AKAO 2017 Annual Report

120 to settle the warrant in cash at its estimated fair value using Black-Scholes. On the closing date of the Private Placement, June 3, 2016, the $2.6 million initial estimated fair value of the warrants was recorded as a warrant liability on the accompanying consolidated balance sheet. At December 31, 2017 and 2016, the estimated fair value of the warrants was approximately $9.8 million and $13.9 million, respectively. The change in the estimated fair value is primarily due to the decrease in the Company's stock price and is included in changes in warrant and derivative liabilities in the Company's consolidated statements of operations. During the year ended December 31, 2016, certain holders of these warrants exercised 707,269 warrants. The Company received $1.2 million in proceeds from these warrant exercises. The Company is required to record the exercised warrants at its estimated fair value at the time of exercise, with any change included in changes in warrant and derivative liabilities in the Company’s consolidated statements of operations. The Company estimated the fair value of these exercised warrants at their respective exercise dates to be $8.3 million, an increase of $7.4 million from its initial valuation, at June 3, 2016, of $0.9 million, primarily due to an increase in the Company’s stock price. During the year ended December 31, 2017, certain holders of these warrants exercised warrants to purchase 113,948 shares of common stock. The Company received $0.4 million in proceeds from these warrant exercises. The Company is required to record the exercised warrants at its estimated fair value at the time of exercise, with any change included in changes in warrant and derivative liabilities in the Company’s consolidated statements of operations. The Company estimated the fair value of these exercised warrants at their respective exercise dates to be $2.1 million, an increase of $0.9 million from its valuation, at December 31, 2016, of $1.2 million, primarily due to an increase in the Company’s stock price. The fair value of the warrant liability is classified as a Level 3 measurement within the fair value hierarchy since the Company’s valuation utilized significant unobservable inputs, including the risk-free interest rate, expected share price volatility, underlying price per share of the Company's common stock and remaining term of the warrants. The estimated fair values of the warrants were determined using Black-Scholes with the following assumptions, during the years ended December 31, 2017 and 2016: December 31, 2017 December 31, 2016 Expected volatility..................................................................................... 80% 60 - 80% Expected term............................................................................................ 3.4 - 4.3 years 4.4 - 5.0 years Risk-free interest rate ................................................................................ 1.6 - 2.0% 1.0 - 1.9% Dividend yield ........................................................................................... —% —% The expected volatility is based on the Company's expected volatility. The expected term is based on the remaining life of the warrants. The risk-free interest rate is obtained from the yields on actively traded U.S. Treasury securities for a period equal to the expected term of the warrants. The dividend yield is zero because the Company has never paid cash dividends and has no present intention to pay cash dividends. Should the share price change by 5%, the fair value of the warrant liability as of December 31, 2017 would change by approximately $593,000.