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Equity Instruments

12 Months Ended

Jun. 30, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Equity Instruments

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. As of June 30, 2018, we have 2,961,055 shares that are available for grant under the 2015 Plan.

Pursuant to the 2015 Stock Plan, 3.0 million shares of its 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. There’s no issuances during the year ended June 30, 2018, therefore, no assumptions are used for fiscal 2018.

The assumptions used for the year ended June 30, 2017, as none were issued in fiscal 2018, are as follows:

		Year Ended June 30,
		2017

Expected volatility		178% - 185%
Risk free interest rate		0.97% - 1.88%
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 in Years
Outstanding June 30, 2016			829			$	7,204.00				9.33
Granted			1,197			$	364.00
Exercised			-			$	-
Forfeited			(75	)		$	1,664.00
Cancelled			(4	)		$	1,292.00
Outstanding June 30, 2017			1,947			$	326.20				8.40
Granted			-			$	-
Exercised			-			$	-
Forfeited			(129	)		$	328.00
Cancelled			(20	)		$	328.00
Outstanding June 30, 2018			1,798			$	325.97				6.95
Exercisable at June 30, 2018			1,375			$	325.24				6.69
Available for grant at June 30, 2018			2,961,002

The following table details the options outstanding at June 30, 2018 by range of exercise prices:

Range of Exercise Prices				Number of Options Outstanding				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life of Options Outstanding				Number of Options Exercisable				Weighted Average Exercise Price
$	280.00				76			$	280.00				8.85				76			$	280.00
$	328.00				1,722			$	328.00				6.86				1,299			$	328.00
					1,798			$	325.97				6.95				1,375			$	325.35

In September 2017, Aytu issued 10,000 shares of restricted stock to employees pursuant to the 2015 Plan, which vest in September 2027. In November 2017, 150 of these restricted shares were cancelled. Also, in November 2017, Aytu issued 24,750 shares of restricted stock to executives, directors and consultants pursuant to the 2015 Plan, which vest in November 2027.

In January 2018, Aytu issued 3,750 shares of restricted stock to an officer pursuant to the 2015 Plan, which vest in January 2028. In March 2018, Aytu issued 650 shares of restricted stock to employees pursuant to the 2015 Plan, which vest in March 2028. During the three months ended March 31, 2018, 650 shares of restricted stock were cancelled.

During fiscal 2018, we modified 2,000 shares of restricted stock for accelerated vesting and recognized an increase in aggregate stock compensation expense of $14,000.

Restricted stock activity is as follows:

		Number of Shares				Weighted Average Grant Date Fair Value				Weighted Average Remaining Contractual Life in Years

Unvested at June 30, 2017			-			$	-				-
Granted			39,150			$	39.80
Vested			(1,150	)		$	40.40
Cancelled			(800	)		$	40.40
Unvested at June 30, 2018			37,200			$	39.80				9.4

Aytu previously issued 1,538 shares of restricted stock outside the Aytu BioScience 2015 Stock Option and Inventive Plan, which vest in July 2026. The unrecognized expense related to these shares was $1,593,000 as of June 30, 2018 and will be recognized over the 10-year vesting period. During fiscal 2018, the expense related to these awards was $139,000. During the quarter ended December 31, 2017, we modified 413 shares of restricted stock for accelerated vesting and recognized a reduction in aggregate stock compensation expense of $36,000. During the quarter ended March 31, 2018, we modified 200 shares of restricted stock for accelerated vesting and recognized a reduction in aggregate stock compensation expense of $37,000.

Stock-based compensation expense related to the fair value of stock options and restricted stock was included in the statements of operations as selling, general and administrative expenses as set forth in the table below. Aytu determined the fair value of stock compensation 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 and restricted stock issuances for fiscal 2018 and 2017:

		2018				2017
Sales, general and administrative:
Stock options		$	349,000			$	2,502,000
Restricted stock			248,000				725,000
Total share-based compensation expense		$	597,000			$	3,227,000

As of June 30, 2018, there was $161,000 of total unrecognized option-based compensation expense related to non-vested stock options. The Company expects to recognize this expense over a weighted-average period of 6.95 years. As of June 30, 2018, there was $2,945,000 of total unrecognized share-based compensation expense related to the non-vested restricted stock. The Company expects to recognize this expense over a weighted-average period of 8.63 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, 2016			5,538			$	2,480.40				4.71

Issuance of settlement warrants to initial investors			221			$	1,600.00
Warrants issued to investors in connection with the registered offering			15,051			$	744.00
Warrants issued to placement agents for the registered offering			1,009			$	300.00
Warrants exercised			(7,477	)		$	300.00

Outstanding June 30, 2017			14,342			$	1,005.80				4.23

Warrants issued in connection with the August 2017 private offering			296,006			$	72.00
Warrants issued to underwriters in connection with the August 2017 private offering			19,749			$	72.00
Warrants issued in connection with the March 2018 public offering			1,533,356			$	10.80
Warrants issued to investor			100,000			$	10.80
Warrants expired			(42	)		$	21,744.00
Warrants exercised			(80,750	)		$	8.20

Outstanding June 30, 2018			1,882,661			$	25.94				4.61

During fiscal 2017, Aytu issued warrants to purchase 221 shares of common stock to initial investors of the Company at an exercise price of $1,600.00 and a term of five years from July 2016. These warrants generated a non-cash expense of $596,000 for the year ended June 30, 2017, which is included in sales, general and administrative expense. These warrants are accounted for under equity treatment.

In connection with our November 2016 public offering, we issued to the underwriters of the public offering warrants to purchase an aggregate of 1,009 shares of common stock at an exercise price of $744.00 and a term of five years. These warrants are accounted for under equity treatment. In February 2017, we reduced the exercise price of these warrants to $300.00.

Also, in connection with our November 2016 public offering, we issued to investors warrants to purchase an aggregate of 15,051 shares of common stock, which includes the over-allotment warrants, at an exercise price of $744.00 with a term of five years. These warrants are accounted for under equity treatment.

In February 2017, the Company consummated its warrant tender offer to exercise, at a temporarily reduced exercise price of $300.00 per share, (i) outstanding warrants to purchase 4,334 shares of common stock with an exercise price of $2,400.00 per share, which were originally issued to investors in the Company’s May 2016 financing (the “May 2016 Warrants”), and (ii) outstanding warrants to purchase 15,051 shares of common stock with an exercise price of $744.00 per share, which were originally issued to investors in the Company’s October 2016 financing (the “October 2016 Warrants” and together with the May 2016 Warrants, the “Original Warrants”). Original Warrants to purchase an aggregate of 7,477 shares of common stock were tendered and exercised in the warrant tender offer, for aggregate gross proceeds to the Company of approximately $2.2 million. Original warrants that were not exercised remain in effect at the pre-tender offer exercise prices of $2,400.00 per share and $744.00 per share, respectively. The incremental fair value, which had no book impact, was $178,000.

The Company also reduced the exercise prices of an aggregate of 1,288 warrants to purchase shares of common stock, which were originally issued as underwriters’ compensation in the May 2016 and October 2016 financings, from $2,400.00 per share and $744.00 per share, respectively, to $300.00 per share. The amended warrants related to the May 2016 financing adjusted the accounting for these warrants from liability classification to equity. The incremental fair value of these warrant modifications, which had no book impact, was $23,000.

In connection with our August 2017 private offering, we issued warrants to purchase an aggregate of 315,755 shares of common stock at an exercise price of $72.00 and a term of five years to investors and underwriters. The remaining outstanding warrants from that offering are accounted for using derivative liability treatment (see Note 5).

In connection with our March 2018 public offering, we issued to investors and underwriters warrants to purchase an aggregate of 1,533,356 shares of common stock at an exercise price of $10.80 with a term of five years from March 6, 2018. These warrants are accounted for under equity treatment. Of the 1,533,356 warrants issued in the March 2018 public offering, 5,750 were exercised in fiscal 2018.

In March 2018, Aytu BioScience, Inc. entered into a warrant exercise agreement with an investor of the Company’s outstanding warrants. Pursuant to the exercise agreement, the Company agreed to reduce the exercise price of the investor’s warrant to purchase 75,000 shares of the Company’s common stock from $72.00 to one cent less than the closing price on the last trading day prior to the exercise date; provided that the investor exercised the warrant for cash by March 23, 2018, and the Company also agreed to issue the investor a new warrant to purchase 100,000 shares of the Company’s common stock at an exercise price of $10.80 per share. In accordance with the exercise agreement, the investor exercised the warrant and the Company received net proceeds of $615,000. The new warrant to purchase 100,000 shares of the Company’s common stock are accounted for under equity treatment and have a fair value of $179,000.

In May 2018, the warrants we issued to the placement agent, in connection with our private placement in 2013, expired. The 42 placement agent warrants have a term of five years from the date of issuance and an exercise price of $21,744.00.

The warrants related to the August Financing issued in fiscal 2018 were valued using the lattice option pricing model. These warrants were accounted for as liability warrants (see Note 5). The warrants related to the March Financing in fiscal 2018 were valued using the Black Scholes pricing model and were accounted for as equity warrants. In order to calculate the fair value of the warrants, certain assumptions were made, 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 betas 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 and modified during the year ended June 30, 2018 were as follows:

		Year Ended June 30,
		2018		2017
Expected volatility		173.40% - 188.00%		156.64% - 169.22%
Risk free interest rate		1.83% - 2.69%		1.63% - 1.87%
Contractual term (years)		4.13 - 5		3.46 - 4.67
Dividend yield		0%		0%