16.

The Financing and warrant liabilities

The

2019

Financing:

August 7, 2019,

the Company entered into a securities purchase agreement with selected investors related to the purchase and sale of the Company’s common stock (the “Shares”), in accordance with which, the Company agreed to issue an aggregate of

3,216,860

Shares in consideration for approximately

US$4.8

million. Each Share was sold to the Investors at

$1.4927

per Share. The private placement was conducted pursuant to Section

(

) of the Securities Act of

1933,

as amended, and Regulation S promulgated thereunder (the

“2019

Financing”). The

first

and the

second

half of the

2019

Financing was consummated on

September 25, 2019

and

October 28, 2019,

respectively.

Accounting for securities issued in the

2019

Financing

The Company determined that the Shares issued in the

2019

Financing should be classified as permanent equity as there was

redemption provision at the option of the holders that is

not

within the control the Company on or after an agreed upon date. As a result, net proceeds from the

2019

Financing of approximately

US$4.79

million was recorded as equity (par value and additional paid-in capital), after deduction of an approximately

US$15

thousand of direct offering cost.

The

2018

Financing:

January 17, 2018 (

the “Closing Date”), the Company consummated a registered direct offering of

2,150,001

shares of the Company’s common stock to certain institutional investors at a purchase price of

$5.15

per share (the

“2018

Financing”). As part of the transaction, the Company also issued to the investors warrants for the purchase of up to

645,000

shares of the Company’s common stock at an exercise price of

$6.60

per share (the “Investor warrants”). The Investors warrants have a term of

months from the date of issuance. The Company received gross proceeds of approximately

$11.1

million.

The placement agent of the

2018

Financing received (i) a placement fee in the amount equal to

of the gross proceeds and (ii) warrants to purchase up to

129,000

shares of common stock at an exercise price of

US$6.60

per share, with a

three

-year term (“Placement agent warrants” and together with the Investor warrants, the “Warrants”). The Placement agent warrants is

not

exercisable for a period of

six

months and

one

day after the Closing Date.

The Warrants have an initial exercise price of

USS6.60

per share, which is subject to anti-dilution provisions that require adjustment of the number of shares of common stock that

may

be acquired upon exercise of the warrant, or to the exercise price of such shares, or both, to reflect stock dividends and splits, subsequent rights offerings, pro-rata distributions, and certain fundamental transactions. The Warrants also contain “full ratchet” price protection in the event of subsequent issuances below the applicable exercise price (the “Down round feature”).

The Warrants

may

not

be exercised if it would result in the holder beneficially owning more than

4.99%

of the Company’s outstanding common shares (the “Beneficial Ownership Limitation”). The holder of the Warrants, upon notice to the Company,

may

increase or decrease the Beneficial Ownership Limitation, provided that the Beneficial Ownership Limitation in

event exceeds

9.99%

of the Company’s outstanding common shares. Any increase in the Beneficial Ownership Limitation will

not

be effective until the

day after such notice is delivered to the Company.

Accounting for securities issued in the

2018

Financing

The Company determined that common stock issued in the

2018

Financing should be classified as permanent equity as there was

redemption provision at the option of the holders that is

not

within the control the Company on or after an agreed upon date.

The Company analyzed the Warrants issued in the

2018

Financing in accordance with ASC Topic

815

“Derivatives and Hedging”. In accordance with ASC Topic

815,

the Company determined that the Warrants should

not

be considered index to its own stock, as the strike price of the Warrants is dominated in a currency (U.S. dollar) other than the functional currency of the Company (Renminbi or Yuan). As a result, the Warrants does

not

meet the scope exception of ASC Topic

815,

therefore, should be accounted for as derivative liabilities and measure at fair value with changes in fair value be recorded in earnings in each reporting period.

Fair value of the warrants

The Company used Binomial model to determine the fair value of the Warrants as of the closing date of the

2018

Financing, based on the assumptions summarized as below:

	Investors Warrants			Placement Agent Warrants

Stock price	$	3.98		$	3.98
Years to maturity		2.50			3.00
Risk-free interest rate		2.22	%		2.39	%
Dividend yield		-			-
Expected volatility		158	%		147	%
Exercise Price	$	6.60		$	6.60

Fair value of the warrant	$	2.93		$	2.99

Warrant liabilities as of the closing date US$(’000)	$	1,890		$	385

Stock price is the closing bid price of the Company’s common stock at the respective valuation date. Years to maturity is the respective remaining contract life of the warrants. Yield-to-maturities in continuous compounding of the United States Government Bonds with the time-to-maturities same as the respective warrant are adopted as the risk-free rate. Annualized historical stock price volatility of the Company at the respective valuation date is deemed to be appropriate to serve as the expected volatility of the stock price of the Company. The dividend yield is calculated based on management’s estimate of dividends to be paid on the underlying stock. Exercise price of the Warrants is the contractual exercise price of the Warrants.

Allocation of gross proceeds from the

2018

Financing

The Company allocated the total proceeds from the

2018

Financing as summarized below:

	Initial measurement
	US$(’000)

Investor warrants		1,890
Common Stock (par value and additional paid-in capital)		9,183
Total proceeds from the 2018 Financing		11,073

Investor warrants issued in the

2018

Financing was initially measurement at fair value. The residual amount, representing difference between the total proceeds and the fair value of the Investor warrants as of the Closing Date was assigned as the carrying value of the common stock issued in the

2018

Financing.

Offering costs

Offering costs in the amount of approximately

US$1.2

million consisting of cash payment of approximately

US$0.66

million placement fee, approximately

US$0.15

million legal expense and fair value of placement agent warrants of approximately

US$0.39

million, which were charged to additional paid-in capital.

Subsequent measurement and changes in fair value of the warrant liabilities

The Company accounted for the Warrants issuing in the

2018

Financing as derivative liabilities which were remeasured at fair value with changes in fair value be recorded in earnings in each reporting period.

	Investors warrants									Placement agent warrants
	January 17, 2018			December 31, 2018			December 31, 2019			January 17, 2018			December 31, 2018			December 31, 2019

Stock price	$	3.98		$	1.34		$	1.17		$	3.98		$	1.34		$	1.17
Years to maturity		2.50			1.55			0.55			3.00			2.05			1.05
Risk-free interest rate		2.22	%		2.50	%		1.58	%		2.39	%		2.50	%		1.57	%
Dividend yield		-			-			-			-			-			-
Expected volatility		158	%		199	%		60	%		147	%		176	%		80	%
Exercise Price	$	6.60		$	6.60		$	1.4927	*	$	6.60		$	6.60		$	1.4927	*

Fair value of the warrant	$	2.93		$	0.78		$	0.11		$	2.99		$	0.80		$	0.28

Warrant liabilities US$(’000)	$	1,890		$	503		$	71		$	385		$	103		$	36

* On

September 25, 2019,

as a result of the close on the

first

half of the

2019

Financing, the exercise price of the warrants issued in

2018

Financing that contain the “full ratchet” price protection in the event of subsequent issuances below the applicable exercise price (the “Down round feature”) was adjusted to

$1.4927.

	As of		As of		As of		Change in Fair Value (gain)/loss
	December 31,		December 31,		January 31,		Year ended December 31,
	2019		2018		2018		2019			2018
	(US$’000)		(US$’000)		(US$’000)		(US$’000)			(US$’000)
Fair value of the Warrants:
Investor warrants		71		503		1,890		(432	)		(1,387	)
Placement agent warrants		36		103		385		(67	)		(282	)
Warrant liabilities		107		606		2,275		(499	)		(1,669	)

Warrants issued and outstanding at

December 31, 2019

and their movements during the

two

years then ended are as follows:

	Warrant Outstanding						Warrant Exercisable
	Number of underlying shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number of underlying shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price

Balance, January 1, 2018		-						-
Issued		774,000		2.58	$	6.60		774,000		2.58	$	6.60
Expired		-						-
Exercised		-						-
Balance, December 31, 2018		774,000		1.63	$	6.60		774,000		1.63	$	6.60
Issued		-						-
Expired		-						-
Exercised		-						-
Balance, December 31, 2019		774,000		0.63	$	1,4927		774,000		0.63	$	1,4927