Note 8 – Equity Instruments

Options

On June 1, 2015, Aytu’s stockholders approved the 2015 Stock Option and Incentive Plan (the “2015 Plan”), which, as amended in July 2017, provides for the award of stock options, stock appreciation rights, restricted stock and other equity awards for up to an aggregate of 3.0 million 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.

Pursuant to the 2015 Stock Plan, 3.0 million shares of the Company’s common stock, are reserved for issuance. The fair value of options granted 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.

Stock option activity is as follows:

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years
Outstanding June 30, 2017		38,263		$	16.31		8.40
Granted		-		$	-
Exercised		-		$	-
Forfeited/Cancelled		(139	)	$	16.40
Outstanding September 30, 2017		38,124		$	16.31		8.13
Exercisable at September 30, 2017		23,385		$	16.40		7.85
Available for grant at September 30, 2017		2,761,876

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 stock option issuances for the three months ended September 30, 2017 and 2016:

	Three Months Ended September 30,
Selling, general and administrative:	2017		2016

Stock options	$	195,000	$	1,044,000

Restricted Stock		72,000		75,000
Total share-based compensation expense	$	267,000	$	1,119,000

As of September 30, 2017, there was $571,000 of total unrecognized share-based compensation expense related to non-vested stock options. The Company expects to recognize this expense over a weighted-average period of 1.60 years.

Warrants

A summary of all warrants is as follows:

	Number of Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years
Outstanding June 30, 2017		286,049	$	50.29		4.23

Warrants issued to investors in connection with the private offering		5,920,002	$	3.60
Warrants issued to underwritters for the private offering		394,669	$	3.60
Outstanding September 30, 2017		6,600,720	$	5.62		4.86

In connection with our August 2017 private offering, we issued to investors and underwriters warrants to purchase an aggregate of 6, 314,671 shares of common stock at an exercise price of $3.60 with a term of five years from August 25, 2017. These warrants are accounted for under derivative liability treatment. (see Note 5).

All warrants issued in fiscal 2018 were valued using the lattice option pricing model. In order to calculate the fair value of the warrants, certain assumptions were made regarding components of the model, including the selling price or fair market value of the underlying common stock, risk-free interest rate, volatility, expected dividend yield, and contractual 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.

Significant assumptions in valuing the warrants issued during the September 30, 2017 quarter are included in Note 5.