Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion
and analysis of our financial condition and results of operations should be read in conjunction with the accompanying condensed consolidated
financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
On May 14, 2021, Raphael
Pharmaceutical Ltd., an Israeli company, and Easy Energy, Inc., a Nevada corporation, completed a share exchange agreement, or the Share
Exchange, pursuant to which the shareholders of Raphael Pharmaceutical Ltd. became the holders of 90% of the issued and outstanding share
capital of Easy Energy, Inc., while Easy Energy, Inc.’s shareholders hold, following the share exchange, 10% of Easy Energy, Inc.
On May 19, 2021, as agreed by the parties to the Share Exchange, Easy Energy, Inc. changed its name to Raphael Pharmaceutical Inc. Unless
otherwise mentioned or unless the context requires otherwise, when used in this prospectus, the terms “Raphael,” “Company,”
“we,” “us,” and “our” refer to Raphael Pharmaceutical Inc. and its subsidiary, Raphael Pharmaceutical
Ltd., or Raphael Israel. References to Easy Energy are to Easy Energy, Inc. Unless otherwise mentioned or unless the context requires
otherwise, the information provided in this Quarterly Report on Form 10-Q relates to Raphael Israel.
Forward-Looking Statements
This Quarterly Report on Form
10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and
other federal securities laws, which include information relating to future events, future financial performance, strategies, expectations,
competitive environment and regulation. Words such as “may,” “will,” “should,” “could,”
“would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,”
“future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions,
as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee
of future performance or results and may not be accurate indications of when such performance or results will be achieved. Forward-looking
statements are based on information we have when those statements are made or our management’s good faith belief as of that time
with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially
from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but
are not limited to:
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the regulatory pathways that we may elect to utilize in seeking U.S. Food and Drug Administration, or FDA, European Medicines Agency, or EMA, and other regulatory approvals, if any; |
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obtaining (and the cost thereof) FDA and EMA approval of, or other regulatory action in Europe or the United States and elsewhere with respect to our product candidates; |
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the commercial launch and future sales of our product candidates and our advancement of product candidates for other indications in our pipeline; |
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the potential cost of our rheumatoid arthritis product candidate, or RA and RA product candidate, respectively, for patients; |
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our expectations regarding the timing of commencing clinical trials; |
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our expectations regarding the supply of the active pharmaceutical ingredient for our product candidates; |
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third-party payor reimbursement for our product candidates; |
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our estimates regarding anticipated expenses, capital requirements and our needs for additional financing; |
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completion and receiving favorable results of clinical trials for our product candidates; and |
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the filing by us, and the subsequent issuance of patents to us, by the U.S. Patent and Trademark Office and other governmental patent agencies. |
The foregoing does not represent
an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced
with that may cause our actual results to differ from those anticipated in our forward-looking statements. For a discussion of these and
other risks that relate to our business and investing in our common stock, you should carefully review the risks and uncertainties described
in this Quarterly Report on Form 10-Q, and those described from time to time in our future reports filed with the Securities and Exchange
Commission. The forward-looking statements contained in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by
this cautionary statement. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances
after the date on which any such statement is made or to reflect the occurrence of unanticipated events.
Overview
We are a pharmaceutical drug
research and development company focused on the discovery and clinical development of life-improving drug therapies based on full spectrum
cannabis oil or purified cannabinoids, or CBD. Unless indicated otherwise, we plan on using oil derived from CBD strains with low levels
of Tetrahydrocannabinol, or THC. All references to the use of CBD in our product candidates refer to CBD strains with less than 0.3% of
THC.
We are currently in the pre-clinical
development stage for our lead product candidate, our RA product candidate for the treatment of RA. In addition, we are aiming to develop
a pharmaceutical drug product for the treatment of hyperinflammatory syndrome and lung inflammation related to COVID-19. At Rambam Health
Care Campus, or Rambam Hospital, we have successfully completed preclinical studies on human-derived immune cells and mouse models for
both the COVID-19 and RA products.
On February 9, 2022, we filed
an application for a clinical trial with the Medical Cannabis Unit of the Ministry of Health of Israel, or MOH. On February 16, 2022 we
submitted an application with the Helsinki Committee at Rambam Hospital for a clinical trial in COVID-19 patients. On March 27, 2023,
the Israel Ministry of Health, or MOH, accepted our proposal for a clinical trial aimed at preventing the deterioration of hospitalized
COVID-19 patients. We will commence the clinical trial during 2023. We plan to submit a human trial application in 2023 to conduct a proof-of-concept
experiment for our RA product
Our vision is to become a
leading company in the development of purified cannabinoids and full-spectrum CBD oil-based pharmaceutical drugs. We strive to apply our
expertise to address the unmet medical needs of patients suffering from various disorders, particularly those associated with inflammation,
such as RA and COVID-19.
In order to achieve our goal,
we have and will continue to build an experienced team of senior executives and scientists, with experience in all facets of pharmaceutical
research and development, drug formulation, clinical trial execution and regulatory submissions. We intend to leverage the knowledge of
our team in order to complete the clinical trials needed to receive approvals of our product candidates from applicable regulatory authorities.
Initially, we intend to obtain
approvals for our product candidates from the FDA and the Medical Cannabis Unit of the Israeli Ministry of Health, or MOH. Upon obtaining
FDA approvals, or in the event that we are not successful in obtaining such approvals, we intend to apply for EMA and other countries’
governmental regulatory agencies approvals for our product candidates. If we are successful in obtaining FDA approvals for our product
candidates, we intend to enter into royalty agreements with good manufacturing practice, or GMP, approved medical manufactures and distributors,
having them using our medical formulas for the purpose of growing, cultivating, manufacturing, and distributing Raphael Pharmaceutical
medical indications in their designated territories.
Critical Accounting Policies
Our financial statements are
prepared in accordance with US GAAP. There are no critical accounting estimates for the years ended December 31, 2022 and 2021. Also,
please see Note 2 of Part I, Item 1 of this Quarterly Report on Form 10-Q for the summary of significant accounting policies.
Results of Operations
Three months ended March 31, 2023
compared to the three months ended March 31, 2022
Revenues. We had no
revenues during the three months ended March 31, 2023 and March 31, 2022.
Research and Development
Expenses. Our research and development expenses totaled $114,000 for the three months ended March 31, 2023, representing a increase
of $28,000, or 33%, compared to $86,000 for the three months ended March 31, 2022. The increase was primarily attributable to additional
payment to Way of Life Cannabis Ltd. for the extraction of the full spectrum CBD oil, development of the medical formula and the placebo
for the clinical trial in COVID-19 patients.
General and Administrative
Expenses. Our general and administrative expenses totaled $144,000 for the three months ended March 31, 2023, representing an increase
of $55,000, or 62%, compared to $89,000 for the three months ended March 31, 2022. The increase was primarily due to fees paid to our
Chief Financial Officer whose service agreement started in July 2022.
Operating Loss. Our
operating loss totaled $258,000 for the three months ended March 31, 2023, representing an increase of $83,000, or 47%, compared to $175,000
for the three months ended March 31, 2022.
Financial Expense. We
recognized financial expense of $6,000 for the three months ended March 31, 2023, representing a decrease of $4,000, or 40%, compared
to financial expense of $10,000 for the three months ended March 31, 2022. The decrease was primarily due to a decrease in exchange rate
differences.
Net Loss. As a result
of the foregoing, our net loss totaled $264,000 for the three months ended March 31, 2023, representing an increase of 79,000, or 43%,
compared to $185,000 for the three months ended March 31, 2022.
Liquidity and Capital Resources
Since inception, we have funded
our operations primarily through our founder’s capital and capital received from Easy Energy. As of March 31, 2023, we had $38,000
in cash and cash equivalents, and have invested most of our available cash funds in ongoing cash accounts.
Net cash used in operating
activities was $399,000 for the three months period ended March 31, 2023, compared with net cash used in operating activities of $82,000
for the corresponding period in 2022. The $317,000 increase in the net cash used in operating activities during the three months period
ended March 31, 2023, compared to the same period in 2022, was primarily the result of an increase in pre-clinical trial expenses.
Net cash used in investing
activities for the three months period ended March 31, 2023 and for the same period in 2021 was zero.
Net cash provided by financing
activities for the three months period ended March 31, 2023 was $149,000 compared to $10,000 for the same period in 2022. The increase
in net cash provided by financing activities during the three months period ended March 31, 20223 compared to the corresponding period
in 2022 was mainly due to an increase in the issuance of common stock and warrants.
Off Balance Sheet Arrangements
Rambam Research Agreement
Pursuant to a research agreement
with Rambam Med-Tech Ltd, or Rambam MT, entered into by the parties in July 2019, or the Research Agreement, the Company agreed to fund
a research project, to be performed by Rambam MT, with a research plan aimed at identifying the effects of different cannabis strains
on the function of immune cells. On October 28, 2020, the Company and Rambam MT agreed to expand the research plan to study the anti-inflammatory
activities of cannabis extracts in an RA mouse model. On February 15, 2021, the Company and Rambam MT agreed to further expand the research
plan to study the effect of cannabis extracts on the immunopathology of the COVID-19 disease. The initial term of the Research Agreement
was 48 months. On October 24, 2022, the Company and Rambam MT entered into a supplement to the Research Agreement, or the Supplement Agreement,
pursuant to which the Company exercised an option to extend the Research Agreement by additional two years.
Pursuant to the Research Agreement,
we agreed to pay Rambam MT $1.4 million in four equal payments, due on the first day of August on each successive year from 2019 through
2022. Pursuant to the Supplement Agreement, we agreed to pay Rambam MT $960,000 plus VAT in four biannual payments from May 2023 through
December 2024. Furthermore, in accordance with the terms of the Research Agreement, we and Rambam MT will have joint ownership of any
IP created as a result of research programs covered by such agreement. In connection with the Research Agreement, Rambam MT agreed not
to work, study or develop any technologies with other entities that compete with our work with Rambam MT for our COVID-19 product candidate
or RA product candidate for a term of three and seven years, respectively, from the end of the parties’ collaboration with respect
to the COVID-19 product candidate and seven years from the end of the term of the Research Agreement with respect to the RA product candidate.
Subject to commercial sales
of any product candidate using the IP created as a part of the research covered by such agreement, Raphael Israel is required to pay Rambam
MT a royalty in an amount equal to 6% of all net sales, subject to certain deductions, such as taxes paid by any purchaser, transportation
and shipping costs, and other customary deductions.
As of March 31, 2023, the
Company has made four of the four equal payments due pursuant to the Research Agreement, for a total amount of $1.4 million.
Way of Life Cannabis Agreement
In October 2020, Raphael Israel
entered into an engagement agreement with Way of Life Cannabis Ltd., or Wolc, pursuant to which, subject to its completing the Share Exchange
with Easy Energy, Raphael Israel will be provided with up to 15 liters of CBD oil, from a strain of cannabis during a term of 18 months,
to be provided in two to three deliveries of between one to seven milliliters of CBD oil. In accordance with Raphael Israel’s agreement
with Wolc, Raphael Israel has agreed to issue to certain persons affiliated with Wolc 3% of Raphael’s issued and outstanding share
capital as of the date of the Share Exchange, to be provided in three equal issuances; provided, however, that such persons may elect
to receive a cash payment of $100,000 instead of any one issuance of Raphael’s shares. In addition to the issuance of shares, Raphael
Israel has also agreed to pay Wolc a royalty fee equal to 15% of the net royalties generated from sales of Raphael Israel’s pharmaceutical
drug products that are developed at Rambam hospital in Israel.
On July 27, 2022, the Company
issued 100,500 shares of common stock to Wolc in connection with the engagement agreement. The value of such issued shares was based on
the value of the service provided, which amounted to $100,000.
Except for the above, we have
not engaged in any off-balance sheet arrangements, such as the use of unconsolidated subsidiaries, structured finance, special purpose
entities or variable interest entities.
We do not believe that our
off-balance sheet arrangements and commitments have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that
is material to investors.
Current Outlook
We have financed our operations
to date primarily through proceeds from our founder’s capital and capital received from Easy Energy. We have incurred losses and
generated negative cash flows from operations since inception in 2019. To date we have not generated revenue, and we do not expect to
generate significant revenues from the sale of our products in the near future.
We do not believe that our
current cash on hand will be sufficient to fund our projected operating requirements. This raises substantial doubt about our ability
to continue as a going concern. At this time, there is no guarantee that we will be able to obtain an adequate level of financial resources
required for the short and long-term support of our operations or that we will be able to obtain additional financing as needed, or meet
the conditions of such financing, or that the costs of such financing may not be prohibitive. These conditions raise substantial doubt
about our ability to continue as a going concern for a period within one year from the date of the financial statements included elsewhere
in this prospectus.
As of March 31, 2023, our
cash and cash equivalents were $38,000. We believe that our existing cash and cash equivalents will not be sufficient to fund our projected
cash requirements through June 2023. Therefore, we will require significant additional financing in the near future to fund our operations.
We currently anticipate that we will require approximately $600 thousand for research and development activities over the course of the
next 12 months. We also anticipate that we will require approximately $1.4 million for capital expenditures over such 12-month period,
which consists primarily of expenditures for clinical trials and general Company operating costs.
In addition, our operating
plans may change as a result of many factors that may currently be unknown to us, and we may need to seek additional funds sooner than
planned. Our future capital requirements will depend on many factors, including:
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our research and development efforts, including our ability to finish research and development projects or product development within the allotted or expected timeline; |
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the cost, timing and outcomes of seeking to commercialize our products in a timely manner; |
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our ability to generate cash flows; |
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economic weakness, including inflation, or political instability in particular foreign economies and markets; |
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government regulation in our industry, and more specifically, the costs and timing of obtaining regulatory approval or permits to launch our technology in various geographical markets; and |
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the costs of, and timing for, strengthening our manufacturing agreements for production of our wave energy systems. |
Until we can generate significant
revenues, if ever, we expect to satisfy our future cash needs through our existing cash, cash equivalents and short-term deposits, loans,
or debt or equity financings. We cannot be certain that additional funding will be available to us on acceptable terms, if at all. If
funds are not available, we may be required to delay, reduce the scope of, or eliminate research or development plans for, or commercialization
efforts with respect to, one or more applications of our products. This may raise substantial doubts about our ability to continue as
a going concern.