Note 8 – Equity Instruments

Options

On June 1, 2015, Aytu’s stockholders approved the Aytu BioScience 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 December 31, 2017, we have 2,271,205 shares that are available for grant 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 has been 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, the risk-free interest rate, volatility, expected dividend yield and the expected option life. Changes to the assumptions could cause significant adjustments to valuation. Aytu estimates the expected term of granted options 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		(1,468	)	$	16.40
Outstanding December 31, 2017		36,795		$	16.30		7.58
Exercisable at December 31, 2017		27,031		$	16.27		7.33

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 the three and six months ended December 31, 2017 and 2016:

	Three Months Ended December 31,				Six Months Ended December 31,
Selling, general and administrative:	2017		2016		2017		2016

Stock options	$	81,000	$	381,000	$	276,000	$	1,425,000

Restricted Stock		32,000		82,000		104,000		157,000
Total share-based compensation expense	$	113,000	$	463,000	$	380,000	$	1,582,000

As of December 31, 2017, there was $390,000 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 1.37 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 in connection with the August 2017 private offering		5,920,002	$	3.60
Warrants issued to underwriters in connection with the August 2017 private offering		394,669	$	3.60
Outstanding December 31, 2017		6,600,720	$	5.62		4.61

In connection with our August 2017 private offering, we issued warrants to purchase an aggregate of 6,314,671 shares of common stock at an exercise price of $3.60 and a term of five years to investors and underwriters. These warrants are accounted for using 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, 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 during the December 31, 2017 quarter are included in Note 5.