks of the hybrid instrument. Each term and feature are then weighed based on the relevant facts and circumstances to determine the nature of the host contract. Terms and features of the hybrid instrument (i.e. embedded derivatives) are then assessed to determine if they must be bifurcated and separately accounted for as freestanding derivatives.

As a “smaller reporting company” (as defined by Item 10 of Regulation S-K), we are permitted to omit information required by this item.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, designed to ensure that information required to be disclosed in our reports is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms. These controls are intended to accumulate and communicate to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), or persons performing similar functions, as appropriate to enable timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our CEO and CFO, evaluated, as of the end of the period covered by this Quarterly Report, the effectiveness of our disclosure controls and procedures. Based on this evaluation, our CEO and CFO concluded that, as of December 31, 2024, our disclosure controls and procedures were not effective at the reasonable assurance level due to a material weakness in internal control over financial reporting, which existed as of December 31, 2024, relating to the documentation of accounting policies and procedures, particularly relating to the correct application of complex accounting measures, as previously reported in our 2024 Annual Report.

A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Management has concluded that we did not maintain effective disclosure controls and procedures due to the material weakness in internal control over financial reporting which existed as of December 31, 2024, relating to the documentation of accounting policies and procedures, particularly relating to the correct application of complex accounting measures.

Remediation Efforts

The measures that we are undertaking to remediate the material weakness in internal control over financial reporting include, but are not limited to: (a) hiring qualified internal control personnel or consultants to manage the implementation of internal control policies, procedures and improvement of the internal audit function, as applicable; (b) developing and implementing written policies and procedures for accounting and financial reporting that meet the standards applied to public companies listed in the United States; and (c) providing internal control training to management, key operations personnel, and the accounting department, so that management and relevant personnel understand the requirements and elements of internal control over financial reporting mandated by the U.S. securities laws.

We believe we have made progress in accordance with our remediation plan even though the material weaknesses will not be considered remediated until we have completed implementing the necessary additional applicable controls and operate with them for a sufficient period of time to allow management and our auditors to concluded that these controls are operating effectively.

We cannot determine when our remediation plan will be fully completed and we cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.

Changes in Internal Control over Financial Reporting

Other than the remediation of the material weakness discussed above, there were no changes in our internal controls over financial reporting, as defined in Rules 13a-15(d) and 15d-15(d) under the Exchange Act, that occurred during the three and six months ended December 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Except as set forth below, there have been no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 2024 Annual Report.

If we are unable to maintain or regain compliance with the requirements of the Nasdaq Global Market, this could result in the delisting of our Common Stock. A delisting of our Common Stock from the Nasdaq Global Market could adversely affect our ability to raise additional capital through the public or private sale of equity securities and the ability of investors to dispose of, or obtain accurate quotations as to the market value of our Common Stock.

Our Common Stock is currently listed on the Nasdaq Global Market. Continued listing of a security on the Nasdaq Stock Market is conditioned upon compliance with various continued listing standards for the applicable market tier. On January 3, 2025, we received a letter (the “Notice”) from Nasdaq notifying us that, we were not in compliance with Nasdaq Listing Rule 5450(b)(2)(A) (the “Listing Rule”), which requires us to maintain a minimum Market Value of Listed Securities (“MLVS”) of at least $50.0 million. The Notice stated that we have 180 calendar days, or until July 2, 2025, to regain compliance with the Listing Rule. There is no immediate effect on the trading of our Common Stock. To regain compliance, our MVLS must meet or exceed $50.0 million for a minimum of ten consecutive business days during the 180-day compliance period ending on July 2, 2025.

We are actively monitoring our stock price and our MLVS and will consider any and all options available to us to maintain or, if necessary, regain compliance, including, to the extent we may then be eligible, listing on the Nasdaq Capital Market. There can be no assurance, however, that we will be able to maintain or, if necessary, regain compliance and meet Nasdaq’s continued listing requirements for any market tier when or as needed. To the extent that we are unable to maintain or, if necessary, regain compliance with the Listing Rule or the other requirements of Nasdaq for continued listing, there is a risk that our Common Stock may be delisted from Nasdaq. Delisting from Nasdaq may limit the range and attractiveness of strategic alternatives that we are able to consider, adversely affect our ability to raise additional financing through the public or private sale of equity securities, significantly affect the ability of investors to trade our securities, or negatively affect the value and liquidity of our Common Stock.