ITEM 4.02(a) NON-RELIANCE ON PREVIOUSLY ISSUED FINANCIAL STATEMENTS OR A RELATED AUDIT REPORT OR COMPLETED INTERIM REVIEW
In conjunction with the audit of the financial statements of Ohr Pharmaceutical, Inc. (the “Company”) for the year ended September 30, 2010 (the “2010 audit”) by the Company’s independent registered public accounting firm, Child Van Wagoner and Bradshaw, PLLC (“CVB”), the Company reviewed its accounting for certain warrant issuances during the Company’s fiscal Quarter ending March 31, 2010 (the “Warrants”). During this review, an error in the Company’s accounting for inducement Warrants issued to exercising warrant holders on January 15, 2010, arose. Management and CVB discussed the matter and management continued working to resolve the issue. On January 12th, 2010, management concluded, based on recommendations from CVB, that the Company’s unaudited interim consolidated financial statements for the quarterly periods ended March 31, 2010 (“March”), and June 30, 2010 (“June”) should no longer be relied on and should be restated.
The error relates to the accounting of warrants issued as an inducement to warrant holders to exercise their warrants. Originally, the Company viewed the issuance of inducement warrants as an additional expense and recorded the fair value of the replacement warrants in earnings. This resulted in the Company recognizing a warrant expense in the Company’s income statement with an offset to derivative liability in March.
In conjunction with the Company’s annual audit, the Company and CVB reviewed the transaction and determined that a more accurate accounting for the Warrants should be as follows. Due to the fact that the replacement warrants were issued in conjunction with common stock that had been exchanged for warrants, the fair value received by the Company on the date of issuance includes both the net cash proceeds from the sale of stock and the fair value of the warrants being forfeited valued on the date of exercise.
The calculated fair market value of the warrants at the time of issuance was accurate, however when considering the fair market value of the warrants forfeited by shareholders under the modified arrangement, no expense ought to be recognized and instead a reduction to the Company’s Additional Paid-in Capital account is appropriate.
The modifications to the restated financial statements reduce Warrant Expense and Additional-Paid in Capital. Additionally, these changes affect two of the elements of the Changes in Shareholders’ Equity by reducing both the Additional Paid-in Capital and Accumulated Deficit accounts.
In March, the correction results in a decrease in Additional Paid-in Capital of $2,868,242 and a reduction of Deficit Accumulated during the Development Stage of $2,868,242. The effect on the income statement for the March period is an elimination of the $2,868,242 recorded in warrant expense for both the three and six month periods which results in a reduction of the reported net loss from $3,022,043 to $153,801 for the three months ended March 31, 2010, from $3,188,798 to $320,556 for the six months ended March 31, 2010 and from $4,028,420 to $1,160,178 from inception of the development stage on October 1, 2007 through March 31, 2010. This results in a reduction of net loss per share of $0.09 and $0.10 for the three and six month periods, respectively. The change had no net effect on the Company’s cash flows from operating, investing or financing activities in the March period.
In June, the correction results in a decrease in Additional Paid-in Capital of $2,868,242 and a reduction of Deficit Accumulated during the Development Stage of $2,868,242. The effect on the income statement for the June period is an elimination of the $2,868,242 recorded in warrant expense for the nine month period which has no effect on the three month period ended June 30, 2010. The change does result in a reduction of the reported net loss from $3,365,403 to $497,161 for the nine months ended June 30, 2010 and from $4,205,025 to $1,336,783 from inception of the development stage on October 1, 2007 through June 30, 2010. This results in a reduction of net loss per share of $0.09 nine month period with no effect on the three month period. The change had no net effect on the Company’s cash flows from operating, investing or financing activities in the June period.
The Company anticipates filing amendments to its Forms 10-Q for the affected quarterly periods to reflect the corrections to its quarterly consolidated financial statements in the near future.