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Note 16 - The Financing and Warrant Liabilities

12 Months Ended

Dec. 31, 2021

16.

The Financing and warrant liabilities

The 2021 Financing:

On February 18, 2021 (the “Closing Date”), the Company consummated a registered direct offering of 5,212,000 shares of the Company’s common stock to certain institutional investors at a purchase price of US$3.59 per share (the “2021 Financing”). As part of the transaction, the Company also issued to the investors warrants to purchase up to 2,606,000 shares of the Company’s common stock at an exercise price of US$3.59 per share (the “2021 Investor Warrants”). The 2021 Investor Warrants are exercisable at any time on or after February 18, 2021 and on or prior to the close of business on August 18, 2024 (the third and one-half years anniversary of the Closing Date). The Company received gross proceeds of approximately US$18.7 million from the 2021 Financing.

The placement agent of the 2021 Financing received (i) a placement fee in the amount equal to 7% of the gross proceeds and (ii) warrants to purchase up to 364,840 shares of the Company’s common stock at an exercise price of US$4.4875 per share (the “2021 Placement Agent Warrants” and together with the 2021 Investor Warrants, the “2021 Warrants”). The 2021 Placement Agent Warrants are exercisable at any time on or after August 18, 2021 (the six-month anniversary of the Closing Date) and on or prior to the close of business on August 18, 2024 (the third and one-half years anniversary of the Closing Date).

The initial exercise prices of the 2021 Warrants are subject to anti-dilution provisions that require adjustment of the number of shares of common stock that may be acquired upon exercise of the 2021 Warrants, 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 2021 Warrants also contain “full ratchet” price protection in the event of subsequent issuances below the applicable exercise price (the “Down round feature”).

The 2021 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 2021 Warrants, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation, provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the Company’s outstanding common shares. Any increase in the Beneficial Ownership Limitation will not be effective until the 61^st day after such notice is delivered to the Company.

The 2020 Financing:

On December 14, 2020 (the “Closing Date”), the Company consummated a registered direct offering of 4,320,989 shares of the Company’s common stock to certain institutional investors at a purchase price of $1.62 per share (the “2020 Financing”). As part of the transaction, the Company also issued to the investors warrants for the purchase of up to 1,728,396 shares of the Company’s common stock at an exercise price of US$2.03 per share (the “2020 Investor Warrants”). The 2020 Investors warrants are exercisable at any time on or after June 14, 2020 (the six-month anniversary of the Closing Date) and on or prior to the close of business on December 14, 2023 (the third anniversary of the Closing Date). The Company received gross proceeds of approximately $7.0 million from the 2020 Financing.

The placement agent of the 2020 Financing received (i) a placement fee in the amount equal to 7% of the gross proceeds and (ii) warrants to purchase up to 302,469 shares of common stock on substantially the same terms as the warrants sold to the investors (the “2020 Placement Agent Warrants” and together with the 2020 Investor warrants, the “2020 Warrants”).

The 2020 Warrants have an initial exercise price of USS2.03 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 2020 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 no event exceeds 9.99% of the Company’s outstanding common shares. Any increase in the Beneficial Ownership Limitation will not be effective until the 61^st day after such notice is delivered to the Company.

Accounting for securities issued in the 2021 Financing and 2020 Financing (Collectively “the Financings”)

The Company determined that the Company’s common stock issued in the Financings should be classified as permanent equity as there was no 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 2021 Warrants and the 2020 Warrants (collectively the “Warrants”) issued in the Financings 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 do 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 on their respective issuance dates, based on the assumptions summarized as below:

	As of February 18, 2021

	2021 Investor Warrants			2021 Placement Agent Warrants

Stock price	$	4.48		$	4.48
Years to maturity		3.50			3.50
Risk-free interest rate		0.26	%		0.26	%
Dividend yield		-			-
Expected volatility		168	%		168	%
Exercise Price	$	3.59		$	4.4875

Fair value of the warrant	$	4.02		$	3.96

Warrant liabilities (US$’000)	$	10,476		$	1,445

	As of December 14, 2020

	2020 Investor Warrants			2020 Placement Agent Warrants

Stock price	$	1.25		$	1.25
Years to maturity		3.00			3.00
Risk-free interest rate		0.17	%		0.17	%
Dividend yield		-			-
Expected volatility		164	%		164	%
Exercise Price	$	2.03		$	2.03

Fair value of the warrant	$	1.01		$	1.01

Warrant liabilities (US$’000)	$	1,746		$	305

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 is the respective contractual exercise price of the Warrants.

Allocation of gross proceeds from the Financings

The Company allocated the total proceeds from the Financings as summarized below:

	Initial measurement
	the 2021 Financing		the 2020 Financing
	(USD’000)		(USD’000)

Investor Warrants		10,476		1,746
Common Stock (par value and additional paid in capital)		8,235		5,254
Total proceeds from the Financing		18,711		7,000

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

Offering costs of the Financings

Offering costs of the 2021 Financing in the amount of approximately US$3.05 million consisting of cash payment of approximately US$1.31 million placement fee, approximately US$0.29 million other direct offering cost of professional service fees and fair value of the 2021 Placement Agent Warrants of approximately US$1.45 million, which were charged to additional paid-in-capital.

Offering costs of the 2020 Financing in the amount of approximately US$1.06 million consisting of cash payment of approximately US$0.49 million placement fee, approximately US$0.26 million other direct offering cost of professional service fees and fair value of placement agent warrants of approximately US$0.31 million, which were charged to additional paid-in capital.

Subsequent measurement and changes in fair value of the warrant liabilities

The Company issued warrants to certain institutional investors and the Company’s placement agent in the registered direct offerings consummated in February 2021, December 2020 and January 2018, which warrants were accounted for as derivative liabilities and measured at fair value with changes in fair value be recorded in earnings in each reporting period.

Warrants issued in the 2021 Financing

	2021 Investor Warrants			2021 Placement Agent Warrants
	December 31, 2021			December 31, 2021

Stock price	$	1.00		$	1.00
Years to maturity		2.63			2.63
Risk-free interest rate		0.87	%		0.87	%
Dividend yield		-			-
Expected volatility		115	%		115	%
Exercise Price	$	3.59		$	4.4875

Fair value of the warrant	$	0.37		$	0.36

Warrant liabilities (US$’000)	$	964		$	132

Warrants issued in the 2020 Financing

	2020 Investor Warrants						2020 Placement Agent Warrants
	December 31, 2021			December 31, 2020			December 31, 2021			December 31, 2020

Stock price	$	1.00		$	1.35		$	1.00		$	1.35
Years to maturity		1.95			2.95			1.95			2.95
Risk-free interest rate		0.72	%		0.17	%		0.72	%		0.17	%
Dividend yield		-			-			-			-
Expected volatility		128	%		102	%		128	%		102	%
Exercise Price	$	2.03		$	2.03		$	2.03		$	2.03

Fair value of the warrant	$	0.46		$	0.74		$	0.49		$	0.74

Warrant liabilities (US$’000)	$	795		$	1,279		$	148		$	224

Warrants issued in the 2018 Financing

	2018 Investor Warrants					2018 Placement Agent Warrants
		December 31, 2020 ⁽¹⁾	December 31, 2019			July 2, 2021 ⁽²⁾			December 31, 2020			December 31, 2019

Stock price			$	1.17		$	1.94		$	1.35		$	1.17
Years to maturity				0.55			0.04			0.05			1.05
Risk-free interest rate				1.58	%		0.05	%		0.08	%		1.57	%
Dividend yield				-			-			-			-
Expected volatility				60	%		75	%		59	%		80	%
Exercise Price			$	1.4927*		$	1.4927*		$	1.4927*		$	1.4927*

Fair value of the warrant			$	0.11		$	0.45		$	0.02		$	0.28

Warrant liabilities (US$’000)			$	71		$	58		$	2		$	36

* On September 25, 2019, as a result of the close on the first half of an unregistered private placement with a select group of investors, the exercise price of the warrants issued in the 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 US$1.4927.

	(1)	The investor warrants issued in the 2018 Financing had expired during the year ended December 31, 2020.

	(2)	The placement agent warrants issued in the 2018 Financing were cashless exercised on July 2, 2021. As a result, the Company issued approximately 0.04 million shares of the Company’s restricted common stock, with a loss of approximately US$0.02 million recognized in other income/(loss) account, which represented the difference between the fair value of these warrants on the date of the exercise and the cost of the Company’s restricted common stock issued, based on the close bid price of the Company’s common stock on the same date.

Changes in fair value of warrant liabilities

For the year ended December 31, 2021

	As of December 31, 2021		As of July 2, 2021		As of February 18, 2021		As of December 31, 2020		Change in Fair Value (Gain)/Loss
	(US$’000)		(US$’000)		(US$’000)		(US$’000)		(US$’000)
Warrants issued in the 2021 Financing:
--Investor warrants		964		*		10,476		*		(9,512	)
--Placement agent warrants		132		*		1,445		*		(1,313	)
Warrants issued in the 2020 Financing:
--Investor warrants		795		*		*		1,279		(484	)
--Placement agent warrants		148		*		*		224		(76	)
Warrants issued in the 2018 Financing:
--Investor warrants		-		*		*		-		-
--Placement agent warrants		-		58		*		2		56
Warrant liabilities		2,039						1,505		(11,329	)

For the year ended December 31, 2020

	As of December 31, 2020		As of December 14, 2020		As of December 31, 2019		Change in Fair Value (Gain)/Loss
	(US$’000)		(US$’000)		(US$’000)		(US$’000)
Warrants issued in the 2020 Financing:
--Investor warrants		1,279		1,746		*		(467	)
--Placement agent warrants		224		305		*		(81	)
Warrants issued in the 2018 Financing:
--Investor warrants		-		*		71		(71	)
--Placement agent warrants		2		*		36		(34	)
Warrant liabilities		1,505				107		(653	)

* Not applicable.

Warrants issued and outstanding at December 31, 2021 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, 2020
774,000 0.63 $ 1.4927 774,000 0.63 $ 1.4927

Issued/Vested
2,030,865 3.00 $ 2.03 -

Expired
(645,000 ) $ 1.4927 (645,000 ) $ 1.4927

Exercised
- -

Balance, December 31, 2020
2,159,865 2.78 $ 2.00 129,000 0.05 $ 1.4927

Issued/Vested
2,970,840 2.63 $ 3.70 5,001,705 2.36 $ 3.02

Expired
- -

Exercised
(129,000 ) $ 1.4927 (129,000 ) $ 1,4927

Balance, December 31, 2021
5,001,705 2.36 $ 3.02 5,001,705 2.36 $ 3.02