Company: IXHL
Filing Date: 2025-02-14
Form Type: 10-Q
Source: 0001213900-25-013783
Chunk: 76

Company: Incannex Healthcare Inc.
Filing Date: 2025-02-14
Form: 10-Q
Item: Part I, Item 8
Chunk 76
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 (“ASC 815”). ASC 815 generally requires an analysis
of embedded terms and features that may exhibit characteristics of derivatives, to determine if bifurcation and separate accounting are
necessary when their economic risks and characteristics are not clearly and closely related to the risks of the host contract. 

The Company evaluated that the conversion right
of the First Tranche Debenture meets the definition of a derivative under ASC 815-10-15-83. Furthermore, the Company determined that the
conversion right of the First Tranche Debenture requires bifurcation from the debt host, as it fails to meet the equity scope exception
in ASC 815-10-15-74(a) and thus is classified as a liability, measured at fair value, and subject to remeasurement at each reporting period.

The Company evaluated that the First Tranche Warrant
is a detachable freestanding instrument. The First Tranche Warrant includes certain cash settlement features in the event of a tender
offer, which are outside the Company’s control, and the exercise price is denominated in a currency (USD) other than the reporting
entity’s functional currency (AUD). As a result, it fails to meet the equity scope exception in ASC 815-10-15-74(a), and is not
considered indexed to the reporting entity’s own stock. As such, the First Tranche Warrant is classified as a liability and measured
at fair value, with changes in fair value each period reported in earnings.

The proceeds from issuing the First Tranche Debenture
were allocated first to the First Tranche Warrant based on its fair value. The remaining proceeds allocated to the debt instrument were
then further allocated between the debt host contract and the bifurcated derivative, based on the fair value of that derivative as prescribed
by ASC 815-15-30-2.

The proceeds of the transaction were initially
allocated as follows:

    Amount 

    (in thousands) 
  
    10% Original issue discount 
     333 
  
    Conversion rights (liability) at fair value 
     302 
  
    First Tranche Warrants (liability) at fair value 
     365 
  
    Debt issuance costs 
     122 
  
    Debt liability host 
     2,211 
  
    Face value 
     3,333 

13

Note 12 – Fair value of Financial Instruments (continued)

Debt discount and the debt issuance