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,” 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:
| |
● |
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; |
| |
|
|
| |
● |
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; |
| |
|
|
| |
● |
the commercial launch and future sales of our product candidates and our advancement of product candidates for other indications in our pipeline; |
| |
|
|
| |
● |
the potential cost of our rheumatoid arthritis product candidate, or RA and RA product candidate, respectively, for patients; |
| |
|
|
| |
● |
our expectations regarding the timing of commencing clinical trials; |
| |
● |
our expectations regarding the supply of the active pharmaceutical ingredient for our product candidates; |
| |
|
|
| |
● |
third-party payor reimbursement for our product candidates; |
| |
|
|
| |
● |
our estimates regarding anticipated expenses, capital requirements and our needs for additional financing; |
| |
|
|
| |
● |
completion and receiving favorable results of clinical trials for our product candidates; and |
| |
|
|
| |
● |
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 cannabinoids,
including cannabidiol, or CBD, oil. Unless indicated otherwise, we plan on using oil derived from cannabidiol, or 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 rheumatoid arthritis, or 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 inflammation related to COVID-19,
or our COVID-19 product candidate, which may be based on data or studies related to our RA product candidate. Our goal is to become a
leader in development of CBD oil-based pharmaceutical drug products for the treatment of indications in which we believe there is a high
unmet medical need in a range of disorders, including those related to inflammation in the body, including RA and COVID-19.
The Company was incorporated
in the State of Nevada in May 2007 and was formerly known as Easy Energy, Inc. On May 14, 2021, Easy Energy and Raphael Israel completed
the Share Exchange, as a result of which, Raphael Israel’s shareholders own 90% of our Company and Easy Energy’s shareholders
hold the remaining 10%. Raphael Israel was incorporated in 2019 in the State of Israel and has focused to date on developing its lead
product candidate for the treatment of RA. Easy Energy did not have any ongoing business or operations before the Share Exchange and following
the Share Exchange we adopted Raphael Israel’s business plan.
Initially, we intend to obtain
approvals for our product candidates from the FDA and Medical Cannabis Unit of the Ministry of Health of Israel. 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 strains 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, 2021 and 2020. 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 September 30,
2022 compared to the three months ended September 30, 2021
Revenues. We had no
revenues during the three months ended September 30, 2022 and September 30, 2021.
Research and Development
Expenses. Our research and development expenses totaled $332,000 for the three months ended September 30, 2022, representing a increase
of $171,000, or 106%, compared to $161,000 for the three months ended September 30, 2021. The increase was primarily attributable to expenses
recorded as a result of issuance of shares of common stock to a service provider of the Company.
General and Administrative
Expenses. Our general and administrative expenses totaled $1,094,000 for the three months ended September 30, 2022, representing an
increase of $837,000, or 325%, compared to $257,000 for the three months ended September 30, 2021. The increase was primarily due to expenses
recorded as a result of issuance of shares of common stock to an executive officer of the Company in connection with his engagement with
the Company.
Operating Loss. Our
operating loss totaled $1,426,000 for the three months ended September 30, 2022, representing an increase of $1,008,000, or 241%, compared
to $418,000 for the three months ended September 30, 2021.
Financial Expense/(Income).
We recognized financial expense of $17,000 for the three months ended September 30, 2022, representing an increase of $19,000, or
650%, compared to financial income of $2,000 for the three months ended September 30, 2021. The increase was primarily due to an increase
in exchange rate differences.
Net Loss. As a result
of the foregoing, our net loss totaled $1,443,000 for the three months ended September 30, 2022, representing an increase of $1,027,000,
or 246%, compared to $416,000 for the three months ended September 30, 2021.
Nine months ended September 30, 2022 compared
to the nine months ended September 30, 2021
Revenues. We had no
revenues during the nine months ended September 30, 2022 and September 30, 2021.
Research and Development
Expenses. Our research and development expenses totaled $502,000 for the nine months ended September 30, 2022, representing a decrease
of $50,000, or 9%, compared to $552,000 for the nine months ended September 30, 2021. The decrease was primarily attributable to expenses
recorded as a result of issuance of shares of common stock to a service provider of the Company which were offset by a decrease in pre-clinical
trial expenses, mainly due to the conclusion of the pre-clinical study in mice for Company’s RA product candidate in 2021.
General and Administrative
Expenses. Our general and administrative expenses totaled $1,711,000 for the nine months ended September 30, 2022, representing an
increase of $1,208,000, or 240%, compared to $503,000 for the nine months ended September 30, 2021. The increase was primarily due to
expenses recorded as a result of issuance of shares of common stock to an executive officer of the Company in connection with his engagement
with the Company and due to retirement fees paid in stock to one of the Company’s directors.
Operating Loss. Our
operating loss totaled $2,213,000 for the nine months ended September 30, 2022, representing an increase of $1,158,000, or 109%, compared
to $1,055,000 for the nine months ended September 30, 2021. The increase was primarily due to increased general and administrative expenses
for the nine months ended September 30, 2022 compared to the corresponding period in 2021.
Financial Expense. We
recognized financial expense of $42,000 for the nine months ended September 30, 2022, representing an increase of $39,000, or 1,300%,
compared to $3,000 for the nine months ended September 30, 2021. The increase was primarily due to an increase in exchange rate differences.
Net Loss. As a result
of the foregoing, our net loss totaled $2,255,000 for the nine months ended September 30, 2022, representing an increase of $1,197,000,
or 113%, compared to $1,058,000 for the nine months ended September 30, 2021.
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 September 30, 2022, we had $93,000
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 $482,000 for the nine months period ended September 30, 2022, compared with net cash used in operating activities of $715,000
for the corresponding period in 2021. The $233,000 decrease in the net cash used in operating activities during the nine months period
ended September 30, 2022, compared to the same period in 2021, was primarily the result of a decrease in pre-clinical trial expenses.
Net cash used in investing
activities was $2,000 for the nine months period ended September 30, 2022, compared with zero net cash used in investing activities for
the corresponding period in 2021. The decrease in the net cash provided by investing activities during the nine months period ended September
30, 2022, compared to the same period in 2021, was primarily due to the purchase of laboratory equipment.
Net cash provided by financing
activities for the nine months period ended September 30, 2022 was $424,000 compared to $657,000 for the same period in 2021. The decrease
in net cash provided by financing activities during the nine months period ended September 30, 2022 compared to the corresponding period
in 2021 was mainly due to decrease in receipt of loan funds.
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 September 30, 2022,
the Company has made three of the four equal payments due pursuant to the Research Agreement, for a total amount of $1,050,000.
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.
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 September 30, 2022,
our cash and cash equivalents were $93,000. We believe that our existing cash and cash equivalents will not be sufficient to fund our
projected cash requirements through September 2023. Therefore, we will require significant additional financing in the near future to
fund our operations. We currently anticipate that we will require approximately $1 million for research and development activities over
the course of the next 12 months. We also anticipate that we will require approximately $2 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:
| |
● |
our research and development efforts, including our ability to finish research and development projects or product development within the allotted or expected timeline; |
| |
● |
the cost, timing and outcomes of seeking to commercialize our products in a timely manner; |
| |
|
|
| |
● |
our ability to generate cash flows; |
| |
|
|
| |
● |
economic weakness, including inflation, or political instability in particular foreign economies and markets; |
| |
|
|
| |
● |
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 |
| |
|
|
| |
● |
the costs of, and timing for, strengthening our manufacturing agreements for production of our wave energy systems. |
In addition to the foregoing,
based on our current assessment, we do not expect any material impact on our long-term liquidity due to the COVID-19 pandemic. However,
we will continue to assess the effect of the pandemic to our operations. The extent to which the COVID-19 pandemic will impact our business
and operations will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the duration
of the COVID-19 pandemic, any restrictions on the ability of hospitals and trial sites to conduct trials that are not designed to address
the COVID-19 pandemic and the perceived effectiveness of actions taken in Israel, the United States and Europe and other countries to
contain and treat the disease. While the potential economic impact brought by COVID-19 may be difficult to assess or predict, a widespread
pandemic could result in significant disruption of global financial markets, reducing our ability to access capital in the future. In
addition, a recession or long-term market correction resulting from the spread of COVID-19 could materially affect our business and the
value of our common stock.
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.
