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Equity Instruments

9 Months Ended

Mar. 31, 2018

Equity Instruments [Abstract]

Equity Instruments

Note 8 – Equity Instruments

Share-based Compensation Plans

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 March 31, 2018, we have 2,198,170 shares that are available for grant under the 2015 Plan.

In September 2017, Aytu issued 200,000 shares of restricted stock to employees pursuant to the 2015 Plan, which vest in September 2027. In November 2017, 3,000 of these restricted shares were cancelled. Also in November 2017, Aytu issued 495,000 shares of restricted stock to executives, directors and consultants pursuant to the 2015 Plan, which vest in November 2027.

In January 2018, Aytu issued 75,000 shares of restricted stock to an officer pursuant to the 2015 Plan, which vest in January 2028. In March 2018, Aytu issued 13,000 shares of restricted stock to employees pursuant to the 2015 Plan, which vest in March 2028. During the three months ended March 31, 2018, 13,000 shares of restricted stock were cancelled. We modified 23,000 shares of restricted stock for accelerated vesting and recognized an increase in aggregate stock compensation expense of $7,400.

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			783,000			$	1.99
Cancelled			(16,000	)		$	2.02
Unvested at March 31, 2018			767,000			$	1.99				9.6

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			(3,433	)		$	16.40
Outstanding March 31, 2018			34,830			$	16.30				7.39
Exercisable at March 31, 2018			25,989			$	16.26				7.17

Aytu previously issued 43,000 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 $1,643,000 as of March 31, 2018 and will be recognized over the 10-year vesting period. During the nine months ended March 31, 2018, the expense related to these awards was $89,000. During the quarter ended December 31, 2017, we modified 8,250 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 4,000 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 the three and nine months ended March 31, 2018 and 2017:

		Three Months Ended March 31,								Nine Months Ended March 31,
Selling, general and administrative:		2018				2017				2018				2017

Stock options		$	12,000			$	817,000			$	288,000			$	2,242,000

Restricted Stock			55,000				499,000				159,000				656,000
Total share-based compensation expense		$	67,000			$	1,316,000			$	447,000			$	2,898,000

As of March 31, 2018, there was $260,000 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 1.39 years. As of March 31, 2018, there was $3,063,000 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 8.89 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
Warrants issued in connection with the March 2018 public offering			30,666,667			$	0.54
Warrants issued to investor			2,000,000			$	0.54
Warrants exercised			(1,547,000	)		$	0.41
Outstanding March 31, 2018			37,720,387			$	1.31				4.85

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. 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 30,666,667 shares of common stock at an exercise price of $0.54 with a term of five years from March 6, 2018. These warrants are accounted for under equity treatment. Of the 30,666,667 warrants issued in the March 2018 public offering, 47,000 were exercised in March 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 1,500,000 shares of the Company’s common stock from $3.60 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 2,000,000 shares of the Company’s common stock at an exercise price of $0.54 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 2,000,000 shares of the Company’s common stock are accounted for under equity treatment and have a fair value of $179,000.

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 March 31, 2018 quarter are as follows:

Warrants:
Volatility			180.0	%
Equivalent term (years)			5.00
Risk-free interest rate			2.65	%
Dividend yield			0.00	%