Note 10 – Equity Instruments

Options

Prior to the Merger, Aytu had two approved stock option plans (Luoxis 2013 Stock Option Plan and Vyrix 2013 Stock Option Plan), pursuant to which Aytu had reserved a total of 1,718,828 million shares of common stock, both of which were terminated on April 16, 2015 upon the closing of the Merger.

The Luoxis options that were in the money and all outstanding Vyrix options issued under the respective 2013 Option Plans were accelerated and cancelled in connection with the Merger. Option holders received a cash payment per option share equal to the difference between the consideration payable per share of common stock pursuant to the Merger and the exercise price of the option; if the consideration paid to holders of common stock was less than the exercise price of such options, no amount was paid to the option holder in connection with the cancellation. The cash payment during the period ended June 30, 2015 was $27,000. The Company recognized compensation of $422,000 and $189,000 related to the Luoxis and Vyrix options that had accelerated vesting as of the Merger date during the period ended June 30, 2015.

The Luoxis options that were not paid out were terminated pursuant to the terms of the 2013 Luoxis Option Plan. The Company treated these options as pre-vesting forfeitures and $433,000 of previously recognized compensation was reversed.

On June 1, 2015, Aytu’s stockholders approved the 2015 Stock Option and Incentive Plan (the “2015 Plan”), which provides for the award of stock options, stock appreciation rights, restricted stock and other equity awards for up to an aggregate of 10,000,000 shares of common stock. The shares of common stock underlying any awards that are forfeited, canceled, reacquired by Aytu prior to vesting, satisfied without any issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2015 Plan will be added back to the shares of common stock available for issuance under the 2015 Plan. The fair value of the options are calculated using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding components of the model, including the estimated fair value of the underlying common stock, risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to valuation. Aytu estimates the expected term based on the average of the vesting term and the contractual term of the options. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of similar maturity. Aytu has computed the fair value of all options granted during the three months ended September 30, 2015 using the following assumptions:


Expected volatility		75.00%
Risk free interest rate		1.08% – 1.59%
Expected term (years)		3.0 – 4.5
Dividend yield		0%

Stock option activity is as follows:


	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Expected Life in Years
Outstanding June 30, 2015		—	$	—
Granted		50,000	$	4.63
Exercised		—	$	—
Forfeited/Cancelled		—	$	—

Outstanding September 30, 2015		50,000	$	4.63		4.86

Exercisable at September 30, 2015		—	$	—

Available for grant at September 30, 2015		9,950,000

Stock-based compensation expense related to the fair value of stock options was included in the statements of operations as research and development expenses and selling, general and administrative expenses as set forth in the table below. Aytu determined the fair value as of the date of grant using the Black-Scholes option pricing model and expenses the fair value ratably over the vesting period. The following table summarizes stock-based compensation expense for the three months ended September 30, 2015 and for the stock-based compensation expense related to the Luoxis and Vyrix options for the three months ended September 30, 2014:


	Three Months Ended September 30,
	2015		2014
Research and development expenses
Stock options	$	5,000	$	90,000
Selling, general and administrative expenses
Stock options		63,000		112,000

	$	68,000	$	202,000

Unrecognized expense at September 30, 2015	$	10,000

Weighted average remaining years to vest		3.55

Warrants

Aytu issued warrants in conjunction with its 2013 private placement. A summary of these warrants is as follows:


	Number of Warrants		Weighted Average Exercise Price		Weighted Average Remaining Expected Life in Years
Outstanding June 30, 2015		102,613	$	4.53		2.92
Outstanding September 30, 2015 (unaudited)		102,613	$	4.53		2.92

Warrant Obligation related to the Convertible Promissory Notes

Aytu has the obligation to issue warrants to the private placement agents as part of their fees for the convertible note financing. These warrants are classified as a derivative warrant liability due to the fact that the number of shares and exercise price have not been set as of September 30, 2015. The number of shares of Company stock that these warrants will convert into is equal to 8% of the gross number of shares of the Company stock issuable upon conversion of the Notes issued to investors introduced to the Company by the private placement agents pursuant to the private placement memorandum. The exercise price will be the lowest conversion price per share at which the Notes are converted into Company common stock. The warrants have a term of five years from August 31, 2015.