ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our interim unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the audited financial statements and notes thereto as of and for the year ended December 31, 2017 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the Securities and Exchange Commission (“SEC”) on March 19, 2018 (the “2017 Annual Report”). As used in this report, unless the context suggests otherwise, “we,” “us,” “our,” or “Ritter” refer to Ritter Pharmaceuticals, Inc. All common share amounts and per share amounts have been adjusted to reflect a 1-for-10 reverse stock split of our common stock on March 23, 2018. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.

Special Note Regarding Forward-Looking Statements and Industry Data

This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

Some of the factors that we believe could cause actual results to differ from those anticipated or predicted include:

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, and healthcare, regulatory and scientific developments and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods.

Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of such statement, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report. You should also read carefully the factors described in the “Risk Factors” section of our 2017 Annual Report and this Quarterly Report to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.

Overview

Ritter Pharmaceuticals, Inc. develops novel therapeutic products that modulate the gut microbiome to treat gastrointestinal diseases. Our lead product, RP-G28, has the potential to become the first FDA-approved treatment for lactose intolerance, a condition that affects millions worldwide. RP-G28 has been studied in Phase 2 trials and is now in Phase 3 clinical development. We are further exploring the functionality and discovering the therapeutic potential that gut microbiome changes may have on treating/preventing a variety of conditions including: gastrointestinal diseases, immuno-oncology, metabolic, and liver disease.

Our first novel microbiome modulator, RP-G28, an orally administered, high purity galacto-oligosaccharide, is currently under development for the treatment of lactose intolerance. RP-G28 is designed to selectively stimulate the growth of lactose-metabolizing bacteria in the colon, thereby effectively adapting the gut microbiome to assist in digesting lactose (the sugar found in milk) that reaches the large intestine. RP-G28 has the potential to become the first drug approved by the Food and Drug Administration (“FDA”) for the treatment of lactose intolerance. RP-G28 has been studied in Phase 2a and Phase 2b clinical trials, is currently being studied in a pivotal Phase 3 clinical trial and is a first-in-class compound.

On March 28, 2017, we announced top-line results from our Phase 2b clinical trial of RP-G28 for the treatment of lactose intolerance. The Phase 2b trial was a double-blind, placebo-controlled, three-arm, multi-center study evaluating safety, efficacy and tolerability of two dosing regimens of RP-G28 in patients with lactose intolerance. Enrollment was initiated in March 2016 and the last patient completed dosing in October 2016. The study aimed to evaluate a patient’s ability to consume dairy foods post-treatment with improved tolerance and reduced digestive symptoms. A total of 377 subjects were randomized in the trial with 18 clinical sites participating throughout the United States. Patients underwent a screening period and a 30-day treatment period, followed by a 30-day post-treatment “real world” observation of milk and dairy product consumption period.

A subset of subjects enrolled into a 12-month extension study to evaluate long-term durability of treatment. The extension study also evaluated each participant’s microbiome, expanding knowledge of the effects that RP-G28 may have on adapting the gut microbiota in a beneficial manner. We completed this study in the fourth quarter of 2017.

We held a Type C meeting with the FDA’s Division of Gastroenterology and Inborn Errors Products in March 2017, prior to the unblinding of our Phase 2b data, to discuss our development plans and Phase 2b clinical trial. The focus of the meeting was to obtain the FDA’s feedback on our Phase 2b clinical trial, including our statistical analysis plan, prior to unblinding any data.

We held an End-of-Phase 2 meeting with the FDA’s Division of Gastroenterology and Inborn Errors Products in August 2017. The purpose of the meeting was to obtain the FDA’s feedback on our Phase 3 program. We reached general consensus with the FDA on certain elements of our current Phase 3 program and have received clear guidance and recommendations on many necessary components of our Phase 3 program; including the clinical, non-clinical, and chemistry, manufacturing and controls (CMC) requirements needed to support an NDA submission.

We have incorporated much of this guidance into our Phase 3 program. Our current Phase 3 clinical program will consist of two confirmatory clinical trials of similar trial design as our Phase 2b clinical trial. The first Phase 3 clinical trial was initiated in the second quarter of 2018.

We have devoted substantially all of our resources to development efforts relating to RP-G28, including conducting clinical trials of RP-G28, providing general and administrative support for these operations and protecting our intellectual property. We currently do not have any products approved for sale and we have not generated any revenue from product sales since our inception.

Financial Operations Overview

We have incurred net losses in each year since our inception, including net losses of approximately $6.0 million for the six months ended June 30, 2018. We had an accumulated deficit of approximately $59.3 million as of June 30, 2018. Substantially all of our net losses resulted from costs incurred in connection with our research and development programs, patent costs, stock-based compensation, and from general and administrative costs associated with our operations.

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially as we:

Research and Development Expenses

Since our inception, we have focused our resources on our research and development activities, including conducting nonclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for RP-G28. Our research and development expenses consist primarily of:

From inception through June 30, 2018, we have incurred approximately $25.2 million in research and development expenses. We plan to increase our research and development expenses for the foreseeable future as we continue the development of RP-G28 for lactose intolerance and other indications, subject to the availability of additional funding.

The successful development of RP-G28 is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the development of RP-G28 or when, if ever, net cash inflows from RP-G28 may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of the clinical development of RP-G28 or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

Patent Costs

Patent costs consist primarily of professional fees for legal services to prosecute patents and maintain patent rights.

General and Administrative Expenses

General and administrative expenses include allocation of facilities costs, salaries, benefits, and stock-based compensation for employees, professional fees for directors, fees for independent contractors and accounting and legal services.

We expect that our general and administrative expenses will increase if RP-G28 is approved for commercialization. We believe that these increases will likely include increased costs for director and officer liability insurance, and increased fees for outside consultants, lawyers and accountants, among other expenses.

Interest Income and Interest Expense

Interest income consists of interest earned on our cash.

Critical Accounting Policies and Estimates

This discussion and analysis is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to fair value of financial instruments, research and development costs, accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors we believe to be 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. Actual results may differ from these estimates under different assumptions or conditions.

A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting estimates are disclosed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our 2017 Annual Report on Form 10-K. There have not been any material changes to such critical accounting estimates since December 31, 2017.

Fair Value of Financial Instruments

Fair value measurement guidelines are prescribed by GAAP to value financial instruments. The guidance includes a definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair value measurements.

The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

These two types of inputs create the following fair value hierarchy:

Level 1 - Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models consider various assumptions, including volatility factors, current market prices and contractual prices for the underlying financial instruments. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 - Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable

The carrying amounts reported in the balance sheet for cash and cash equivalents, prepaid expenses, accounts payable, accrued expenses, and the notes payable approximate the fair values due to the short-term nature of the instruments.

Research and Development Costs

We expense the cost of research and development as incurred. Research and development expenses comprise costs incurred in performing research and development activities, including clinical study costs, contracted services, and other external costs. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity is performed or when the goods have been received, rather than when payment is made, in accordance with ASC 730, Research and Development .

Accrued Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make accrued expense adjustments, if necessary. The significant estimates in our accrued research and development expenses include fees due to service providers.

Emerging Growth Company Status

On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year (a) following the fifth anniversary of the date we completed our initial public offering, which was June 29, 2015, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeded $700.0 million as of the prior June 30th, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Research and Development Expenses

Research and development expenses increased by approximately $1.1 million, or 142%, during the three months ended June 30, 2018 as compared to the three months ended June 30, 2017. The primary reason for this increase is due to the costs associated with preparation of our Phase 3 clinical trial, including manufacturing costs. Research and development expenses during the three months ended June 30, 2017 primarily reflect extension study costs and continued Phase 3 program analysis costs.

Patent Costs

Patent costs during the three months ended June 30, 2018 were relatively consistent as compared to the same period in 2017. Patent costs relate to our maintenance of patent rights and the prosecution of patents, the new patent applications and our preparation to file national phase applications in certain foreign countries. During the three months ended June 30, 2018, there were no patents issued.

General and Administrative Expenses

General and administrative expenses increased approximately $543,000, or 47%, during the three months ended June 30, 2018 as compared to the three months ended June 30, 2017, primarily due to increased personnel costs due to hiring and one-time employee separation payments and an increase in professional fees, offset by a decrease in stock-based compensation. Approximately $178,000 in stock-based compensation expense was recognized during the three months ended June 30, 2018, as compared to approximately $249,000 during the same period in 2017.

Other Income

Other income increased by approximately $15,000, or 244%, during the three months ended June 30, 2018 as compared to the three months ended June 30, 2017, due to interest income on higher average cash balance in the three months ended June 30, 2018 as compared to the comparative period ended June 30, 2017.

Research and Development Expenses

Research and development expenses increased by approximately $1.5 million, or 125%, during the six months ended June 30, 2018 as compared to the six months ended June 30, 2017. The primary reason for this increase is due to costs associated with the preparation of our Phase 3 clinical trial, including manufacturing costs. Research and development expenses during the six months ended June 30, 2017 primarily reflect extension study costs and continued Phase 3 program development related costs.

Patent Costs

The approximate $17,000, or 13%, decrease in patent costs during the six months ended June 30, 2018 as compared to the same period in 2017 was mainly due to the reduction in costs related to our maintenance of patent rights and the prosecution of patents. In addition, the costs associated with the new patent applications and our preparation to file national phase applications in certain foreign countries were absent in the six months ended during the six months ended June 30, 2017. During the six months ended June 30, 2018, there were no patents issued.

General and Administrative Expenses

General and administrative expenses increased by approximately $497,000, or 21%, during the six months ended June 30, 2018 as compared to the six months ended June 30, 2017, primarily due to increased personnel costs due to hiring and one-time employee separation payments and an increase in professional fees, offset by a decrease in stock-based compensation. Approximately $391,000 in stock-based compensation expense was recognized during the six months ended June 30, 2018, as compared to approximately $543,000 during the same period in 2017.

Other Income

Other income increased by approximately $34,000, or 238%, during the six months ended June 30, 2018 as compared to the six months ended June 30, 2017, due to increased interest income on higher average cash balance in the six months ended June 30, 2018 as compared to the six months ended June 30, 2017.

Liquidity and Capital Resources

Since our inception, we have incurred net losses and negative cash flows from operations, and, as of June 30, 2018, we had an accumulated deficit of approximately $58.9 million. Substantially all of our net losses resulted from costs incurred in connection with our research and development programs, stock-based compensation, and from general and administrative costs associated with our operations.

At June 30, 2018, we had working capital of approximately $14.9 million, and cash of approximately $16.3 million. We have not generated any product revenues and have not achieved profitable operations.

Operating Activities

During the six months ended June 30, 2018, net cash used in operating activities of approximately $6.4 million primarily reflects our net loss for the period of approximately $6.0 million and a decrease of non-cash adjustment of approximately $894,000 relating to a accounts payable settlement, offset by non-cash charges of approximately $391,000 for stock-based compensation expense and changes in our working capital accounts, mainly consisting of an approximate $80,000 increase in accrued expenses.

Net cash used in operating activities of approximately $3.6 million during the six months ended June 30, 2017 primarily reflects our net loss for the period of approximately $3.6 million, offset by non-cash charges of approximately $543,000 for stock-based compensation expense and changes in our working capital accounts, mainly consisting of decreases in accounts payable and accrued expenses of approximately $190,000 and $547,000, respectively.

Investing Activities

Net cash used in investing activities of approximately $2,000 during the six months ended June 30, 2018 related to the purchase of office furniture and equipment.

No cash was used in investing activities for the six months ended June 30, 2017.

Financing Activities

Net cash used in financing activities of $3,256 during the six months ended June 30, 2018 related to the payout of fractional shares to stockholders relating to the reverse stock split.

Net cash provided by financing activities of approximately $2.0 million during the six months ended June 30, 2017 resulted from proceeds received from the sale of common shares to Aspire Capital, LLC (“Aspire Capital”) pursuant to the Company’s 2015 Common Stock Purchase Agreement with Aspire Capital (the “2015 Common Stock Purchase Agreement”). There were no sales of common shares under the 2015 Common Stock Purchase Agreement during the six months ended June 30, 2018

Sources of Liquidity

Aspire Capital Financing Arrangement

On May 4, 2017, we entered into a common stock purchase agreement (the “2017 Aspire Purchase Agreement”) with Aspire Capital. The 2017 Aspire Purchase Agreement provides access to us of up to an aggregate of $6.5 million through the sale of shares of our common stock, over a 30-month period (subject to limitation described below). In consideration for entering into the 2017 Aspire Purchase Agreement, we issued to Aspire Capital 13,732 shares of our common stock with an aggregate dollar value equal to $97,500 (the “Commitment Shares”).

Under the 2017 Aspire Purchase Agreement, on any trading day on which the closing price of the Company’s common stock exceeds $2.50 per share, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice (each, a “Purchase Notice”), directing Aspire Capital (as principal) to purchase up to 10,000 shares of our common stock per trading day (which may be increased by as much as an additional 200,000 shares per trading day by mutual agreement), up to an aggregate of $6.5 million of our common stock (subject to limitation described below), at a per share price (the “Purchase Price”) equal to the lesser of:

The aggregate purchase price payable by Aspire Capital on any one purchase date may not exceed $50,000, unless otherwise mutually agreed.

In addition, on any date on which we submit a Purchase Notice to Aspire Capital in an amount equal to 10,000 shares and our stock price is not less than $2.50 per share, we may also, in our sole discretion, present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of our common stock equal to up to 30% of the aggregate shares of our common stock traded on its principal market on the next trading day (the “VWAP Purchase Date”), as determined by us. The purchase price per share pursuant to such VWAP Purchase Notice is generally 97% of the volume-weighted average price for our common stock traded on its principal market on the VWAP Purchase Date.

We may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the 2017 Aspire Purchase Agreement, so long as the most recent purchase has been completed.

The 2017 Aspire Purchase Agreement provides that the number of shares that may be sold to Aspire Capital (including the Commitment Shares) will be limited to 284,242 shares (the “Exchange Cap”), which represents 19.99% of our outstanding shares of common stock as of May 2, 2017, unless stockholder approval or an exception pursuant to the rules of Nasdaq is obtained to issue more than 19.99% of our outstanding shares as of May 2, 2017. This limitation will not apply if, at any time the Exchange Cap is reached and at all times thereafter, the average price paid for all shares issued under the 2017 Aspire Purchase Agreement is equal to or greater than $6.80, which was the consolidated closing bid price of our common stock on May 4, 2017. We are not required or permitted to issue any shares of common stock under the 2017 Aspire Purchase Agreement if such issuance would breach our obligations under the rules or regulations of Nasdaq.

October 2016 Public Offering

On October 31, 2016, we closed a public offering of 212,766 shares of our common stock at a price to the public of $23.50 per share, for net proceeds of approximately $4.4 million, after deducting underwriting discounts and commissions and offering expenses payable by us. The offering was made pursuant to a shelf registration statement on Form S-3 (Registration Number 333-213087).

October 2017 Public Offering

On October 3, 2017, we closed a public offering of (i) 3,455,000 Class A Units consisting of 3,455,000 shares of our common stock and warrants to purchase 3,455,000 shares of our common stock, at a public offering price of $4.00 per unit, and (ii) 9,180 Class B Units consisting of 9,180 shares of our Series A Convertible Preferred stock, with a stated value of $1,000, and convertible into an aggregate of 2,295,000 shares of our common stock, and warrants to purchase 2,295,000 shares of our common stock, at a public offering price of $1,000 per unit. We received approximately $21.0 million in net proceeds from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The offering was made pursuant to a shelf registration statement on Form S-1 (Registration Number 333-219147).

Future Funding Requirements

To date, we have not generated any revenue. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize RP-G28 or any of our other product candidates. At the same time, we expect our expenses to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, RP-G28. In addition, subject to obtaining regulatory approval of RP-G28, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need substantial additional funding in connection with our continuing operations.

Our future capital requirements will depend on many factors, including:

We expect that significant ongoing operating expenditures will be necessary to successfully implement our business plan and develop, manufacture, and market our products. Based on our current operating plan, our existing cash and cash equivalents, together with interest, may not be sufficient to fund our operations for the next twelve months from the date of this filing. Our operations have been and will continue to be dependent upon management’s ability to raise operating capital through a combination of equity offerings (including sales pursuant to the 2017 Aspire Purchase Agreement), debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances and licensing agreements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, commercialization, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

Contractual Obligations and Commitments

Other than as disclosed in Note 5- Commitment and Contingencies of our unaudited financial statements included in the Quarterly Report, there have been no material changes to our contractual obligations and commitments from those disclosed in our 2017 Annual Report.

Off-Balance Sheet Arrangements

Through June 30, 2018, we do not have any off-balance sheet arrangements, as defined by applicable SEC regulations.