Note 7 – 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 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.

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.

Pursuant to the Luoxis 2013 Stock Option Plan, 1,102,761 shares of its common stock were reserved for issuance. The fair value of the options was 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. The assumptions are as follows:


	Years Ended June 30,
	2015	2014

Expected volatility	79% - 108%	79% - 82%
Risk free interest rate	1.62% - 2.09%	0.75% - 1.53%
Expected term (years)	5.5 - 7.0	5.0 - 6.5
Dividend yield	0%	0%

Stock option activity is as follows:


	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding June 30, 2013		396,994		$	4.53		9.96	$	1,272,000

Granted		33,083		$	4.53
Exercised		—		$	—
Forfeited/Cancelled		—		$	—

Outstanding June 30, 2014		430,077		$	4.53		9.01	$	1,374,000
Granted		195,189		$	7.25
Exercised		—		$	—
Forfeited/Cancelled		(625,266	)	$	5.40

Outstanding June 30, 2015		—		$	—

Exercisable at June 30, 2015		—		$	—

Available for grant at June 30, 2015		—

Pursuant to the Vyrix 2013 Stock Option Plan, 616,067 shares of its common stock were reserved for issuance. The fair value of the options was 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. In accordance with the Vyrix 2013 Stock Option Plan, no additional options were granted during the year-ended June 30, 2015. The assumptions are as follows:


		Year Ended June 30,
		2014

Expected volatility		63% - 76%
Risk free interest rate		0.90% - 2.02%
Expected term (years)		5.0 - 6.5
Dividend yield		0%

Stock option activity is as follows:


	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding June 30, 2013		—		$	—		—	$	—

Granted		117,053		$	5.68
Exercised		—		$	—
Forfeited/Cancelled		—		$	—

Outstanding June 30, 2014		117,053		$	5.68		9.54	$	417,000
Granted		—		$	—
Exercised		—		$	—
Forfeited/Cancelled		(117,053	)	$	5.68

Outstanding June 30, 2015		—		$	—

Exercisable at June 30, 2015		—		$	—

Available for grant at June 30, 2015		—

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 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 years ended June 30 2015 and 2014:


	Years Ended June 30,
	2015		2014
Research and development expenses
Stock options
Luoxis	$	427,000	$	206,000
Vyrix		92,000		38,000
General and administrative expenses
Stock options
Luoxis		316,000		152,000
Vyrix		183,000		104,000

	$	1,018,000	$	500,000


Unrecognized expense at June 30, 2015
Luoxis	$	—
Vyrix	$	—
Weighted average remaining years to vest
Luoxis		—
Vyrix		—

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. As of September 28, 2015, no grants have been made under the 2015 Plan.

Warrants

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


	Number of Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life

Outstanding June 30, 2013		102,613	$	4.53		4.41
Outstanding June 30, 2014		102,613	$	4.53		3.92
Outstanding June 30, 2015		102,613	$	4.53		2.92

These warrants were valued using the Black-Scholes option pricing model. In order to calculate the fair value of the warrants, certain assumptions were made regarding components of the model, including the closing price of the underlying common stock, risk-free interest rate, volatility, expected dividend yield, and expected life. Changes to the assumptions could cause significant adjustments to valuation. The Company estimated a volatility factor utilizing a weighted average of comparable published volatilities of peer companies. 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. The offering costs and the additional paid-in capital for the warrants associated with the common stock offering were valued at $313,000 using the Black-Scholes valuation methodology.