UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

Of the Securities Exchange Act of 1934

 

August 18, 2017

Date of report (date of earliest event reported)

 

BORQS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 British Virgin Islands

 

 001- 37593

 

 N/A 

(State or other jurisdiction of

incorporation or organization)

  (Commission File Number)   (I.R.S. Employer
Identification Number)

 

Tower A, Building B23,

Universal Business Park

No. 10 Jiuxiangqiao Road

Chaoyang District, Beijing, 100015 China

 

(Address of Principal Executive Offices)

 

(86) 10-5975-6336

 

(Registrant’s telephone number, including area code)

 

Pacific Special Acquisition Corp.

855 Pudong South Road

The World Plaza, 27th Floor

Pudong, Shanghai

China

 

(Former name or former address, if changed since last report.)

   

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below):

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

  

 

 

 

 

 

TABLE OF CONTENTS

 

    Page No.
     
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 3
     
EXPLANATORY NOTE 4
     
Item 1.01. Entry into a Material Definitive Agreement. 5
     
Item 2.01. Completion of Acquisition of Disposition of Assets. 5
     
THE MERGER AGREEMENT AND RELATED TRANSACTIONS 5
     
DESCRIPTION OF BUSINESS 9
     
DESCRIPTION OF PROPERTIES 26
     
RISK FACTORS 27
     
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 51
     
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 71
     
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 73
     
EXECUTIVE COMPENSATION 78
     
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 80
     
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 83
     
DESCRIPTION OF SECURITIES 84
     
LEGAL PROCEEDINGS 90
     
INDEMNIFICATION OF DIRECTORS AND OFFICERS 90
     
Item 3.01. Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing. 91
     
Item 3.02. Unregistered Sales of Equity Securities. 91
     
Item 3.03. Material Modification to Rights of Security Holders. 91
     
Item 4.01. Changes in Registrant’s Certifying Accountant. 91
     
Item 5.01. Changes in Control of Registrant. 92
     
Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. 92
     
Item 5.03. Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year. 92
     
Item 5.06. Change in Shell Company Status. 93
     
Item 8.01 Other Events. 93
     
Item 9.01. Financial Statements and Exhibits. 93

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Current Report on Form 8-K (“ Report ”) contains forward-looking statements in the sections captioned “ Description of Business ,” “ Risk Factors ,” “ Management’s Discussion and Analysis of Financial Condition and Plan of Operations ” and elsewhere. Any and all statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Terms such as “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “pro-forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future,” and terms of similar import (including the negative of any of these terms) may identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this Report may include, without limitation, statements regarding the plans and objectives of management for future operations, projections of income or loss, earnings or loss per share, capital expenditures, dividends, capital structure or other financial items, our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the Securities and Exchange Commission (“ SEC ”), and the assumptions underlying or relating to any such statement.

 

The forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Factors that may influence or contribute to the accuracy of the forward-looking statements or cause actual results to differ materially from expected or desired results may include, without limitation:

 

  Market acceptance of our products and services;

 

  Competition from existing products or new products that may emerge;

 

  The implementation of our business model and strategic plans for our business and our products;

 

  Estimates of our future revenue, expenses, capital requirements and our need for financing;

 

  Our financial performance;

 

  Current and future government regulations;

 

  Developments relating to our competitors; and

 

  Other risks and uncertainties, including those listed under the section titled “ Risk Factors .”

 

Readers are cautioned not to place undue reliance on forward-looking statements because of the risks and uncertainties related to them and to the risk factors. We disclaim any obligation to update the forward-looking statements contained in this Report to reflect any new information or future events or circumstances or otherwise, except as required by law. Readers should read this Report in conjunction with the discussion under the caption “ Risk Factors ,” our financial statements and the related notes thereto in this Report, and other documents which we may file from time to time with the SEC.

 

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EXPLANATORY NOTE

 

Borqs Technologies, Inc., a British Virgin Islands corporation (“ Company ” or “ Borqs ”), formerly known as Pacific Special Acquisition Corp., was incorporated in the British Virgin Islands as a company with limited liability on July 1, 2015 for the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation, or contractual control arrangement with, purchasing all or substantially all of the assets of, or engaging in any other similar business combination with one or more businesses or entities.

 

On August 18, 2017 (“ Closing Date ”), the Company consummated the transactions contemplated by that certain Merger Agreement dated December 27, 2016, as amended on May 10, 2017 and June 29, 2017 (“ Merger Agreement ”), by and among Pacific Special Acquisition Corp. (“ Pacific ”), PAAC Merger Subsidiary Limited, an exempted company incorporated under the laws of the Cayman Islands with limited liability and a wholly-owned subsidiary of the Company (“ Merger Sub ”), Borqs International Holding Corp, an exempted company incorporated under the laws of the Cayman Islands with limited liability (“ Borqs International ”), Pacific’s sponsor, Zhengqi International Holding Limited, in its capacity thereunder as the Purchaser Representative (the “ Purchaser Representative ”), the representative Zhengdong Zou (the “ Sellers’ Representative ”) for each of Borqs International’s shareholders immediately prior to the closing (collectively, the “ Sellers ”), and for certain limited purposes thereof, Zhengqi International Holding Limited (the “ Sponsor ”). Pursuant to the Merger Agreement, Merger Sub merged with and into Borqs International, with Borqs International continuing as the surviving company and a wholly-owned subsidiary of the Company, and the Company issued a total of 25,913,964 ordinary shares of the Company, with 942,467 of such shares set aside in escrow for indemnity obligations of the Sellers and 2,352,285 of such shares set aside in escrow subject to certain earn-out provisions in the Merger Agreement (and, to the extent not earned, being retained by the Sponsor and another investor that participated in the backstop arrangement) (such transaction, the “ Business Combination ”). As a result of the Business Combination, the Sellers became the controlling shareholders of the Company and Borqs International became a wholly-owned subsidiary of the Company. 

 

As a result of the Business Combination, the Company will continue the business operations of Borqs International as a publicly traded company under the name “Borqs Technologies, Inc.”

 

In accordance with “reverse merger” or “reverse acquisition” accounting treatment, our historical financial statements as of period ends, and for periods ended, prior to the Business Combination will be replaced with the historical financial statements of Borqs International in all future filings with the SEC.

 

As used in this Report, unless otherwise stated or the context clearly indicates otherwise, the terms “Company,” “Registrant,” “we,” “us” and “our” refer to Borqs Technologies, Inc., giving effect to the Business Combination.

 

This Report contains summaries of the material terms of various agreements executed in connection with the Business Combination described herein. The summaries of these agreements are subject to, and are qualified in their entirety by reference to, these agreements, which are filed as exhibits hereto and incorporated herein by reference.

 

Prior to the Business Combination, we were a “shell company” as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (“ Exchange Act ”). As a result of the Business Combination, we have ceased to be a “shell company.” The information contained in this Report constitutes the information necessary to satisfy the conditions contained in Rule 144(i)(2) under the Securities Act of 1933, as amended (“ Securities Act ”).

  

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Item 1.01. Entry into a Material Definitive Agreement.

 

The information contained in Item 2.01 below relating to the various agreements described therein is incorporated herein by reference.

 

Item 2.01. Completion of Acquisition of Disposition of Assets.

 

THE MERGER AND RELATED TRANSACTIONS

 

The Merger

 

On December 27, 2016, the Company entered into the Merger Agreement with Borqs International, Merger Sub, the Purchaser Representative, the Sellers’ Representative and, for certain limited purposes thereof, the Sponsor, as amended on May 10, 2017 and June 29, 2017, pursuant to which the Company would acquire Borqs International and its subsidiaries, including its variable interest entity Beijing Big Cloud Network Technology Co., Ltd. and its subsidiaries, by acquiring from the Sellers all outstanding equity interests of Borqs International. The acquisition was executed through a reverse merger by which Merger Sub merged with and into Borqs International with Borqs International being the surviving entity (the “ Merger ”). The Business Combination closed on August 18, 2017 (the “ Closing ”).

 

As a result of the Business Combination, we acquired the business of Borqs International and its subsidiaries, which is to provide software and products for IoT providing customizable, differentiated and scalable Android-based smart connected devices and cloud service solutions. As a result, we have ceased to be a shell company.

 

As consideration for the Merger, the Company issued to the Sellers a total of 25,913,964 ordinary shares of the Company (“ Merger Consideration Shares ”) , based on a final agreed upon Adjusted Merger Consideration of $269,505,229, with a portion of such shares held in escrow as described below. Additionally, the holders of Borqs International issued and outstanding warrants received replacement warrants to acquire an aggregate of 417,166 Company ordinary shares (“ Replacement Warrants ”), and the holders of Borqs International issued and outstanding options had their options assumed by the Company and now hold options to acquire a total of 3,628,196 Company ordinary shares upon exercise of those options (“ Assumed Options ”). The number of shares and exercise price of the Replacement Warrants and the Assumed Options were equitably adjusted to reflect the terms of the Merger Agreement. The Replacement Warrants were in the form of Borq International’s existing warrants rather than the form the Company’s public warrants.

 

Of the Merger Consideration Shares, a total of 25,913,964 ordinary shares were issued to the Sellers at closing, with 942,467 of such shares deposited into escrow for indemnification obligations (“ Indemnity Shares ”), 2,352,285 of such shares deposited in escrow subject to the Company meeting certain earn-out requirements (“ Earnout Shares ” and together with the Indemnity Shares, the “ Escrow Shares ”) in the event certain net income earnout conditions are met during the period July 1, 2017 to June 30, 2018 (“ Earnout Period ”) and 1,178,084 of such shares were issued to a financial advisor engaged by Borqs International in connection with the Business Combination.

 

In connection with the Business Combination, the Company sold 1,038,251 of its ordinary shares in a private placement to the Sponsor and EarlyBirdCapital, Inc., the underwriter in the Company’s initial public offering (together, “ Backstop Commitment Investors ”), for an aggregate consideration of approximately $10.8 million (“ Backstop Guarantee Shares ”). Additionally, in connection with the closing of the Business Combination, the Company issued 628,187 ordinary shares to the holders of its outstanding public and private rights. The Earnout Shares were issued in the name of the Backstop Commitment Investors and to the extent that the earnout conditions are not met, the Earnout Shares will be released to the Backstop Commitment Investors. To the extent that the earnout conditions are met, the Earnout Shares will be disbursed to the Company and the Company will cancel the shares and issue replacement shares to the Sellers (with 4% of such shares being withheld and deposited into escrow as additional Indemnity Shares).

  

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The Business Combination will be treated as a “reverse acquisition” of the Company for financial accounting purposes, Borqs International will be considered the acquirer for accounting purposes, and the historical financial statements of the Company before the Business Combination will be replaced with the historical financial statements of Borqs International and its consolidated entities before the Business Combination in all future filings with the SEC.

 

The issuance of Company ordinary shares to the Sellers, the issuance of the Backstop Guarantee Shares to the Backstop Commitment Investors and the issuance of the Replacement Warrants to Borqs International warrant holders in connection with the Business Combination have not been registered under the Securities Act, in reliance upon the exemption from registration provided by Section 4(a)(2), which exempts transactions by an issuer not involving any public offering, and Regulation D and/or Regulation S promulgated by the SEC under that section. These shares may not be offered or sold in the United States absent registration or an applicable exemption from registration.

 

The foregoing description of the Merger Agreement does not purport to be complete. For further information, please refer to the copy of the Merger Agreement that is filed as Exhibit 2.1 to this Report. There are representations and warranties contained in the Merger Agreement that were made by the parties to each other as of specific dates. The assertions embodied in these representations and warranties were made solely for purposes of the Merger Agreement and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating their terms. Moreover, some representations and warranties may not be accurate or complete as of any specified date because they are subject to a contractual standard of materiality that is different from certain standards generally applicable to shareholders or were used for the purpose of allocating risk between the parties rather than establishing matters as facts. For these reasons, investors should not rely on the representations and warranties in the Merger Agreement as statements of factual information. 

 

Registration Rights Agreement

 

As of the Closing and in connection with the Business Combination, we entered into a Registration Rights Agreement with the Sellers, the holders of Borqs warrants and the Purchaser Representative (“ Registration Rights Agreement ”). Under the Registration Rights Agreement, the Sellers and Borqs International warrant holders (“ Warrant Holders ” and together with the Sellers, the “ Selling Shareholders ”) will have registration rights that obligate us to register for resale under the Securities Act all or any portion of their Merger Consideration Shares and shares issuable upon exercise of the Replacement Warrants (together with any securities issued as a dividend or distribution with respect thereto or in exchange therefor, “ Registrable Securities ”), except that Registrable Securities that are subject to transfer restrictions in the Lock-Up Agreement or Escrow Shares held in the Escrow Account may not be requested to be registered before the end of the applicable transfer restrictions. Holders of a majority-in-interest of any class of Registrable Securities are entitled under the Registration Rights Agreement to make a written demand for registration under the Securities Act of all or part of the their Registrable Securities, and other holders of the Registrable Securities are entitled to join in such demand registration. Subject to exceptions, if the Company proposes to file a registration statement under the Securities Act, we are required to give notice of the proposed filing to the holders of the Registrable Securities and offer them an opportunity to register the resale of such number of Registrable Securities as they may request in writing, subject to customary cut-backs. In addition, subject to some exceptions, holders of Registrable Securities will be entitled under the Registration Rights Agreement to request in writing that we register the resale of any or all of such Registrable Securities on Form S-3 and any similar short-form registration that may be available at such time.

 

Under the Registration Rights Agreement, we agreed to indemnify the holders of Registrable Securities and certain persons or entities related to them, such as their officers, directors, employees, agents and representatives, against any losses or damages resulting from any untrue statement or omission of a material fact in any registration statement or prospectus pursuant to which they sell Registrable Securities, unless such liability arose from their misstatement or omission; the holders of Registrable Securities, including Registrable Securities in any registration statement or prospectus, agreed to indemnify the Company and certain persons or entities related to it, such as its officers and directors and underwriters, against all losses caused by their misstatements or omissions in those documents.

 

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The foregoing description of the Registration Rights Agreement does not purport to be complete. For further information, please refer to the copy of the Registration Rights Agreement that is filed as Exhibit 10.1 to this Report.

 

Lock-Up Agreement

 

At the Closing and in connection with the Business Combination, the Selling Shareholders entered into a Lock-Up Agreement with the Company and the Purchaser Representative (“ Lock-Up Agreement ”). Under the Lock-Up Agreement, each Seller agreed that, during the period from the Closing until the earlier of (x) the first anniversary of the Closing, (y) the date on which the Company consummates a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of the Company’s shareholders having the right to exchange their equity holdings in the Company for cash, securities or other property and, (z) only with respect to 50% of each type of Restricted Securities held by each holder, the date on which the closing sale price of Company ordinary shares equals or exceeds $12.50 per share (as adjusted for share splits, share dividends, reorganizations and recapitalizations) for any 20 trading days within any 30 trading day period commencing after the Closing Date, it will not (i) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any Restricted Securities, (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Restricted Securities, or (iii) publicly announce any intention to effect any transaction specified in clause (i) or (ii). Each holder also agreed that the Escrow Shares will continue to be subject to such transfer restrictions until they are released from the Escrow Account. However, each holder is permitted to transfer its Restricted Securities (other than the Escrow Shares while they are held in the Escrow Account) by gift, will or intestate succession upon such holder’s death, pursuant to a court order or settlement agreement related to the distribution of assets in connection with the dissolution of marriage or civil union or to certain permitted transferees, provided in each such case that the transferee thereof agrees to be bound by the restrictions set forth in the Lock-up Agreement. Additionally, each holder will be allowed to pledge its Restricted Securities (other than the Escrow Shares while they are held in the Escrow Account) to an unaffiliated third party as a guarantee to secure borrowings made by such third party to the Company or any of its subsidiaries. In the event that any holder that enters into a Lock-Up Agreement is released from its obligations thereunder with respect to all or any portion of its Restricted Securities, each other holder subject to a Lock-Up Agreement will similarly be released in a proportional manner.

 

The foregoing description of the Lock-Up Agreement does not purport to be complete. For further information, please refer to the copy of the Lock-Up Agreement that is filed as Exhibit 10.2 to this Report.

 

Non-Competition and Non-Solicitation Agreement

 

At the Closing and in connection with the Business Combination, specified Sellers actively involved with Borqs International management (each, a “ Subject Party ”) entered into Non-Competition and Non-Solicitation Agreements (each, a “ Non-Competition Agreement ”), in favor of the Company, Borqs International and their respective successors and subsidiaries (referred to as the “ Covered Parties ”), and to which the Purchaser Representative is also a party thereunder, relating to the business of providing software and solutions for connected devices in the Internet of Things industry, and mobile communication services as a Mobile Virtual Network Operator (“ Business ”) as conducted by Borqs and to be conducted by us after the Closing. Under the Non-Competition Agreement, for a period from the Closing until the later of (i) the four-year anniversary of the Closing or (ii) the date on which the Subject Party is no longer a director, officer, manager, employee or independent contractor of any Covered Party (“ Restricted Period ”), the Subject Party and its controlled affiliates will not, without the Company’s prior written consent, anywhere in the Peoples’ Republic of China or in any other markets in which the Covered Parties are engaged, or are actively contemplating to become engaged, in the Business as of the Closing Date or during the Restricted Period, directly or indirectly engage in the Business (other than through a Covered Party) or own, manage, finance or control, or participate in the ownership, management, financing or control of, or become engaged or serve as an officer, director, member, partner, employee, agent, consultant, advisor or representative of, a business or entity (other than a Covered Party) that engages in the Business (“ Competitor ”). However, the Subject Party and its affiliates will be permitted under the Non-Competition Agreement to own passive investments of no more than 2% of any class of outstanding equity interests in a Competitor that is publicly traded, so long as the Subject Party and its affiliates and immediate family members are not involved in the management or control of such Competitor. Under the Non-Competition Agreements, the Subject Party and its controlled affiliates will also be subject to certain non-solicitation and non-interference obligations during the Restricted Period with respect to the Covered Parties’ respective (i) employees, consultants and independent contractors, (ii) customers and (iii) vendors, suppliers, distributors, agents or other service providers. The Subject Party will also be subject to non-disparagement provisions regarding the Covered Parties and confidentiality obligations with respect to the confidential information of the Covered Parties.

 

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The foregoing description of the Non-Competition Agreement does not purport to be complete. For further information, please refer to the copy of the form of Non-Competition Agreement that is filed as Exhibit 10.3 to this Report.

 

Escrow Agreement

 

At the Closing, the Company, the Purchaser Representative and the Seller Representative (on behalf of the Sellers) entered into an Escrow Agreement with Continental Stock Transfer & Trust Company (“ Escrow Agent ”) pursuant to which the Escrow Agent will hold the Escrow Shares in escrow accounts, to be held and disbursed as agreed to in the Merger Agreement. The Purchaser Representative will have the sole right to act on our behalf under the Escrow Agreement.

 

The foregoing description of the Escrow Agreement does not purport to be complete. For further information, please refer to the copy of the Escrow Agreement that is filed as Exhibit 10.4 to this Report.

 

Letter of Transmittal

 

At the Closing and in connection with the Business Combination, the Sellers and the holders of a Borqs International warrant provided Borqs International and Pacific with a completed and duly executed Letter of Transmittal (“ Letter of Transmittal ”), with respect to their Borqs International shares and warrants. In the Letter of Transmittal, each such holder made customary representations and warranties, acknowledged its obligations with respect to the indemnification obligations and escrow provisions under the Merger Agreement, appointed the Seller Representative to act on its behalf in accordance with the terms of the Merger Agreement, provided a general release to Borqs International and its affiliates and certain related persons with respect to claims relating to the holder’s capacity as a holder of Borqs International shares, warrants or options, and agreed to be bound by confidentiality obligations to Borqs International for two years after the Closing.

 

The foregoing description of the Letter of Transmittal does not purport to be complete. For further information, please refer to the copy of the Letter of Transmittal that is filed as Exhibit 10.5 to this Report.

 

Backstop and Subscription Agreement

 

On May 11, 2017, in connection with the execution of an amendment to the Merger Agreement on May 10, 2017, the Company and the Sponsor entered into a Backstop and Subscription Agreement (“ Backstop and Subscription Agreement ”), pursuant to which the Sponsor agreed to purchase up to $24.0 million of our ordinary shares through (i) open market or privately negotiated transactions with third parties (with the Sponsor not obligated to pay a price of greater than $10.40 per share), (ii) a private placement at a price of $10.40 per share with consummation to occur concurrently with that of the Business Combination or (iii) a combination thereof, in order to ensure that there is at least $24.0 million in funds left in the Company’s trust account after redemptions in connection with the Merger and the proceeds from any third party equity financing conducted by the Company prior to the closing of the Merger (“ Backstop Commitment ”), although the Sponsor was entitled, at its sole election, to purchase additional ordinary shares in excess of such $24.0 million closing proceeds requirement, up to a total of $24.0 million purchased in total in connection with the Backstop and Subscription Agreement. On August 16, 2017, $750,000 of the Sponsor’s obligations to purchase shares in the private placement from the Company under the Backstop and Subscription Agreement were assigned to EarlyBirdCapital. As consideration for the Backstop Commitment, the Sponsor and EarlyBirdCapital received the Backstop Guarantee Shares. At the Closing, the Company, the Sponsor, EarlyBirdCapital and certain other investors thereto amended and restated the registration rights agreement, dated as of October 14, 2015, with respect to the Backstop Guarantee Shares and the shares purchased by the Sponsor and EarlyBirdCapital in connection with the Backstop and Subscription Agreement.

 

The foregoing description of the Backstop and Subscription Agreement does not purport to be complete. For further information, please refer to the copy of the Backstop and Subscription Agreement that is filed as Exhibit 10.6 to this Report and the Partial Assignment and Amendment of Backstop and Subscription Agreement, dated August 18, 2017, by and between the Sponsor, EarlyBirdCapital, Pacific and Borqs International that is filed as Exhibit 10.12 to this Report.

 

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DESCRIPTION OF BUSINESS

  

The business of Borqs Technologies, Inc. is to provide customizable, differentiated and scalable Android-based smart connected devices and cloud service solutions through its two business units (“ BUs ”), Connected Solutions and MVNO. The Connected Solutions BU develops wireless mobile connected devices and cloud solutions. The MVNO BU operates a mobile virtual network in China that provides a full range of 2G/3G/4G mobile communication services at the consumer level.

 

Overview

 

Borqs Technologies, Inc. is a global leader in software, development services and products providing customizable, differentiated and scalable Android-based smart connected devices and cloud service solutions. Borqs is a leading provider of commercial grade Android platform software for mobile chipset manufacturers, mobile device OEMs and mobile operators, as well as complete product solutions of mobile connected devices for enterprise and consumer applications. In recent years, Borqs has been awarded significant business contracts from Intel and Qualcomm, leading global chipset manufacturers.

 

Borqs has two BUs, Connected Solutions and MVNO. The Connected Solutions BU develops wireless mobile connected devices and cloud solutions. Connected Solutions BU revenue is recognized as software revenue and hardware revenue. The MVNO BU operates a mobile virtual network in China that provides a full range of 2G/3G/4G mobile communication services at the consumer level.

 

The Connected Solutions BU works closely with chipset partners to develop new connected devices. Borqs developed the reference Android software platform and hardware platform for Intel and Qualcomm phones and tablets. In February 2016, Qualcomm announced its planned business expansion for its next generation Qualcomm ®  Snapdragon™ Wear platform with the addition of new ecosystem partners, including Borqs. The platform is targeted for next generation connected and tethered wearables, such as smartwatches, kid and elderly watches, smart bands, smart eyewear and smart headsets. The availability of the state-of-the-art chipset functionalities from partners, combined with full service industrial design, hardware and software engineering and manufacturing management, opens exciting new possibilities for device manufacturers to accelerate the design, development and deployment of innovative connected devices.

 

The Borqs platform is built on the Android platform developed by Google and first released to the public in 2008. Borqs was among the first to obtain the Android source code, and in 2008 Borqs built an innovative technology platform used in the first deployment of Android-based mobile devices to support the TD-SCDMA network of China Mobile Communications Corporation (“ China Mobile ”).

 

Borqs provides Connected Solutions customers with customized, integrated, commercial grade Android platform software and service solutions to address vertical market segment needs through the targeted BorqsWare software platform solutions. The BorqsWare software platform consists of BorqsWare Client Software and BorqsWare Server Software. The BorqsWare Client Software platform consists of three major components: the latest commercial grade Android software that works with particular mobile chipsets, functionality enhancements of the open source Android software and mobile operator required services. Based on the BorqsWare Client Software platform, customers may require Borqs to provide further customization based on their specific market needs. The BorqsWare Client Software platform has been used in Android phones, tablets, watches and various Internet-of-things (“ IoT ”) devices. The BorqsWare Server Software platform consists of back-end server software that allows customers to develop their own mobile end-to-end services for their devices. The BorqsWare Server Software provides software necessary for upgrades, charging and various APIs that enhance the customers’ services. Based on BorqsWare Server Software service platform, customers may require us to provide further customization based on their specific needs.

 

The MVNO BU provides a full range 2G/3G/4G voice and data services for general consumer usage and IoT devices, as well as traditional telecom services such as voice conferencing. The MVNO BU also acts as a sales and promotion channel for the products developed by the Connected Solutions BU. Borqs believes that a key component of the sales of connected devices going forward is the bundling of those devices with a voice/data plan through its MVNO BU. The MVNO BU launched operations in the fourth quarter of 2014. The MVNO BU provides services throughout China. Borqs had more than two million registered subscribers at the end of 2015 and approximately 4.5 million at the end of 2016.

  

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The MVNO BU is the principal in providing the bundled voice and data services to Chinese consumers, thus revenue is recognized on a gross basis. As sales of bundled services are mostly pre-paid by the consumers, cash received in advance of voice and data consumption are recognized as deferred revenue. Revenue is recognized when the services are actually used. Pre-paid bundled services do not expire. Sales of the bundles are mostly made through agents and franchisees. Bundled services sold to agents are discounted and not refundable to Borqs; and such discounts are recorded as reductions of revenue. We enter into profit sharing arrangements with franchisees under which bundled services may be returned if not sold to the consumers. The franchisees receive certain percentages of profits made by Borqs on the sales of the bundled services as they are used by the consumers. We account for profit sharing with franchisees as selling expenses in the consolidated statements of operations. Pursuant to the Company’s policy, the amount of discounts that may be provided by the franchisees to consumers is capped at 5%, based on which, we recognized the maximum amount of discounts that may be provided by the franchisees as reductions of revenue.

 

The Connected Solutions BU has a global customer base covering the core parts of the Android platform value chain, including mobile chipset manufacturers, mobile device OEMs and mobile operators. This BU represented 73.4% and 70.9% of Borqs’ net revenues in 2015 and 2016, respectively, while the MVNO BU represented 26.6% and 29.1% of net revenues for the same periods. In 2015 and 2016, Borqs generated 61.7% and 65.7%, respectively, of its net revenues from customers headquartered outside of China and 38.3% and 34.3%, respectively, of its net revenues from customers headquartered within China. As of July 2017, Borqs has collaborated with six mobile chipset manufacturers and 29 mobile device OEMs to commercially launch Android based connected devices in 11 countries, and sales of connected devices with the BorqsWare software platform solutions are embedded in more than 10 million units worldwide.

 

Borqs has dedicated significant resources to research and development, and has research and development centers in Beijing, China and Bangalore, India. As of December 31, 2016, 403 of its 565 full-time employees and contractors were technical professionals dedicated to platform research and development and product specific customization. Technical professionals have diverse backgrounds and experience gained through employment with leading mobile chipset designers and manufacturers, mobile device OEMs, internet content providers and other software and hardware enterprises.

 

Borqs has achieved significant growth since inception in 2007. Net revenues increased from $47.5 million in 2014 to $75.1 million and $120.6 million in 2015 and 2016, respectively. Borqs recorded a net loss of $8.2 million in 2014 and a net income of $0.8 million and $2.6 million in 2015 and 2016, respectively.

 

Corporate Information and History

 

We incorporated in the British Virgin Islands on July 1, 2015. We were formed for the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation, purchasing all or substantially all of the assets of, entering into contractual arrangements, or engaging in any other similar business combination with one or more businesses or entities. Since incorporation and prior to the Business Combination, we were a “shell company” as defined in Rule 12b-2 under the Exchange Act. As a result of the Business Combination, we acquired the business of Borqs International and have ceased to be a shell company.

 

As of August 18, 2017, our authorized and issued capital stock consisted of 30,804,635 ordinary shares, 5,750,000 public warrants, 497,671 private warrants, and 4,415,923 assumed warrants. Our ordinary shares and warrants began trading on the Nasdaq Capital Market (“ Nasdaq ”) under the symbols “BRQS” and “BRQSW,” respectively, on or around August 21, 2017.

 

Our principal executive offices are located at Tower A, Building B23, Universal Business Park No. 10 Jiuxiangqiao Road, Chaoyang District, Beijing, 100015 China. Our telephone number is +86 10-5975-6336. Our website address is www.borqs.com. The information contained on our website is not incorporated by reference into this Report.

 

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Borqs International Holding Corp was incorporated in the Cayman Islands on July 27, 2007 and after the Business Combination is a direct, wholly-owned subsidiary of the Company. As of the date of this Report, the Company conducts its business principally through BORQS Beijing Ltd. (“ Borqs Beijing ”), which is a wholly-owned Chinese subsidiary. In addition, Borqs conducts part of its operations through its other subsidiaries in China, India, Hong Kong and South Korea.

 

The following diagram illustrates our current corporate structure and the place of formation, ownership interest and affiliation of each of our subsidiaries and consolidated affiliated entities as of the date of this Report.

 

Corporate Organizational Chart

 

 

 

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Borqs Wholly-Owned Subsidiaries and Consolidated Affiliated Entities

 

Borqs Beijing, a wholly foreign owned enterprise established under the laws of the PRC in 2007, which is Borqs’ primary operating entity and 100% owned by BORQS Hong Kong Limited;

 

BORQS Hong Kong Limited, or Borqs Hong Kong, a limited company established under the laws of Hong Kong in 2007, which engages in the software and services business and is 100% owned by us;

 

BORQS Software Solutions Private Limited, or Borqs Software Solutions, a private limited company established under the laws of India in 2009, which engages in the R&D of software and is 99.99% owned by us and 0.01% owned by Borqs Hong Kong;

 

BORQS Korea, or Borqs Korea, a company established under the laws of South Korea in 2012, which engages in the R&D of software and is 100% owned by Borqs Hong Kong;

 

Beijing BORQS Software Technology Co, Ltd., or Borqs Software, a company established under the laws of the PRC in 2008, which engages in government subsidized software development and engineering projects as well as other software and services business and is 100% owned by Beijing Big Cloud Century Technology Limited, or Big Cloud, which is 100% owned by Borqs Beijing; and

 

YuanTel (Beijing) Telecommunications Technology Co., Ltd., or YuanTel Telecom, a company established under the laws of the PRC in 2004, which mainly engages in MVNO services and is 95% owned by YuanTel (Beijing) Investment Management Co., Ltd., which is 79% owned by Beijing Big Cloud Network Technology Co. Ltd., which is 100% beneficially owned and controlled by Borqs Beijing through contractual control arrangements.

 

Our Business

 

Immediately following the Business Combination, the business of Borqs Technologies, Inc. is to provide customizable, differentiated and scalable Android-based smart connected devices and cloud service solutions through its two BUs, Connected Solutions and MVNO. The Connected Solutions BU develops wireless mobile connected devices and cloud solutions. The MVNO BU operates a mobile virtual network in China that provides a full range of 2G/3G/4G mobile communication services at the consumer level.

 

Industry Background

 

Overview

 

Android is an open source operating system for mobile devices such as smartphones and tablet computers, and was first released to the public by Google in late 2008. Participants in the Android ecosystem, including mobile device OEMs, mobile chipset manufacturers, mobile network operators, Android platform software companies and third party developers, can work together on this open source platform to provide customized end-to-end solutions, services and applications for connected devices. Android has become the world’s top-selling smartphone platform.

 

Android source code is available under free and open software licenses, but has limited commercial viability in several respects, including the fact that it:

 

lacks software needed to integrate with a particular chipset;
   
does not support many advanced radio network features;
   
lacks user interface and features differentiation for different mobile device OEMs;
   
lacks software for mobile operator services; and
   
lacks software for various vertical applications.

 

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Worldwide Connected Devices vs IoT Market

 

Connected devices include regular phones, tablets, wearables and machine-to-machine (M2M) devices. Each connected device has a uniquely identifiable endpoint that communicates using IP connectivity — be it “locally” using Wifi/Bluetooth or “remotely” using 2G/3G/4G/5G technologies. Connected devices facilitate ubiquitous connectivity for businesses, governments and consumers, leveraging built-in management, monitoring and analytics capabilities. We define IoT to include all connected devices other than phones and tablets, so devices such as wearables and M2M devices are in the category of IoT.

 

In its report on IoT platforms, IHS Technology describes IoT devices as having four major components: the managed device itself; managed connectivity through operators and MVNOs; the IoT end-to-end software platform and particular IoT software applications. For instance, to provide a fleet management IoT solution, a managed device (e.g., a fleet device in a vehicle) is needed, along with a phone number (usually stored in a SIM card) providing connectivity (managed through operators or MVNOs), an end-to-end software platform to manage the devices with software upgrade, charging and control capabilities and a fleet software application that runs on both the fleet device and the backend cloud server (IoT particular application).

 

Deloitte has identified IoT as one of four key technology trends, and the consensus of different industry forecasts is that the IoT market is growing rapidly. IHS Technology estimates that there were about 15 billion IoT devices in use in 2015, and that number will grow to about 30 billion IoT devices in 2020. In its June 2016 mobility report, Ericsson forecasts that the number of IoT devices in use is expected to increase at a compounded annual growth rate (CAGR) of 23 percent from 2015 to 2021, driven by new use cases. In total, Ericsson estimates around 28 billion connected devices will ship by 2021, of which close to 16 billion will be related to IoT. There were around 400 million IoT devices with cellular subscriptions at the end of 2015. Cellular IoT is expected to have the highest growth among the all categories of connected devices, reaching 1.5 billion in 2021.

 

Smartphones and Tablets Operating System Market Share

 

Android and iOS remain the dominant operating systems for smartphones and tablets. IDC reported that in the second quarter of 2016, Android and iOS market shares for smartphones were 87.6% and 11.7%, respectively. Strata reported that in the third quarter of 2016, the market share of iOS tablets was about 21.5% and the remainder is dominated by Android tablets.

 

IoT Operating System Market Share

 

The current IoT operating system market is fragmented. Android, Android-based operating systems, Windows and proprietary operating systems compete in the market along with other small players. The success of an IoT operating system depends on many factors, including the ability to build a full ecosystem of products and services that utilize the IoT operating system.

 

Android.  Google first announced Android in November 2007 and first released it to the public in late 2008. Developers use the open source Android platform to provide customized solutions, services and applications for mobile devices. In addition, Android has built a strong developer community through the Android Market, which features over 2.2M applications that have over ten billion downloads collectively. This developer community is expected to continue to support the growth and development of Android. In addition, Google has launched the specific version of Android for wearables, called Android Wear.

 

Android-Based.  Android-based operating systems are based on Android but with significant changes in the underlying software. This includes Google’s Brillo/Weave operating system. Brillo has the advantages of being open source and can leverage the Android ecosystem; it is suitable for connected devices that have small memory footprint and a small or no display. Brillo’s communications protocol is called Weave.

 

Linux-Based Open Source.  The Linux community has developed a number of open source IoT operating systems, e.g. RIOT and Zephyr. One advantage of these operating systems is that they are open source and a number of developers can explore and enhance the software. However, these operating systems lack industry standardization and support that large companies like Google or Microsoft can provide.

 

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Linux-Based Proprietary.  Historically, various companies have developed real-time operating systems that can be used in real-time applications, such as VxWorks and Nucleus. These operating systems are proprietary and not open source. They have mostly been used in the industrial, medical, and aerospace fields. The disadvantage of these operating systems is that they lack industry momentum and support from large companies such as Google or Microsoft, and they lack service APIs to create versatile applications.

 

Windows.  Microsoft’s latest embedded operating system is known as Windows 10 for IoT. Under this umbrella, three subset operating systems are available. Windows 10 for IoT Mobile supports the ARM architecture; Windows 10 for IoT Core supports Raspberry Pi and Intel Atom; and Windows 10 for IoT Enterprise is essentially the full-blown Windows 10 Enterprise operating system. Because Windows 10 for IoT is so new, it lags behind many others in terms of user base and experienced developers.

 

ARM.  ARM is developing its own open source embedded operating system, called mbed OS. Since it is being developed by ARM, that is the only supported architecture. That said, mbed OS is expected to make a splash in the smart-home and wearable-device IoT segments. Mbed OS differs from many other embedded operating systems because it is single-threaded, rather than multi-threaded. ARM says it feels this is necessary for it to be able to run on the smallest and lowest-power devices out there. If physical size and battery life are critical, mbed OS can be a choice.

 

Apple iOS.  While Apple has yet to play a significant role in today’s IoT market, it is expected to do so soon. Up to this point, Apple has adopted variants of its iOS platform and created IoT devices such as Apple TV, CarPlay and the Apple Watch. Moving forward, Apple is expected to continue its use of iOS and to modify OS X so that it runs leaner and more efficiently on IoT endpoints.

 

The table below shows historical and current market shares of mobile operating systems for smartphone based on unit shipments. Android dominates the market shares, followed by Apple iOS. While the IoT OS ecosystem is fragmented, we anticipate that Android and Android-based IoT OS will follow the trend of smartphones to dominate the IoT OS.

 

 

 

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Android Platform and Software Market

 

Market Development.  Prior to the introduction of Android, the market for mobile chipset and mobile device software was primarily served by the in-house research and development teams of mobile chipset manufacturers and mobile device OEMs, who developed and configured proprietary software, such as the BlackBerry and Windows Mobile operating systems, for each mobile device. However, Android’s open source nature has enabled participants in the Android ecosystem to exert greater influence over the design of mobile devices and related software and features, as well as mobile services. This has led to a rapid proliferation and upgrading of products, and introduced a greater degree of complexity for participants in the Android ecosystem because Android requires configuration and customization of both Android platform software and other essential software in order to become commercially viable. For example:

 

mobile chipset manufacturers need to develop chipsets with the latest commercial grade Android software that supports specific radio networks, enhances compute and connectivity performance, optimizes power management and supports network specific features;
   
connected devices OEMs may need to manufacture devices that contain the latest commercial grade Android software that supports mobile device- and network-specific features, enhances Android compute and connectivity performance, enhances the user interface and incorporates operator software packages; and
   
mobile operators may need to provide services to their customers, such as subscriber data synchronization, file backup and restore, software upgrades, mobile markets, content push and others.

 

The key drivers for growth in the Android platform and software market include:

 

continued widespread acceptance and deployment of the Android platform;
   
continued rollout of high speed mobile networks, which are expected to promote growth in the smartphone market and contribute to the growth of mobile operating system platforms;
   
continued growth in smartphone shipments;
   
introduction of new and targeted mobile services;
   
increasing variety and availability of mobile chipsets and mobile devices; and
   
mobile operators seeking to create unique and differentiated services for their subscribers.

 

Market Segmentation.  Segmentation in the connected device market includes connected chipset manufacturers, connected device and mobile operators.

 

Connected Chipset Manufacturers.  The connected chipset industry has undergone consolidation in the past several years. Currently, Intel, MediaTek, Spreadtrum and Qualcomm are the four leading mobile chipset vendors. Intel and Qualcomm are known for their innovation and capability. MediaTek and Spreadtrum are known for being low cost. These companies have acquired a number of their competitors. Qualcomm has announced the acquisition of NXP in October 2016. NXP said it was the fifth-largest non-memory semiconductor supplier in 2016, and the leading semiconductor supplier for the secure identification, automotive and digital networking industries. The market for connected chipsets is expected to experience significant growth in conjunction with the increasing popularity of connected devices.

 

Connected Device.  The market for traditional connected devices, such as smartphones and tablets, are expected to continue to grow. Ericsson forecasted that the worldwide mobile subscriptions would increase from 3.2 billion in 2015 to 6.3 billion in 2016. The growth was due to the fact that many consumers in developing markets first experience the internet on a smartphone, usually due to limited access to fixed broadband. The growth will primarily come from markets such as India, Middle East and Africa.

 

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With the popularity of IoT devices, connected devices are expected to post another wave of significant growth. Ericsson forecasted that around 29 billion connected devices by 2022, of which around 18 billion will be IoT devices. Cisco estimated that the number of connected devices per person, which was 1.84 devices per person in 2010, will grow to 6.58 devices per person by 2020. The table below shows the historical and projected growth of IoT devices.

 

 

 

Mobile Operators.  For the past two decades, mobile operators have experienced a significant growth in subscribers due to the popularity of mobile phones. With the launch of 3G and 4G services, the growth of data traffic has increased significantly as the cost per bit declined. Ericsson’s report states the monthly traffic per smartphone grew from 1GB/month in 2014 to 1.4GB/month in 2015, and forecasted a CAGR of 35% over the period 2015-2021. Cellular networks have also evolved to support the growth of data traffic and IoT traffic. The state-of-the-art 4G network can support more than 1Gbps downlink traffic and 500Mbps uplink traffic. By 5G, the network architecture can support up to 10Gbps and 100 times more number of connected devices. Ericsson estimated that 70% of wide-area IoT devices will use cellular technology in 2022. In 2018, the number of IoT devices is expected to exceed the number of mobile phones.

 

MVNO.  A mobile virtual network operator (“ MVNO ”) is a wireless communications services provider that does not own the wireless network infrastructure over which it provides services to its customers. An MVNO enters into a business agreement with a mobile network operator to obtain bulk access to network services at wholesale rates, then sets retail prices independently. An MVNO may use its own customer service, billing support systems, marketing, and sales personnel, or may employ the services of a mobile virtual network enabler. GSMA Intelligence estimated that between June 2010 and June 2015, the number of MVNOs worldwide increased by 70%, to 1,017 in June 2015. The report noted that the 10 countries with the largest number of MVNOs in June 2015 were Germany with 129, the U.S. with 108, the UK 76, the Netherlands 56, France 49, Australia 43, Denmark 43, Spain 35, Poland 27, and Belgium with 26. In Europe, about 30% to 40% of the mobile users are MVNO subscribers. In the U.S., it is about 10% to 15%. China launched MVNO in late 2014. Statista estimated that there were 30 million MVNO subscribers in China in 2015 and will grow to 90 million by 2020.

 

Necessity for Third Party Providers.  Although the in-house research and development teams of mobile chipset manufacturers and connected device OEMs have dominated the Android platform and software market, participants in the Android ecosystem are increasingly turning to third party solutions providers to address their needs. Several factors have contributed to this shift, including the increasing need of mobile chipset manufacturers and mobile device OEMs to deal with a wider range of specific software requirements and limited capabilities of in-house research and development teams with respect to product development and implementation. Third party providers often (i) have the domain expertise and resources to develop enhanced Android platform software and service solutions that address the specific performance, feature and functionality requirements of various mobile chipset manufacturers, mobile device OEMs and mobile operators, (ii) generate deep expertise from developing and customizing software products for multiple customers and (iii) are able to keep pace with the near-constant introduction of new mobile chipsets, mobile devices, OS and apps. Therefore, third party providers are expected to continue to play a key role in providing comprehensive software and service solutions for participants in the Android ecosystem.

 

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Solution Offering — End to End Business Model

 

 

 

The Borqs Connected Solutions BU can help customers to design, develop and “realize” the commercialization of their connected devices. The MVNO BU can help customers to deploy their devices in China with 2G/3G/4G cellular connectivity with flexible voice/data plan.

 

Ideation & Design — Based on customer requirements on the type of connected device the customer want to have, we can help customers design the product ID and user interface. We have the design engineering to provide 2D/3D rendering. The Company can provide physical mockup with different color, material and finishes, so the customer can hold and “feel” the mockup before finalizing the product ID.

 

Software IP Development — IoT devices are often highly customized and require special software to display the data (e.g. circular watch display and user interface), to reduce the power consumption (e.g., a small battery in a wearable device), to perform specific functions (e.g., push-to-talk) and to connect to the network (e.g., 3G/4G connection). The Company has developed a large number of software libraries that can be reused for various connected devices.

 

Product “Realization” — Some customers have limited hardware design capabilities. The Company has a strong hardware research and development team to help customers to design the hardware, including the PCBA design and mechanical design. The Company can also provide turn-key services to help customer to handle the manufacturing logistics (including supply chain and EMS management) in order to manufacture the product. The Company has the experiences and resources to manage the factory supply chain, quality control and other manufacturing logistics.

 

Deployment — A number of connected devices require cellular 2G/3G/4G connectivity to connect to the network to access the backend cloud services. If a customer intends to deploy their connected devices in China, the customer can acquire SIM cards with flexible voice/data plans from our MVNO to have the cellular connectivity.

 

Cloud Services and Support — The MVNO can help customers to provision and manage their subscribers database, handle the payment and re-charging and as well as provide data analytics of the subscribers for their usage traffic models.

 

Competitive Strengths

 

We believe the following factors differentiate us from our competitors and contribute to our success:

 

Strategic relationships with leading chipset vendors.

 

The Company works closely with the world’s two leading chipset vendors, Intel and Qualcomm, in their software development, including software for their latest state-of-the-art chipsets. The Company develops connected device products and solutions based on these chipsets. Due to these strategic relationships, it is able to come up with a competitive product portfolio. The Company leverages the large global sales teams of both Intel and Qualcomm.

 

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Strong software capabilities across core parts of the Android platform value chain, driving a full suite of BorqsWare software and services platform solutions and a significant time to market advantage for customers.

 

The Company was among the first to obtain the Android source code in early 2008 and has since been focused on building the Company’s innovative technology platform to serve customers across the core parts of the Android platform value chain. For example, the Company believes it was the first company to develop commercial grade software to support video telephony for Android, which was not supported by open source Android. In addition, in connection with collaboration with China Mobile, the Company developed the base chipset software for the first deployment of Android-based mobile devices to support China Mobile’s TD-SCDMA network. Recently, the Company partnered with Qualcomm and launched the world’s first 4G watch. The Company has the Google GMS license that can be used for the Android phones and tablets for its customers.

 

Global customer base and extensive industry relationships.

 

The Company had more than 50 customers as of December 31, 2016, including some of the world’s leading companies in the mobile industry. Its diversified customer base includes mobile chipset manufacturers, mobile device OEMs and mobile operators. The Company has collaborated with more than six mobile chipset manufacturers (Intel, Qualcomm, Marvell, etc.) and 29 connected device OEMs (LGE, Micromax, Acer, Motorola, Vizio, etc.) to commercially launch Android-based devices in 11 countries, and more than 10 million mobile devices sold worldwide have BorqsWare software platform solutions embedded. Our products have been deployed by more than 10 service providers (AT&T, China Mobile, Claro, Orange, Reliance Jio, Sprint, Verizon, etc.) on four continents.

 

MVNO subscribers and sales channel.

 

According to the MVNO Cooperative Office of the Regulatory Affairs Department of China Unicom (the incumbent mobile operator), we had 4.56 million registered subscribers as of December 31, 2016, making it the second largest MVNO in China. The Company’s MVNO BU provides a positive cash flow. The Company believes that a key success factor of IoT business is to bundle IoT devices with a SIM card for voice/data communications. It plans to launch connected devices together with SIM cards (and voice/data plans) in 2017, converting one-time device sales revenues into recurring monthly voice/data revenues.

 

Significant resources dedicated to research and development.

 

The Company dedicated significant financial and human resources to research and development needed to build a full suite of connected device software and service platform solutions to address customers’ evolving needs across the core parts of the Android platform value chain. Research and development expenses represented 57.7% and 37.2% of operating expenses in 2014 and 2015. The decrease in research and development expenses as a percentage of operating expenses was due to the capitalization of $3.3 million in project-based software development costs in the year 2015. In 2016, research and development expenses represented 30.1% of operating expenses, while $4.9 million of project-based software development costs were capitalized.

 

To date, the Company has been granted 130 patents in China and six patents in the United States, and it has 18 pending patent applications in China and three pending patent applications in the United States. The Company also has 91 software copyrights and 47 trademarks registered and 17 pending trademarks in China. In addition, the Company has registered its domain name with various domain name registration services.

 

The Company believes that it has one of the most experienced research and development teams in the Android platform software ecosystem. As of December 31, 2016, the Company had 565 full-time employees and contractors, of which 71 were technical professionals dedicated to platform research and development and project-specific customization. Of these, 60% have more than five years of experience in software or hardware engineering and development and 100% hold a bachelor’s degree or higher. The Company’s research and development team members have diverse backgrounds and experience gained through employment with leading mobile chipset designers and manufacturers, mobile device OEMs, Internet content providers and other software and hardware enterprises.

 

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Strong and experienced management team.

 

The Company is led by a strong management team with rich operational experience and strong execution capabilities. Several senior executives have technical and engineering backgrounds and extensive experience as senior managers of leading mobile technology companies. The Company’s Chairman of the Board and Chief Executive Officer, Pat Chan, is the former senior vice president and general manager of UTStarcom, a telecommunications and telecommunications equipment company listed on Nasdaq, where he was responsible for the infrastructure business, including mobile networks, broadband and IPTV. Mr. Chan is an established entrepreneur and has received many awards, including the “High-Caliber Talent from Overseas Award” from the PRC government, and “2012 Beijing Entrepreneur of the Year” in 2012 from Silicon Dragon.

 

The Connected Solutions BU is headed by Hareesh Ramanna and Simon Sun. Mr. Ramanna has over 20 years of experience in mobile industry. Prior to joining us, he served as senior director and head of mobile devices software in Global Software Group, Motorola India Electronic. Mr. Simon Sun was the CEO of Nollec, a phone design house in China. The MVNO BU is headed by Gene Wuu. Previously Mr. Wuu was the SVP and GM of UTStarcom and has also worked as an executive in Telcordia Technologies (formerly Bellcore). The international business team is headed by George Thangadurai. Mr. Thangadurai worked for Intel for more than two decades in various technical and senior management roles including GM of Strategy & Product Planning for the Mobile PC business and GM of the Client Services business. The Company’s Chief Financial Officer has over 30 years of experience in US-China cross border investments and business operations, and has been instrumentally involved with M&A, spin-off, IPO and capital market transactions totaling over US$200 million. Our corporate affairs and China sales is headed by Bob Li, who has over 20 years research and development and management experience in the wireless communications, semiconductor and mobile Internet industries.

 

Growth Strategies

 

Our strategic goal is to lead and expand the market for smart connected devices, and grow our MVNO market share in China. We plan to achieve its goal through the following key strategies:

 

Maintain and grow market share and maintain technology leadership.

 

The Company intends to leverage its core technology to maintain its position as a leading independent provider of commercial grade Android platform software for mobile chipset manufacturers, mobile device OEMs and mobile operators, and further grow market share by expanding its BorqsWare software and service platform solutions. The Company also intends to hire additional experienced engineers in China and India and further invest in research and development efforts to strengthen its core technology expertise and capabilities to maintain technology leadership. With respect to the BorqsWare Client software platform solutions, the Company intends to leverage its core technology and strength in research and development to maintain its technology leadership position in the industry. With respect to BorqsWare Server software platform, we believe that mobile operators and MVNO intend to capture additional revenue from their networks by providing various services to their customers rather than just providing bandwidth. The Company intends to continue to develop and promote its BorqsWare Server platform solutions, which include end-to-end Android platform software for both mobile devices and servers and services to operate, manage, maintain and promote end-to-end services for customers. In addition, the Company intends to focus additional research and development resources in areas including enhancing Android platform security, virtualization, such as running multiple operating systems on the same hardware, and end-to-end Android platform software and service solutions for adaptation to mobile operator legacy systems.

 

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Deepen relationships with existing customers.

 

The Company believes that its relationships with existing customers are strong and intends to strengthen those relationships to create more opportunities for its business. Through collaborations with customers from the early stages of a product launch, the Company believes that it can gain unique insight into its customers’ long-term goals. The Company further believes that its customers are looking for more integrated Android platform solutions across the Android platform value chain. With respect to BorqsWare Client software platform solutions, we work closely with various mobile chipset manufacturers to develop the corresponding software platform solutions for their new chipsets. When the chipsets are ready for commercial launch, we also work with connected device OEMs and mobile operators to develop operator service packages and network specific features for these chipsets based on the BorqsWare Client software platform solutions. With respect to the BorqsWare Server platform solutions, for example, we plan to launch our wearable watch server solution in 2017.

 

Expand MVNO market share in China.

 

The Company is one of the top MVNO businesses in China, as measured in terms of registered subscribers. It intends to expand market share organically or by acquiring smaller MVNOs. The Company intends to bundle its connected products with its SIM cards (with voice/data plans) and focus the bundling in the IoT devices.

 

Selectively pursue acquisitions, strategic alliances, joint ventures and partnerships.

 

The Company intends to selectively pursue acquisition opportunities, strategic alliances, joint ventures and partnerships to complement its core technology, further its geographic expansion and otherwise enhance shareholder value. Given the fragmentation in the industry, in which we operate, it is actively looking for attractive acquisition, strategic alliance, joint venture and partnership opportunities to grow its business.

 

Business Units

 

The Company has two BUs, the Connected Solutions BU and the MVNO BU. The Connected Solutions BU develops wireless smart connected devices and cloud solutions. The MVNO BU operates a mobile virtual network in China that provides a full range of 2G/3G/4G mobile communication services at the consumer level and some traditional commercial telephony services.

 

The following table presents the sales and profitability of the Company’s two BUs:

 

SALES AND PROFITABILITY OF BUSINESS UNITS
(Dollars in thousands)

 

    For the year ended December 31,  
    2014     2015     2016  
    $     %     $     %     $     %  
    ($ in thousands)  
Net Revenues:                                    
Connected solutions     45,280       95 %     55,115       73 %     85,448       71 %
MVNO and others     2,208       5 %     19,957       27 %     35,138       29 %
Total net revenues     47,488               75,072               120,586          
                                                 
Cost of Revenues:                                                
Connected solutions     33,269       93 %     38,761       67 %     63,799       68 %
MVNO and others     2,378       7 %     19,205       33 %     30,493       32 %
Total cost of revenues     35,647               57,966               94,292          
                                                 
Gross Margin:                                                
Connected solutions     27 %             30 %             25 %        
MVNO and others     -8 %             4 %             13 %        
Combined gross margin of the Group     25 %             23 %             22 %        

 

The Connected Solutions BU designs chipsets and related software for mobile connected devices. The Company outsources manufacturing of connected devices to third-party factories, buying key components for devices and consigning them to the factories to manufacture and assemble. The Company sells the final connected device products to its customers, which are responsible for marketing and retail distribution.

 

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The MVNO BU serves all the domestic China market. Operating under the brand name Yuantel, it leverages the network coverage China Unicom, which is China’s incumbent mobile operator. Subscribers purchase prepaid services, and are charged by the amount of data consumed, minutes of voice calls made, number of text messages sent, and other value-added services (such as caller ID display) used. As needed, subscribers may refresh the mobile phone SIM card, on a pay-as-you-go basis. Each month, we pay China Unicom for the total amount of traffic (MB of data, minutes of voice call made, etc.) actually consumed by subscribers.

 

The Company uses MVNO franchisees and agents as distribution channels. Those franchisees sell our prepaid services to their subscribers, on SIM cards. The Company compensates franchisees under a profit-sharing arrangement that is based on gross margin on franchisee sales of our services to subscribers. Agents sell our services on behalf of the Company and pay us a discount price for those services.

 

Customers

 

The Company’s primary customers are mobile chipset manufacturers, mobile device OEMs and mobile operators. The following table sets forth the top ten customers by net revenue contribution for 2015 and 2016, in absolute amount and as a percentage of net revenues.

 

Top 10 Customers   Year ended
December 31,
2015
 
    $ in thousands     % of revenues  
Chipset manufacturer            
Customer A   $ 7,473       10.0 %
Customer B   $ 6,259       8.3 %
                 
Mobile operator                
Customer C   $ 1,003       1.3 %
                 
Mobile device OEM                
Customer D   $ 19,302       25.7 %
Customer E   $ 4,265       5.7 %
Customer F   $ 3,868       5.2 %
Customer G   $ 3,235       4.3 %
Customer H   $ 2,400       3.2 %
Customer I   $ 1,170       1.6 %
Customer J   $ 894       1.2 %

 

Top 10 Customers   Year ended
December 31,
2016
 
    $ in thousands     % of revenues  
Chipset manufacturer            
Customer A   $ 4,250       3.5 %
Customer B   $ 1,101       0.9 %
                 
Mobile device OEM                
Customer P   $ 19,985       16.6 %
Customer D   $ 17,623       14.6 %
Customer K   $ 11,068       9.2 %
Customer L   $ 9,196       7.6 %
Customer F   $ 4,465       3.7 %
Customer M   $ 4,249       3.5 %
Customer O   $ 2,605       2.2 %
Customer N   $ 2,489       2.1 %

 

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In 2015, the Company generated 61.7% of its net revenues from customers whose headquarters are located outside of China and 38.3% of net revenues from customers whose headquarters are located within China. In 2016, we generated 65.7% of net revenues from customers whose headquarters are located outside of China and 34.3% of net revenues from customers whose headquarters are located within China. These figures do not take into account the geographic location of end-users of customers’ products that we sell to our customers.

 

As of the date of this Report, the Company has collaborated with six mobile chipset manufacturers and 29 mobile device OEMs to commercially launch Android-based mobile devices in 11 countries, and sales of mobile devices with BorqsWare software platform embedded have exceeded 10 million units worldwide.

 

Case Study.  A prominent mobile chipset manufacturer customer decided to enter the wearable market with its newly designed chipset. The Company collaborated with this customer to develop the latest Android software to support its chipset. The Company integrated the BorqsWare software platform into the newly designed chipset that provides enhanced features and user experiences, improved chipset performance and stability, optimized power management and included the mobile operator’s required operator software package. In June of 2016, we announced the launch of one of the world’s first 4G watches for this customer.
   
Case Study.  A major TV manufacturer in United States selected the Company to develop its TV Wifi tablet remote. This connected device has been sold in the United States since 2016. The tablet remote uses Qualcomm chipsets with BorqsWare software platform.
   
Case Study.  This Company customer supplies restaurant ordering tablets to Applebee’s restaurants in the United States. These Android-based ordering tablets use BorqsWare software running on and Intel and Qualcomm chipsets.
   
Case Study.  A major mobile operator in India launched the world first 4G LTE FDD/TDD carrier aggregation Android phone in 2016. We provided this phone, which uses BorqsWare and Qualcomm chipsets.

 

Research and Development

 

The Company has dedicated significant resources to research and development, with research and development centers in Beijing, China and Bangalore, India. Of the 565 full-time employees and contractors as of December 31, 2016, 71% were technical professionals dedicated to platform research and development and project-specific customization. Of those research and development staff, 60% had more than five years of experience in software engineering and development and 100% of them hold a bachelor’s degree or higher. The Company’s technical professionals have diverse backgrounds and experience gained through employment with leading mobile chipset designers and manufacturers, mobile device OEMs, Internet content providers and other software and hardware enterprises. The Company’s research and development staff members have in-depth knowledge of the Android platform, real-time operating systems and high speed mobile network and internet IP protocols, as well as telecommunications technology and services. The Company research and development expenses represented 57.7% and 37.2% of operating expenses in 2014 and 2015, respectively. The decrease in research and development expenses as a percentage of operating expenses was due to the capitalization of $3.3 million in project-based software development costs in the year 2015. For 2016, research and development expenses represented 30.1% of operating expenses and $4.9 million of project-based software development costs were capitalized. For the three and six months ended June 30, 2017, research and development expenses represented 29% and 26% of operating expenses, respectively.

 

The Company’s research and development centers work together to develop core proprietary software, and each center focuses on project specific implementation related to specific hardware platforms and customer specifications. The Company technical professionals are divided into two core groups, one focused on our Android+ software platform solutions, and one focused on our Android+ service platform solutions. Each group is further divided into sub-groups for platform development, system engineering and architecture, low-level software development, high-level application development, program management, system testing and verification and software configuration management.

 

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Our current research and development efforts are focused on developing the BorqsWare software and service platform solutions to improve and enhance the following aspects of the Android platform:

 

stability and reliability;
   
performance and power management;
   
Android platform integration with various kinds of chipsets;
   
usability, input mechanism and display mechanism;
   
security and anti-hacking of applications;
   
in-country localization;
   
automated cross applications software testing;
   
4G radio network specific functionality, such as FDD-LTE and TD-LTE; and
   
mobile operator end-to-end services; and integration of mobile Internet services with traditional telecommunication services, such as integration of instant messaging with short messaging.

 

A typical research and development project is staffed with members of the sales team, a research and development team comprised of a project manager, a platform development team, a customer development team and a system testing team, as well as finance personnel. At the beginning of a project, a member of the sales team will work with a project manager to simultaneously track research and development and commercial milestones. The project manager is responsible for ensuring the research and development milestones are achieved in a timely manner, including system testing, and a member of the sales team is responsible for tracking sales milestones. Finance personnel review each invoice and determine the appropriate accounting treatment under U.S. Generally Accepted Accounting Principles (“ GAAP ”). A typical research and development project takes between six to nine months to complete. In general, a significant portion of each research and development project consists of existing Android platform software and service solutions, while incorporating necessary customizations for a particular customer.

 

Intellectual Property

 

The Company regards patents, copyrights, trademarks, software registrations, trade secrets and similar intellectual property as critical to its success. The Company relies on a combination of trademark, copyright, patent, software registration and trade secret laws, and enters into confidentiality agreements with employees and relevant third parties to protect our intellectual property rights. All employees enter into agreements requiring them to keep confidential all proprietary and other information relating to customers, methods, technologies, business practices and trade secrets. These agreements also stipulate that all software, inventions, trade secrets, works of authorship, developments and other processes; whether patentable or copyrightable; made by them during their employment are our properties. Despite these precautions, it may be possible for third parties to obtain and use the Company’s intellectual property without our authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property rights in the Internet and telecommunications-related industries are uncertain and still evolving. Infringement and misappropriation of our intellectual property could materially harm its business.

 

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The Company has been granted 128 patents in China and four patents in the United States, and as of December 31, 2016, the Company had 20 pending patent applications in China and six pending patent applications in the United States. The Company also had 68 software copyrights and 45 trademarks registered and 10 pending trademarks in China. In addition, the Company had registered domain names with various domain name registration services as of December 31, 2016. Among key intellectual property rights are patents related to:

 

mobile devices user interface and operation, such as a new method to perform multi-touch input, voice-based input and gesture-based input;
   
mobile application software algorithm, such as a new method to store XML data; and
   
new network technology for mobile devices, such as a new method to conduct time-shift mobile TV broadcasting.

 

As of the date of this Report, the Company believes that certain intellectual property may be subject to certain intellectual property arrangements and joint patent ownership agreement the Company entered into with China Mobile and China Mobile Research Institute. The Company’s rights of and related to historical revenues generated from such intellectual property may be subject to objections or claims raised by China Mobile or China Mobile Research Institute. See “ Risk Factors — Risks Related to Borqs Business and Industry — the Company could face claims from China Mobile and its affiliates related to certain intellectual property rights. If the Company fails to defend against such claims, the Company may lose certain intellectual property rights and may be subject to monetary damages .”

 

Competition

 

The Company believes that the marketplace for connected devices and cloud service solutions is highly fragmented, but that few are capable of providing an end-to-end solution with software, hardware, product realization and bundling with a SIM card with voice/data plan (via a MVNO or mobile operator). As of the date of this Report, the Company is aware of only one such company, Foxconn, which has these capabilities and own both mobile networks and MVNO. The Company believes that it competes principally on the basis of various factors, including, among others, reliability and efficiency, performance, experience and track-record, product features and functionality, development complexity and time-to-market, price, support for multiple architectures and processors, interoperability with other systems, support for emerging industry and customer standards and protocols and levels of training, technical services and customer support.

 

The Company believes that it competes favorably with respect to each of these factors. However, the market for connected devices and cloud service solutions is still rapidly evolving, and the Company may not be able to compete successfully against current and potential competitors in the future. The Company expects competition to intensify as more competitors enter the market, and as existing competitors attempt to diversify and expand their software and service solutions offerings across the Android platform. The primary competitors for the Company include traditional hardware-centric OEMs and software development companies:

 

The traditional OEMs, such as Foxconn and Compal, are strong in hardware design and own factories, but they are very weak in software development as well as not familiar with operator and mobile chipset requirement;
   
The large software development companies, such as Neusoft and Wipro, have sizable software teams and global coverage, but they are very weak in hardware design and manufacturing expertise;
   
Some of the companies may have significantly greater financial, technical, marketing, sales and other resources and significantly greater name recognition than we have.

 

As of the date of this Report, there are 42 MVNO licenses in China. According to the MVNO Cooperative Office of the Regulatory Affairs Department of China Unicom (the incumbent mobile operator), we had 4.56 million registered subscribers as of December 31, 2016, making us the second largest MVNO in China. Major competitors include Snail Mobile, d.Mobile and Soshare. The Company estimates that these four MVNOs (including the Company) have more than a 50% market share of all the MVNO subscribers in China. The Company believes that it competes favorably because of strong research and development capabilities; including the Company’s ability to develop IoT-based connected devices and cloud service solutions. The Company is not aware of any of its MVNO competitors that have research and development capabilities comparable to its own.

 

Some of the companies that operate in the software and services solutions market may have significantly greater financial, technical, marketing, sales and other resources and significantly greater name recognition than we have.

 

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Government Regulation

 

The Company’s operations are subject to extensive and complex state, provincial and local laws, rules and regulations. The PRC government restricts or imposes conditions on foreign investment in telecommunication business. Borqs International Holding Corp and its PRC subsidiaries are considered foreign persons or foreign-invested enterprises under PRC foreign investment related laws. As a result, they are subject to PRC legal restrictions on or conditions for foreign ownership of telecommunication business. Due to these restrictions and conditions, the Company conducts its MVNO business in China through BC-NW, its variable interest entity and the subsidiaries of BC-NW. As all the registered shareholders of BC-NW are PRC citizens and all other shareholders of the subsidiaries of BC-NW are also PRC citizens or PRC domestic enterprises, BC-NW and its subsidiaries are therefore considered as PRC domestic enterprises under PRC law. The “registered shareholders” of BC-NW refer to those shareholders who have pledged their equity interest in BC-NW to Borqs Beijing Ltd., or WFOE, and entered into exclusive option agreements with WFOE as part of the contractual arrangements. The Company’s contractual arrangements with BC-NW and the registered shareholders of BC-NW allow it to have the power to direct the activities of BC-NW and its subsidiaries that most significantly impact their economic performance.

 

Employees  

 

The Company had 565 full-time employees and contractors as of December 31, 2016. The following sets forth the number of our full-time employees and contractors by geographic location and function as of December 31, 2016:

 

Function   China     India     Others     Total
Number of
Personnel
 
General and Administrative     28       9             37  
Sales and Marketing     122             3       125  
Research and Development     183       220             403  
Total     333       229       3       565  

 

The Company pays most of employees a base salary and performance-based bonuses, including annual incentive bonuses and project-based bonuses. It also pays commissions to sales personnel. All full-time employees are eligible to participate in employee stock option program, which is designed to provide long-term incentives to employees.

 

The Company is required under PRC laws and regulations to participate in a government-mandated, defined benefit plan for its full time employees, pursuant to which we provide social welfare benefits, such as pension, medical care, unemployment insurance, work-related injury insurance, maternity insurance and employee housing fund. The Company employees are not covered by any collective bargaining agreement. The Company believes it has good relations with employees.

 

The Company uses a variety of methods to recruit technical professionals to ensure that it has sufficient research and development and other expertise on an ongoing basis, including the company website, an external online recruiting website, targeted technical forums, such as bbs.tsinghua.edu.cn and www.shoudurc.com , campus recruitment at leading technical universities and institutions, such as Beijing University of Posts and Telecommunications and Beijing University of Aeronautics & Astronautics, job fairs and internal referrals from current employees. The Company is also working with leading technical universities and institutions to implement an internship program.

 

The Company offers certain training programs to its employees covering professional training such as training related to customer service and product management and technical training such as training related to telephony and project management. The Company also holds periodic workshops to enhance the leadership skills of management personnel.

 

Legal Proceedings

 

To the knowledge of our management, there is no material litigation currently pending or contemplated against us, any of our officers or directors in their capacity as such or against any of our property.

 

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DESCRIPTION OF PROPERTIES

 

The Company’s principal executive offices are located in Beijing, China, where the Company leases approximately 3,600 square meters of office space. The Company also occupies leased facilities for other offices and research and development facilities in India. The following table sets forth the location, approximate size and primary use of leased facilities as of December 31, 2016:

 

Location   Approximate Size
of Office Space
(m 2 )
    Primary Use
Beijing, China     3,600     Principal executive office and research and development
Bangalore, India     1,580     Research and development
Total     5,180      

 

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RISK FACTORS

 

The following risk factors apply to the business and operations of the Company. These risk factors are not exhaustive. Investors are encouraged to perform their own investigation with respect to the business, financial condition and prospects of the Company. You should carefully consider the following risk factors, as well as the other information included in this Report. In particular, please refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements.” We may face additional risks and uncertainties that are not presently known to us, or that we currently deem immaterial, which may also impair our business. The following discussion should be read in conjunction with the financial statements and notes to the financial statements included herein. For the purposes of these risk factors, unless otherwise indicated, the term “Borqs” “we,” “us,” “our” or “the Company” refers to Borqs Technologies, Inc. together with our consolidated subsidiaries and consolidated affiliated entities.

 

Risks Related to Our Business and Industry

 

If alternative mobile operating system platforms become more widely used or accepted, or mobile chipset manufacturers, mobile device OEMs and mobile operators do not continue to make product and service offerings compatible with the Android platform, our business could be materially harmed.

 

The mobile operating system platform industry is intensely competitive and characterized by rapid technological changes, which often result in shifts in market share among the industry’s participants as one operating system may become more widely used than others. For example, in the past the Symbian mobile operating system platform, or Symbian, from Nokia Corporation, or Nokia, dominated market share for consumer products and the BlackBerry mobile operating system platform, or BlackBerry, from Research in Motion Limited, or RIM, dominated market share for enterprise products. In the past five years, with the rise of the iOS mobile operating system platform, or iOS, from Apple Inc., or Apple, and the Android platform, both the Symbian and Blackberry platforms have experienced a substantial decline. There can be no assurance that the Android platform will continue to compete effectively with alternative mobile operating system platforms, such as the iOS platform or Windows Mobile mobile operating system platform, or Windows Mobile, from Microsoft Corporation. If these or other mobile operating system platforms become more widely used or accepted, such as operating system platforms being developed by Baidu, Inc., or Baidu, and Alibaba.com Ltd., or Alibaba, in China, the market appeal of the Android platform and our Android+ software and service platform solutions could be diminished, which could materially adversely affect our business and financial performance.

 

Furthermore, the competitiveness of our Android+ software and service platform solutions is dependent upon the continued compatibility of the Android platform with the offerings of our customers. If these customers choose not to continue to adopt the Android platform or they are unable to retain or increase their market share, the demand for our Android+ software and service platform solutions may be diminished, which could materially adversely affect our business and financial performance.

 

We generate a significant portion of our net revenues from a small number of major customers and key projects and any loss of business from these customers or key projects could reduce our net revenues and significantly harm our business.

 

We have derived, and believe that in the foreseeable future we will continue to derive, a significant portion of our net revenues from a small number of major customers and key projects. For 2015 and 2016, our top five customers accounted for 54.1% and 51.7%, respectively, of our net revenues.

 

Our ability to maintain close relationships with our major customers is essential to the growth and profitability of our business. However, the volume of work performed for a specific customer is likely to vary from year-to-year and project-to-project, especially since we are generally not the exclusive Android platform software and service solutions provider for our customers, some of our customers have in-house research and development capabilities and we do not have long-term purchase commitments from any of our customers. A major customer in one year may not provide the same level of net revenues for us in any subsequent year. The products we provide to our customers, and the net revenues and income from those products, may decline or vary as the type and quantity of products changes over time. In addition, reliance on any individual customer for a significant portion of our net revenues may give that customer a degree of pricing leverage when negotiating contracts and terms of service with us.

 

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In addition, a number of factors not within our control could cause the loss of, or reduction in, business or revenues from any customer, and these factors are not predictable. These factors include, among others, a customer’s decision to re-negotiate the royalty payment of a contract if the volume of unit sales exceeds original expectations, pricing pressure from competitors, a change in a customer’s business strategy, or failure of a mobile chipset manufacturer or mobile device OEM to develop competitive products. Our customers may also choose to pursue alternative technologies and develop alternative products in addition to, or in lieu of, our products, either on their own or in collaboration with others, including our competitors. The loss of any major customer or key project, or a significant decrease in the volume of customer demand or the price at which we sells our products to customers, could materially adversely affect our financial condition and results of operations.

 

We have expanded our product offerings in both our Connected Solutions BU and MVNO BU, and there can be no assurance that our efforts in these areas will be successful.

 

From our inception in 2007 through 2014, we have focused primarily on providing our Android+ software platform solutions to mobile chipset manufacturers, mobile device OEMs and mobile operators as well as complete product solutions of mobile connected devices for enterprise and consumer applications. In 2014, after acquiring Yuantel Investment, we entered into the MVNO business. As we continue to grow our business and markets, we will continue to increase our service product offerings in both our Connected Solutions BU and MVNO BU. However, the success of these new product offerings will depend on many factors, including timely and successful research and development, pricing, market and consumer acceptance of such new products and the product offerings of our competitors. If new product offerings are not successful, our revenue growth will suffer and our results of operations may be harmed. Further, we do not have significant experience in the MVNO business and cannot be assured that our investments in the development of our MVNO business will result in increased revenue.

 

We rely on a prominent mobile chipset manufacturer customer for a significant portion of our net revenues. Any deterioration of our relationship with this manufacturer, or any interruption to the ongoing collaboration with this customer may significantly harm our business, financial condition and results of operations.

 

We generate a significant portion of our revenue from a prominent chipset manufacturer, which beneficially owned 12.3% of our outstanding shares as of the date of this Report. We rely significantly on this customer from a strategic viewpoint since we scale products developed for this customer to deploy with mobile devices for OEM customers and devote a portion of our research and development resources accordingly. In 2014, 2015 and 2016, we generated 18%, 10.0% and 3.5% of our net revenues, respectively, from this customer. We anticipate that our dependence on this customer will continue for the foreseeable future. Consequently, various events could cause material fluctuations or declines in our net revenues or liquidity position and have a material adverse effect on our financial condition and results of operations:

 

this customer’s collaborations with our competitors;

 

reduced, delayed or canceled of contracts from this customer;

 

market success of this customer’s Android-based products; and

 

this customer’s decision to move product development in-house.

 

Although we have collaborated with this customer on various projects since 2010, there can be no assurance that this customer will continue working with us in the future, whether due to changes in management preferences, business strategy, corporate structure or other factors. Our failure to continue our collaboration with this customer would adversely affect our business, financial conditions and results of operations.

 

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We provide mobile communication services as a mobile virtue network operator in China. The current license to operate such services is based on a government issued extension of a trial license that originally would have expired on December 31, 2015. If we cannot obtain a renewed license or the current extension is terminated, we will need to cease this operation and our total revenues will be significantly reduced.

 

Our MVNO BU contributed 4.6%, 26.6% and 29.1% of our net revenues in 2014, 2015 and 2016, respectively, and we are currently one of the top MVNO businesses in China, as measured in terms of registered subscribers.

 

The ability of MVNOs to provide mobile communication services in China is based on trial licenses granted by the Ministry of Industry & Information Technology of China, or MIIT, under the mobile virtue network trial program initiated by the MIIT in 2013 to implement the Chinese State Council’s encouragement of private investments in various industries, including telecommunication industry. The trial program and all trails licenses issued thereunder, including our own, were originally set to expire as of December 31, 2015. According to the trial program policies issued by the MIIT, the MIIT will work on formalizing commercial policies regarding the operation of MVNO based on the development of the trial program. On December 28, 2015, the MIIT issued a notice stating that while the government is “diligently researching and determining the formal commercial policies regarding the operation of MVNO, the temporary licenses issued continue to allow MVNO enterprises to operate, and the base telecommunication enterprises shall continue to provide cooperation, support and maintenance services”, as translated from the MIIT’s notice. There has been no other announcement to date regarding the timing of the formalize policies, or the granting of official licenses, or changes to the current extension to operate. All MVNOs in China, including us, will continue to operate and provide mobile communication services for subscribers based on the trial licenses.

 

Although it is a common belief among MVNOs in China that since the MVNO business in China was initiated by the current Chinese administration and has gained a large number of subscribers during the trial program, the continuation of MVNO operation will be supported by the Chinese administration, there is no guarantee that the Chinese government or the MIIT will not terminate MVNO operation. If we cannot obtain a renewed license or the current extension is terminated, we will be forced to cease this operation, our total revenues will be significantly reduced and our investment into this business will be completely lost.

 

Failure to complete real-name registration of all users of our MVNO services could subject us to penalties, damage our reputation and brand, and harm our business and results of operations.

 

Chinese laws require telecommunication business operators to verify and register real names and identification information of users of mobile phones. For example, in September 2016, the MIIT and certain other governmental departments issued the Notice regarding Prevention of and Cracking Down Telecommunication or Online Frauds to emphasize the real-name registration requirements and to further require telecommunication business operators, including MVNOs, to complete the real-name registration for all of their existing users by end of 2016. In August 2016 and February 2017, we were warned by the MIIT for our failure to strictly comply with the real-name registration requirement. We have since rectified such failure in accordance with the MIIT’s requirements and have also established internal policies and required all our staff to strictly comply with the real-name registration requirements for new users. However, we cannot assure you that all our staff will strictly implement our internal policies or that all users will provide authentic information to us. If we are found by the authorities not to comply with the real-name registration requirement, we may be subject to penalties, or be required to suspend or terminate our MVNO business. In addition, complying with these laws and regulations could cause us to incur substantial costs.

 

PRC laws and regulations governing our businesses and the validity of certain of our contractual arrangements are uncertain. If we are found to be in violation, we could be subject to sanctions. In addition, changes in PRC laws and regulations or changes in interpretations thereof may materially and adversely affect our business.

 

The PRC government restricts or imposes conditions on foreign investment in telecommunication business. We and our PRC subsidiaries are considered foreign persons or foreign-invested enterprises under PRC foreign investment related laws. As a result, we are subject to PRC legal restrictions on or conditions for foreign ownership of telecommunication business. Due to these restrictions and conditions, we conduct our MVNO business in China through BC-NW, our variable interest entity and the subsidiaries of BC-NW. As all the registered shareholders of BC-NW are PRC citizens and all other shareholders of the subsidiaries of BC-NW are also PRC citizens or PRC domestic enterprises, BC-NW and our subsidiaries are therefore considered PRC domestic enterprises under PRC law. The “registered shareholders” of BC-NW refer to those shareholders who have pledged their equity interest in BC-NW to WFOE and entered into exclusive option agreements with WFOE as part of the contractual arrangements. Our contractual arrangements with BC-NW and the registered shareholders of BC-NW allow it to have the power to direct the activities of BC-NW and our subsidiaries that most significantly impact economic performance.

 

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There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing the MVNO business, or the enforcement and performance of our contractual arrangements with BC-NW. These laws and regulations may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.

 

Although we believe we are in compliance with current PRC laws and regulations, we cannot assure you that the PRC government would agree that our contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. The PRC government has broad discretion in determining penalties for violations of laws and regulations. If the PRC government determines that we do not comply with applicable law, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, block our websites, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us that could be harmful to our business. Any of these or similar occurrences could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations. If any of these occurrences results in our inability to direct the activities of any of our consolidated affiliated entities that most significantly impact our economic performance, and/or our failure to receive the economic benefits from any of our consolidated affiliated entities, we may not be able to consolidate such entity in our consolidated financial statements in accordance with U.S. GAAP.

 

We operate in a rapidly evolving industry. If we fail to keep up with technological developments and changing requirements of our customers, business, financial condition and results of operations may be materially and adversely affected.

 

The mobile industry is rapidly evolving and subject to continuous technological developments. Our success depends on our ability to keep up with these technological developments and the resulting changes in customers’ demands. There may also be changes in the industry landscape as different types of platforms compete with one another for market share. If we do not adapt our Android+ software and service platform solutions to such changes in an effective and timely manner as more mobile operating system platforms become available in the future, we may suffer a loss in market share. Given that we operate in a rapidly evolving industry, we also need to continuously invest significant resources in research and development in order to enhance our existing products and to respond to changes in customer preference, new challenges and industry changes in a timely and effective manner. If we fail to keep up with technological developments and continue to innovate to meet the needs of our customers, our Android+ software and service platform solutions may become less attractive to customers, which in turn may adversely affect our reputation, competitiveness, results of operations and prospects.

 

We face intense competition from onshore and offshore third party software providers in the Android platform and software market, and, if we are unable to compete effectively, it may lose customers and our revenues may decline.

 

The Android platform and software market is highly fragmented and competitive, and we expect competition to persist and intensify from both existing competitors and new market entrants. We believe that the principal competitive factors in our industry are reliability and efficiency, performance, product features and functionality, development complexity and time-to-market, price, support for multiple architectures and processors, interoperability with other systems, support for emerging industry and customer standards and protocols and levels of training, technical services and customer support.

 

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Our business model is to provide a full suite of Android+ software and service platform solutions to a broad range of customers, including mobile chipset manufacturers, mobile device OEMs and mobile operators. As of the date of this Report, we are not aware of any significant independent competitor that provides a full range of Android platform software and service solutions as we do to the range of customers it has, although we have a number of competitors that provide one or several Android platform software and/or service solutions to one or more of our range of customers. See “Business — Competition.”

 

In addition, we face competition from companies seeking to compete with the Android platform by developing their own operating systems, such as Baidu and Alibaba in China, and major mobile device OEMs, such as Foxconn Technology Group and BYD Electronic (International) Company Limited, which are able to develop low-level software for mobile chipsets, as well as Huawei, GTE and Xiaomi.

 

We believe that we presently compete favorably with respect to each segment identified above. However, the market for Android platform software and service solutions is still rapidly evolving, and we may not be able to compete successfully against current and potential competitors in the future. In addition, some of our independent competitors are more focused on one or several particular segments of the value chain and may deliver better services in those segments than we do. Furthermore, some of our competitors may have significantly greater financial, technical, marketing, sales and other resources and significantly greater name recognition than we have. If we are unable to compete successfully on the principal competitive factors described above or otherwise, our business could be harmed.

 

As an MVNO, we face intense competition in the wireless communications market and if we cannot compete effectively our revenues, profits, cash flows and growth may be adversely affected.

 

The wireless communications market is extremely competitive, and competition for customers is increasing. We compete with other MVNOs such as Snail Mobile, d.Mobile and Soshare. We are one of the top MVNOs in China as measured in terms of registered subscribers, and we intend to expand our market share organically or by acquiring smaller MVNOs. However, we continue to face intense competition from the dozens of other MVNOs and we may not be able to compete successfully in the future. In addition, continued consolidation in the industry creates even large competitors, and such competitors may have greater financial, technical, personnel and marketing resources and a larger market share than us, and we may not be able to compete successfully against them. If we are unable to compete successfully on the principal competitive factors described above or otherwise, our MVNO business could be harmed.

 

We may undertake acquisitions, investments, joint ventures or other strategic alliances in the future, which could expose us to new operational, regulatory and market risks. In addition, such undertakings may not be successful, which may adversely affect our business, results of operations, financial condition and prospects.

 

In connection with our growth strategy, we intend to grow both organically by expanding our current business lines and geographic coverage and through acquisitions, investments, joint ventures or other strategic alliances if the appropriate opportunities arise. These potential business plans, acquisitions, investments, joint ventures and strategic alliances may expose us to new operational, regulatory and market risks, as well as risks associated with additional capital requirements. In addition, we may not be able to identify suitable future acquisition or investment candidates or joint venture or alliance partners. Even if we identify suitable candidates or partners, we may be unable to complete an acquisition, investment or alliance on terms commercially acceptable to us. If we fail to identify appropriate candidates or partners, or complete desired acquisitions, investments or alliances, we may not be able to implement our strategies effectively or efficiently.

 

In addition, our ability to successfully integrate acquired companies and their operations may be adversely affected by a number of factors, including, among others, the ability to capitalize on anticipated synergies, diversion of resources and management’s attention, difficulties in retaining personnel of the acquired companies, unanticipated problems or legal liabilities and tax and accounting issues. If we fail to integrate any acquired company efficiently, our earnings, revenues, gross margins, operating margins and business operations could be adversely affected. The integration of acquired companies is a complex, time-consuming and expensive process.

 

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We are dependent upon the Android platform and, if Google determines to no longer develop the Android platform and our further development is not taken up by reliable alternative sources, our business could be materially harmed.

 

Our business model is dependent upon the Android platform, which is a free and fully open source mobile software platform developed by Google. The Android platform has been updated frequently since our original release and the development of the Android platform is an ongoing process which we do not control. If Google determines to no longer develop the Android platform or our further development is not taken up by reliable alternative sources, such as another third party or the open source community, demand for our Android+ software and service platform solutions could decline significantly and our revenue and financial condition could be materially harmed.

 

If our customers move more research and development work in-house, lower demand for our solutions could reduce our net revenues and harm our business.

 

Collaboration with customers is essential to the growth and profitability of our business. However, our customers may elect to move more research and development work in-house, and reduce collaboration with us for Android platform projects. There are many factors beyond our control that could cause our customers to move their work in-house, such as spending reductions due to a challenging economic environment, corporate restructuring, cost control, pricing pressure and concerns regarding the protection of technology know-how, trade secrets and other intellectual property rights. If our customers decide to change their strategy by moving more research and development work in-house, our net revenues may decline, and our business, financial condition and results of operations may be adversely affected.

 

Our limited operating history makes it difficult to evaluate our business, financial performance and prospects.

 

We were incorporated under the laws of the Cayman Islands in 2007 as Borqs International Holding Corp and have experienced rapid growth since then. This limited operating history may make it difficult to evaluate our business, financial performance and prospects. We may not have sufficient experience to address the risks frequently encountered by fast-growing companies entering new and rapidly evolving markets such as the Android platform and software market, which may increase the difficulty of evaluating our prospects. We incurred a net loss in 2014 of $8.1 million, and had net income of $0.8 million in 2015 and $2.6 million in 2016. There can be no assurance that we will continue to generate net income in future periods, and we may incur losses in the future. Due to our limited operating history, our historical growth may not be indicative of our future performance and may not be able to sustain our profitability. You should consider our prospects in light of the risks and uncertainties that fast-growing companies with a limited operating history may encounter or to which such companies may be exposed.

 

Most of our engagements with customers are for a specific project only and do not provide for subsequent engagements. If we are unable to generate a substantial number of new engagements for projects on a continuing basis, our business and results of operations will be adversely affected.

 

Our customers generally retain us on project-by-project basis in connection with specific projects rather than on a recurring basis under long-term contracts. Historically, a significant portion of our net revenues has been comprised of product fees. These revenues relate to one-time research and engineering work performed for customers. For 2014, 2015 and 2016, our net revenues from products fees were $17.2 million, $22.5 million and $14.9 million, respectively, representing 36.2%, 29.9% and 12.4% of total net revenues. Although a significant amount of our net revenues are generated from repeat business, which we define as revenues from a customer who also contributed to our revenues during the prior fiscal year, our engagements with our customers are typically for individual projects that are often on a non-exclusive, project-by-project basis. In addition, a majority of our customer contracts from which we generate product fees can be terminated by customers with or without cause. There are many factors outside of our control that might lead customers to terminate a contract or project with us, including, among others:

 

financial difficulties for our customers;

 

business going to our competitors or remaining in-house;

 

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unsuccessful launch of a product;

 

disclosure of core technology by a third party; and

 

mergers and acquisitions or significant corporate restructurings by our customers.

 

Furthermore, some of our customer contracts specify that if a change of control occurs during the term of the contract, the customer has the right to terminate the contract upon advance notice. If our customers terminate our contracts before completion or choose not to renew their contracts, our business, financial condition and results of operations may be materially and adversely affected.

 

Therefore, we have to continuously seek new engagements while our current engagements are being performed or are completed or terminated, and we are constantly seeking to expand our business with existing customers and secure new customers. If we are unable to generate a substantial number of new engagements on a continuing basis, our business and results of operations will be adversely affected.

 

Because of the characteristics of open source software, there are limited technology entry barriers into the Android platform and software market in which we compete, and it may be relatively easy for competitors, some of which may have greater resources than we have, to enter our markets and compete with us.

 

One of the characteristics of open source software is that anyone can modify and redistribute the existing open source software and use it to compete against us. Such competition can develop without the degree of overhead and lead time required by traditional proprietary software companies. It is possible for new competitors with greater resources than us to develop their own Android platform software and service solutions, potentially reducing the demand for, and putting pricing pressure on, our Android+ software and service platform solutions. In addition, some competitors make their open source software available for free download and use on an ad hoc basis, or may position their open source software as a loss leader in order to win customers. There can be no assurance that we will be able to compete successfully against current and future competitors or that competitive pressure and/or the availability of open source software will not result in price reductions, reduced operating margins and loss of market share, any of which could seriously harm our business.

 

Security and privacy breaches may expose us to liability and harm our reputation and business.

 

As part of our business we receive and process information about our employees, customers and partners, and we may store (or contract with third parties to store) our customers’ data. While we take security measures relating to our Android+ software and service platform solutions, specifically, and our operations, generally, those measures may not prevent security breaches that could harm our business. Advances in computer capabilities, inadequate technology or facility security measures or other factors may result in a compromise or breach of our systems and the data we store and process. Our security measures may be breached as a result of actions by third parties or employee error or malfeasance. A party who is able to circumvent our security measures or exploit inadequacies in our security measures, could, among other things, misappropriate proprietary information (including information about our employees, customers and partners and our customers’ information), cause the loss or disclosure of some or all of this information, cause interruptions in our operations or our customers’ or expose our customers to computer viruses or other disruptions or vulnerabilities. Any compromise of our systems or the data it stores or processes could result in a loss of confidence in the security of our Android+ software and service platform solutions, damage our reputation, disrupt our business, lead to legal liability and adversely affect our financial condition and results of operations. Moreover, a compromise of our systems could remain undetected for an extended period of time, exacerbating the impact of that compromise. Actual or perceived vulnerabilities may lead to claims against us by our customers, partners or other third parties, which could be material. While our customer agreements typically contain provisions that seek to limit our liability, there is no assurance these provisions will be enforceable and effective under applicable law. In addition, the cost and operational consequences of implementing further data protection measures could be significant.

 

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We are vulnerable to technology infrastructure failures, which could harm our reputation and business.

 

We rely on our technology infrastructure for many functions, including selling our Android+ software and service platform solutions, supporting our customers and billing, collecting and making payments. We also rely on our own technology infrastructure, which is located on a third party site, as well as the technology infrastructure of third parties, to provide some of our back-end services. This technology infrastructure may be vulnerable to damage or interruption from natural disasters, power loss, telecommunication failures, terrorist attacks, computer intrusions and viruses, software errors, computer denial-of-service attacks and other events. A significant number of the systems making up this infrastructure are not redundant, and our disaster recovery planning is not sufficient for every eventuality. This technology infrastructure is also subject to break-ins, sabotage and intentional acts of vandalism by internal employees, contractors and third parties. Despite any precautions we or our third-party partners may take, such problems could result in, among other consequences, interruptions in our services and loss of data, which could harm our reputation, business and financial condition. We do not carry business interruption insurance sufficient to protect us from all losses that may result from interruptions in our services as a result of technology infrastructure failures or to cover all contingencies. Any interruption in the availability of our websites and on-line interactions with customers and partners would create a large volume of questions and complaints that would need to be addressed by our support personnel. If our support personnel cannot meet this demand, customer and partner satisfaction levels may fall, which in turn could cause additional claims, reduced revenue, reputation damage or loss of customers.

 

We may not be able to continue to use or adequately protect our intellectual property rights, which could harm our business reputation and competitive position.

 

Although Android is an open source mobile software platform for mobile devices, we are not required to share the source code for our Android software, which we have invested significant resources to develop. Accordingly, we believe that patents, trademarks, trade secrets, copyright, software registration and other intellectual property we use are important to our business. We rely on a combination of patent, trademark, copyright, software registration and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property and brand name. Any failure by us to maintain or protect our intellectual property rights, including any unauthorized use of our intellectual property by third parties or use of “Borqs” as a company name to conduct software or services business, may adversely affect our current and future revenues and our reputation.

 

In addition, the validity, enforceability and scope of protection available under intellectual property laws with respect to the mobile and Internet industries in China, where a significant part of our business and operations are located, are uncertain and still evolving. Implementation and enforcement of PRC intellectual property-related laws have historically been deficient, ineffective and hampered by corruption and local protectionism. Accordingly, protection of intellectual property rights in China may not be as effective as in the United States or other countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.

 

We also may be required to enter into license agreements with certain third parties to use their intellectual property for our business operations. If such third parties fail to perform under these license agreements or if the agreements are terminated for any reason, our business and results of operations may be negatively impacted. Furthermore, if we are deemed to be using third parties’ intellectual property without due authorization, we may become subject to legal proceedings or sanctions, which may be time-consuming and costly to defend, divert management attention and resources or require us to enter into licensing agreements, which may not be available on commercial terms, or at all.

 

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The international nature of our business exposes it to risks that could adversely affect our financial condition and results of operations.

 

We conduct our business throughout the world in multiple locations. Our corporate structure also spans multiple jurisdictions, with our parent holding company incorporated in the British Virgin Islands and intermediate and operating subsidiaries incorporated in China, Hong Kong, India, Brazil, Japan and South Korea. In addition, one of our growth strategies is to further expand our business in Europe and into the United States. As a result, we are exposed to risks typically associated with conducting business internationally, many of which are beyond our control. These risks include, among others:

 

significant currency fluctuations between the Renminbi and the U.S. dollar and other currencies in which we transact business;

 

difficulty in identifying appropriate mobile chipset manufacturers, mobile device OEMs, mobile operators and/or joint venture partners, and establishing and maintaining good relationships with them;

 

legal uncertainty owing to the overlap and inconsistencies of different legal regimes, problems in asserting contractual or other rights across international borders and the burden and expense of complying with the laws and regulations of various jurisdictions;

 

potentially adverse tax consequences, such as scrutiny of transfer pricing arrangements by authorities in the countries in which we operate;

 

adverse effect of inflation and increase in labor costs;

 

current and future tariffs and other trade barriers, including restrictions on technology and data transfers;

 

general global economic downturn;

 

unexpected changes in political environment and regulatory requirements; and

 

terrorist attacks and other acts of violence or war.

 

The occurrence of any of these events could have a material adverse effect on our results of operations and financial condition.

 

Furthermore, we are in the process of implementing policies and procedures designed to facilitate compliance with laws and regulations in various jurisdictions applicable to us, but there can be no assurance that our employees, contractors or agents will not violate such laws and regulations or our policies. Any such violations could, individually or in the aggregate, materially and adversely affect our financial condition and operating results.

 

We may not be able to manage our anticipated growth and our current and planned resources may not be adequate to support our expanding operations; consequently, our business, results of operations and prospects may be materially and adversely affected.

 

We have experienced rapid growth since we commenced operations. Our rapid expansion may expose us to new challenges and risks. To manage the further expansion of our business and the growth of our operations and personnel, we need to continuously expand and enhance our infrastructure and technology, and improve our operational and financial systems and procedures and controls. For example, we currently manage all of our human resources functions manually and expect that we will need to upgrade our current system as we continue to increase our headcount. We also need to expand, train and manage our growing employee base. In addition, our management will be required to obtain, maintain or expand relationships with mobile chipset manufacturers, mobile device OEMs and mobile operators, as well as other third-party business partners. We cannot assure you that our current and planned personnel, infrastructure, systems, procedures and controls will be adequate to support our expanding operations. If we fail to manage our expansion effectively, our business, results of operations and prospects may be materially and adversely affected.

 

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Due to intense competition for highly skilled personnel, we may fail to attract and retain qualified personnel to support our research and development operations; as a result, our ability to bid for and obtain new projects may be adversely affected and our net revenues could decline.

 

The mobile industry relies on the talents and efforts of highly skilled personnel, and our success depends to a significant extent on our ability to recruit, train, develop, retain and motivate qualified personnel for all areas of our organization. The mobile industry in China has experienced significant levels of employee attrition. Our attrition rates were 19% in 2014, 18% in 2015, and 12% in 2016. We may encounter higher attrition rates in the future, particularly if the mobile industry continues to experience strong growth.

 

Competition in our industry for qualified employees, especially technical employees, is intense, and our competitors directly target our employees from time to time. We have also experienced employees leaving us to start competing businesses or to join the in-house research and development teams of our customers. The loss of the technical knowledge and industry expertise of any of these individuals could seriously impede our success. Moreover, the loss of these individuals, particularly to a competitor, some of which are in a position to offer greater compensation, and any resulting loss of customers or trade secrets and technological expertise could further lead to a reduction in our market share and adversely affect our business. If we are required to increase the compensation payable to our qualified employees to compete with certain competitors with greater resources than we have or to discourage employees from leaving us to start competing businesses, our operating expenses will increase which, in turn, will adversely affect our results or operations.

 

Our success depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.

 

Our future success heavily depends upon the continued services of our senior executives and other key employees. In particular, we rely on the expertise, experience, customer relationships and reputation of Pat Chan, our founder, chairman and chief executive officer. We currently do not maintain key man life insurance for any of the senior members of our management team or other key employees. If one or more of our senior executives or key employees are unable or unwilling to continue in their present positions, it could disrupt our business operations, and we may not be able to replace them easily or at all. In addition, competition for senior executives and key employees in our industry is intense, and we may be unable to retain our senior executives and key employees or attract and retain new senior executive and key employees in the future, in which case our business may be severely disrupted, and our financial condition and results of operations may be materially and adversely affected.

 

If any of our senior executives or key employees joins a competitor or forms a competing company, it may lose customers, know-how and other key employees and staff members to them. Also, if any of our business development managers, who generally keep a close relationship with our customers, joins a competitor or forms a competing company, we may lose customers, and our net revenues may be materially and adversely affected. Additionally, there could be unauthorized disclosure or use of our technical knowledge, practices or procedures by such employees. All of our executives and key employees have entered into employment agreements with us that contain non-competition provisions, non-solicitation and nondisclosure covenants. However, if any dispute arises between our executive officers or key employees and us, such non-competition, non-solicitation and nondisclosure provisions might not provide effective protection to us, especially in China, where most of these executive officers and key employees reside, in light of the uncertainties with China’s legal system. See “Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could harm us.”

 

A significant majority of our outstanding ordinary shares are held by a small number of shareholders, which may have significantly greater influence on us due to the size of their shareholdings relative to other shareholders.

 

As of the date of this Report, Asset Horizon International Limited, Keytone Ventures, L.P., Norwest Venture Partners X, L.P., GSR Ventures II, L.P. and our affiliates, and Intel Capital Corporation beneficially own approximately 10.7%, 9.8%, 10.8%, 8.4% and 12.3%, respectively, of the outstanding ordinary shares of the Company. These major shareholders have significant influence in determining the outcome of any corporate transactions or other matters submitted to our shareholders for approval, including mergers, consolidations and schemes of arrangement, election and removal of directors and other significant corporate actions. They may not act in our best interests or our minority shareholders’ interests. In addition, without the consent of these major shareholders, we could be prevented from entering into transactions that could be beneficial to us. This concentration of ownership may also discourage, delay or prevent a change in control, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ordinary shares. These actions may be taken even if they are opposed by our other shareholders.

 

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In the course of preparing our consolidated financial statements, we identified material weaknesses, significant deficiencies and other deficiencies in our internal control over financial reporting.

 

Prior to the Business Combination, we have been a private company with limited accounting personnel and other resources with which to address our internal controls and procedures for financial reporting. We identified material weaknesses, significant deficiencies and other deficiencies in our internal control over financial reporting, and are in the process of implementing remedial steps to improve our internal control over financial reporting. If we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting. Moreover, effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important to help prevent fraud. If we fail to maintain effective internal control over financial reporting, investors could lost confidence in the reliability of our financial statements, which could harm our business and the trading price of our ordinary shares. In addition, we anticipate that we will incur considerable costs and devote significant management time and efforts and other resources to our efforts to maintain effective internal control over financial reporting.

 

If we fail to maintain effective internal control over financial reporting, we may not be able to accurately and timely report our financial results or prevent fraud, and investor confidence and the market price of our ordinary shares may be adversely impacted.

 

We are subject to the reporting requirements of the Sarbanes-Oxley Act. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which could have a negative effect on the trading price of our ordinary shares.

 

In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq Capital Market. We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. We will be required to provide an annual management report on the effectiveness of our internal control over financial reporting in our 2017 annual report on Form 10-K or Form 20-F.

 

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed, or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and operating results and could cause a decline in the price of our ordinary shares.

 

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We could be an emerging growth company for up to five full fiscal years following the date of Pacific’s initial public offering, although circumstances could cause us to lose that status earlier, including if the market value of our ordinary shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31.

 

We are subject to, and therefore may be exposed to liability risk under, various anti-corruption and anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and PRC and Indian anti-corruption and anti-bribery laws; any determination that we have violated such laws could damage our business and reputation, limit our ability to bid for certain business opportunities, and subject us to significant criminal and civil penalties, civil litigation (such as shareholder derivative suits), and commercial liabilities.

 

We are subject to anti-corruption and anti-bribery laws in the United States, United Kingdom, China, and India that prohibit certain improper payments made directly or indirectly to government departments, agencies, and instrumentalities; officials of those government departments, agencies, and instrumentalities; political parties and their officials; candidates for political office; officials of public international organizations; persons acting on behalf of the foregoing; and commercial counterparties. These laws include the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act 2010, the PRC Criminal Law, the PRC Anti-Unfair Competition Law, the Indian Prevention of Corruption Act 1988, the Indian Penal Code and anti-corruption laws in various Indian states.

 

We are engaged in business in a number of countries that are regarded as posing significant risks of corruption. Of particular note, we conduct operations, have agreements with state-controlled enterprises and other third parties and make sales in the PRC, and we have research and development activities in India, each of which may be exposed to corruption risk. It is our policy to implement safeguards and procedures to prohibit these practices by our employees, officers, directors, or by third parties acting on our behalf. However, we cannot rule out the risk that any of our employees, officers, directors, or third parties acting on our behalf may engage in breaches of our policies or anti-corruption laws, for which we might be held responsible.

 

Allegations of violations of these anti-corruption and anti-bribery laws, and investigation into such allegations, could negatively affect our reputation, business, operating results, and financial condition. The violation of these laws may result in substantial monetary and even criminal sanctions, follow-on civil litigation (such as shareholder derivative suits), and monitoring of our compliance program by the United States or other governments, each of which could negatively affect our reputation, business, operating results, and financial condition. In addition, the United States or other governments may seek to hold us liable for violations of these laws committed by companies in which we invest or acquire.

 

There can be no assurance that our ordinary shares and warrants will continue to be so listed on Nasdaq or, if listed, that we will be able to comply with the continued listing standards of Nasdaq.

 

To continue listing the Company’s securities on the Nasdaq Capital Market, we will be required to demonstrate compliance with Nasdaq’s initial listing standards, which are more rigorous than Nasdaq’s continued listing requirements. For instance, the Company must maintain a minimum number of holders (300 round-lot holders). The Company cannot assure you that we will be able to meet those initial listing standards.

 

If the Nasdaq Capital Market delists the Company’s ordinary shares or warrants from trading on its exchange due to our failure to meet the Nasdaq Capital Market’s initial and/or continued listing standards, we and our securityholders could face significant material adverse consequences including:

 

a limited availability of market quotations for our securities;

 

a determination that our ordinary shares are a “penny stock,” which will require brokers trading in our ordinary shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our ordinary shares;

 

a limited amount of analyst coverage; and

 

a decreased ability to issue additional securities or obtain additional financing in the future.

 

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Risks Related to Doing Business in China

 

China’s economic, political and social conditions, as well as changes in any government policies, laws and regulations, could have a material adverse effect on our business.

 

A substantial portion of our operations are conducted in China, and a significant portion of our net revenues are derived from customers where the contracting entity is located in China. Accordingly, our business, financial condition, results of operations, prospects and certain transactions we may undertake are subject, to a significant extent, to economic, political and legal developments in China.

 

China’s economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past two to three decades, growth has been uneven, both geographically and among various sectors of the economy. Demand for our services and products depends, in large part, on economic conditions in China. Any slowdown in China’s economic growth may cause our potential customers to delay or cancel their plans to purchase our services and products, which in turn could reduce our net revenues.

 

Although China’s economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through allocating resources, controlling the incurrence and payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Changes in any of these policies, laws and regulations could adversely affect the economy in China and could have a material adverse effect on our business.

 

The PRC government has implemented various measures to encourage foreign investment and sustainable economic growth and to guide the allocation of financial and other resources, which have for the most part had a positive effect on our business and growth. However, we cannot assure you that the PRC government will not repeal or alter these measures or introduce new measures that will have a negative effect on us. China’s social and political conditions may also not be as stable as those of the United States and other developed countries. Any sudden changes to China’s political system or the occurrence of widespread social unrest could have a material adverse effect on our business and results of operations.

 

Uncertainties with respect to the PRC legal system could harm us.

 

Our operations in China are governed by PRC government laws and regulations. The PRC legal system is a civil law system based on written statutes. Unlike common law systems, prior court decisions have limited precedential value. Borqs Beijing is generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises, and our other wholly-owned subsidiaries in China may be subject to certain laws and regulations in connection with investments made by foreign-invested enterprises.

 

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently-enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Moreover, some regulatory requirements issued by certain PRC government authorities may not be consistently applied by other government authorities, including local government authorities, thus making strict compliance with all regulatory requirements impractical, or in some circumstances, impossible. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

 

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Our subsidiaries in China are subject to restrictions on making dividends and other payments to it or any other affiliated company.

 

We are a holding company and may rely on dividends paid by our PRC subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders to the extent we choose to do so, to service any debt it may incur and to pay our operating expenses. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our PRC subsidiaries are required to set aside at least 10% of our after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of our registered capital. Appropriations to the employee welfare funds are at the discretion of the board of directors of Borqs Beijing. These reserves are not distributable as cash dividends.

 

In addition, under the PRC Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008, dividends paid to us by our PRC subsidiaries are subject to withholding tax. Currently, the withholding tax rate is 10.0% (subject to reductions by the relevant tax treaties, if applicable).

 

Furthermore, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us.

 

To date, our PRC subsidiaries have not paid dividends to us out of their accumulated profits. In the future, we do not expect to receive dividends from our PRC subsidiaries because the accumulated profits of these PRC subsidiaries are expected to be used for their own business or expansions. Any limitation on the ability of our PRC subsidiaries to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.

 

The discontinuation of any of the preferential tax treatments currently available to our PRC subsidiaries could materially increase our tax liabilities.

 

Preferential tax treatments and incentives granted to our PRC subsidiaries by PRC governmental authorities are subject to review and may be adjusted or revoked at any time in the future. The discontinuation or revocation of any preferential tax treatments and incentives currently available to them will cause their effective tax rate to materially increase, which will decrease our net income and may adversely affect our financial condition and results of operations.

 

We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

 

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, or the SAT, on December 10, 2009 with retroactive effect from January 1, 2008, where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, the non-resident enterprise investor, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject to PRC withholding tax at the rate of up to 10%. In addition, the PRC resident enterprise may be required to provide necessary assistance to support the enforcement of Circular 698.

 

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On February 3, 2015, the SAT issued a Public Notice Regarding Certain Enterprise Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or Public Notice 7. Public Notice 7 has introduced a new tax regime that is significantly different from that under Circular 698. Public Notice 7 extends our tax jurisdiction to not only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, Public Notice 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. Public Notice 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may re-characterize such indirect transfer as a direct transfer of the equity interests in the PRC tax resident enterprise and other properties in China. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of up to 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

 

We face uncertainties with respect to the reporting and consequences of private equity financing transactions, share exchange or other transactions involving the transfer of our ordinary shares by investors that are non-PRC resident enterprises, or sale or purchase of shares in other non-PRC resident companies or other taxable assets by us. We and other non-resident enterprises in our group may be subject to filing obligations or being taxed if we and other non-resident enterprises affiliated with us are transferors in such transactions, and may be subject to withholding obligations if we and other non-resident enterprises affiliated with us are transferees in such transactions, under Circular 698 and Public Notice 7. For the transfer of shares in us by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under Circular 698 and Public Notice 7. As a result, we may be required to expend valuable resources to comply with Circular 698 and Public Notice 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that we and other non-resident enterprises affiliated with us should not be taxed under these circulars. The PRC tax authorities have the discretion under Circular 698 and Public Notice 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make adjustments to the taxable income of the transactions under Circular 698 and Public Notice 7, our income tax costs associated with such transactions will be increased in the event that we are a transferee of such transactions, which may have an adverse effect on our financial condition and results of operations. Heightened scrutiny over acquisition transactions by the PRC tax authorities may also have a negative impact on potential acquisitions we may pursue in the future.

 

It is unclear whether we will be considered a PRC “resident enterprise” under the EIT Law and, depending on the determination of our PRC “resident enterprise” status, we may be subject to 25.0% PRC enterprise income tax on our worldwide income, and holders of our ordinary shares may be subject to PRC withholding tax on dividends paid by us and gains realized on their transfer of our ordinary shares.

 

The EIT Law and our Implementing Regulations, both of which became effective on January 1, 2008, provide that enterprises established outside of China whose “ de facto management bodies” are located in China are considered “resident enterprises.” The Implementing Regulations of the EIT Law define the term “ de facto management bodies” as a body which substantially manages, or has control over the business, personnel, finance and assets of an enterprise. On April 22, 2009, the SAT issued the Notice Regarding Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. According to Circular 82, certain PRC-controlled enterprises will be classified as “resident enterprises” if all of the following conditions are met: (a) the senior management and core management departments in charge of our daily operations function have their presence mainly in the PRC; (b) our financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) our major assets, accounting books, company seals, and minutes and files of our board and shareholders’ meetings are located or kept in the PRC; and (d) more than half of the enterprise’s directors or senior management with voting rights habitually reside in the PRC. Further, the Administrative Measures of Enterprise Income Tax of Chinese controlled Offshore Incorporated Resident Enterprises (Trial), or Bulletin No. 45, took effect on September 1, 2011, and provides more guidance on the implementation of Circular 82. The State Administration of Taxation issued an amendment to Circular 82 delegating the authority to our provincial branches to determine whether a Chinese-controlled overseas-incorporated enterprise should be considered a PRC resident enterprise, in January 2014.

 

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Although Circular 82, our amendment and Bulletin No. 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the determining criteria set forth in Circular 82 and Bulletin No. 45 may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. Although we do not believe that our legal entities organized outside of the PRC constitute PRC resident enterprises, it is possible that the PRC tax authorities could reach a different conclusion.

 

If we are treated as a PRC “resident enterprise,” we will be subject to PRC enterprise income tax on our worldwide income, as well as PRC enterprise income tax reporting obligations. Our income such as interest on other non-PRC sourced income may be subject to PRC enterprise income tax at a rate of 25.0%. In addition, although under the EIT Law and our Implementing Rules dividends paid to us by our PRC subsidiaries would qualify as “tax-exempt income,” we cannot assure you that such dividends will not be subject to a 10.0% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes.

 

Furthermore, if we are considered a PRC resident enterprise under the EIT Law, shareholders who are deemed non-resident enterprises may be subject to the PRC enterprise income tax at the rate of 10% upon the dividends payable by us or upon any gains realized from the transfer of our ordinary shares, if such income is deemed derived from China, provided that (i) such foreign enterprise investor has no establishment or premises in China, or (ii) it has establishment or premises in China but our income derived from China has no real connection with such establishment or premises. If we are required under the EIT Law to withhold PRC income tax on our dividends payable to our non-PRC resident enterprise shareholders, or if any gains realized from the transfer of our ordinary shares by our non-PRC resident enterprise shareholders are subject to the PRC enterprise income tax, your investment in our ordinary shares could be materially and adversely affected.

 

In addition, if we are considered a PRC resident enterprise and relevant PRC tax authorities consider dividends we pay with respect to our shares and the gains realized from the transfer of our shares to be income derived from sources within the PRC, it is possible that such dividends and gains earned by non-resident individuals may be subject to PRC individual income tax at a rate of 20%. If we are required under PRC tax laws to withhold PRC income tax on dividends payable to our non-PRC investors that are non-resident individuals or if you are required to pay PRC income tax on the transfer of our ordinary shares, the value of your investment in our ordinary shares may be materially and adversely affected.

 

We may not be able to obtain certain treaty benefits on dividends paid by our PRC subsidiary to us through our Hong Kong Subsidiary.

 

Under the EIT Law, dividends generated from retained earnings after January 1, 2008 from a PRC company to a foreign parent company are subject to a withholding tax rate of 10.0% unless the foreign parent’s jurisdiction of incorporation has a tax treaty with China that provides for a preferential withholding arrangement. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income or the Hong Kong Tax Treaty, which became effective on December 8, 2006, a company incorporated in Hong Kong, such as Borqs Hong Kong, will be subject to withholding income tax at a rate of 5% on dividends it receives from our PRC subsidiary if it holds a 25.0% or more interest in that particular PRC subsidiary at all times within the 12-month period immediately preceding the distribution of dividends and be a “beneficial owner” of the dividends. However, the SAT promulgated a tax notice on October 27, 2009, or Circular 601, which provides that tax treaty benefits will be denied to “conduit” or shell companies without business substance, and a beneficial ownership analysis will be used based on a “substance-over-the-form” principle to determine whether or not to grant tax treaty benefits. On June 29, 2012, the SAT further issued the Announcement of the SAT regarding Recognition of “Beneficial Owner” under Tax Treaties, or Announcement 30, which provides that a comprehensive analysis should be made when determining the beneficial owner status based on various factors that supported by various types of documents including the articles of association, financial statements, records of cash movements, board meeting minutes, board resolutions, staffing and materials, relevant expenditures, functions and risk assumption as well as relevant contracts and other information. In August 2015, the SAT promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties, or SAT Circular 60, which became effective on November 1, 2015. SAT Circular 60 provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises may, if they determine by self-assessment that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply for the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-filing examinations by the relevant tax authorities.

 

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As a result, although our PRC subsidiary, Borqs Beijing, is currently wholly owned by Borqs Hong Kong, we cannot assure you that we would be entitled to the tax treaty benefits and enjoy the favorable 5.0% rate applicable under the Hong Kong Tax on dividends. If Borqs Hong Kong cannot be recognized as the beneficial owner of the dividends to be paid by our PRC subsidiaries to us, such dividends will be subject to a normal withholding tax of 10% as provided by the EIT Law.

 

Restrictions on currency exchange may limit our ability to receive and use our revenue effectively.

 

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive part of our revenue in Renminbi. Under our current corporate structure, our British Virgin Islands holding company primarily relies on dividend payments from our PRC and Hong Kong subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the SAFE, by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, accumulated after-tax profits generated from the operations of Borqs Beijing in China may be used to pay dividends to us. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE’s approval to use cash generated from the operations of our PRC subsidiaries to pay off any debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi. The PRC government may at our discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.

 

Fluctuations in the value of the RMB may have a material adverse effect on your investment.

 

The value of the RMB against the U.S. Dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. Dollar, and the RMB appreciated more than 20.0% against the U.S. Dollar over the following three years. However, the People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve policy goals. During the period between July 2008 and June 2010, the exchange rate between the RMB and the U.S. Dollar had been stable and traded within a narrow band. However, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. Dollar. Since June 2010, the Renminbi has fluctuated against the U.S. Dollar, at times significantly and unpredictably, and in recent months the RMB has depreciated significantly against the U.S. Dollar. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. Dollar in the future.

 

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Approximately half of our revenues and costs are denominated in RMB. Any significant revaluation of RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ordinary shares in U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would make any new RMB denominated investments or expenditures more costly to us, to the extent that it needs to convert U.S. dollars into RMB for such purposes. An appreciation of RMB against the U.S. dollar would also result in foreign currency translation losses for financial reporting purposes when we translate our U.S. dollar denominated financial assets into RMB, as RMB is our reporting currency. Conversely, a significant depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ordinary shares. Furthermore, a significant depreciation of the RMB against the U.S. dollar may have a material adverse impact on our cash flow in the event we need to convert our RMB into U.S. dollars to repay our U.S. dollar denominated payment obligations.

 

PRC regulations relating to the establishment of offshore holding companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

 

The SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-Trip Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies on October 26, 2005, or Circular 75, requiring PRC residents, including PRC resident individuals and PRC companies, to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies owned by such PRC residents, referred to in the notice as an “offshore special purpose vehicle.” The PRC resident individuals include not only PRC citizens, but also foreign natural persons who habitually reside in China due to economic interests. SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or Circular 37, on July 4, 2014, which replaced the Circular 75. Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in Circular 37 as a “special purpose vehicle.” Under Circular 37, a PRC resident who is a foreign nature person is not required to complete the registration if he/she uses assets outside China or equity interests in offshore entities to special purpose vehicles. The term “control” under Circular 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by the PRC residents in the offshore special purpose vehicles or PRC companies by such means as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. Circular 37 further requires amendment to the registration in the event of any changes with respect to the basic information of the special purpose vehicle, such as changes in a PRC resident individual shareholder, name or operation period; or any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. If the shareholders of the offshore holding company who are PRC residents do not complete their registration with the local SAFE branches, the PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to the offshore company, and the offshore company may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with SAFE registration and amendment requirements described above could result in liability under PRC law for evasion of applicable foreign exchange restrictions. On February 28, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or Circular 13, which became effective on June 1, 2015. In accordance with Circular 13, entities and individuals are required to apply for foreign exchange registration of foreign direct investment and overseas direct investment, including those required under the Circular 37, with qualified banks, instead of SAFE. The qualified banks, under the supervision of SAFE, directly examine the applications and conduct the registration.

 

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We requested all of our current shareholders and/or beneficial owners to disclose whether they or their shareholders or beneficial owners fall within the ambit of Circular 37 and Circular 13 and will urge relevant shareholders, upon learning they are PRC residents, to register with the local SAFE branch as required under Circular 37 and Circular 13. As of the date of this Report, we are aware that a few of our natural person shareholders who are not PRC citizens may otherwise be deemed as PRC residents pursuant to the definitions under the SAFE regulations, but we are not aware that any of them uses assets inside China or equity interest in PRC companies to invest in the Company. Before the issuance of Circular 37, we had attempted to submit applications to the Beijing branch of SAFE for such individual shareholders in accordance with Circular 75, but those applications were not accepted by the Beijing branch of SAFE because those individuals are not PRC citizens. After Circular 37 became effective, we understand these individuals are not required to conduct the registrations since they do not use assets within China or equity interests in PRC companies to invest in the Company. We cannot assure you, however, that the SAFE’s opinion will be the same as our opinion and all of these individuals can successfully complete required filings or updates on a timely manner, or at all in the event these individuals required to conduct the filings. Furthermore, as there is uncertainty concerning the reconciliation of the new regulations with other approval requirements, it is unclear how these regulations, and any further regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We can provide no assurance that we currently are, and we will in the future continue to be, fully informed of identities of all our shareholders or beneficial owners who are PRC residents, and we cannot provide any assurance that all of our shareholders and beneficial owners who are PRC residents will comply with our request to make, obtain or update any applicable registrations or comply with other requirements required by Circular 37 and Circular 13 or other related rules in a timely manner. Any failure or inability by any of our shareholders or beneficial owners who are PRC residents to comply with SAFE regulations may subject them to fines or other legal sanctions, such as potential liability for our PRC subsidiaries and, in some instances, for their legal representatives and other liable individuals, as well as restrictions on our ability to contribute additional capital into our PRC subsidiaries or our PRC subsidiaries’ ability to distribute dividends to, or obtain foreign-exchange-denominated loans from our offshore holding companies. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

 

Failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

 

In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital account. In January 2007, SAFE issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly-listed company. In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules, which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by SAFE in March 2007. Under these rules, PRC residents who participate in stock incentive plans in an overseas publicly-listed company are required to register with SAFE or our local branches and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly-listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of our participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes.

 

We and our PRC resident employees who participate in our employee stock incentive plans are subject to these regulations. If we or our PRC option grantees fail to comply with these regulations, we or our PRC option grantees may be subject to fines and other legal or administrative sanctions.

 

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PRC regulations establish complex procedures for some acquisitions conducted by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

 

The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, adopted by six PRC regulatory agencies in August 2006 and amended in June 2009, among other things, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. In addition, the Implementing Rules Concerning Security Review on the Mergers and Acquisitions by Foreign Investors of Domestic Enterprises, issued by the Ministry of Commerce in August 2011, specify that mergers and acquisitions by foreign investors involved in “an industry related to national security” are subject to strict review by the Ministry of Commerce, and prohibit any activities attempting to bypass such security review, including by structuring the transaction through a proxy or contractual control arrangement. We believe that our business is not in an industry related to national security, but it cannot preclude the possibility that the Ministry of Commerce or other government agencies may publish explanations contrary to our understanding or broaden the scope of such security reviews in the future, in which case our future acquisitions in the PRC, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited. Moreover, the Anti-Monopoly Law requires that the Ministry of Commerce be notified in advance of any concentration of undertaking if certain filing thresholds are triggered. We may grow our business in part by directly acquiring complementary businesses in China. Complying with the requirements of the laws and regulations mentioned above and other PRC regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share. Our ability to expand our business or maintain or expand our market share through future acquisitions would as such be materially and adversely affected.

 

Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

 

The Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The Ministry of Commerce is currently soliciting comments on this draft and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects.

 

Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company should be treated as a foreign-invested enterprise, or an FIE. According to the definition set forth in the draft Foreign Investment Law, FIEs refer to enterprises established in China pursuant to PRC law that are solely or partially invested by foreign investors. The draft Foreign Investment Law specifically provides that entities established in China (without direct foreign equity ownership) but “controlled” by foreign investors, through contract or trust for example, will be treated as FIEs. Once an entity falls within the definition of FIE, it may be subject to foreign investment “restrictions” or “prohibitions” set forth in a “negative list” to be separately issued by the State Council later. If an FIE proposes to conduct business in an industry subject to foreign investment “restrictions” in the “negative list,” the FIE must go through a market entry clearance by the Ministry of Commerce before being established. An FIE is prohibited from conducting business in an industry subject to foreign investment “prohibitions” in the “negative list”. However, an FIE, during the market entry clearance process, may apply in writing to be treated as a PRC domestic enterprise if its foreign investor(s) is/are ultimately “controlled” by PRC government authorities and its affiliates and/or PRC citizens. In this connection, “control” is broadly defined in the draft law to cover the following summarized categories: (i) holding 50% or more of the voting rights of the subject entity; (ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to exert material influence on the board, the shareholders’ meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operations, financial matters or other key aspects of business operations.

 

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The “variable interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. Under the draft Foreign Investment Law, variable interest entities that are controlled via contractual arrangement would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors. Therefore, for any companies with a VIE structure in an industry category that is included in the “negative list” as restricted industry, the VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC government authorities and its affiliates or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the variable interest entities will be treated as FIEs and any operation in the industry category on the “negative list” without market entry clearance may be considered as illegal.

 

The draft Foreign Investment Law has not taken a position on what actions shall be taken with respect to the existing companies with a VIE structure, whether or not these companies are controlled by Chinese parties, while it is soliciting comments from the public on this point. Moreover, it is uncertain whether the telecommunication business, in which our variable interest entity operates, will be subject to the foreign investment restrictions or prohibitions set forth in the “negative list” to be issued. If the enacted version of the Foreign Investment Law and the final “negative list” mandate further actions, such as Ministry of Commerce market entry clearance, to be completed by companies with existing VIE structure like us, we face uncertainties as to whether such clearance can be timely obtained, or at all.

 

The draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs.

 

Aside from investment implementation report and investment amendment report that are required at each investment and alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.

 

The enforcement of the labor laws and other labor-related regulations in the PRC may adversely affect our results of operations.

 

On June 29, 2007, the Standing Committee of the National People’s Congress of China enacted the Labor Contract Law, which became effective on January 1, 2008. The Labor Contract Law introduces specific provisions related to fixed-term employment contracts, part-time employment, probation, consultation with labor union and employee assemblies, employment without a written contract, dismissal of employees, severance, and collective bargaining, which together represent enhanced enforcement of labor laws and regulations. According to the Labor Contract Law, an employer is obliged to sign an unlimited-term labor contract with any employee who has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor contract that has already been entered into twice consecutively, the resulting contract must have an unlimited term, with certain exceptions. The employer must pay severance to an employee where a labor contract is terminated or expires, with certain exceptions. In addition, the government has continued to introduce various new labor-related regulations after the effectiveness of the Labor Contract Law. Among other things, it is required that that annual leave ranging from five to 15 days be made available to employees and that the employee be compensated for any untaken annual leave days in the amount of three times of the employee’s daily salary, subject to certain exceptions. As a result of these regulations designed to enhance labor protection and increasing labor costs in China, our labor costs have increased. In addition, as the interpretation and implementation of these new regulations are still evolving, we cannot assure you that our employment practice will at all times be deemed in compliance with the new regulations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigations, our business and results of operations may be adversely affected.

 

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Our failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.

 

Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations. Our failure to make contributions to various employee benefit plans and to comply with applicable PRC labor-related laws may subject them to late payment penalties. If we are subject to such penalties in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

 

If the custodians or authorized users of our controlling non-tangible assets, including corporate chops and seals, fail to fulfill their responsibilities or misappropriate or misuse those assets, our business and operations could be materially and adversely affected.

 

In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Under PRC law, legal documents for corporate transactions, including contracts and leases that our business relies upon, are executed using “corporate chops,” which are instruments that contain either the official seal of the signing entity or the signature of a legal representative whose designation is registered and filed with the State Administration for Industry and Commerce, or SAIC.

 

Our PRC subsidiaries generally execute legal documents with corporate chops. One or more of our corporate chops may be used to, among other things, execute commercial sales or purchase contracts, procurement contracts and office leases, open bank accounts, issue checks and to issue invoices. We believe that it has sufficient controls in place over access to and use of the chops. Our chops, or chops, including the chops at headquarters level and of each PRC subsidiary, are kept securely at our legal department under the direction of the executive officers at vice president level or higher. Use of chops requires proper approvals in accordance with our internal control procedures. The custodian at our legal department also maintains a log to keep a detailed record or each use of the chops.

 

However, we cannot assure you that unauthorized access to or use of those chops can be prevented. Our designated employees who hold the corporate chops could abuse their authority by, for example, binding us to contracts against our interests or intentions, which could result in economic harm, disruption or our operations or other damages to them as a result of any contractual obligations, or resulting disputes, that might arise. If the party contracting with us asserted that we did not act in good faith under such circumstances, then we could incur costs to nullify such contracts. Such corporate or legal action could involve significant time and resources, while distracting management from our operations. In addition, we may not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation if a transferee relies on the apparent authority of the representative and acts in good faith.

 

If a designated employee uses a chop in an effort to obtain control over one or more of our PRC subsidiaries, we would need to take legal action to seek the return of the applicable chop(s), apply for a new chop(s) with the relevant authorities or otherwise seek legal redress for the violation of their duties. During any period where we lose effective control of the corporate activities of one or more of our PRC subsidiaries as a result of such misuse or misappropriation, the business activities of the affected entity could be disrupted and we could lose the economic benefits of that aspect of our business. To the extent those chops are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and the operations of those entities could be significantly and adversely impacted.

 

The financial statements included in this Report are audited by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.

 

Our independent registered public accounting firm, as auditors of companies that are traded publicly in the United States and a firm registered with the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess our compliance with the laws of the United States and professional standards. Because our auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. In May 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by PCAOB, the China Securities Regulatory Commission, or the CSRC, or the Ministry of Finance in the United States and the PRC, respectively. PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.

 

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Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and our quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

 

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

 

Our contractual arrangements may not be as effective in providing control over the variable interest entity as direct ownership.

 

We rely on contractual arrangements with our variable interest entity to operate part of our businesses in China and other businesses in which foreign investment is restricted or prohibited. These contractual arrangements may not be as effective as direct ownership in providing us with control over our variable interest entity and our subsidiaries. If we had direct ownership of the variable interest entity, we would be able to exercise our rights as an equity holder directly to effect changes in the board of directors of the variable interest entity, which could effect changes at the management and operational level. Under our contractual arrangements, we may not be able to directly change the members of the board of directors of the variable interest entity and would have to rely on the variable interest entity and the variable interest entity equity holders to perform their obligations in order to exercise control over the variable interest entity. The variable interest entity equity holders may have conflicts of interest with us or our shareholders, and they may not act in the best interests of us or may not perform their obligations under these contracts. For example, our variable interest entity and our respective equity holders could breach their contractual arrangements with them by, among other things, failing to conduct their operations, including maintaining our websites and using our domain names and trademarks which the variable interest entity has exclusive rights to use, in an acceptable manner or taking other actions that are detrimental to our interests. Pursuant to the call option, we may replace the equity holders of the variable interest entity at any time pursuant to the contractual arrangements. However, if any equity holder is uncooperative and any dispute relating to these contracts or the replacement of the equity holders remains unresolved, we will have to enforce our rights under the contractual arrangements through the operations of PRC law and arbitral or judicial agencies, which may be costly and time-consuming and will be subject to uncertainties in the PRC legal system.

 

Any failure by our variable interest entity or our equity holders to perform their obligations under the contractual arrangements would have a material adverse effect on our business, financial condition and results of operations.

 

If our variable interest entity or our equity holders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. Although we have entered into exclusive option agreements in relation to the variable interest entity, which provide that we may exercise an option to acquire, or nominate a person to acquire, ownership of the equity in that entity to the extent permitted by applicable PRC laws, rules and regulations, the exercise of these call options is subject to the review and approval of the relevant PRC governmental authorities. We have also entered into share pledge agreements with respect to the variable interest entity to secure certain obligations of the variable interest entity or our equity holders to us under the contractual arrangements. However, the enforcement of such agreements through arbitral or judicial agencies may be costly and time-consuming and will be subject to uncertainties in the PRC legal system. Moreover, our remedies under the share pledge agreements are primarily intended to help it collect debts owed to us by the variable interest entity or the variable interest entity equity holders under the contractual arrangements and may not help us in acquiring the assets or equity of the variable interest entity.

 

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In addition, although the terms of the contractual arrangements provide that they will be binding on the successors of the variable interest entity equity holders, as those successors are not a party to the agreements, it is uncertain whether the successors in case of the death, bankruptcy or divorce of a variable interest entity equity holder will be subject to or will be willing to honor the obligations of such variable interest entity equity holder under the contractual arrangements. If the variable interest entity or our equity holder (or our successor), as applicable, fails to transfer the shares of the variable interest entity according to the respective exclusive option agreement or share pledge agreement, we would need to enforce our rights under the exclusive option agreement or share pledge agreement, which may be costly and time-consuming and may not be successful. The contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration or court proceedings in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. Moreover, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a variable interest entity should be interpreted or enforced under PRC law, and as a result it may be difficult to predict how an arbitration panel or court would view such contractual arrangements. As a result, uncertainties in the PRC legal system could limit our ability to enforce the contractual arrangements. Under PRC law, if the losing parties fail to carry out the arbitration awards or court judgments within a prescribed time limit, the prevailing parties may only enforce the arbitration awards or court judgments in PRC courts, which would require additional expense and delay. In the event we are unable to enforce the contractual arrangements, we may not be able to exert effective control over the variable interest entity and our subsidiaries, and our ability to conduct our business, as well as our financial condition and results of operations, may be materially and adversely affected.

 

We may lose the ability to use, or otherwise benefit from, the licenses, approvals and assets held by our variable interest entity, which could severely disrupt our business, render us unable to conduct some or all of our business operations and constrain our growth.

 

Although the significant majority of our revenues are generated, and the significant majority of our operational assets are held, by our wholly-foreign owned enterprises, which are our subsidiaries, our variable interest entity hold licenses and approvals and assets that are necessary for our business operations, as well as equity interests in a series of our portfolio companies, to which foreign investments are typically restricted or prohibited under applicable PRC law. The contractual arrangements contain terms that specifically obligate variable interest entity equity holders to ensure the valid existence of the variable interest entity and restrict the disposal of material assets of the variable interest entity. However, in the event the variable interest entity equity holders breach the terms of these contractual arrangements and voluntarily liquidate the variable interest entity or any of our subsidiary, or any of these entities declares bankruptcy and all or part of our assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to conduct some or all of our business operations or otherwise benefit from the assets held by the variable interest entity or our subsidiaries, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, if our variable interest entity undergoes a voluntary or involuntary liquidation proceeding, our equity holders or unrelated third-party creditors may claim rights to some or all of the assets of such variable interest entity, thereby hindering our ability to operate our business as well as constrain our growth.

 

The equity holders, directors and executive officers of the variable interest entity, as well as our employees who execute other strategic initiatives may have potential conflicts of interest with us.

 

PRC laws provide that a director and an executive officer owes a fiduciary duty to the company he or she directs or manages. The directors and executive officers of the variable interest entity must act in good faith and in the best interests of the variable interest entity and must not use their respective positions for personal gain. We control our variable interest entity through contractual arrangements and the business and operations of our variable interest entity are closely integrated with the business and operations of our subsidiaries. Nonetheless, conflicts of interests for these individuals may arise due to dual roles both as directors and executive officers of the variable interest entity and as our directors or employees, and may also arise due to dual roles both as variable interest entity equity holders and as our directors or employees. We cannot assure you that these individuals will always act in our best interests should any conflicts of interest arise, or that any conflicts of interest will always be resolved in our favor. Moreover, we also cannot assure you that these individuals will ensure that the variable interest entity will not breach the existing contractual arrangements. If we cannot resolve any such conflicts of interest or any related disputes, we would have to rely on legal proceedings to resolve these disputes and/or take enforcement action under the contractual arrangements. There is substantial uncertainty as to the outcome of any such legal proceedings.

 

The contractual arrangements with our variable interest entity may be subject to scrutiny by the PRC tax authorities. Any adjustment of related party transaction pricing could lead to additional taxes, and therefore substantially reduce our consolidated net income and the value of your investment.

 

The tax regime in China is rapidly evolving and there is significant uncertainty for taxpayers in China as PRC tax laws may be interpreted in significantly different ways. The PRC tax authorities may assert that we or our subsidiaries or the variable interest entity or their equity holders owe and/or are required to pay additional taxes on previous or future revenue or income. In particular, under applicable PRC laws, rules and regulations, arrangements and transactions among related parties, such as the contractual arrangements with our variable interest entity, may be subject to audit or challenge by the PRC tax authorities. If the PRC tax authorities determine that any contractual arrangements were not entered into on an arm’s length basis and therefore constitute a favorable transfer pricing, the PRC tax liabilities of the relevant subsidiaries and/or variable interest entity and/or variable interest entity equity holders could be increased, which could increase our overall tax liabilities. In addition, the PRC tax authorities may impose late payment interest. Our net income may be materially reduced if our tax liabilities increase.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read it in conjunction with the accompanying consolidated financial statements and the related notes filed hereafter as Exhibit 99.1. The discussion contains forward-looking statements that involve risks and uncertainties, such as statements of the Company’s future plans, objectives, expectations and intentions. The Company’s actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Report, particularly in “Risk Factors.”

 

Overview

 

Pursuant to the recently completed Business Combination, Borqs International became a wholly-owned subsidiary of the Company, with the Company adopting Borqs International and its consolidated subsidiaries’ businesses going forward and reporting Borqs International’s historical consolidated financial statements on future SEC filings as those of the continuing company, which was renamed Borqs Technologies, Inc. We refer to Borqs Technologies, Inc. and its consolidated subsidiaries and consolidated affiliates collectively as “we”, “us”, “our”, and “the Company.”

 

The Company is a global leader in software, development services and products providing customizable, differentiated and scalable Android-based smart connected devices and cloud service solutions and a leading provider of commercial grade Android platform software for mobile chipset manufacturers, mobile device OEMs and mobile operators, as well as complete product solutions of mobile connected devices for enterprise and consumer applications. In recent years, the Company has been awarded significant business contracts from Intel and Qualcomm, leading global chipset manufacturers.

 

The Company has two BUs, Connected Solutions and MVNO. The Connected Solutions BU develops wireless smart connected devices and cloud solutions; revenue from this BU is recognized as software revenue and hardware revenue. The MVNO BU operates a mobile virtual network in Mainland China that provides a full range of 2G/3G/4G mobile communication services at the consumer level.

 

The Connected Solutions BU works closely with chipset partners to develop new connected devices. The Company developed the reference Android software platform and hardware platform for Intel and Qualcomm phones and tablets. In February 2016 Qualcomm announced its planned business expansion for its next generation Qualcomm® Snapdragon™ Wear platform with the addition of new ecosystem partners, including the Company. The platform is targeted for next generation connected and tethered wearables, such as smartwatches, watches for children and elderly individuals, smart bands, smart eyewear and smart headsets. The availability of the state-of-the-art chipset functionalities from partners, combined with full service industrial design, hardware and software engineering and manufacturing management, opens exciting new possibilities for device manufacturers to accelerate the design, development and deployment of innovative connected devices.

 

The Company platform is built on the Android platform developed by Google and first released to the public in 2008. The Company was among the first to obtain the Android source code, and in 2008 the Company built an innovative technology platform used in the first deployment of Android-based mobile devices to support the TD-SCDMA network of China Mobile Communications Corporation, or China Mobile.

 

The Company provides Connected Solutions customers with customized, integrated, commercial grade Android platform software and service solutions to address vertical market segment needs through the targeted BorqsWare software platform solutions. The BorqsWare software platform consists of BorqsWare Client Software and BorqsWare Server Software. The BorqsWare Client Software platform consists of three major components: the latest commercial grade Android software that works with particular mobile chipsets, functionality enhancements of the open source Android software and mobile operator required services. Based on the BorqsWare Client Software platform, customers may require the Company to provide further customization based on their specific market needs. The BorqsWare Client Software platform has been used in Android phones, tablets, watches and various Internet-of-things, or IoT, devices. The BorqsWare Server Software platform consists of back-end server software that allows customers to develop their own mobile end-to-end services for their devices. The BorqsWare Server Software provides software necessary for upgrades, charging and various APIs that enhance the customers’ services. Based on BorqsWare Server Software service platform, customers may require us to provide further customization based on their specific needs.

 

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The MVNO BU provides a full range 2G/3G/4G voice and data services for general consumer usage and IoT devices, as well as traditional telecom services such as voice conferencing. The MVNO BU also acts as a sales and promotion channel for the products developed by the Connected Solutions BU. The Company believes that a key component of the sales of connected devices going forward is the bundling of those devices with a voice/data plan through its MVNO BU. The MVNO BU launched operations in the fourth quarter of 2014. The MVNO BU provides services throughout China. According to the MVNO Cooperative Office of the Regulatory Affairs Department of China Unicom (the incumbent mobile operator), the Company had 4.56 million registered subscribers as of December 31, 2016, making it the second largest MVNO in China.

 

The Connected Solutions BU has a global customer base covering core parts of the Android platform value chain, including mobile chipset manufacturers, mobile device OEMs and mobile operators. This BU represented 95.4%, 73.4%, 70.9%, 65% and 72.9% of the Company’s net revenues in 2014, 2015, 2016, and the three and six months ended June 30, 2017, respectively while the MVNO BU represented 4.6%, 26.6%, 29.1%, 34.9% and 27.1% of net revenues for the same periods. In 2014, 2015, 2016, and the six months ended June 30, 2017, the Company generated 66.7%, 62.1% 65.8%, 69.2%, respectively, of its net revenues from customers headquartered outside of China and 33.3%, 37.9%, 34.2%, 30.8%, respectively, of its net revenues from customers headquartered within China. As of July 2017, the Company has collaborated with six mobile chipset manufacturers and 29 mobile device OEMs to commercially launch Android based connected devices in 11 countries, and sales of connected devices with the BorqsWare software platform solutions are embedded in more than 10 million units worldwide.

 

The Company has dedicated significant resources to research and development, and it has research and development centers in Beijing, China and Bangalore, India. As of December 31, 2016, 403 of 565 full-time employees and contractors were technical professionals dedicated to platform research and development and product specific customization. Technical professionals have diverse backgrounds and experience gained through employment with leading mobile chipset designers and manufacturers, mobile device OEMs, internet content providers and other software and hardware enterprises.

 

The Company has achieved significant growth since inception. Net revenues increased from $47.5 million in 2014 to $75.1 million in 2015 and to $120.6 million in 2016. The Company recorded a net loss of $8.2 million in 2014, net income of $0.8 million in 2015 and net income of $2.6 million in 2016.

 

Key Factors Affecting Results of Operations

 

Revenue mix impacts the Company’s overall gross profit and gross margin. In particular,

 

Connected Solutions BU . Revenue from product sales is the largest component of Connected Solutions BU revenue. Product sales gross margin is primarily affected by competition, cost of components, and intellectual property royalties that the Company pays to patent licensors. Gross margin for engineering design fees and software royalties tends to be higher because the associated cost of revenues is less and pricing is less subject to competitive pressure. In addition, because product sales and software royalties are generally calculated on a per-unit basis, our revenue will vary depending upon the volume of product sales. Engineering design fees are generally not related to volume of product sales.
     
MVNO BU . Gross margin of the MVNO BU is affected by the wholesale rates the Company obtained from the incumbent operator, as well as the competition in the market. Over time, wholesale rates generally decline due to competition and newer technologies (e.g. 4G, 4.5G, and 4.75G).

 

Connected Solutions BU net revenues and gross profits are affected by general factors in the highly competitive mobile industry, such as shifts in consumer preferences and customer demands, technological innovations, competing mobile operating systems, and pricing trends. Results are also affected by developments in the Android platform and software market specifically, such as Google’s continued support of the Android platform, continued availability of a free and open source software license for that platform, continued deployment of the Android platform, and continued outsourcing of software development to third party providers. Unfavorable changes in any of these factors could affect market demand for BorqsWare software and service platform solutions and could materially and adversely affect the Company’s revenues and results of operations.

 

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Revenues and gross profit in the Connected Solutions BU is also affected by company-specific factors, including:

 

We rely on a limited number of customers for a significant portion of our net revenues, particularly our relationship with a customer that is a prominent mobile chipset manufacturer. We also rely on this customer from a strategic viewpoint, since products that we develop for this customer may also be scaled to other mobile device OEM customers. We devote a significant portion of our research and development resources to this effort. Our results of operations would be significantly harmed if our collaboration with this customer were to decline or its Android-related product development efforts were not successful.

 

Our ability to grow our net revenues depends on our ability to expand our customer base, both in terms of number of customers and geographic concentration, and increase the number of projects we undertake for existing and new customers. Our ability to do so depends on the success of our products and services and those of our customers, and on our marketing and sales performance.

 

Our ability to maintain our position as one of the largest independent Android platform software company will require us to continue to strengthen our technology expertise and capabilities by focusing our research and development to maintain technology leadership and offer advanced Android platform software and service solutions on our customers’ demanding timelines. In addition, our ability to grow our revenues will largely depend on how quickly we and our customers can roll out new products and services.

 

Competing successfully in the Android platform and software market requires us to maintain a competitive pricing structure, including labor costs and operating expenses. Competition for software engineers is intense, particularly in Mainland China and in India.

 

MVNO BU revenues and gross profit are affected by general factors in the mobile telecom industry in China, such as the voice/data pricing trends offered by other MVNOs and the incumbent operators. We enter into profit sharing arrangements with franchisees, under which franchisees receive a percentage of profits on sales of bundled services as they are used by the consumers. Profit sharing amounts are recognized as selling expenses, and limited discounts provided by franchisees to consumers are recognized as reductions of revenue in accordance with ASC 605-50. Competitive factors in voice/data pricing could affect the demand for our MVNO services and affect our mobile subscriber growth, which could materially and adversely affect our revenues and result of operations. MVNO BU revenues and gross profit are also directly affected by company specific factors, including:

 

The bulk wholesale rates for voice and data service. We rely on China Unicom, the incumbent operator, to provide us with attractive and competitive bulk wholesales rate of voice-per-minute and MB-of-data to compete with our competitors.

 

The Chinese government policy on MVNO services. We rely on China’s government to continue to grant us a license to operate the MVNO services.

 

Our cash amounts and short-term investments are not materially affected by currency fluctuations because the majority of the Company’s revenues are denominated in U.S. Dollars based on contracts made in Hong Kong and the Cayman Islands. Financings from sales of equity and working capital loans are denominated in U.S. Dollars and executed in Hong Kong and the Cayman Islands, and repayments have been made in U.S. Dollars outside of China, thus not requiring approval from the PRC State Administration of Foreign Exchange. The MVNO business, and small amounts of Connected Solutions BU activities within China, generate revenue in Renminbi. Personnel and personnel-related expenses are primarily paid in Renminbi, and costs of components used in Connected Solutions BU hardware revenues are primarily paid in U.S. Dollars. As of June 30, 2017, we held $3.5 million outside of China and our entities held RMB15.9 million and $0.6 million in China, totaling $6.5 million on a consolidated basis.

 

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Results of Operations

 

The following table sets forth a summary of the Company’s consolidated results of operations for the periods indicated. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere or incorporated by reference in this Report. The operating results in any period are not necessarily indicative of results that may be expected for any future period.

 

Comparisons of Fiscal Years Ended December 31, 2014, 2015 and 2016

 

    Fiscal Years Ended December 31,  
Consolidated Statement of Operations Data:   2014     2015     2016  
    ($ in thousands)  
Net revenues     47,488       75,072       120,586  
Cost of revenues     (35,647 )     (57,966 )     (94,292 )
Gross profit     11,841       17,106       26,294  
                         
Operating expenses     (20,359 )     (19,487 )     (22,814 )
Other operating income     648       3,094       1,760  
Operating (loss) income     (7,870 )     713       5,240  
                         
Other (expense) income     (107 )     933       15  
(Loss) profit before income taxes     (7,977 )     1,646       5,255  
                         
Income tax expense     (194 )     (851 )     (2,659 )
Net (loss) income     (8,171 )     795       2,596  
                         
Less: net loss attribute to noncontrolling interests     (510 )     (1,316 )     (632 )
Net (loss) income attribute to BORQS     (7,661 )     2,111       3,228  

 

We experienced a net loss of $8.2 million in 2014, a net profit of $0.8 million in 2015 and a net profit of $2.6 million in 2016. We experienced a loss in the MVNO BU in 2014, 2015 and 2016, and after recognizing adjustments for to the 25% non-controlling interest of the MVNO BU, we recognized net loss attributable to the Company of $7.7 million in 2014 and gains of $2.1 million and $3.2 million in 2015 and 2016, respectively. We expect that its net loss attributable to noncontrolling interests will decline as we grow our MVNO business.

 

Net Revenues

 

Our net revenues represent our gross revenues, less business taxes and other deductions. Connected Solutions BU net revenues consists of engineering design fees, software royalties and product sales. MVNO BU net revenues consists primarily of monthly recurring revenue.

 

For 2015, Connected Solutions BU net revenues was $55.1 million and net revenues from the MVNO BU was $20.0 million, compared to $45.3 million and $2.2 million in 2014, respectively. Connected Solutions BU net revenues increased 21.7% from 2014 to 2015. The increase in MVNO BU reflects the commencement of MVNO BU operations in the fourth quarter of 2014.

 

For 2016, Connected Solutions BU net revenues was $85.4 million and MVNO BU net revenues was $35.1 million, representing increases of 55.0% and 76.1% over 2015 respectively.

 

    For the year ended December 31,  
    2014     2015     2016  
    US$     %     US$     %     US$     %  
    ($ in thousands)  
Connected Solutions BU     45,280       95.4 %     55,115       73.4 %     85,448       70.9 %
MVNO BU     2,208       4.6 %     19,957       26.6 %     35,138       29.1 %
Net revenues     47,488       100.0 %     75,072       100.0 %     120,586       100.0 %

 

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The percentage of net revenues represented by MVNO BU increased from 4.6% in 2014 to 26.6% in 2015 and to 29.1% in 2016. These increases reflect the rapid growth of the MVNO BU.

 

The following table sets forth net revenues from customers based on location of the customer’s headquarters, both in absolute amount and as a percentage of net revenues. These figures do not take into account the geographic location of end-users of customer products:

 

    For the year ended December 31,  
    2014     2015     2016  
    US$     %     US$     %     US$     %  
    ($ in thousands)  
China     15,793       33.3 %     28,442       37.9 %     41,214       34.2 %
India     2,026       4.3 %     7,949       10.6 %     25,126       20.8 %
United States     20,237       42.6 %     14,978       20.0 %     34,526       28.6 %
Rest of the World     9,432       19.9 %     23,702       31.6 %     19,720       16.4 %
Net revenues     47,488       100.0 %     75,073       100.0 %     120,586       100.0 %

 

Our net revenues from U.S. customers are attributed to our ongoing collaboration with a prominent mobile chipset vendor and other mobile device OEMs. Revenue from the Company’s customers headquartered in the rest of the world reflect sales of our products to customers outside the U.S. Our revenues from customers in India started in the second half of 2016.

 

Net Revenues — Connected Solutions BU

 

Connected Solutions BU net revenues consists of engineering design fees, software royalties and product sales. MVNO BU net revenues consist primarily of monthly recurring revenue.

 

BorqsWare software platform solutions are based on the Company’s core proprietary software and include base chipset software supporting various radio network chipsets and application processors, commercial grade software to differentiate the Android platform for our customers and mobile operator required services. BorqsWare software platform solutions are embedded directly into connected devices. We generate revenues from our BorqsWare software platform solutions by charging our customers a product fee for project-based design contracts and/or a service fee for research and development services on a time and material basis, depending upon the nature of the contracts we entered into with our customers. In addition, we charge usage-based royalties in a majority of our project-based software contracts, which royalties are determined based on the customer’s volume of sales of products in which a mobile chipset or connected device with BorqsWare software platform solutions embedded.

 

As discussed more fully under “— Critical Accounting Policies and Estimates — Revenue Recognition — Project-Based Software Contracts,” the Company’s project-based software contracts include post-contract support, or PCS, where the customer has the right to receive unspecified upgrades/enhancements on a when-and-if available basis. Since we are unable to establish vendor-specific objective evidence of fair value of post contract services, or PCS, revenues from project-based software contracts are recognized on a straight-line basis over the longest expected delivery period of undelivered elements of the arrangement, which is typically the PCS period. Project-based software contracts that include PCS, which have a typical PCS period of 12 months, range from six to 36 months. As a result of this revenue recognition method, some portion of the net revenues we report in each period is recognition of deferred revenues from contracts entered into in prior periods and for which the research and development and engineering work has already been completed. In addition, a majority of the project-based software contracts provide for usage-based royalties. We recognize royalties upon the receipt of quarterly usage reports provided by customers.

 

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The following table sets forth the Company net revenues, as well as the components of such revenues, for the periods indicated, both in absolute amount and as a percentage of total net revenues:

 

    For the year ended December 31,  
    2014     2015     2016  
    US$     %     US$     %     US$     %  
    ($ in thousands)  
Software     17,222       38.0 %     22,468       40.8 %     14,912       17.5 %
Hardware     28,058       62.0 %     32,647       59.2 %     70,536       82.5 %
Connected Solutions BU net revenues     45,280       100.0 %     55,115       100.0 %     85,448       100.0 %

 

Software

 

Software net revenues was $17.2 million, $22.4 million and $14.9 million in 2014, 2015 and 2016, respectively, representing 38.0%, 40.8% and 17.5% of Connected Solutions BU net revenues. The $5.2 million increase in 2015 over 2014 mainly reflected increases in software engineering activities completed for customers in 2015 as well as the recognition of PCS delivered during 2015 for projects completed in 2014. We account for software engineering contracts applying the completed contract method, recognizing the entire software project fixed fees ratably over the PCS service periods. PCS service periods are generally 12 months, with ranges from six months to three years, and commences upon completion of customer acceptance of the completed software projects. The $7.5 million decline in software net revenues in 2016 from 2015 was mainly attributable to an overall decrease in software engineering project sales.

 

Hardware

 

Hardware net revenues were $28.1 million, $32.6 million and $70.5 million in 2014, 2015 and 2016, respectively, representing 62.0%, 59.2% and 82.5% of Connected Solutions BU net revenues. The $4.5 million increase in 2015 and the $37.9 million increase in 2016 reflected the increased volume of sales of products in those periods, particularly in tablets, ruggedized handsets, and high speed data smartphones and home entertainment remote controls.

 

All hardware sales were contracted and made to order, and our sales were final without taking returns. Small percentages of replacement units and parts were provided to customers and those costs were included in cost of revenues. We provide engineering design work as specified by our customers, and production begins after the customer accepts the design. We are responsible for procurement of all components, materials and tooling, and for selection of third-party factories for product assembly. Revenue is recognized when products are shipped to the customer. We are not engaged in the marketing and distribution of the hardware products.

 

Customer Concentration

 

We were initially focused on research and development efforts for providing BorqsWare software platform solutions to mobile device OEMs. We have since leveraged our deep technology expertise to provide BorqsWare software platform solutions to mobile chipset manufacturers and mobile operators. The following table sets forth net revenues by type of customer, both in absolute amount and as a percentage of net revenues for the periods presented:

 

    For the year ended December 31,  
    2014     2015     2016  
    US$     %     US$     %     US$     %  
    ($ in thousands)  
Mobile device OEMs     32,927       72.7 %     38,622       70.1 %     70,536       82.5 %
Mobile Chipset Vendors     9,899       21.9 %     14,491       26.3 %     14,912       17.5 %
Mobile Operators     2,454       5.4 %     2,002       3.6 %     0       0.0 %
Connected Solutions BU Net Revenues     45,280       100.0 %     55,115       100.0 %     85,448       100.0 %

 

We expect our net revenues from Mobile device OEMs to continue to grow as we develop more connected devices, especially IoT products.

 

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Geographic Concentration

 

The following table sets forth the Company net revenues from customers based on location of the customer’s headquarters, both in absolute amount and as a percentage of net revenues. These figures do not take into account the geographic location of end-users of customer products:

 

    For the year ended December 31,  
    2014     2015     2016  
    US$     %     US$     %     US$     %  
    ($ in thousands)  
China     13,619       30.1 %     8,609       15.6 %     6,224       7.3 %
India     0       0.0 %     0       0.0 %     25,091       29.4 %
United States     10,113       22.3 %     22,787       41.3 %     30,709       35.9 %
Rest of the World     21,548       47.6 %     23,719       43.0 %     23,424       27.4 %
Net Revenues     45,280       100.0 %     55,115       100.0 %     85,448       100.0 %

 

The Company net revenues from customers with headquarters in the United States are attributed to its ongoing collaboration with a prominent mobile chipset vendor and other mobile device OEMs. From 2015 to 2016, revenues from customers with headquarters in China declined slightly, and we engaged a significant new customer in India during the second half of 2016.

 

Net Revenues — MVNO BU

 

The MVNO BU provides a full range of 2G/3G/4G mobile communication services to consumers, as well as some traditional commercial telephony services. In 2014, the MVNO BU entered into a business agreement with China Unicom, the incumbent Mainland China mobile network operator to obtain bulk access to network services at wholesale rates in 2014. The MVNO BU has its own brand in Mainland China, “Yuantel.” MVNO BU net revenues, consisting of “MVNO” and “Other” revenues, are entirely from Mainland China. “Other” revenues are primarily related to traditional commercial telephony services, such as conference call services.

 

    For the year ended December 31,  
    2014     2015     2016  
    US$     %     US$     %     US$     %  
    ($ in thousands)  
MVNO     58       2.6 %     16,007       80.2 %     29,309       83.4 %
Other     2,150       97.4 %     3,950       19.8 %     5,829       16.6 %
MVNO BU net revenues     2,208       100.0 %     19,957       100.0 %     35,138       100.0 %

 

We started the MVNO services in late 2014 and experienced significant growth in our MVNO BU net revenues from 2014 to 2016, reflecting increasing sales of bundled services. We expect sales of MVNO services to increase at a slower rate in future periods while traditional commercial services revenues will remain stable.

 

Cost of Revenues

 

Cost of Connected Solutions BU revenues primarily consists of personnel and personnel-related costs associated with engineering projects paid for by customers, and costs of hardware components used to manufacture products. Cost of MVNO BU revenues primarily consists of wholesale traffic fees, paid to the incumbent operator, based on traffic consumed by subscribers to the MVNO network. The incumbent operator also charges us a minimum wholesale tariff based on the number of mobile phone numbers issued to the Company.

 

The following table sets forth cost of revenues, both in absolute amount and as a percentage of total cost of revenues, for Connected Solutions BU revenue and MVNO BU revenue:

 

    For the year ended December 31,  
    2014     2015     2016  
    US$     %     US$     %     US$     %  
    ($ in thousands)  
Connected Solutions BU     33,269       93.3 %     38,761       66.9 %     63,799       67.7 %
MVNO BU     2,378       6.7 %     19,205       33.1 %     30,493       32.3 %
Total Cost of Revenues     35,647       100.0 %     57,966       100.0 %     94,292       100.0 %

 

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Connected Solutions BU cost of revenues increased from $33.3 million in 2014 to $38.8 million in 2015 and $63.8 million in 2016. These increases were attributable to the similar trend of increases in our volume of hardware connected products sales during these years.

 

Cost of MVNO BU revenues increased from $2.4 million in 2014 to $19.2 million in 2015 and to $30.5 million in 2016, generally in line with the expansion of the MVNO BU over that period from the initiation of the MVNO BU in the second half of 2014. As MVNO BU revenue increases, the cost of revenue of the MVNO BU generally increases as well.

 

Gross Profit and Gross Margin

 

Gross profit represents net revenues less cost of revenues. Gross margin represents gross profit as a percentage of revenues.

 

The Company gross profits were $11.8 million in 2014, $17.1 million in 2015 and $26.3 million in 2016, with the breakdown between the Connected Solutions BU and MVNO BU as follows:

 

    For the year ended December 31,  
    2014     2015     2016  
    US$     %     US$     %     US$     %  
    (Gross Profit in thousands, Gross Margin in %)  
Connected Solutions BU     12,011       26.5 %     16,354       29.7 %     21,649       25.3 %
MVNO BU     (170 )     -7.7 %     752       3.8 %     4,645       13.2 %
Total     11,841       24.9 %     17,106       22.4 %     26,294       21.8 %

 

Connected Solutions BU gross margin was 27%, 30% and 25% for 2014, 2015 and 2016, respectively, while MVNO BU gross margin was nil, 4% and 13% for 2014, 2015 and 2016, respectively. MVNO BU gross margin was on an upward trend through 2016 as the MVNO business gradually gained economic scale after its launch in late 2014.

 

Connected Solutions BU gross profits include gross profits from software projects and gross profits from hardware projects. As shown in the following table, software gross profits remained relatively stable from 2014 through 2016, while hardware gross profits increased significantly as customers increasingly demanded a comprehensive solution including software design through final commercial product. Software gross profits increased in 2015 while software gross margin declined, reflecting fluctuation in design projects discussed below.

 

    For the year ended December 31,  
    2014     2015     2016  
    US$     %     US$     %     US$     %  
    (Gross Profit in thousands, Gross Margin in %)  
Software     8,256       47.9 %     9,808       43.7 %     8,565       57.4 %
Hardware     3,755       13.4 %     6,546       20.1 %     13,084       18.5 %
Total     12,011       26.5 %     16,354       29.7 %     21,649       25.3 %

 

Software projects are further categorized as design, royalty and service projects, reflecting the nature of the work:

 

Design projects consist primarily of non-recurring engineering fees for which we provide customized work according to our clients’ required functionalities and needs;

 

Royalty projects consist of per unit royalties based on customer usage of our previously completed software products; and

 

Service projects where our engineers perform engineering services following the instructions of the customers, charging them hourly fees on full time equivalent basis.

 

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The breakdown of gross profits and gross margins for these categories of software projects were as follows.

 

    For the year ended December 31,  
    2014     2015     2016  
    US$     %     US$     %     US$     %  
    (Gross Profit in thousands, Gross Margin in %)  
Design     7,028       51.5 %     8,247       40.0 %     6,735       56.0 %
Royalty     48       100.0 %     1,404       100.0 %     1,276       100.0 %
Service     1,180       33.5 %     157       34.9 %     554       34.5 %
Total     8,256       47.9 %     9,808       43.7 %     8,565       57.4 %

 

Gross margin for design work in 2015 declined due to the mix of projects that year, which included an order for a large chipset manufacturer that was competitively priced at a relatively lower margin. Otherwise the margins across the three software areas remained stable.

 

Operating Expenses

 

Our operating expenses principally consist of research and development expenses, selling and marketing expenses, and general and administrative expenses. The following table sets forth operating expenses for the periods indicated, both in absolute amount and as a percentage of net revenues:

 

    For the year ended December 31,  
    2014     2015     2016  
    US$     As % of Revenue     US$     As % of Revenue     US$     As % of Revenue  
    ($ in thousands)  
Research and development expenses     (11,743 )     24.7 %     (7,245 )     9.7 %     (6,886 )     5.7 %
Sales and marketing expenses     (4,419 )     9.3 %     (7,359 )     9.8 %     (5,874 )     4.9 %
General and administrative expenses     (4,197 )     8.8 %     (4,883 )     6.5 %     (10,042 )     8.3 %
Changes in fair value of warrant     0       0.0 %     0       0.0 %     (12 )     0.0 %
Total     (20,359 )     42.9 %     (19,487 )     26.0 %     (22,814 )     18.9 %

 

Research and Development Expenses

 

Research and development expenses include payroll, employee benefits and other headcount-related expenses associated with the development of the BorqsWare software platform, as well as outsourcing and third party service expenses. Research and development expenses also include rent, depreciation and other expenses for platform development and other projects that are not customer-specific.

 

Research and development expense decreased from 2014 to 2015 as some 2015 expenses were considered cost of revenue in 2014 because these expenses were related to projects directly paid by customers. In addition, in 2015, we were able to develop the software as a platform that can be reused across multiple products and projects, and some of the related research and development expense was capitalized. Such software platform is developed to be sold and the development cost was capitalized beginning when the technological feasibility was reached in accordance with ASC 985-20, Costs of Software to be Sold, Leased, or Marketed . In 2016, research and development expenses were relatively flat amounts but declined as a percentage of net revenues as net revenues increased.

 

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Selling and Marketing Expenses

 

Selling and marketing expenses include payroll, employee benefits and other expenses relating to our sales and marketing personnel, travel, rent and other expenses relating to our marketing activities, including entertainment and advertising. For the MVNO BU, we pay our franchisees commission to sell products, which are recognized as selling and marketing expenses.

 

Selling and marketing expenses increased from 2014 to 2015 mainly because of the franchisees commission of the MVNO BU. In 2015 and 2016, selling and marketing expenses decreased from 9.8% to 4.9% of net revenues due to higher revenue from hardware customers. We expect our selling and marketing expenses to increase in absolute terms as we expand our sales and marketing efforts, but decrease as a percentage of net revenues.

 

General and Administrative Expenses

 

Our general and administrative expenses include payroll, employee benefits, professional fees, rent, travel and other administrative costs.

 

General and administrative expenses slightly increased from 2014 to 2015 due to expenses to support the newly established MVNO BU. In 2015 and 2016, general and administrative expenses increased due to expenses associated with increased headcount to support the MVNO BU, and professional fees. From 2015 to 2016, these expenses increased from 6.5% to 8.1% of net revenues. We expect our general and administrative expenses to increase in absolute terms now that we are a public company and as we continue to grow, but to decrease over time as a percentage of net revenues as net revenues increase.

 

Other Operating Income

 

We received subsidies from local government authorities as financial support for certain technology development projects. These subsidies are classified as “Other operating income”. We recognized $0.6 million, $3.1 million, and $1.8 million of other operating income in 2014, 2015 and 2016, respectively.

 

Subsidies are recorded as a liability when received and recognized as other operating income when the related projects are completed and the subsidies are not subject to future return. Under the requirements of the government subsidies, we are obligated to make progress on the related technology development projects, based on the timetable established by the government authorities, and to appropriately allocate the government subsidies for various purposes. We expect to continue to recognize additional government subsidies in 2017 due to its involvement in on-going government subsidized technology projects.

 

Income tax benefit/(expense)

 

Our effective tax rate was (2)%, 52% and 53% for 2014, 2015 and 2016, respectively. The fluctuation from 2014 to 2015 was primarily due to change of valuation allowance and non-taxation income. The fluctuation from 2015 to 2016 was primarily due to change of valuation allowance.

 

Three and Six Months Ended June 30, 2017 Compared to Three and Six Months Ended June 30, 2016

 

    For Three Months Ended
June 30,
    For Six Months Ended
June 30,
 
Consolidated Statement of Operations Data:   2016     2017     2016     2017  
    ($ in thousands)  
Net revenues     27,251       22,464       50,591       54,048  
Cost of revenues     (18,574 )     (15,768 )     (37,706 )     (42,152 )
Gross profit     8,677       6,696       12,885       11,896  
                                 
Operating expenses     (5,653 )     (6,437 )     (11,329 )     (10,832 )
Other operating income     489       -       910       267  
Operating income     3,513       259       2,466       1,331  
                                 
Other income (expense)     336       (779 )     228       (1,388 )
Profit (loss) before income taxes     3,849       (520 )     2,694       (57 )
                                 
Income tax expense     (560 )     (446 )     (1,276 )     (890 )
Net income (loss)     3,289       (966 )     1,418       (947 )
                                 
Less: (loss) income attribute to noncontrolling interests     (534 )     197       (660 )     119  
Net income (loss) income attribute to BORQS     3,823       (1,163 )     2,078       (1,066 )

 

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We had a net profit of $3.8 million and net loss $1.2 million for the three months ended June 30, 2016 and June 30, 2017, respectively, and a net profit of $2.1 million and net loss of $1.1 million for the six months ended June 30, 2016 and June 30, 2017, respectively.

 

We had significant connected products for world-wide customers scheduled for delivery in the third and fourth quarters of 2017. In the first half of the year, much effort was made in the preparation of such products including testing, certification, and preparation for mass production and we expect revenue from these products will be recognized during the latter part of 2017.

 

Net Revenues

 

For the three months ending June 30, 2017, Connected Solutions BU net revenues was $14.6 million and net revenues from the MVNO BU was $7.8 million, compared to $18.5 million and $8.7 million for the three months ended June 30, 2016, respectively. Connected Solutions BU net revenues decreased 21% between the three months ended June 30, 2016 and the three months ended June 30, 2017. MVNO BU net revenues decreased 10% between the three months ended June 30, 2016 and the three months ended June 30, 2017.

 

For the six months ended June 30, 2017, Connected Solutions BU net revenues was $39.4 million and net revenues from the MVNO BU was $14.7 million, compared to $33.1 million and $17.5 million for the six months ended June 30, 2016, respectively. Connected Solutions BU net revenues increased 19% between the six months ended June 30, 2016 and the six months ended June 30, 2017. MVNO BU net revenues decreased 16% between the six months ended June 30, 2016 and the six months ended June 30, 2017.

 

    For Three Months Ended
June 30,
    For Six Months Ended
June 30,
 
    2016     2017     2016     2017  
    US$     US$     %     US$     US$     %  
    ($ in thousands)  
Connected Solutions BU     18,514       14,621       ↓21%       33,134       39,384       ↑19%  
MVNO BU     8,737       7,843       ↓10%       17,457       14,664       ↓16%  
Net revenues     27,251       22,464       ↓18%       50,591       54,048       ↑7%  

 

The percentage of net revenues represented by MVNO BU decreased from 10% for the three months ended June 30, 2017 to 16% for the six months ended June 30, 2017. These decreases are attributed to the current governmental policies requiring heightened security checks for authentication of PRC identification cards at the point of sales of SIM cards, in an overall effort to curb fraudulent activities in the mobile industry. However, the precautionary regulations pave the way for the eventual granting of the official MNVO licenses expected later this year.

 

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The following table sets forth net revenues from customers based on location of the customer’s headquarters, both in absolute amount and as a percentage of net revenues. These figures do not take into account the geographic location of end-users of customer products:

 

    For Year Ended Dec 31,     For Six Months Ended
June 30,
 
    2014           2015           2016           2017        
    US$           US$           US$           US$        
    ($ in thousands)  
China     15,793       33.3 %     28,442       37.9 %     41,214       34.2 %     16,632       30.8 %
India     2,026             7,949             25,126             4,020        
United States     20,237     66.7 %     14,978     62.1 %     34,526     65.8 %     3,839     69.2 %
Rest of the World     9,432             23,703             19,720             29,557        
Net revenues     47,488               75,072               120,586               54,048          

 

Our net revenues from U.S. customers are attributed to our ongoing collaboration with a prominent mobile chipset vendor and other mobile device OEMs. Revenue from our customers headquartered in the rest of the world reflect sales of our products to customers outside the U.S. Our revenues from customers in India started in the second half of 2016.

 

Net Revenues — Connected Solutions BU

 

The following table sets forth the Company net revenues, as well as the components of such revenues, for the periods indicated, both in absolute amount and as a percentage of total net revenues:

 

    For Three Months Ended
June 30,
    For Six Months Ended
June 30,
 
    2016     2017     2016     2017  
    US$     %     US$     %     US$     %     US$     %  
    ($ in thousands)  
Software     4,428       24 %     3,499       24 %     7,625       23 %     6,583       17 %
Hardware     14,086       76 %     11,122       76 %     25,509       77 %     32,801       83 %
Connected Solutions BU net revenues     18,514               14,621               33,134               39,384          

 

Software

 

Software net revenues were $4.4 million and $3.4 million for the three months ended June 30, 2016 and June 30, 2017, respectively, representing 24% and 24% of Connected Solutions BU net revenues.

 

Software net revenues were $7.6 million and $6.6 million for the six months ended June 30, 2016 and June 30, 2017, respectively, representing 23% and 17% of Connected Solutions BU net revenues. The 14% decrease in the six months ended June 30, 2017 compared to the six months ended June 30, 2016 primarily reflects the exit from one of the Company’s major chip manufacturer client from the Android based product platform.

 

Hardware

 

Hardware net revenues were $14 million and $11 million for the three months ended June 30, 2016 and June 30, 2017, respectively, representing 76% and 76% of Connected Solutions BU net revenues.

 

Hardware net revenues were $25.5 million and $32.8 million for the six months ended June 30, 2016 and June 30, 2017, respectively, representing 77% and 83% of Connected Solutions BU net revenues. The 29% increase in the six months ended June 30, 2017 compared to the six months ended June 30, 2016 primarily reflects an increase in hardware product orders from the emerging market in Asia.

 

All hardware sales were contracted and made to order, and our sales were final without taking returns. Small percentages of replacement units and parts were provided to customers and those costs were included in cost of revenues. We provide engineering design work as specified by our customers, and production begins after the customer accepts the design. We are responsible for procurement of all components, materials and tooling, and for the selection of third-party factories for product assembly. Revenue is recognized when products are shipped to the customer. We are not engaged in the marketing and distribution of the hardware products.

 

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Net Revenues — MVNO BU

 

    For Three Months Ended
June 30,
    For Six Months Ended
June 30,
 
    2016     2017     2016     2017  
    US$     US$     %     US$     US$     %  
    ($ in thousands)  
MVNO     8,043       7,322               16,043       13,628          
Other     694       521               1,414       1,036          
MVNO BU net revenues     8,737       7,843       ↓10%       17,457       14,664       ↓16%  

 

As previously noted, we expect sales of MVNO services to increase at a slower rate in future periods while traditional commercial services revenues will remain stable. As discussed above, governmental policies requiring heightened security checks for authentication of PRC identification cards at the point of sales of SIM cards continues to have an impact on our subscription activities.

 

Cost of Revenues

 

The following table sets forth cost of revenues, both in absolute amount and as a percentage of total cost of revenues, for Connected Solutions BU revenue and MVNO BU revenue:

 

    For Three Months Ended
June 30,
    For Six Months Ended
June 30,
 
    2016     2017     2016     2017  
    US$     %     US$     %     US$     %     US$     %  
    ($ in thousands)  
Connected Solutions BU     9,859       53 %     10,947       69 %     21,288       56 %     31,844       76 %
MVNO BU     8,715       47 %     4,821       31 %     16,418       44 %     10,308       24 %
Total Cost of Revenues     18,574               15,768               37,706               42,152          

 

Connected Solutions BU cost of revenues increased from $9.9 million to $10.9 million for the three months ended June 30, 2016 and June 30, 2017, respectively, and from $21.3 million to $31.8 million for the six months ended June 30, 2016 and June 30, 2017, respectively. These increases were directly proportional to the level of activities.

 

Cost of MVNO BU decreased from $8.7 million to $4.8 million for the three months ended June 30, 2016 and June 30, 2017, respectively, and from $16.4 million to $10.3 million for the six months ended June 30, 2016 and June 30, 2017, respectively. As MVNO BU revenue decreases, the cost of revenue of the MVNO BU generally decreases as well.

 

Gross Profit and Gross Margin

 

Our gross profits were $8.7 million and $6.7 million for the three months ended June 30, 2016 and June 30, 2017, respectively, and $12.9 million and $11.9 million for the six months ended June 30, 2016 and June 30, 2017, respectively, with the breakdown between the Connected Solutions BU and MVNO BU as follows:

 

    For Three Months Ended June 30,     For Six Months Ended June 30,  
    2016     2017     2016     2017  
    US$     %     US$     %     US$     %     US$     %  
    (Gross Profit in thousands, Gross Margin in %)  
Connected Solutions BU     8,655       32 %     3,674       17 %     11,846       23 %     7,540       14 %
MVNO BU     22       -%       3,022       13 %     1,039       2 %     4,356       8 %
Total     8,677       32 %     6,696       30 %     12,885       25 %     11,896       22 %

 

Connected Solutions BU gross margin was 32% and 17% for the three months ended June 30, 2016 and June 30, 2017, respectively, while MVNO BU gross margin was -% and 13% for the three months ended June 30, 2016 and June 30, 2017, respectively. Connected Solutions BU gross margin was 23% and 14% for the six months ended June 30, 2016 and June 30, 2017, respectively, while MVNO BU gross margin was 2% and 8% for the six months ended June 30, 2016 and June 30, 2017, respectively. Gross margin in the connected solutions area decreased due to higher volume of hardware sales; while gross margin in our MVNO unit increased as we gain economic of scale.

 

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Connected Solutions BU gross profits include gross profits from software projects and gross profits from hardware projects, as shown in the following table:

 

    For Three Months Ended
June 30,
    For Six Months Ended
June 30,
 
    2016     2017     2016     2017  
    US$     US$     US$     US$  
    (Gross Profit in thousands)  
Software     3,463       2,560       5,115       3,985  
Hardware     5,192       1,114       6,731       3,555  
Total     8,655       3,674       11,846       7,540  

 

Operating Expenses

 

The following table sets forth operating expenses for the periods indicated, both in absolute amount and as a percentage of net revenues:

 

    For Three Months Ended June 30,     For Six Months Ended June 30,  
    2016     2017     2016     2017  
    US$     As % of Revenue     US$     As % of Revenue     US$     As % of Revenue     US$     As % of Revenue  
    ($ in thousands)  
Research and development expenses     2,776       10 %     1,857       8 %     4,414       8.7 %     2,820       5.2 %
Sales and marketing expenses     1,283       5 %     1,646       7 %     2,972       5.9 %     2,985       5.5 %
General and administrative expenses     1,594       6 %     2,934       13 %     3,943       7.8 %     4,866       9 %
Changes in fair value of warrant     -               -               -       -       161       0.3 %
Total     5,653       21 %     6,437       28 %     11,329       22 %     10,832       20 %

 

Research and Development Expenses

 

Research and development expenses decreased $0.9 million from $2.8 million for the three months ended June 30, 2016 to $1.9 million for the three months ended June 30, 2017. Research and development expenses decreased $1.6 million from $4.4 million for the six months ended June 30, 2016 to $2.8 million for the six months ended June 30, 2017 due to lesser a portion of our design activities being directly expensed as cost of revenue from our hardware projects.

 

Selling and Marketing Expenses

 

Selling and marketing expenses decreased $0.3 million from $1.3 million for the three months ended June 30, 2016 to $1.6 million for the three months ended June 30, 2017. Research and development expenses increased $20,000 from $2.97 million for the six months ended June 30, 2016 to $2.99 million for the six months ended June 30, 2017.

 

General and Administrative Expenses

 

General and administrative expenses increased $1.3 million from $1.6 million for the three months ended June 30, 2016 to $2.9 million for the three months ended June 30, 2017. G&A expenses increased $900,000 from $4.0 million for the six months ended June 30, 2016 to $4.9 million for the six months ended June 30, 2017 due to increase head-count.

 

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Other Operating Income

 

We received subsidies from local government authorities as financial support for certain technology development projects. These subsidies are classified as “Other operating income”. We recognized $0.5 million and zero for the three months ended June 30, 2016 and June 30, 2017, respectively, and $0.9 million and $0.3 million for the six months ended June 30, 2016 and June 30, 2017, respectively.

 

Income tax benefit/(expense)

 

Our effective tax rate was 15% and 86% for the three months ended June 30, 2016 and June 30 2017, respectively, and was 47% for the six months ended June 30, 2016. For the six months ended June 30, 3017, we had a tax payable amount of $0.9 million despite an operational loss of $0.1 million. The Company’s actual tax rates have been much higher than the statutory rates due to the fact that the losses experienced by certain of our subsidiaries could not be used to offset gains in other subsidiaries within the same jurisdiction.

 

Liquidity and Capital Resources

 

To date, we have financed our operations primarily through the proceeds from private placements of preference shares. Principal uses of cash were for operating activities. As of December 31, 2016, we had $3.6 million in cash and $12.2 million in bank and commercial borrowings. As of June 30, 2017, we had $6.46 million in cash and $14.5 million commercial borrowings.

 

In recent periods, the Company accounts receivable balances generally fall in the range of 60 to 90 days. The build-up in accounts receivable in 2016 was primarily due to the significant increase in hardware projects in the Connected Solutions BU from sales of $28.1 million in 2014, $32.6 million in 2015 to $70.5 million in 2016, while DSO remained stable. Similarly, the increase in accounts payable for 2016 was due to increased amounts of components purchased for the hardware projects. The only related party receivable, which related to a major chipset manufacturer for software related work, amounted to $0.1 million, $6.0 million, $0.5 million, and $4.0 million for 2014, 2015, 2016, and for the six months ended June 30, 2017, respectively.

 

Our hardware projects in the Connected Solutions BU include upfront customer deposits, up to 30% of the amount of purchase orders, with the balances to be paid up to 90 days from product shipment dates, which may be made in batches. Payment terms for components procured for customer projects can range from cash-on-delivery to 30 days credit. Therefore, a significant amount of capital is required to service the hardware projects, which increased significantly in 2015 and 2016, as discussed below.

 

Cash flows for our software projects in the Connected Solutions BU are comparatively easier to manage because customer payments are due when project milestones are reached.

 

The MVNO BU operates using customer prepayments for services, and the only significant capital needs are for expansion purposes and for security deposits with the incumbent carrier.

 

To accommodate larger hardware projects in our Connected Solutions BU anticipated for 2017, the Company incurred an additional $2.0 million of revolving credit and $9.0 million in sales of Series E preferred shares in the first quarter of 2017.

 

Cash used in operating activities in 2016 was $9.4 million and primarily consisted of net income of $2.6 million and adjustment for non-cash items including depreciation and amortization of $3.2 million, while deducting foreign exchange gain of $0.7 million. There was cash use of $14.6 million due to changes in operating assets and liabilities in 2016 primarily due to increase in receivables of $22.2 million, increase in inventories of $6.4 million, increase in prepaid expenses and other current assets of $3.2 million, and increase in deferred revenue of $3.4 million, while offset by increase in payables of $20.6 million.

 

Cash provided by operating activities in 2015 was $1.6 million and primarily consisted of net income of $0.8 million and adjustment for non-cash items including depreciation and amortization of $2.5 million, while deducting foreign exchange gain of $0.9 million, property disposal of $0.4 million and deferred income tax benefits of $1.0 million. There was a cash contribution of $0.6 million due to changes in working capital items in 2015.

 

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Cash used in operating activities for the six months ended June 30, 2016 was $1.0 million and primarily consisted of net income of $1.4 million and adjustment for non-cash items including depreciation and amortization of $1.7 million, while deducting foreign exchange gain of $0.3 million. Other uses of cash included $8.7 million of increase in accounts receivable, $1.5 million of increase in receivables from our MVNO franchisees, $3.8 million of increase in inventories and $1.4 million of increase in deferred government grants; while offset by increases in cash from the reduction of accounts receivable from related parties (one of our major chip manufacturer clients) of $5.1 million, reduction in prepaid expenses of $1.6 million and increases in accounts payable of $5.5 million.

 

Cash used in operating activities for the six months ended June 30, 2017 was $3.9 million and primarily consisted of net income loss of $0.9 million and adjustment for non-cash items including depreciation and amortization of $2.4 million, while adding back foreign exchange loss of $0.3 million; cash used by increase in restricted cash of $2.2 million, increase in accounts receivable of $4.5 million, increase in prepaid expenses of $5.0 million, decrease in accounts payable of $1.1 million, increase in deferred revenue of $3.4 million.  The increases in cash was contributed by $7.2 million in reduction in inventory, increase of $1.5 million in accrued expenses, and increase of $1.2 million in advances from customers.

 

Cash used in investing activities in 2016 was $5.3 million and primarily consisted of purchase of intangible assets (MVNO BU) of $5.2 million, purchase of equipment of $0.5 million and offset by a loan repaid to the Company of $0.5 million. Cash used in investing activities in 2015 was $7.4 million and primarily consisted of purchase of intangible assets (also for the MVNO BU) of $5.2 million, purchase of equipment of $0.8 million and extension of a loan to a third party in the amount of $1.5 million.

 

Cash used in investing activities for the six months ended June 30, 2016 was $2.4 million and primarily consisted of purchase of intangible assets (MVNO BU) of $2.6 million, purchase of equipment of $0.1 million and offset by a loan repaid to the Company of $0.2 million. Cash used in investing activities for the six months ended June 30, 2017 was $3.9 million and primarily consisted of purchase of intangible assets (also for the MVNO BU) of $4.0 million, purchase of equipment of $0.2 million and extension of a loan to a third party in the amount of $0.2 million.

 

Cash provided by financing activities for the six months ended June 30, 2016 was $0.5 million which included short-term borrowings of $0.8 million, repayment of long-term borrowings of $0.3 million. Cash provided by financing activities for the six months ended June 30, 2017 was $10.5 million which included long-term borrowings of $2.0 million, while repayments of loans used $0.3 million, issuance of series E convertible redeemable preferred shares of $9.0 million, exercise of Series – E1 warrants of $8,000, issuance cost of Series E convertible redeemable preferred shares and of $0.3 million.

 

Cash provided by financing activities in 2016 was $10.2 million which included short-term borrowings of $6.8 million, long-term borrowings of $6.0 million, while repayments of loans used $2.6 million. Cash provided by financing activities in 2015 was negligible.

 

We believe that our current and anticipated cash flows from operations will be sufficient to meet anticipated cash needs for at least the next 12 months. In recent periods, the Company accounts receivable balances generally fall in the range of 60 to 90 days. The only related party accounts receivable, which related to a major chipset manufacturer for software related work, amounted to $0.1 million, $6.0 million, $0.5 million, and $4.0 million for 2014, 2015, 2016, and for the six months ended June 30, 2017, respectively.

 

We may require additional cash due to unanticipated business conditions or other future developments, including any investments or acquisitions it may decide to pursue. If existing cash is insufficient to meet requirements, we may sell additional equity securities, debt securities or borrow from banks. Currently, we gave no plans to seek external funding.

 

Cash transfers from PRC subsidiaries to the Company subsidiaries outside of China are subject to PRC government control of currency conversion. Restrictions on the availability of foreign currency may affect the ability of the Company’ PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency obligation. See “Risk Factors — Risks Related to Doing Business in China —Our subsidiaries in China are subject to restrictions on making dividends and other payments to it or any other affiliated company and —Restrictions on currency exchange may limit our ability to receive and use our revenue effectively.”

 

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Critical Accounting Policies

 

The Company prepares its financial statements in accordance with U.S. GAAP, which requires it to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the end of each fiscal period and the reported amounts of revenues and expenses during each fiscal period. The Company continually evaluates these judgments and estimates based on its own historical experience, knowledge and assessment of current business and other conditions, and expectations regarding the future based on available information and assumptions that it believes to be reasonable, which together form the basis for making judgments that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of the Company’s accounting policies require a higher degree of judgment than others in their application.

 

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing the Company’s financial statements. The Company believes the following accounting policies involve the most significant judgments and estimates used in the preparation of its financial statements.

 

Revenue recognition

 

The Company recognizes revenue when persuasive evidence of an arrangement exists, as evidenced by signed contracts, delivery has occurred, the sales price is fixed or determinable and collection is reasonably assured.

 

Project-based Contracts

 

The Company accounts revenue from project-based contracts as “Software” revenue. The Company’s project-based contracts are generally considered multiple element arrangements since they include perpetual software licenses, development services, such as customization, modification, implementation and integration, and PCS where customers have the right to receive unspecified upgrades/enhancements on a when-and-if-available basis. The Company is unable to establish vendor specific objective evidence of the fair value of PCS, and PCS is the only undelivered element upon completion of software projects and, therefore, the entire revenue is recognized ratably over the longest expected delivery period of undelivered elements of the arrangement, which is typically the PCS term. The term of PCS is generally 12 months, with ranges from 6 to 36 months, beginning at the completion of final acceptance test.

 

Service Contracts

 

The Company provides research and development services to certain customer to develop software where fees are charged on a time and material basis and the Company is not responsible for the outcome of such development projects. The revenue is recognized as the “Software” revenue is delivered.

 

Connected Devices Sales Contracts

 

The Company sells connected devices to customers. This includes the hardware component cost, manufacturing cost and our profit margin. The sales of the connected device is considered as “Hardware” revenue.

 

MVNO Subscriber Usage Payment

 

The Company MVNO subscribers pay a fee based on the actual minutes of voice call made, MB of data consumed, number of SMS/MMS sent and supplementary services (e.g. call-ID display) subscribed. These are considered as “MVNO” revenue.

 

Traditional Telecom Services

 

The Company provides traditional telecom services such as voice conferencing services and 400 toll free services. These are considered as “Other” revenue and are recognized based on the actual consumption by the customers.

 

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Income Taxes

 

In preparing its consolidated financial statements, the Company must estimate its income taxes in each of the jurisdictions in which it operates. The Company estimates actual tax exposure and assess temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which is included in the consolidated balance sheet. The Company must then assess the likelihood that it will recover its deferred tax assets from future taxable income. If the Company believes that recovery is not likely, it must establish a valuation allowance. To the extent it establishes a valuation allowance or increases this allowance, the Company must include an expense within the tax provision in its consolidated statement of operations. If actual results differ from these estimates or the Company adjusts these estimates in future periods, it may need to establish an additional valuation allowance, which could materially impact its financial position and results of operations.

 

U.S. GAAP requires that an entity recognize the impact of an uncertain income tax position on the income tax return at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. If the Company ultimately determines that payment of these liabilities will be unnecessary, it will reverse the liability and recognize a tax benefit during that period. Conversely, the Company records additional tax charges in a period in which it determines that a recorded tax liability is less than the expected ultimate assessment. The Company did not recognize any significant unrecognized tax benefits during the periods presented in this Report.

 

Uncertainties exist with respect to the application of the EIT Law and its implementation rules to the Company’s operations, specifically with respect to tax residency status. The EIT Law specifies that legal entities organized outside of the PRC will be considered residents for PRC income tax purposes if their “de facto management bodies” are located within the PRC. The EIT Law’s implementation rules define the term “de facto management bodies” as establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise. On April 22, 2009, the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, was issued. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Further the Administrative Measures of Enterprise Income Tax of Chinese controlled Offshore Incorporated Resident Enterprises (Trial), or Bulletin No. 45, took effect on September 1, 2011, and provides more guidance on the implementation of Circular 82.

 

According to Circular 82, a Chinese-controlled offshore-incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following conditions set forth in Circular 82 are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals and board and shareholder resolutions are located or maintained in the PRC; and (iv) at least 50.0% of voting board members or senior executives habitually reside in the PRC. In addition, Bulletin No. 45 provides clarification in resident status determination, post-determination administration and competent tax authorities. It also specifies that when provided with a copy of Chinese tax resident determination certificate from a resident Chinese-controlled offshore- incorporated enterprise, the payer should not withhold 10% income tax when paying certain Chinese-sourced income, such as dividends, interest and royalties to the Chinese-controlled offshore-incorporated enterprise.

 

Although both the circular and the bulletin only apply to offshore enterprises controlled by PRC enterprises and not those by PRC or foreign individuals, the determination criteria set forth in the circular and administration clarification made in the bulletin may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax residency status of offshore enterprises and the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals.

 

Despite the uncertainties resulting from limited PRC tax guidance on the issue, the Company does not believe that its legal entities organized outside of the PRC are tax residents under the EIT Law. If one or more of its legal entities organized outside of the PRC were characterized as PRC tax residents, the Company’s results of operations would be materially and adversely affected.

 

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Share-based Compensation

 

The Company’s cost of revenues and operating expenses do not include share based compensation expenses. Borqs will remove the qualified IPO performance condition for options issued and outstanding. Our share-based compensation for options with completed service conditions will be expensed in the quarterly period the business combination with PAAC actually occurs.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Credit Risk

  

The Company is subject to the risk of loss arising from the credit risk related to the possible inability of its customers to pay for the products and services that it sells to them. The Company attempts to limit its credit risk by monitoring the creditworthiness of the Company’s customers to whom it extends credit and establishing credit limits in accordance with its credit policy. The Company performs credit evaluations on substantially all customers requesting credit and will not extend credit to customers for whom it has substantial concerns and will deal with those customers on a cash basis. The Company offers billing terms that allow certain customers to remit payment during a period of time ranging from 60 days to 3 months.

  

The Company typically has limited risk from a concentration of credit risk as no individual customer represents greater than 20% of the outstanding accounts receivable balance.

  

Liquidity Risk

 

The Company is also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage.

 

Interest Rate Risk

 

The Company does not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. The Company has not been exposed nor does it anticipate being exposed to material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on the Company’s consolidated financial statements.

 

Foreign Currency Risk

 

Approximately half of our revenues and costs are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the PBOC or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.

 

A hypothetical 10% change in foreign exchange rates during any of the preceding periods presented would have had an insignificant effect on the Company’s consolidated financial statements.

 

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Internal Control over Financial Reporting

 

Prior to the Business Combination, the Company was a private company with limited accounting personnel and other resources with which to address its internal control and procedures over financial reporting. Our independent registered public accounting firm has not concluded an audit of our internal control over financial reporting. In connection with the preparation and external audit of our consolidated financial statements for the two years ended December 31, 2015, we and Ernst and Young Hua Ming LLP, an independent registered public accounting firm, identified a material weakness on our internal control over financial reporting. The Company has undertaken or is in the process of undertaking certain remedial steps to improve its internal control over financial reporting, including: (i) launching a recruitment program to hire additional senior professional qualified accounting staff with knowledge of U.S. GAAP and SEC reporting, including hiring a chief financial officer and vice president of finance with proper qualifications and experience; (ii) implementing regular U.S. GAAP accounting and financial reporting programs, both internal and external, for the Company’s existing accounting and reporting personnel; and (iii) developing additional controls to ensure that appropriate accruals are made for expenses, including (a) a thorough review of invoices before closing the accounting records for the period, (b) capturing data about purchases made for goods and services in a period even where the invoice has not yet been received and (c) developing expectations as to period expenses level by category to be used to monitor the adequacy of the accruals made. In addition, the Company is formulating internal policies relating to internal control over financial reporting, including preparing a comprehensive written accounting policies and procedures manual that can effectively and efficiently guide its finance and accounting personnel in addressing significant accounting issues and assist in preparing financial statements that are in compliance with U.S. GAAP and SEC requirements.

 

The Company plans to take additional measures to further improve its internal control over financial reporting, including (i) establishing an independent audit committee to oversee the design and implementation effectiveness of its internal control over financial reporting, (ii) continuing to hire qualified professionals with U.S. GAAP accounting experience and (iii) providing proper training to the Company’s accounting personnel. In addition, the Company is considering whether to engage an external service provider to assist management in evaluating its current internal control over financial reporting and implementing necessary controls and measures to assist it in preparing for compliance with internal control reporting.

 

However, the implementation of these initiatives may not fully address the material weaknesses and significant deficiencies in the Company internal control over financial reporting. See “Risk Factors — Risks Related to our Business and Industry”. In the course of preparing its consolidated financial statements, certain control deficiencies, including material weaknesses and significant deficiencies, were identified. If the Company fails to maintain an effective system of internal control over financial reporting, it may not be able to accurately and timely report its financial results or prevent fraud, and investor confidence and the market price of its securities may be adversely impacted.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth information known to the Company regarding beneficial ownership of our ordinary shares immediately following consummation of the Business Combination on August 18, 2017.

 

Beneficial ownership is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security, including options and warrants that are currently exercisable or exercisable within 60 days of the date of this Report. Unless otherwise indicated, we believe that all persons named in the table below have sole voting and investment power with respect to all ordinary shares beneficially owned by them.

 

    After the Business Combination
    Number of
Shares
  %
Name and Address of Beneficial Owners (1)                
Zhengqi International Holding Limited (2)     5,038,686 (3)     16.4  
Yaqi Feng     60,000       *  
Jason Zexian Shen     30,000       *  
Honghui Deng     30,000       *  
Pat Sek Yuen Chan (4)(5)     927,334       3.0  
Bill Huang     -       -  
Eric Tao     -       -  
Joseph Wai Leung Wong (4)     -       -  
Bob Li, Ph.D. (4)(6)     387,072       1.3  
Anthony K. Chan (4)(7)     109,428       *  
All directors and officers as a group (Post-Business Combination) (13 persons) (8)     1,886,640       6.0  
Asset Horizon International Limited (9)     3,282,859       10.7  
Keytone Ventures, L.P. (10)     3,025,627       9.8  
GSR Entities (11)     2,601,653       8.4  
Intel Capital Corporation (12)     3,799,172       12.3  
Norwest Venture Partners X, L.P. (13)     3,342,126       10.8  

 

 

 

* Less than one percent

 

(1) Unless otherwise indicated, the business address of each of the individuals is 855 Pudong South Road, The World Plaza, 27 th Floor, Pudong, Shanghai, China.

 

(2) The Sponsor is a wholly-owned indirect subsidiary of Pacific Securities Capital Management Co. Ltd., a company incorporated in the People’s Republic of China, which, in turn, is a wholly owned subsidiary of Pacific Securities Co. Ltd., a company incorporated in the People’s Republic of China, in which Jian Tu, our former Chairman, serves as a director and as Chairman of the Strategic Planning Committee.

 

(3) Includes: (i) 248,836 ordinary shares, underlying 497,671 warrants, each warrant exercisable to purchase one half of one ordinary share at $12.00 per full share; and (ii) 2,278,776 Backstop Guarantee Shares that the Sponsor is entitled to vote while held in escrow.

 

 

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(4) The business address is Tower A, Building B23, Universal Business Park, No. 10 Jiuxiangqiao Road, Chaoyang District, Beijing 100015, China.

 

(5) Includes 687,361 ordinary shares and 239,973 ordinary shares subject to options that are exercisable within 60 days of the date of this Report.

 

(6) Includes 335,626 ordinary shares and 51,446 ordinary shares subject to options that are exercisable within 60 days of the date of this Report.

 

(7) Includes 11,724 ordinary shares and 97,704 ordinary shares subject to options that are exercisable within 60 days of the date of this Report.

 

(8) Includes 1,217,240 ordinary shares and 669,400 ordinary shares subject to options that are held by all of our directors and executive officers as a group and are exercisable within 60 days of the date of this Report.

 

(9) Fung Bik Wah is the sole director of Asset Horizon International Limited and is deemed as to have voting and dispositive control over shares held by of record by Asset Horizon International Limited. The business address of Asset Horizon International Limited is Unit C, 8/F, Jonsim Place, 228 Queen’s Road East, Hong Kong.

 

(10) The management company of Keytone Ventures L.P. is Keytone Capital Advisors, Ltd. Joe Zhou is the sole director of Keytone Capital Advisors, Ltd. Joe Zhou exercises voting and investment power over the shares held of record by Keytone Ventures L.P. and disclaims beneficial ownership of such shares except to the extent of such individual’s proportionate pecuniary interest therein. The address of Keytone Ventures L.P. is PO Box 309, Ugland House, Grand Cayman, KY-1104, Cayman Islands.

 

(11) Includes 2,451,709 ordinary shares issued to GSR Ventures II, L.P., 147,102 ordinary shares issued to GSR Associates II, L.P. and 2,842 ordinary shares issued to Banean Holdings Ltd. GSR Ventures II, L.P., GSR Associates II, L.P. and Banean Holdings Ltd. are collectively referred to as GSR Entities. The general partner of each of GSR Entities is GSR Partners II, L.P., whose general partner is GSR Partners II, Ltd., a company incorporated in the Cayman Islands, which is owned by Richard Lim, James Ding, Ryann Yap, Alexander Pan and Kevin Fong. Each of these individuals exercise shares voting and investment power over the shares held of record by GSR Ventures II, L.P. and GSR Associates II, L.P. and disclaims beneficial ownership of such shares except to the extent of such individual’s proportionate pecuniary interest therein. The business address of GSR Entities is Floor 4, Willow House, Cricket Square, Grand Cayman KY1-9010, Cayman Islands.

 

(12) Intel Corporation, a publicly-listed corporation is the parent company of Intel Capital Corporation and is deemed as to have voting and dispositive control over shares held by Intel Capital Corporation. Wendell Brooks, Robert Swan and Susie Giordano may be deemed to share voting power and investment power with respect to the shares held by Intel Corporation and Intel Capital Corporation. Each individual listed herein disclaims beneficial ownership with respect to all such shares except to the extent of his or her pecuniary interest therein. The business address of Intel Corporation and Intel Capital Corporation is 2200 Mission College Blvd., M/S RNB 6-59, Santa Clara, California 95054.

 

(13) The general partner of Norwest Venture Partners X, LP is Genesis VC Partners X, LLC. The managing member of Genesis VC Partners X, LLC is NVP Associates, LLC and Promod Haque, Jeffrey Crowe and Matthew Howard are the Co-CEOs of NVP Associates, LLC. Each of these individuals exercises shared voting and investment power over the shares held of record by Norwest Venture Partners X, LP and disclaims beneficial ownership of such shares except to the extent of such individual’s proportionate pecuniary interest therein. The business address of Norwest Venture Partners X, LP is 525 University Avenue, # 800, Palo Alto, CA 94301-1903. Ca. 94301-1903.

 

Change of Control

  

As a result of the issuance of the shares pursuant to the Business Combination and related transactions, a change in control of the Company occurred as of August 18, 2017. Except as described in this Report, no arrangements or understandings exist among present or former controlling shareholders with respect to the election of members of our Board and, to our knowledge, no other arrangements exist that might result in a change of control of the Company.

 

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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

 

Directors and Executive Officers

  

Below are the names of and certain information regarding the Company’s current executive officers and directors who were appointed effective as of the closing of the Business Combination:

 

Name

 

Age

 

Position

 

Class

Board of Directors            
Pat Sek Yuen Chan   52   Founder, Chairman of the Board, Chief Executive Officer and President   III
Honghui Deng   47   Director   I
Yaqi Feng   34   Director   III
Bill Huang   54   Director   I
Jason Zexian Shen   62   Director   II
Eric Tao   39   Director   III
Joseph Wai Leung Wong   61   Director   II
             
Executive Officers            
Bob Li, Ph.D   54   Borqs Founder, Executive Vice President Corporate Affairs and China Sales
Anthony K. Chan   62   Chief Financial Officer, Executive Vice President Corporate Finance
Simon Sun   50   Executive Vice President and Co-General Manager of Product Business Unit
Hareesh Ramanna   56   Executive Vice President and Co-General Manager of Product Business Unit
George Thangadurai   54   Executive Vice President and President of International Business
Gene Wuu, Ph.D.   61   Executive Vice President and General Manager of Cloud Business Unit

 

Dr. Deng and Mr. Huang will serve as Class I directors, Mr. Shen and Mr. Wong will serve as Class II directors, and Mr. Tao, Mr. Chan and Ms. Feng will serve as Class III directors. Class I directors will serve until our 2018 annual meeting, Class II members will serve until our 2019 annual meeting, and Class III members will serve until our 2020 annual meeting.

 

The principal occupation and business experience during the past five years for our executive officers and directors is as follows:

 

Pat Sek Yuen Chan, 52, is the founder and Chairman of the board of directors of Borqs, and since 2007 he has served as its Chief Executive Officer and President. Mr. Chan has over 20 years of experience in the mobile network communications sector. Prior to founding Borqs, Mr. Chan served as Senior Vice President and General Manager of the infrastructure business unit of UTStarcom Inc., a telecommunications equipment company, from 2000 to 2007. Earlier, Mr. Chan was an engineering manager in Motorola responsible for the development of the GPRS switching. Mr. Chan is an established entrepreneur and has received many awards, including the “High-Caliber Talent from Overseas Award” from the PRC government, and “2012 Beijing Entrepreneur of the Year” from Silicon Dragon. Mr. Chan received his bachelor’s degree in computer science from the University of Toronto and his master’s degree in computer science from the University of British Columbia.

 

Honghui Deng, 47, served as one of Pacific’s directors from October 2015 until the consummation of the Business Combination. Dr. Deng started his education professional career in 1990 as a lecturer in Chongqing University in China. Dr. Deng has been serving as the independent director at 500.com, Ltd. (WBAI.NYSE) since May, 2011. Dr. Deng was the founder and served as the Chief Executive Officer of HHD Consulting Service LLC from 2003 to 2008. He has been serving as a fellow at the Innovation Creativity Capital Institute (IC2) of the University of Texas at Austin since 2010. Dr. Deng also has been teaching as an EMBA/MBA professor at Peking University Guanghua School of Management since 2005. He has been working as an assistant professor at the School of Business of University of Nevada, Las Vegas since 2003. From 1993 to 1997, he worked as an official in the Ministry of Education of China. Dr. Deng has extensive consulting experiences for business firms on long-term strategy, finance and management. He received a Bachelor’s Degree in Electronic Engineering and Business Administration from the School of Electronic Engineering of Chongqing University in 1990 and 1994, and a Ph.D. Degree in Business Administration from Red McCombs School of Business, University of Texas at Austin in 2003.

 

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Yaqi Feng, 34, served as Pacific’s Chief Operating Officer and Secretary to Pacific’s board of directors from July 2015 until the consummation of the Business Combination. Ms. Feng has been working as the Executive Director of the Global Business Department in Pacific Securities Co., Ltd. since 2013, where she is responsible for Chinese companies’ overseas IPOs, cross border M&A transactions, and global investment management. From 2012 to 2013, she worked as the Managing Director of Regeneration Capital Group LLC in New York, where she was responsible for IPOs and listing projects for emerging market companies, business development, project due diligence as well as transaction management. From 2010 to 2012, Ms. Feng worked as a VP for Griffin Financial Group, a mid-sized investment bank; in this capacity she was responsible for public offerings, private placements, deal structuring, financial modeling as well as institutional sales. She also served as a manager for Asian Legend Asset Management Inc. a private equity firm based in China and New York that specialized in China related projects, from 2009 to 2010. Ms. Feng worked as an associate in the New York office of the Jun He law firm from 2007 to 2008. Ms. Feng received an LL.M from Boston University School of Law and an LL.B from the School of International Law, China University of Political Science and Law in Beijing, China, where she also earned a B.A. in Business.

 

Bill Huang , 54, is the founder and Chief Executive Officer of CloudMinds Inc, a provider of cloud connected smart machines and robotics solutions, since 2015. Mr. Huang has over 30 years of experience in the mobile network communication industry. From 2007 to 2015, Mr. Huang was the General Manager and head of research and development for China Mobile Research Institute where he led China Mobile in many key innovative projects, including OPhone, BigCloud, TD-LTE, C-RAN, PTN, MCPA, and labs.chinamobile.com. He served as Senior Vice President and Chief Technology Officer of UTStarcom Inc., a telecommunications equipment company, from 1994 to 2006, and was responsible for innovations such as MSAN, “Xiao Ling Tong” PAS, IP-DSLAM, Wacos mSwitch, GE-PON, and MediaSwitch. Mr. Huang received his Bachelor’s degree in Electronic Engineering from the Huazhong University of Science and Technology and his Master’s degree in Electronic Engineering and Computer Science from the University of Illinois at Chicago.

 

Jason Zexian Shen, 62, served as one of Pacific’s directors from July 2015 until the consummation of the Business Combination. Mr. Shen started his own business in 2012 to open Jason Z. Shen CPA Firm, a local CPA accounting firm in the State of New York. From 2007 to 2012, Mr. Shen worked in the AIG Corporate Comptrollers in New York as a senior accountant. He worked in Alliance Building Services from 2006 to 2007. He was the accounting manager in Gandhi Engineering, Inc. from 1994 to 2001, and the accounting manager in Berger Lehman Associates, PC from 2001 to 2006. Mr. Shen has worked as the accounting manager in the New China News Agency Hong Kong Office (Now Liaison Office of the Central People’s Government in Hong Kong from 1982 to 1991. Mr. Shen graduated from Peking University with the Bachelor’s Degree in Economy in 1982 and Master’s Degree in Accounting from Binghamton University in 1993. He is the Certified Public Accountant licensed in the State of New York.

 

Eric Tao, Ph.D. , 39, is a founding member of Keystone Ventures and since 2008 a partner of this leading venture capital firm in China focusing in technology investments. He has over 10 years of technology venture investment experience and five years of venture operations experience. His active investments include Borqs, Garena, Kuyun Interactive, Zebra, Wisjoy, InnoSpark, LP Amina, Lattice Power, China Eastern Clean Energy, Zhongte Logistics and Vega Interactive; while past investments included Greatwall Software, AMEC, TechFaith (NASDAQ: CNTF) and InvenSense (NASDAQ: INVN). Previously Dr. Tao worked as a founding member of the KPCB China Fund, covering mostly mobile internet and technology investments, and as an investment manager at Qualcomm Ventures, covering strategic investments globally. Dr. Tao was the co-founder and served as Vice President of Business Development of Clean Coal Energy in Silicon Valley. Dr. Tao received his B.S. degree from Tsinghua University, M.S. and Ph.D. degrees in engineering from Stanford University. He holds three international patents and two U.S. patents.

 

Joseph Wai Leung Wong , 61, has been a member of the Borqs’ board of directors since 2012. Mr. Wong has over 29 years of experience in cross border investments and business operations. Mr. Wong was Executive Director of Credit Agricole (Suisse) Hong Kong from 2006 to 2012. From 1988 to 2006, Mr. Wong was a partner in the Tax Department of Deloitte Touche Tohmatsu Hong Kong, serving high net worth clients on cross border investment tax planning, and advising on initial public offerings in Hong Kong. Mr. Wong is a member of the Cordlife Group Limited board of directors, where he is also Chairman of the Audit Committee and a member of the Remuneration Committee Mr. Wong received his Bachelor’s degree from the University of Calgary in Alberta, Canada, and is a member of Hong Kong Independent Non-Executive Director Association.

 

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Classified Board of Directors

 

In accordance with our charter, our board of directors is divided into three classes with only one class of directors being elected in each year and each class (except for those directors appointed prior to our first annual meeting of shareholders) serving a three-year term.

 

Director Independence

 

Nasdaq listing standards require that a majority of our board of directors be independent as long as we are not a controlled company. Even if we elect to be a controlled company, we anticipate that a majority of our board of directors will be independent. An “independent director” is defined under the Nasdaq rules generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which in the opinion of the company’s board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Our board of directors has determined that Joseph Wai Leung Wong, Jason Zexian Shen, Honghui Deng, Eric Tao and Bill Huang are “independent directors” as defined in the Nasdaq listing standards and applicable SEC rules. Our independent directors will have regularly scheduled meetings at which only independent directors are present.

 

Leadership Structure and Risk Oversight

 

The board of directors does not have a lead independent director. As of the Business Combination, Pat Sek Yuen Chan succeeded Zhouhong Peng as our Chief Executive Officer and Mr. Chan was appointed as Chairman of the Board.

 

Committees of the Board of Directors

 

The standing committees of our board of directors currently consists of an Audit Committee and a Compensation Committee.

 

Audit Committee

 

We have established an audit committee of the board of directors. The rules of NASDAQ require that the audit committee of a listed company be comprised solely of at least three independent directors. The members of our audit committee are Mr. Huang, Mr. Shen and Mr. Wong (chairman of the committee), each of whom qualifies as an independent director under the Nasdaq listing rules. Each member of the audit committee is financially literate and our board of directors determined Mr. Wong qualifies as our “audit committee financial expert,” as such term is defined in Item 401(h) of Regulation S-K.

 

Our board of directors has adopted an audit committee charter, which details the responsibilities of the audit committee, including:

 

the appointment, compensation, retention, replacement, and oversight of the work of the independent auditors and any other independent registered public accounting firm engaged by us;

 

pre-approving all audit and non-audit services to be provided by the independent auditors or any other registered public accounting firm engaged by us, and establishing pre-approval policies and procedures;

 

reviewing and discussing with the independent auditors all relationships the auditors have with us in order to evaluate their continued independence;

 

setting clear hiring policies for employees or former employees of the independent auditors;

 

setting clear policies for audit partner rotation in compliance with applicable laws and regulations;

 

obtaining and reviewing a report, at least annually, from the independent auditors describing (i) the independent auditor’s internal quality-control procedures and (ii) any material issues raised by the most recent internal quality-control review, or peer review, of the audit firm, or by any inquiry or investigation by governmental or professional authorities, within, the preceding five years respecting one or more independent audits carried out by the firm and any steps taken to deal with such issues;

 

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reviewing and approving any related party transaction required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the SEC prior to us entering into such transaction; and

 

reviewing with management, the independent auditors, and our legal advisors, as appropriate, any legal, regulatory or compliance matters, including any correspondence with regulators or government agencies and any employee complaints or published reports that raise material issues regarding our financial statements or accounting policies and any significant changes in accounting standards or rules promulgated by the Financial Accounting Standards Board, the SEC or other regulatory authorities.

 

Compensation Committee

 

The members of our Compensation Committee are Mr. Huang, Mr. Shen (chairman of the committee), and Mr. Wong, each of who is an independent director under the Nasdaq listing rules.

 

Our Board of Directors has adopted a Compensation Committee charter, which details the principal functions of the Compensation Committee, including:

 

reviewing and approving on an annual basis the corporate goals and objectives relevant to our Chief Executive Officer’s compensation, evaluating our Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration (if any) of our Chief Executive Officer’s based on such evaluation in executive session at which the Chief Executive Officer is not present;

 

reviewing and approving the compensation of all of our other executive officers;

 

reviewing our executive compensation policies and plans;

 

implementing and administering our incentive compensation equity-based remuneration plans;

 

assisting management in complying with our proxy statement and annual report disclosure requirements;

 

approving all special perquisites, special cash payments and other special compensation and benefit arrangements for our executive officers and employees;

 

producing a report on executive compensation to be included in our annual proxy statement; and

 

reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors.

 

The charter also provides that the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, legal counsel or other adviser and will be directly responsible for the appointment, compensation and oversight of the work of any such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel or any other adviser, the compensation committee will consider the independence of each such adviser, including the factors required by Nasdaq and the SEC.

 

Compensation Committee Interlocks and Insider Participation

 

As of the Business Combination, no officer or employee serves as a member of the Company’s Compensation Committee. None of our executive officers will serve as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or Compensation Committee.

 

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Code of Ethics

 

We will adopt a Code of Ethics that applies to all of our employees, including our chief executive officer, chief financial officer and principal accounting officer. Our Code of Ethics will be available on our corporate website, www.borqs.com , promptly following the consummation of the Business Combination. If we amend or grant a waiver of one or more of the provisions of our Code of Ethics, we intend to satisfy the requirements under Item 5.05 of Form 8-K regarding the disclosure of amendments to or waivers from provisions of our Code of Ethics that apply to our principal executive officer, principal financial officer and principal accounting officer by posting the required information on our website.

 

Involvement in Certain Legal Proceedings

 

No executive officer or director of ours has been involved in the last ten years in any of the following:

 

Any bankruptcy petition filed by or against any business or property of such person, or of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

 

Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;

 

Being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;

 

Being the subject of or a party to any judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated relating to an alleged violation of any federal or state securities or commodities law or regulation, or any law or regulation respecting financial institutions or insurance companies, including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail, fraud, wire fraud or fraud in connection with any business entity; or

 

Being the subject of or a party to any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act, any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

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EXECUTIVE COMPENSATION

 

This section discusses the material components of the 2016 executive compensation program for the named directors of the Company who are identified in the Summary Compensation Table below. This discussion may contain forward-looking statements that are based on the Company’s current plans, considerations, expectations and determinations regarding future compensation programs.

 

Summary of Cash and Certain Other Compensation

 

The Company has opted to comply with the executive compensation disclosure rules applicable to emerging growth companies. The scaled down disclosure rules are those applicable to “smaller reporting companies,” as such term is defined in the rules promulgated under the Securities Act, which require compensation disclosure for the Company’s principal executive officer and its two most highly compensated executive officers other than the principal executive officer whose total compensation for 2016 exceeded $100,000. Pat Sek Yuen Chan is principal executive officer. During 2016, the two most highly compensated executive officers other than Mr. Chan whose total compensation exceeded $100,000 were Bob Li, EVP Corporate Affairs and China Sales, and Anthony K. Chan, Chief Financial Officer. Pat Chan, Bob Li, and Anthony Chan are referred to in this Report as the Company’s named executive officers.

 

The following table provides information regarding the compensation awarded to, or earned by, the named executive officers for 2016.

 

Summary Compensation Table

 

Name and principal position   Fiscal
year
    Salary
($)
    Bonus
($)
    Stock
awards
($)
    Option
awards
($)
    Non-equity
incentive plan
compensation
($) (3)
    Nonqualified
deferred
compensation
earnings
($)
    All other
compensation
($)
    Total
($)
 
Pat Sek Yuen Chan,
Chief Executive Officer
    2016       303,143                            —          —           —       303,143  
Bob Xiao Bo Li,
EVP Corporate Affairs & China Sales
    2016       252,486                                           252,486  
Anthony K. Chan,
Chief Financial Officer
    2016       150,000                                           150,000  

 

2016 Outstanding Equity Awards at Year-End Table

 

The following table provides information regarding each unexercised stock option held by the named executive officers as of December 31, 2016.

 

Name   Grant Date   Vesting Start
Date (1)
  Number of
Securities
Underlying
Unexercised
Options
Vested
(#)
    Number of
Securities
Underlying
Unexercised
Options
Unvested
(#)
    Option
Exercise Price
($) (2)
    Option
Expiration
Date
Pat Sek Yuen Chan   10/24/2009   10/24/2009     500,000           $ 0.210     12/3/2019
    7/23/2011   7/23/2011     318,200           $ 0.275     7/23/2021
    5/26/2012   5/26/2012     18,200           $ 0.275     5/26/2022
    4/27/2013   4/27/2013     34,000       2,834     $ 0.459     4/27/2023
    5/30/2015   5/30/2015     21,000       12,688     $ 0.459     5/30/2025
                                     
Bob Xiao Bo Li   10/24/2009   10/24/2009     300,000           $ 0.210     12/3/2019
    7/23/2011   7/23/2011     320,100           $ 0.275     7/23/2021
    5/26/2012   5/26/2012     7,150           $ 0.275     5/26/2022
    4/27/2013   4/27/2013     19,250       1,605     $ 0.459     4/27/2023
    8/16/2014   5/24/2014     8,250       2,922     $ 0.459     8/16/2024
    5/30/2015   5/30/2015     8,250       4,985     $ 0.459     5/30/2025

 

 

 

(1) Except as otherwise described in these footnotes, 25% of the options vest on the first anniversary of the vesting start date and 1/48 of the options shall vest each month thereafter over the next three years.

 

(2) Exercise price represents the exercise price of the options granted, as determined by the board of directors, on the grant date. See the accompanying notes to the audited financial statements — critical accounting policies and estimates, and stock-based compensation, for a discussion of the valuation of the Company’s options and ordinary shares.

  

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Employment Agreements and Other Arrangements with Named Executive Officers

 

Borqs International Holding Corp and Pat Chan entered into an arrangement in July 2013 that provides that Mr. Chan will serve as President and Chief Executive Officer at a base salary of $303,143, subject to review and adjustment by the Company. The arrangement has been renewed for an indefinite term unless either party provides one month prior written notice of termination or unless both parties mutually decide to terminate such arrangement. In addition, the arrangement between the parties provides for termination upon the occurrence of certain stipulated events, and in some situations, the Company will pay Mr. Chan an appropriate subsidy and compensation pursuant to the terms of the arrangement and in accordance with the provisions of relevant Chinese laws and regulations. Mr. Chan’s arrangement with the Company further provides that Mr. Chan will not hold any appointment for any other entity that has a competitive relationship with the Company during the arrangement and for one year following the termination of such arrangement.

 

Borqs International and Anthony Chan entered into an arrangement in April 2015 that provides that Mr. Chan will provide corporate finance services and will receive monthly compensation in the amount of $12,500 per month, subject to periodic review and adjustment. The arrangement with Mr. Chan initially had a nine month term and is now renewable by the parties mutually agreement for an indefinite term, unless either party provides one month prior written notice of termination. In addition, the arrangement provided that Mr. Chan would be eligible to receive ordinary shares of the Company upon the completion of certain transactions. In February 2017, Mr. Chan was granted 150,000 ordinary shares of Borqs International at the cost of $0.1375 per share and options to purchase 2,000,000 ordinary shares of Borqs International at an exercise price of $0.678 per share. If the Company terminates its arrangement with Mr. Chan, the Company will pay Mr. Chan all amounts accrued for services performed until the date of termination.

 

Borqs International and Bob Li entered into an arrangement in July 2013 that provides that Mr. Li will serve as Senior Vice President for Commercial Affairs at a base salary of $252,486, subject to review and adjustment. Borqs International’s arrangement with Mr. Li initially had a fixed term until June 2015 and has now been renewed for an indefinite term, unless either party provides one month prior written notice of termination or unless both parties mutually decide to terminate such arrangement. In addition, the arrangement between the parties provides for termination upon the occurrence of certain stipulated events, and in some situations, the Company will pay Mr. Li an appropriate subsidy and compensation pursuant to the terms of the arrangement and in accordance with the provisions of relevant Chinese laws and regulations.

 

2016 Director Compensation

 

During 2016, Borqs International paid directors’ fees to Joseph Wong, and no other director received fees for service as a board member during 2016. The Company reimburses all of its directors for their reasonable expenses (if any) incurred in attending meetings of the board of directors and committees of the board of directors. Pacific Special Acquisition Corp. (“ Pacific ”) paid each of its independent directors an annual retainer of $30,000 (to be prorated for a partial term), payable in arrears commencing on the first anniversary of the Initial Public Offering and ending on the earlier of a Business Combination and the Company’s liquidation. The following table sets forth the compensation paid to each person who served as a member of either Borqs International board of directors or the Pacific board of directors in 2016. Pat Chan, the Borqs International President and Chief Executive Officer, did not receive any additional compensation for his service as a director in 2016. See the Summary Compensation Table and related disclosures for information concerning the compensation paid to Mr. Chan.

  

2016 Director Compensation Table

 

Name   Fees
Earned or
Paid in
Cash
($)
    Stock
Awards (3)
($)
    Option
Awards
($)
    Non-Equity
Incentive Plan
Compensation
($)
    Nonqualified
Deferred
Compensation
Earnings
($)
    All Other
Compensation
($)
    Total
($)
 
Pat Sek Yuen Chan   $ 0                                   $ 0  
Joseph Wai Leung Wong   $ 48,000                                   $ 48,000  
Honghui Deng   $ 31,000                                   $ 31,000  
Yaqi Feng   $ N/A       N/A       N/A       N/A       N/A       N/A     $ N/A  
Bill Huang   $ N/A       N/A       N/A       N/A       N/A       N/A     $ N/A  
Jason Zexian Shen   $ 31,000                                     31,000  
Eric Tao     N/A       N/A       N/A       N/A       N/A       N/A       N/A  

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

Pacific Related Person Transactions

 

As used in this Report, unless otherwise stated, the terms “Company,” “Registrant,” “we,” “us” and “our” refer to Borqs Technologies, Inc., giving effect to the Business Combination. In this section, reference to “Pacific” means “Pacific Special Acquisition Corp.,” the public company whose securities were traded on the Nasdaq Capital Market prior to the Business Combination and before Borqs International Holding Corp became its wholly-owned subsidiary.

 

In July 2015, Pacific issued an aggregate of 1,437,500 founder shares to its initial shareholders for an aggregate purchase price of $25,000 in cash, or approximately $0.017 per share. On or about August 3, 2015, Pacific’s sponsor transferred an aggregate of 410,000 ordinary shares to the members of Pacific’s board of directors (other than Mr. Shen, who purchased 30,000 ordinary shares directly from Pacific) and Pacific’s Chief Executive Officer and Chief Operating Officer. All of the founder shares were placed in escrow with Continental Stock Transfer & Trust Company, as escrow agent, at the time of Pacific’s IPO.

 

Pacific’s initial shareholders have agreed not to transfer, assign or sell any of the founder shares (except to certain permitted transferees as described below) until, with respect to 50% of the founder shares, the earlier of (i) August 18, 2018 or (ii) the date on which the closing price of the Company’s ordinary shares equals or exceeds $12.50 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period commencing after August 18, 2017, with respect to the remaining 50% of the founder shares, upon August 18, 2017, or earlier, in either case, if, subsequent to August 18, 2017, the Company consummates a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of Pacific’s shareholders having the right to exchange their ordinary shares for cash, securities or other property.

 

Pacific’s sponsor purchased an aggregate of 497,671 insider units in a private placement that closed simultaneously with the closing of Pacific’s initial public offering and the closing of the over-allotment option for Pacific’s IPO. Pacific’s sponsor has agreed not to transfer, assign or sell any of the ordinary shares included in the insider units and the respective ordinary shares underlying the rights and the warrants included in the insider units until after August 18, 2017.

 

Until August 18, 2017, Pacific’s Chairman made available to Pacific, through one of his affiliates, office space, utilities and secretarial and administrative services, as Pacific required from time to time. Pacific agreed to pay an affiliate of the Chairman $10,000 per month for these services. Pacific believes, based on rents and fees for similar services in the Shanghai area, that the fee charged by Pacific’s Chairman is at least as favorable as Pacific could have obtained from an unaffiliated person.

 

Pacific paid each of Pacific’s independent directors an annual retainer of $30,000 (to be prorated for a partial term), payable in arrears commencing on October 20, 2016 and ending on August 18, 2017. Pacific’s Sponsor paid Mr. Boris, one of Pacific’s directors, a $50,000 consulting fee as compensation for advisory services provided by Mr. Boris to Pacific’s sponsor prior to Pacific’s initial public offering in connection with selecting potential underwriters, attorneys, accountants and other necessary professionals for such offering.

 

Additionally, on January 10, 2017, Pacific entered into an agreement (the “Director’s Agreement”) to pay Mr. Boris certain additional fees to act a special director to Pacific’s board of directors in Pacific’s efforts in closing the Business Combination. Such agreement became effective December 23, 2016 and continued until August 18, 2017. The Company paid Mr. Boris a cash fee of $50,000. In addition, as of December 23, 2016, Pacific’s Sponsor sold Mr. Boris 80,000 shares of Pacific’s ordinary shares at a purchase price of $0.017 per share provided that a portion of such shares were subject to forfeiture and were to be transferred following the consummation of the Business Combination.

 

Prior to Pacific’s IPO, Pacific’s Sponsor advanced to Pacific an aggregate of $90,917 and loaned to Pacific $300,000 to cover expenses related to such offering. This advance and loan were repaid from the proceeds of Pacific’s IPO not placed in the trust account.

 

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On November 9, 2016, Pacific’s Sponsor loaned Pacific $500,000, to be used for expenses relating to investigating and selecting a target business and other working capital requirements. The convertible promissory note issued in connection therewith, as amended on February 9, 2017, was non-interest bearing, due and paid on the date on August 18, 2017. The convertible promissory note is convertible, in whole or in part, at the election of the sponsor, upon the consummation of an initial business combination. Upon such election, the convertible promissory note will convert into private units, at a price of $10.00 per unit.

 

As of March 31, 2017, certain members of Pacific’s management had advanced to Pacific an aggregate of $229,061 to cover expenses related to identifying targets for an initial business combination. The advances were non-interest bearing, unsecured, due and paid on August 18, 2017.

 

In connection with Pacific’s April 18, 2017 meeting of shareholders (the “ Extension Meeting ”), Pacific’s Sponsor agreed to contribute to Pacific as a loan $0.03 for each public share that was not redeemed, for each calendar month (commencing on April 20, 2017 and on the 20th day of each subsequent month), or portion thereof, that is needed by Pacific to complete the Business Combination or another business combination from April 20, 2017 until August 21, 2017 (each, a “ Contribution ”). As a result of the Contributions and following redemption of the public shares in connection with the Extension Meeting, the pro rata portion of the funds available in the trust account for the public shares that were not redeemed increased from approximately $10.40 per share to approximately $10.52 per share. Each Contribution did not bear interest and was repaid to the Sponsor on August 18, 2017.

 

Pursuant to the terms of the Merger Agreement, as amended on May 10, 2017 and June 29, 2017, and in consideration of entering into the Backstop and Subscription Agreement, as described below, the Sponsor and the assignees under the Backstop Agreement will be entitled to receive 2,352,285 of the Earnout Shares if they are not earned by the Sellers, (or a proportionate number of shares if the earnout is only partially earned by the Sellers) The Backstop Guarantee Shares will be issued at the Closing in the name of the Sponsor and deposited in escrow, and while held in escrow, the Sponsor will be entitled to all voting rights and dividend rights (other than equity securities paid as dividends) with respect to such shares. Any portion of the Backstop Guarantee Shares that are earned by the Sellers will be forfeited by the Sponsor and Pacific will issue new equivalent shares to the Sellers, and four percent (4%) of any Earnout Shares earned by the Sellers during the Earnout Period will be deposited in escrow to support certain indemnification obligations under the Merger Agreement. Additionally, the Merger Agreement provides that at the closing, we will amend Pacific’s charter to, in the case of certain future acquisitions by the Company during the Earnout Period, (a) if having a value in excess of $60 million, require the approval of at least two-thirds of the directors then-serving on the board to approve any such acquisitions that close on or before June 30, 2018, the expiration date of the Earnout Period, (b) grant Pacific’s Sponsor and the Purchaser Representative certain information rights relating to such acquisitions, (c) and, if requested by Pacific’s Sponsor or the Purchaser Representative, to provide a fairness opinion in respect of such acquisitions.

 

On May 11, 2017, Pacific and the Sponsor entered into a Backstop and Subscription Agreement, pursuant to which the Sponsor agreed to purchase up to $24.0 million of Pacific ordinary shares through (i) open market or privately negotiated transactions with third parties, (ii) a private placement at a price of $10.40 per share with consummation to occur concurrently with that of the Business Combination or (iii) a combination thereof, in order to ensure that there is at least $24.0 million in the trust account together with proceeds from any private placement to be conducted by Pacific prior to the closing of the Business Combination. Notwithstanding the foregoing, the Backstop Investor is entitled, at its sole election, to purchase additional Pacific ordinary shares in excess of such $24.0 million Closing Proceeds requirement, up to a total of $24.0 million purchased in total in connection with the Backstop and Subscription Agreement. On August 16, 2017, $750,000 of the Sponsor’s obligations to purchase shares in the private placement from the Company under the Backstop and Subscription Agreement were assigned to EarlyBirdCapital. In connection with the Business Combination and as consideration for the Backstop and Subscription Agreement, the Company sold 1,038,251 of its ordinary shares for an aggregate consideration of approximately $10.8 million.

 

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Pursuant to a registration rights agreement we entered into on October 14, 2015, Pacific’s initial shareholders and EarlyBirdCapital and their permitted transferees can demand that we register the founder shares, the private units and underlying securities. The holders of the majority of the founder shares are entitled to demand that the Company register these shares at any time commencing three months prior to August 18, 2018. The holders of the private units (or underlying securities) are entitled to demand that the Company register these securities at any time after August18, 2017. In addition, the holders have certain “piggy-back” registration rights on registration statements filed after August 18, 2017. At the Closing, the Company, the Sponsor, EarlyBirdCapital and certain other investors thereto amended and restated the registration rights agreement dated as of October 14, 2015 to include similar registration rights for the Earnout Shares, Backstop Guarantee Shares and the shares purchased by the Sponsor and EarlyBirdCapital in connection with the Backstop and Subscription Agreement.

 

Borqs Related Person Transactions

 

For ten years, Borqs International has provided non-exclusive software development services to Intel, a leading global chipset manufacturer. In August 2014, Borqs issued 14,825,902 shares of its Series D Preferred Stock to Intel for an aggregate purchase price of approximately $5.0 million, or approximately $0.34 per share. In February 2011, Borqs issued 32,727,272 shares of Series C Preferred Stock to Intel for an aggregate purchase price of approximately $7.0, or approximately $0.21 per share.

 

Policies and Procedures for Related Person Transactions

 

Our board of directors adopted a written related person transactions policy that sets forth the policies and procedures for the review and approval or ratification of related person transactions. Our policy requires that a “related person” (as defined in paragraph (a) of Item 404 of Regulation S-K) must promptly disclose to our general counsel any “related person transaction” (defined as any transaction that is reportable by us under Item 404(a) of Regulation S-K in which we are or will be a participant and the amount involved exceeds $120,000 and in which any related person has or will have a direct or indirect material interest) and all material facts with respect thereto. The general counsel will promptly communicate such information to our audit committee or another independent body of our board of directors. No related person transaction will be entered into without the approval or ratification of our audit committee or another independent body of our board of directors. It is our policy that directors interested in a related person transaction will recuse themselves from any such vote. Our policy does not specify the standards to be applied by our audit committee or another independent body of our board of directors in determining whether or not to approve or ratify a related person transaction, although such determinations will be made in accordance with BVI law.

 

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MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Pacific

 

Price Range of Pacific Securities

 

Our units, ordinary shares, rights and warrants were listed on the Nasdaq Capital Market under the symbols “PAACU,” “PAAC,” “PAACR” and “PAACW,” respectively from October 15, 2017 to August 18, 2017. Our units commenced public trading on October 20, 2015; our ordinary shares, rights and warrants each commenced separate public trading on October 29, 2016. Our units and rights ceased trading on August 18, 2017. Our units and ordinary shares are now listed on the Nasdaq Capital Market under the symbols “BRQS” and “BRQSW”.

 

The table below sets forth, for the calendar quarter indicated, the high and low bid prices of our units, ordinary shares, rights and warrants as reported on the Nasdaq for the period October 20, 2015 through August 18, 2017.

 

Period   Units     Ordinary Shares     Warrants     Rights  
Fiscal Year Ended June 30, 2016   Low     High     Low     High     Low     High     Low     High  
October 15, 2015 through December 31, 2015   $ 9.90     $ 10.15     $ 9.80     $ 9.92     $ 0.07     $ 0.14     $ 0.20     $ 0.27  
January 1, 2016 through March 31, 2016   $ 9.95     $ 10.20     $ 9.86     $ 10.02     $ 0.06     $ 0.10     $ 0.12     $ 0.20  
April 1, 2016 through June 30, 2016   $ 10.15     $ 12.24     $ 10.00     $ 10.43     $ 0.07     $ 0.10     $ 0.09     $ 0.23  
Fiscal Year Ending June 30, 2017                                                                
July 1, 2016 through September 30, 2016   $ 10.27     $ 11.00     $ 10.06     $ 11.20     $ 0.07     $ 0.18     $ 0.14     $ 0.30  
October 1, 2016 through December 31, 2016   $ 10.46     $ 13.63     $ 10.20     $ 13.00     $ 0.09     $ 0.51     $ 0.15     $ 0.53  
January 1, 2017 through March 31, 2017   $ 10.82     $ 11.35     $ 10.25     $ 10.40     $ 0.13     $ 0.47     $ 0.35     $ 0.54  
April 1, 2017 through June 30, 2017   $ 10.94     $ 11.85     $ 10.25     $ 10.50     $ 0.30     $ 0.55     $ 0.35     $ 0.75  
July 1, 2017 through August 18, 2017 (1)   $ 10.42     $ 13.58     $ 7.30     $ 10.50     $ 0.23     $ 0.58     $ 0.48     $ 0.69  

 

 

 

(1) Through August 18, 2017.

 

After giving effect to the Business Combination on August 18, 2017, the Company had a total of approximately 45 shareholders of record.

 

Dividend Policy of Pacific

 

Pacific has not paid any cash dividends on its ordinary shares to date. The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition and will be within the discretion of our Board.  In addition, our Board is not currently contemplating and does not anticipate declaring any stock dividends in the foreseeable future.

 

Borqs

 

Price Range of Borqs Ordinary Shares

 

Historical market price information regarding Borqs is not provided because there is no, and has never been, any public market for Borqs ordinary shares. Borqs International has not paid the following cash dividends during the past two years.

 

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DESCRIPTION OF SECURITIES

 

We are a company incorporated in the British Virgin Islands as a BVI business company (company number 1880410) and our affairs are governed by our charter, the Companies Act and the common law of the British Virgin Islands. We are authorized to issue an unlimited number of both ordinary shares of no par value and preferred shares of no par value. The following description summarizes certain terms of our shares as set out more particularly in our charter. Because it is only a summary, it may not contain all the information that is important to you.

 

Ordinary Shares

 

As of August 18, 2017, there were 30,804,635 ordinary shares outstanding. Under the Companies Act, the ordinary shares are deemed to be issued when the name of the shareholder is entered in our register of members. Our register of members is maintained by our transfer agent, Continental Stock Transfer & Trust Company. Our transfer agent has entered the name of Cede & Co. in our register of members as nominee for each of the respective public shareholders. If (a) information that is required to be entered in the register of members is omitted from the register or is inaccurately entered in the register, or (b) there is unreasonable delay in entering information in the register, a shareholder of the company, or any person who is aggrieved by the omission, inaccuracy or delay, may apply to the British Virgin Islands Courts for an order that the register be rectified, and the court may either refuse the application or order the rectification of the register, and may direct the company to pay all costs of the application and any damages the applicant may have sustained.

 

At any general meeting on a show of hands every ordinary shareholder who is present in person (or, in the case of a shareholder being a corporation, by its duly authorized representative) or by proxy will have one vote for each share held on all matters to be voted on by shareholders. Voting at any meeting of the ordinary shareholders is by show of hands unless a poll is demanded. A poll may be demanded by shareholders present in person or by proxy if the shareholder disputes the outcome of the vote on a proposed resolution and the chairman shall cause a poll to be taken. The rights and obligations attaching to our ordinary shares and other provisions of our charter may be amended if approved by a majority of the votes of shareholders attending and voting on such amendment or by resolution of the directors. Our board of directors is presently divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors (provided, that, holders of at least 50% of the shares so voted can remove a director with or without cause). Our shareholders are entitled to receive ratable dividends when, as and if declared by the board of directors out of funds legally available therefore.

 

Our shareholders are entitled to receive ratable dividends when, as and if declared by the board of directors out of legally available funds. In the event of a liquidation or winding up of the company, our shareholders are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of shares, if any, having preference over the ordinary shares. Our shareholders have no preemptive or other subscription rights. There are no sinking fund provisions applicable to the ordinary shares, except that we will provide our shareholders with the redemption rights set forth above.

 

Founder Shares

 

The founder shares are identical to the other ordinary shares, and holders of founder shares have the same shareholder rights as public shareholders, except that the founder shares are subject to certain transfer restrictions. Our initial shareholders have agreed not to transfer, assign or sell any of the founder shares (except to certain permitted transferees) until, with respect to 50% of the founder shares, the earlier of (i) one year after the date of the consummation of our initial business combination or (ii) the date on which the closing price of our ordinary shares equals or exceeds $12.50 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period commencing after our initial business combination, with respect to the remaining 50% of the founder shares, upon one year after the date of the consummation of our initial business combination, or earlier, in either case, if, subsequent to our initial business combination, we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our shareholders having the right to exchange their ordinary shares for cash, securities or other property.

Preferred Shares

Our charter authorizes the creation and issuance without shareholder approval of an unlimited number of preferred shares divided into five classes, Class A through Class E each with such further designation, rights and preferences as may be determined by a resolution of our board of directors to amend the charter to create such designations, rights and preferences. We have five classes of preferred shares to give us flexibility as to the terms on which each Class is issued. Unlike Delaware law, all shares of a single class must be issued with the same rights and obligations. Accordingly, starting with five classes of preference shares will allow us to issue shares at different times on different terms. Accordingly, our board of directors is empowered, without shareholder approval, to issue preferred shares with dividend, liquidation, redemption, voting or other rights, which could adversely affect the voting power or other rights of the holders of ordinary shares. These preferred shares could be utilized as a method of discouraging, delaying or preventing a change in control of us.

 

No preferred shares are currently issued or outstanding. Although we do not currently intend to issue any preferred shares, we may do so in the future.

 

The rights of preferred shareholders, once the preferred shares are in issue, may only be amended by a resolution to amend our charter provided such amendment is also approved by a separate resolution of a majority of the votes of preferred shareholders who being so entitled attend and vote at the class meeting of the relevant preferred class. If our preferred shareholders want us to hold a meeting of preferred shareholders (or of a class of preferred shareholders), they may requisition the directors to hold one upon the written request of preferred shareholders entitled to exercise at least 30 percent of the voting rights in respect of the matter (or class) for which the meeting is requested. Under British Virgin Islands law, we may not increase the required percentage to call a meeting above 30 percent.

 

Under the Companies Act there are no provisions which specifically prevent the issuance of preferred shares or any such other “poison pill” measures. Our memorandum and articles of association also do not contain any express prohibitions on the issuance of any preferred shares. Therefore, the directors, without the approval of the holders of ordinary shares, may issue preferred shares that have characteristics that may be deemed anti-takeover. Additionally, such a designation of shares may be used in connection with plans that are poison pill plans. However, as noted above under the Companies Act, a director in the exercise of his powers and performance of his duties is required to act honestly and in good faith in what the director believes to be the best interests of the company.

 

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Warrants

 

As of August 18, 2017, our authorized and issued capital stock consisted of 30,804,635 ordinary shares, 5,750,000 public warrants, 497,671 private warrants, and 4,415,923 Replacement Warrants. Each public warrant entitles the registered holder to purchase one half of one ordinary share at a price of $12.00 per full share, subject to adjustment as discussed below. Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares. This means that only an even number of warrants may be exercised at any given time by a warrant holder. However, no public warrants will be exercisable for cash unless we have an effective and current registration statement covering the ordinary shares issuable upon exercise of the warrants and a current prospectus relating to such ordinary shares. Notwithstanding the foregoing, if a registration statement covering the ordinary shares issuable upon exercise of the public warrants is not effective within 90 days from August 18, 2017, warrant holders may, until such time as there is an effective registration statement and during any period when we shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis pursuant to an available exemption from registration under the Securities Act. If an exemption from registration is not available, holders will not be able to exercise their warrants on a cashless basis. The warrants will expire on the fifth anniversary of the Closing at 5:00 p.m., New York City time.

 

The private warrants are identical to the public warrants except that such private warrants will be exercisable for cash (even if a registration statement covering the ordinary shares issuable upon exercise of such warrants is not effective) or on a cashless basis, at the holder’s option, and will not be redeemable by us, in each case so long as they are still held by the initial purchasers or their affiliates. The Replacement Warrants issued to the former holders of Borqs International warrants entitle each warrant holder to purchase ordinary shares at a price of $5.36 per share, and are exercisable for cash or on a cashless basis, at the holder’s option. The holders of Replacement Warrants entered into Lock-Up Agreements identical to the Lock-Up Agreements executed by Borqs International shareholders and became party to the Registration Rights Agreement along with the other Borqs International shareholders. A form of the Replacement Warrants are attached as Exhibit 10.11 hereto.

 

We may call the warrants for redemption (excluding the private warrants and the Replacement Warrants, which may not be called for redemption, but including any outstanding warrants issued upon exercise of the unit purchase option issued to EarlyBirdCapital and/or its designees), in whole and not in part, at a price of $0.01 per warrant:

 

at any time while the warrants are exercisable,

 

upon not less than 30 days’ prior written notice of redemption to each warrant holder,

 

if, and only if, the reported last sale price of the ordinary shares equals or exceeds $18.00 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders, and

 

if, and only if, there is a current registration statement in effect with respect to the ordinary shares underlying such warrants at the time of redemption and for the entire 30-day trading period referred to above and continuing each day thereafter until the date of redemption.

 

The right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant.

 

The redemption criteria for our warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing share price and the warrant exercise price so that if the share price declines as a result of our redemption call, the redemption will not cause the share price to drop below the exercise price of the warrants.

 

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If we call the warrants for redemption as described above, our management will have the option to require all holders that wish to exercise warrants to do so on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering the warrants for that number of ordinary shares equal to the quotient obtained by dividing (x) the product of the number of ordinary shares underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of the ordinary shares for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. Whether we will exercise our option to require all holders to exercise their warrants on a “cashless basis” will depend on a variety of factors including the price of our ordinary shares at the time the warrants are called for redemption, our cash needs at such time and concerns regarding dilutive share issuances.

 

The warrants were issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval, by written consent or vote, of the holders of a majority of the then outstanding warrants in order to make any change that adversely affects the interests of the registered holders.

 

The exercise price and number of ordinary shares issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of ordinary shares at a price below their respective exercise prices.

 

The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of ordinary shares and any voting rights until they exercise their warrants and receive ordinary shares. After the issuance of ordinary shares upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by shareholders.

 

Except as described above, no public warrants will be exercisable and we will not be obligated to issue ordinary shares unless at the time a holder seeks to exercise such warrant, a prospectus relating to the ordinary shares issuable upon exercise of the warrants is current and the ordinary shares have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to use our best efforts to meet these conditions and to maintain a current prospectus relating to the ordinary shares issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so and, if we do not maintain a current prospectus relating to the ordinary shares issuable upon exercise of the warrants, holders will be unable to exercise their warrants and we will not be required to settle any such warrant exercise. If the prospectus relating to the ordinary shares issuable upon the exercise of the warrants is not current or if the ordinary shares is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, we will not be required to net cash settle or cash settle the warrant exercise, the warrants may have no value, the market for the warrants may be limited and the warrants may expire worthless.

 

Warrant holders may elect to be subject to a restriction on the exercise of their warrants such that an electing warrant holder would not be able to exercise their warrants to the extent that, after giving effect to such exercise, such holder would beneficially own in excess of 9.8% of the ordinary shares outstanding.

 

No fractional shares will be issued upon exercise of warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up or down to the nearest whole number the number of ordinary shares to be issued to the warrant holder.

 

In connection with the Business Combination, holders of issued and outstanding Borqs warrants received Replacement Warrants exercisable for an aggregate of 344,559 of our ordinary shares, the terms and conditions of which are as described above.

 

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Purchase Option

 

We have sold to EarlyBirdCapital (and/or its designees) an option to purchase up to 400,000 units at $10.00 per unit. The units issuable upon exercise of this option are identical to the public units, except the option represents the right to purchase up to 440,000 ordinary shares (which includes the 40,000 ordinary shares issuable for the rights included in the units) and 400,000 warrants to purchase 200,000 full shares.

 

The purchase option may be exercised for cash or on a cashless basis, at the holder’s option, at any time after the closing of our initial business combination and terminating on the fifth anniversary of such effectiveness date. Notwithstanding anything to the contrary, neither the option nor the warrants underlying the option shall be exercisable after October 14, 2020, the five year anniversary of the effective date of the IPO registration statement. The option grants to holders demand and “piggy back” rights for periods of five and seven years, respectively, from October 14, 2015 (the effective date of the IPO registration statement) with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the option. We will bear all fees and expenses attendant to registering the securities, other than underwriting commissions, which will be paid for by the holders themselves. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances of ordinary shares at a price below its exercise price. We will have no obligation to net cash settle the exercise of the purchase option or the rights or warrants underlying the purchase option. The holder of the purchase option will not be entitled to exercise the purchase option or the warrants underlying the purchase option unless a registration statement covering the securities underlying the purchase option is effective or an exemption from registration is available. If the holder is unable to exercise the purchase option or underlying warrants, the purchase option or warrants, as applicable, will expire worthless.

 

Options Issued under the Borqs International 2007 Global Share Plan

 

The Company has assumed the obligations under options held by holders of issued and outstanding Borqs International options, including the applicable provisions of the 2007 Global Share Plan (the “2007 Plan”) under which such options were issued), except that the number of shares and exercise price thereunder will be based on the number of Borqs International ordinary shares and exercise price under the Borqs International option, with each equitably adjusted as described above to be exercisable for our ordinary shares.

 

As of the date of this Report, 38,284,188 shares (equitably adjusted as described above) are outstanding under the 2007 Plan with an exercise price per share from $0.0100 to $0.8590 (as equitably adjusted as described above). No further equity grants will be made under the 2007 Plan.

 

Award Agreements.  All options under the 2007 Plan are evidenced by an option award agreement, which sets forth the terms and conditions of the award, including the vesting schedule, which shall be consistent with the 2007 Plan.

 

Term of Awards.  The term of option awards granted under the 2007 Plan is ten years.

 

Transferability.  Unless otherwise provided in the award agreement, the 2007 Plan does not allow for the transfer of options other than by will or the laws of descent and distribution and options may be exercised during the lifetime of the optionee only by the optionee or the optionee’s guardian or legal representative.

 

Governing Law and Compliance with Law.  The 2007 Plan and options granted under it are governed by and construed in accordance with the laws of the Cayman Islands. Shares will not be issued upon exercise of an option unless the issuance is permitted by applicable law.

 

Borqs Technologies, Inc. 2017 Equity Incentive Plan

 

In connection with the Business Combination, we adopted the Borqs Technologies, Inc. 2017 Equity Incentive Plan, referred to as the Incentive Plan.

 

On August 10, 2017, the shareholders approved the Incentive Plan wherein 2,500,000 shares were reserved for issuance. We subsequently reduced that number and have reserved 530,432 shares for issuance under the Incentive Plan. In addition, the number of shares reserved for issuance under the Incentive Plan will increase automatically on January 1 of each of 2018 through 2027 by the number of shares equal to 5% of the aggregate number of outstanding shares as of the immediately preceding December 31. Our board of directors however, may reduce the amount of this annual increase in any particular year.

 

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In addition, the following shares will again be available for grant and issuance under our Incentive Plan:

 

· shares subject to options or share appreciation rights granted under our Incentive Plan that cease to be subject to the option or stock appreciation right for any reason other than exercise of the option or share appreciation right;
     
· shares subject to awards granted under our Incentive Plan that are subsequently forfeited or repurchased by us at the original issue price;
     
· shares subject to awards granted under our Incentive Plan that otherwise terminate without shares being issued;
     
· shares surrendered, cancelled or exchanged for cash or a different award (or combination thereof).

 

Shares that otherwise become available for grant and issuance because of the provisions above will not include shares subject to awards that initially became available due to our substitution of outstanding awards granted by another company in an acquisition of that company or otherwise.

 

Eligibility. The Incentive Plan provides for the grant of incentive stock options to our employees and any parent and subsidiary corporations’ employees and for the grant of nonqualified share options, restricted shares, restricted share units, share appreciation rights, share bonuses and performance awards to our employees, directors and consultants and our parent and subsidiary corporations employees and consultants. No more than 5,000,000 shares may be issued as incentive stock options under the Incentive Plan. In addition, no participant in the Incentive Plan may receive awards for more than 2,000,000 shares in any calendar year, except that new employees are eligible to be granted up to a maximum of award of 4,000,000 shares.

 

Administration. The Incentive Plan is administered by the board of directors or by our Compensation Committee; in this plan description we refer to the board of directors or Compensation Committee as the plan administrator. The plan administrator determines the terms of all awards.

 

Types of Awards. The Incentive Plan allows for the grant of options, restricted shares, restricted share units, share appreciation rights, share bonuses and performance awards.

 

Award Agreements. All awards under the Incentive Plan are evidenced by an award agreement which shall set forth the number of shares subject to the award and the terms and conditions of the award, which shall be consistent with the Incentive Plan.

 

Term of Awards. The term of awards granted under the Incentive Plan is ten years.

 

Vesting Schedule and Price.  The plan administrator has the sole discretion in setting the vesting period and, if applicable, exercise schedule of an award, determining that an award may not vest for a specified period after it is granted and accelerating the vesting period of an award. The plan administrator determines the exercise or purchase price of each award, to the extent applicable.

 

Transferability.  Unless the plan administrator provides otherwise, the Incentive Plan does not allow for the transfer of awards other than by will or the laws of descent and distribution. Unless otherwise permitted by the plan administrator, options may be exercised during the lifetime of the optionee only by the optionee or the optionee’s guardian or legal representative.

 

Changes in Capitalization.  In the event there is a specified type of change in our capital structure without our receipt of consideration, such as a share split, or if required by applicable law, appropriate adjustments will be made to the share maximums and exercise prices, as applicable, of outstanding awards under the Incentive Plan.

 

Change in Control Transactions.  In the event of specified types of mergers or consolidations, a sale, lease, or other disposition of all or substantially all of our assets or a corporate transaction, outstanding awards under our Incentive Plan may be assumed or replaced by any surviving or acquiring corporation; the surviving or acquiring corporation may substitute similar awards for those outstanding under our Incentive Plan; outstanding awards may be settled for the full value of such outstanding award (whether or not then vested or exercisable) in cash, cash equivalents, or securities (or a combination thereof) of the successor entity with payment deferred until the date or dates the award would have become exercisable or vested; or outstanding awards may be terminated for no consideration. The plan administrator, may, on a discretionary basis, accelerate, in full or in part, the vesting and exercisability of the awards.

 

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Governing Law and Compliance with Law.  The Incentive Plan and awards granted under it is governed by and construed in accordance with the laws of the British Virgin Islands. Shares will not be issued under an award unless the issuance is permitted by applicable law.

 

Amendment and Termination.  The Incentive Plan terminates ten years from the date it was approved by our shareholders, unless it is terminated earlier by our board of directors. Our board of directors may amend or terminate our Incentive Plan at any time. Our board of directors generally may amend our Incentive Plan, without shareholder approval unless required by applicable law.

 

Dividends

 

We have not paid any cash dividends on our shares of ordinary share to date. While the Company intends to pay quarterly cash dividends, such dividends will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any dividends subsequent to our initial business combination will be within the discretion of our Board.

 

Insider Units

 

In connection with the Business Combination, the insider units were separated into their component securities of (i) ordinary shares, (ii) warrants and (iii) rights which were subsequently converted into ordinary shares. The ordinary shares are not redeemable by us and the warrants will not be redeemable by us so long as they are held by members of our Sponsor or their permitted transferees. Otherwise, the securities separated from the insider units have the terms and provisions identical to the units sold in Pacific’s IPO except that these warrants are non-redeemable and may be exercised on a cashless basis, in each case so long as the warrants continue to be held by the initial purchasers or their permitted transferees. If these warrants are held by holders other than the holders who purchased insider units or their permitted transferees, the warrants will be redeemable by us and exercisable by the holders on the same basis as the warrants included in the units sold in Pacific’s IPO.

 

Our Transfer Agent, Warrant Agent, and Right Agent

 

The transfer agent for our ordinary shares and warrant agent for our warrants is Continental Stock Transfer & Trust Company.

 

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LEGAL PROCEEDINGS

 

The Company is not and has not been involved in any material legal proceedings, other than ordinary litigation incidental to its business. Although no assurances can be given about the final outcome of pending legal proceedings, at the present time the Company is not a party to any legal proceeding or investigation that, in the opinion of management, is likely to have a material adverse effect on its business, financial condition or results of operations.

 

There are no proceedings in which any of the Company’s directors, officers or any of their respective affiliates, or any beneficial shareholder of more than five percent of voting securities, is an adverse party or has a material interest adverse to the above-mentioned companies’ interest.

 

INDEMNIFICATION OF DIRECTORS AND OFFICERS

 

Our charter, the BVI Business Companies Act, 2004, as amended and the common law of the British Virgin Islands allow us to indemnify our officers and directors from certain liabilities. Our charter provides that the Company may indemnify, hold harmless and exonerate against all direct and indirect costs, fees and expenses of any type or nature whatsoever, any person who (a) is or was a party or is threatened to be made a party to any proceeding by reason of the fact that such person is or was a director, officer, key employee, adviser of the Company or who at the request of the Company; or (b) is or was, at the request of the Company, serving as a director of, or in any other capacity is or was acting for, another Enterprise.

 

The Company will only indemnify the individual in question if the relevant indemnitee acted honestly and in good faith with a view to the best interests of the Company and, in the case of criminal proceedings, the indemnitee had no reasonable cause to believe that his conduct was unlawful. The decision of the Board as to whether an indemnitee acted honestly and in good faith and with a view to the best interests of the Company and as to whether such indemnitee had no reasonable cause to believe that his conduct was unlawful is, in the absence of fraud, sufficient for the purposes of our charter, unless a question of law is involved.

 

The termination of any proceedings by any judgment, order, settlement, conviction or the entering of a nolle prosequi does not, by itself, create a presumption that the relevant indemnitee did not act honestly and in good faith and with a view to the best interests of the Company or that such indemnitee had reasonable cause to believe that his conduct was unlawful.

 

The Company may purchase and maintain insurance, purchase or furnish similar protection or make other arrangements including, but not limited to, providing a trust fund, letter of credit, or surety bond in relation to any indemnitee or who at the request of the Company is or was serving as a Director, officer or liquidator of, or in any other capacity is or was acting for, another Enterprise, against any liability asserted against the person and incurred by him in that capacity, whether or not the Company has or would have had the power to indemnify him against the liability as provided in our charter.

 

  90  

 

 

Item 3.01. Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing.

 

Prior to the Closing, the Company’s units, ordinary shares, rights and warrants were each quoted on Nasdaq Capital Market, under the symbols “PAACU,” “PAAC,” “PAACR” and “PAACW,” respectively. After the Closing, each unseparated unit was automatically separated into their component ordinary shares of no par value, warrants to purchase one-half of one ordinary share, and rights to receive 1/10 of an ordinary share. As a result, the units and rights are no longer listed on Nasdaq Capital Market. The Company’s ordinary shares and warrants began trading on Nasdaq Capital Market under the ticker symbols “BRQS” and “BRQSW,” respectively, on or around August 21, 2017.

 

Item 3.02. Unregistered Sales of Equity Securities.

  

On August 18, 2017, pursuant to the terms of the Merger Agreement, all of the shares of outstanding capital stock of Borqs International were exchanged for 25,913,964 shares of our ordinary shares, 3,294,752 of which were held in escrow pursuant to the Escrow Agreement.

 

Additionally, the holders of Borqs International issued and outstanding warrants received Replacement Warrants to acquire an aggregate of 417,166 Company ordinary shares, and the holders of Borqs International issued and outstanding options had their options assumed by the Company and now hold options to acquire a total of 3,628,196 Company ordinary shares upon exercise of those options. The number of shares and exercise price of the Replacement Warrants and the Assumed Options were equitably adjusted to reflect the terms of the Merger Agreement.

 

Additionally, in connection with the closing of the Business Combination, the Company issued 628,187 ordinary shares to the holders of its outstanding public and private rights. The Earnout Shares were issued in the name of the Backstop Commitment Investors and to the extent that the earnout conditions are not met, the Earnout Shares will be released to the Backstop Commitment Investors.

 

Additionally, in connection with the Business Combination and as consideration for the Backstop and Subscription Agreement, the Company sold 1,038,251 of its ordinary shares in a private placement to the Sponsor and EarlyBirdCapital, Inc., the underwriter in the Company’s initial public offering for an aggregate consideration of approximately $10.8 million.  

   

The issuance of the shares in the Business Combination was exempt from registration under Section 4(a)(2) of the Securities Act.

 

Item 3.03  Material Modification to Rights of Security Holders.

 

On August 18, 2017, the Company filed an Amended and Restated Memorandum and Articles of Association (“ Amended Charter ”) of the Company with the Registrar of Corporate Affairs in the British Virgin Islands.  The material terms of the Amended Charter and the general effect upon the rights of holders of the Company’s capital stock are included in the Proxy Statement under the sections entitled “Charter Amendment Proposal,” which is incorporated by reference herein.

 

A copy of the Amended Charter is attached as Exhibit 3.1 to this Report and is incorporated by reference herein.

 

Item 4.01. Changes in Registrant’s Certifying Accountant.

  

In connection with the Closing, the Company engaged Ernest & Young Hua Ming LLP, or EY, as the Company’s independent registered public accounting firm to audit the Company’s consolidated financial statements. EY served as the independent registered public accounting firm of Borqs International prior to the Business Combination, and on August 22, 2017, our board of directors approved the change of accountants to EY. Accordingly, as of August 22, 2017, Marcum LLP, or Marcum, Pacific’s independent registered public accounting firm prior to the Business Combination, was informed that it will be dismissed as the Company’s independent registered public accounting firm effective August 22, 2017.

 

  91  

 

 

During the period from inception on July 1, 2015 to June 30, 2016, and the year ended June 30, 2017 and the subsequent period through August 22, 2017, there were no: (i) disagreements (as described in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) with Marcum on any matter of accounting principles or practices, financial statement disclosure or auditing scope procedure, which disagreements if not resolved to their satisfaction would have caused them to make reference to the subject matter of the disagreement in connection with their reports, or (ii) reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

 

The audit report of Marcum on the balance sheets of Pacific as of June 30, 2016 and June 30, 2017, and the related statements of operations, stockholders’ equity and cash flows for the period from July 1, 2015 (inception) through June 30, 2017 and for the year ended June 30, 2017, did not contain any adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to audit scope or accounting principles.

 

During the two most recent fiscal years, and subsequent interim period through August 22, 2017, Pacific has not consulted with EY regarding either (i) the application of accounting principles to a specific transaction, either completed or proposed; or the type of audit opinion that might be rendered on the registrant’s financial statements, and no written report or oral advice was provided to the Company that EY concluded was an important factor considered by the Company in reaching its decision as to an accounting, auditing, or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as described in paragraph 304(a)(1)(v) of Regulation S-K).

 

In accordance with Item 304(a)(3) of Regulation S-K, the Company provided Marcum with a copy of the statements set forth above prior to the time this Report was filed with the SEC. The Company requested that Marcum furnish the Company with a letter addressed to the SEC stating whether Marcum agrees with the above statements. Marcum has furnished the requested letter, and it is attached as Exhibit 16.1 to this Report.

 

Item 5.01. Changes in Control of Registrant.

 

As a result of the Business Combination, we experienced a change in control with the former shareholders of Borqs International effectively acquiring control of us. The disclosure set forth in Item 2.01 to this Report is incorporated into this item by reference.

 

Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

 

The disclosure set forth in Item 2.01 to this Report is incorporated into this item by reference.

 

Item 5.03. Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.

  

Articles of Incorporation and Bylaws

 

On August 18, 2017, we filed the Amended Charter. The filing date of August 18, 2017, is also deemed the effective date of the Amended Charter. We filed the Amended Charter to (1) remove or amend those provisions of our memorandum and articles which terminate or otherwise cease to be applicable following the consummation of the Business Combination, (2) give our board of directors the ability to reclassify the board, and if necessary modify existing terms, into up to three classes at any time after the consummation of the Business Combination and (3), in the case of certain future acquisitions by Pacific for the Earnout Period (a) if having a value in excess of $60 million, to require at least two-thirds of the directors then-serving on the board to approve any such acquisitions that close on or before June 30, 2018, the expiration date of the Earnout Period, (b) to grant our Sponsor and the Purchaser Representative certain information rights relating to such acquisitions, (c) and, if requested by our Sponsor or the Purchaser Representative, to provide a fairness opinion in respect of such acquisitions (such amendments to be adopted by way of the amendment and restatement of the charter in the form of the Amended Charter).”

 

  92  

 

 

Fiscal Year

  

On August 18, 2017, the Board of Directors of the Company approved a change in the Company’s fiscal year end from June 30 to December 31. The change in fiscal year is effective for the Company’s 2017-2018 fiscal year, which began on July 1, 2017 and will end on June 30, 2018.

 

Item 5.06. Change in Shell Company Status.

  

Prior to the Business Combination, we were a “shell company” (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended). As a result of the Business Combination, we have ceased to be a “shell company.” The information contained in this Report as filed with the SEC, constitute the current “Form 10 information” necessary to satisfy the conditions contained in Rule 144(i)(2) under the Securities Act.

 

Item 8.01. Other Events.

 

On August 24, 2017, the Company’s announced that the Board of Directors authorized a share repurchase program.  Under the program, the Company may repurchase up to $6.0 million of Company ordinary shares from time to time in open market or privately negotiated transactions, at the price not higher than $10.40 per share, until December 31, 2017.  The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions, share price, trading volume, Company cash needs and other business factors, as determined by the Company.  The Company may suspend or discontinue the repurchase program at any time.  The Company issued a press release to announce the adoption of the share repurchase program, attached hereto as Exhibit 99.3.

 

Item 9.01. Financial Statements and Exhibits.

 

(a) Financial Statements of Business Acquired.

 

In accordance with Item 9.01(a), Borqs’ audited consolidated financial statements for the year ended December 31, 2016, 2015 and 2014, and unaudited condensed consolidated financial statements for the six months ended June 30, 2017, are filed as Exhibit 99.1 hereto.

 

(b) Pro Forma Financial Information.

 

In accordance with Item 9.01(b), unaudited pro forma condensed combined financial statements as of June 30, 2017, and the accompanying notes are filed as Exhibit 99.2 hereto.

 

(d) Exhibits 

 

Exhibit   Description
2.1   Merger Agreement dated December 27, 2016, as amended on May 10, 2017 and June 29, 2017, by and among Pacific, Borqs International, Sellers, the Purchaser Representative, the Seller Representative and, for certain limited purposes thereof, the Sponsor (incorporated by reference from Annex A to the Registrant’s Definitive Proxy Statement, filed with the SEC on July 14, 2017)
3.1   Amended and Restated Memorandum and Articles of Association
10.1   Registration Rights Agreement, dated August 18, 2017, by and among each of Selling Shareholders and the Purchaser Representative
10.2   Form of Lock-Up Agreement, by and among each of the Selling Shareholders, Pacific and the Purchaser Representative
10.3   Form of Non-Competition and Non-Solicitation Agreement, dated August 18, 2017, by and among certain shareholders of Pacific, Pacific, Borqs International and the Purchaser Representative
10.4   Escrow Agreement, dated August 18, 2017, by and among the Registrant, the Purchaser Representative, Seller Representative and the Escrow Agent
10.5   Form of Letter of Transmittal
10.6   Backstop and Subscription Agreement, dated May 11, 2017, by and among Pacific and the Sponsor
10.7   Employment Contract, dated July 1, 2013, by and between Borqs International and Pat Sek Yuen Chan
10.8   Employment Contract, dated July 1, 2013, by and between Borqs International and Bob Xiao Bo Li
10.9   Consulting Agreement, dated April 1, 2015, by and between Borqs International and Anthony K. Chan
10.10   Borqs Technologies, Inc. 2017 Equity Incentive Plan, as amended
10.11   Form of Warrant, dated August 18, 2017, by and between the Company and each of Warrant Holders
10.12   Partial Assignment and Amendment of Backstop and Subscription Agreement, dated August 18, 2017, by and between the Sponsor, EarlyBirdCapital, Pacific and Borqs International
10.13   Amended and Restated Registration Rights Agreement, dated August 18, 2017, by and among Pacific and certain shareholders of Pacific
16.1   Letter from Marcum LLP
21.1   Subsidiaries of Registrant
99.1   Audited Financial Statements of Registrant
99.2   Pro Forma Financial Statements
99.3   Press Release, dated August 24, 2017

 

 

* The disclosure schedules to the Merger Agreement are not being filed herewith. The Company agrees to furnish supplementally a copy of any such schedules to the Securities and Exchange Commission upon request.

 

  93  

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.

 

  BORQS INTERNATIONAL  
     
August 24, 2017 By: /s/ Anthony K. Chan
    Anthony K. Chan
    Chief Financial Officer

 

  94  

 

 

BORQS TECHNOLOGIES, INC.

 

Exhibit Index to Current Report on Form 8-K

 

Exhibit   Description
2.1   Merger Agreement dated December 27, 2016, as amended on May 10, 2017 and June 29, 2017, by and among Pacific, Borqs International, Sellers, the Purchaser Representative, the Seller Representative and, for certain limited purposes thereof, the Sponsor (incorporated by reference from Annex A to the Registrant’s Definitive Proxy Statement, filed with the SEC on July 14, 2017)
3.1   Amended and Restated Memorandum and Articles of Association
10.1   Registration Rights Agreement, dated August 18, 2017, by and among each of Selling Shareholders and the Purchaser Representative
10.2   Form of Lock-Up Agreement, by and among each of the Selling Shareholders, Pacific and the Purchaser Representative
10.3   Form of Non-Competition and Non-Solicitation Agreement, dated August 18, 2017, by and among certain shareholders of Pacific, Pacific, Borqs International and the Purchaser Representative
10.4   Escrow Agreement, dated August 18, 2017, by and among the Registrant, the Purchaser Representative, Seller Representative and the Escrow Agent
10.5   Form of Letter of Transmittal
10.6   Backstop and Subscription Agreement, dated May 11, 2017, by and among Pacific and the Sponsor
10.7   Employment Contract, dated July 1, 2013, by and between Borqs International and Pat Sek Yuen Chan
10.8   Employment Contract, dated July 1, 2013, by and between Borqs International and Bob Xiao Bo Li
10.9   Consulting Agreement, dated April 1, 2015, by and between Borqs International and Anthony K. Chan
10.10   Borqs Technologies, Inc. 2017 Equity Incentive Plan, as amended
10.11   Form of Warrant, dated August 18, 2017, by and between the Company and each of Warrant Holders
10.12   Partial Assignment and Amendment of Backstop and Subscription Agreement, dated August 18, 2017, by and between the Sponsor, EarlyBirdCapital, Pacific and Borqs International
10.13   Amended and Restated Registration Rights Agreement, dated August 18, 2017, by and among Pacific and certain shareholders of Pacific
16.1   Letter from Marcum LLP
21.1   Subsidiaries of Registrant
99.1   Audited Financial Statements of Registrant
99.2   Pro Forma Financial Statements
99.3   Press Release, dated August 24, 2017

 

 

* The disclosure schedules to the Merger Agreement are not being filed herewith. The Company agrees to furnish supplementally a copy of any such schedules to the Securities and Exchange Commission upon request.

 

 

95

 

 

Exhibit 2.1

MERGER AGREEMENT

by and among

PACIFIC SPECIAL ACQUISITION CORP.,
as the Purchaser,

ZHENGQI INTERNATIONAL HOLDING LIMITED,
i n the capacity as the Purchaser Representative,

PAAC MERGER SUBSIDIARY LIMITED
as Merger Sub,

ZHENGDONG ZOU
in the capacity as the Seller Representative,

ZHENGQI INTERNATIONAL HOLDING LIMITED,
as the Sponsor,

and

BORQS INTERNATIONAL HOLDING CORP,
as the Company,

Dated as of December 27, 2016

 

TABLE OF CONTENTS

 

 

Page

I. MERGER

 

2

1.1. Merger

 

2

1.2. Effective Time

 

2

1.3. Effect of the Merger

 

2

1.4. Tax Consequences

 

2

1.5. Memorandum and Articles of Association of the Surviving Company

 

2

1.6. Directors and Officers of the Transaction Surviving Company

 

2

1.7. Merger Consideration Shares

 

3

1.8. Effect of Merger on Company Securities

 

3

1.9. Surrender of Company Securities and Payment of Merger Consideration Shares

 

4

1.10. Effect of Transaction on Merger Sub Stock

 

5

1.11. Closing Calculations

 

5

1.12. Taking of Necessary Action; Further Action

 

6

1.13. Appraisal and Dissenter’s Rights

 

6

1.14. Escrow

 

7

 

 

 

II. CLOSING

 

7

2.1. Closing

 

7

 

 

 

III. representations and warranties of THE purchaser

 

7

3.1. Due Organization and Good Standing

 

7

3.2. Authorization; Binding Agreement

 

8

3.3. Governmental Approvals

 

8

3.4. Non-Contravention

 

8

3.5. Capitalization

 

8

3.6. SEC Filings and Purchaser Financials

 

9

3.7. Absence of Certain Changes

 

10

3.8. Compliance with Laws

 

10

3.9. Actions; Orders; Permits

 

10

3.10. Taxes and Returns

 

10

3.11. Employees and Employee Benefit Plans

 

11

3.12. Properties

 

11

3.13. Material Contracts

 

11

3.14. Transactions with Affiliates

 

11

3.15. Investment Company Act

 

11

3.16. Finders and Brokers

 

11

3.17. Ownership of Merger Consideration Shares

 

11

3.18. Certain Business Practices

 

12

3.19. Insurance

 

12

3.20. Independent Investigation

 

12

 

 

 

Iv. representations and warranties of THE COMPANY

 

12

4.1. Due Organization and Good Standing

 

12

4.2. Authorization; Binding Agreement

 

13

4.3. Capitalization

 

13

4.4. Subsidiaries

 

14

4.5. Governmental Approvals

 

15

4.6. Non-Contravention

 

15

4.7. Financial Statements

 

15

4.8. Absence of Certain Changes

 

16

i

 

 

Page

4.9. Compliance with Laws

 

16

4.10. Company Permits

 

16

4.11. Litigation

 

17

4.12. Material Contracts

 

17

4.13. Intellectual Property

 

18

4.14. Taxes and Returns

 

20

4.15. Real Property

 

21

4.16. Personal Property

 

21

4.17. Title to and Sufficiency of Assets

 

21

4.18. Employee Matters

 

21

4.19. Benefit Plans

 

22

4.20. Environmental Matters

 

23

4.21. Transactions with Related Persons

 

24

4.22. Insurance

 

24

4.23. Books and Records

 

24

4.24. Top Customers and Suppliers

 

24

4.25 Certain Business Practices

 

25

4.26 Investment Company Act

 

25

4.27. Finders and Investment Bankers

 

25

4.28. Independent Investigation

 

25

4.29. Information Supplied

 

25

 

 

 

V. COVENANTS

 

26

5.1. Access and Information

 

26

5.2. Conduct of Business of the Company

 

27

5.3. Conduct of Business of the Purchaser

 

29

5.4. Annual and Interim Financial Statements

 

30

5.5. Purchaser Public Filings

 

30

5.6. Company Shareholder Meeting

 

31

5.7. No Solicitation

 

31

5.8. No Trading

 

31

5.9. Notification of Certain Matters

 

32

5.10. Efforts

 

32

5.11. Tax Matters

 

33

5.12. Further Assurances

 

33

5.13. The Proxy Statement

 

33

5.14. Public Announcements

 

35

5.15. Confidential Information

 

36

5.16. Documents and Information

 

36

5.17. Post-Closing Board of Directors and Executive Officers

 

37

5.18. Use of Trust Account Proceeds After the Closing

 

37

5.19. Purchaser Policies

 

37

5.20. Disclosure Schedules Updates

 

37

 

 

 

vI. survival and indemnification

 

38

6.1. Survival

 

38

6.2. Indemnification by the Company Shareholders

 

38

6.3. Payment from Escrow Account

 

39

6.4. Limitations and General Indemnification Provisions

 

39

6.5. Indemnification Procedures

 

40

6.6. Exclusive Remedy

 

41

ii

 

 

Page

VII. Closing conditions

 

41

7.1. Conditions of Each Party’s Obligations

 

41

7.2. Conditions to Obligations of the Company

 

42

7.3. Conditions to Obligations of the Purchaser

 

43

7.4. Frustration of Conditions

 

44

 

 

 

VIII. TERMINATION AND EXPENSES

 

44

8.1. Termination

 

44

8.2. Effect of Termination

 

45

8.3. Fees and Expenses

 

45

8.4. Termination Fee

 

46

 

 

 

Ix. WAIVERS and releases

 

46

9.1. Waiver of Claims Against Trust

 

46

 

 

 

x. MISCELLANEOUS

 

47

10.1. Notices

 

47

10.2. Binding Effect; Assignment

 

48

10.3. Third Parties

 

48

10.4. Arbitration

 

48

10.5. Governing Law; Jurisdiction

 

49

10.6. WAIVER OF JURY TRIAL

 

49

10.7. Specific Performance

 

49

10.8. Severability

 

49

10.9. Amendment

 

50

10.10. Waiver

 

50

10.11. Entire Agreement

 

50

10.12. Interpretation

 

50

10.13. Counterparts

 

51

10.14. Purchaser Representative

 

51

10.15. Seller Representative

 

52

10.16. Termination Fee Guarantee

 

53

 

 

 

XI DEFINITIONS

 

54

11.1. Certain Definitions

 

54

11.2. Section References

 

62

INDEX OF EXHIBITS

Exhibit

 

Description

Exhibit A

 

Voting Agreements

Exhibit B

 

Form of Lock-Up Agreement

Exhibit C

 

Form of Registration Rights Agreement

Exhibit D

 

Form of Non-Competition Agreement

Exhibit E

 

Form of Letter of Transmittal

iii

MERGER AGREEMENT

This Merger Agreement (this “ Agreement ”) is made and entered into as of December 27, 2016 by and among (i) Pacific Special Acquisition Corp. , a British Virgin Islands business company with limited liability (the “ Purchaser ”), (ii) PAAC Merger Subsidiary Limited , an exempted company incorporated under the laws of the Cayman Islands with limited liability and a wholly-owned subsidiary of the Purchaser ( Merger Sub ”) , (iii) Zhengqi International Holding Limited , a company incorporated in the British Virgin Islands, in the capacity as the representative from and after the Effective Time (as defined below) for the stockholders of the Purchaser other than the stockholders of the Company (as defined below) as of immediately prior to the Effective Time and their successors and assignees in accordance with the terms and conditions of this Agreement (the “ Purchaser Representative ”), (iv) Zhengdong Zou , in the capacity as the representative from and after the Effective Time for the stockholders of the Company as of immediately prior to the Effective Time in accordance with the terms and conditions of this Agreement (the “ Seller Representative ”), (v) Borqs International Holding Corp , an exempted company incorporated under the laws of the Cayman Islands with limited liability (the “ Company ”) and, (vi) solely for the purposes of Section 10.16 hereof (and the related enforcement and interpretive provision), Zhengqi International Holding Limited , a company incorporated in the British Virgin Islands (the “ Sponsor ”). The Purchaser, Merger Sub, the Purchaser Representative, the Seller Representative, the Company and, solely the purposes of Section 10.16 and the related enforcement and interpretive provisions, Sponsor, are sometimes referred to herein individually as a “ Party ” and, collectively, as the “ Parties ”.

RECITALS:

A.      The Company, directly and indirectly through its subsidiaries, provides software and solutions for connected devices in the Internet of Things industry, and mobile communication service as a Mobile Virtual Network Operator;

B.      The Company is a holding company for Borqs Hong Kong Limited, a Hong Kong registered company (“ Borqs HK ”), which in turn owns 100% of the issued and outstanding equity interests in Borqs Beijing Ltd., a Wholly Foreign-Owned Enterprise registered in Beijing, China (the “ WFOE ”) in accordance with the laws of the People’s Republic of China (“ PRC ”);

C.      The WFOE and certain individual shareholders of the Company are parties to certain variable interest entity contracts pursuant to which the profits of each of Beijing Big Cloud Network Technology Co., Ltd., Beijing Big Cloud Information Technology Co., Ltd., Jiangsu Chenhui Information Technology Company, Ltd., Yuantel (Beijing) Investment Management Co., Ltd. and Yuantel (Beijing) Telecommunications Technology Co. Ltd. each such company formed under PRC Law (each such entity, a VIE Entity ), are directly paid to the WFOE, and in connection with such variable interest entity contracts, the VIE Entity are directly controlled by the WFOE;

D.      The Purchaser owns all of the issued and outstanding capital shares of Merger Sub, which was formed for the sole purpose of the Merger (as defined below);

E.      The Parties intend to effect the merger of the Merger Sub with and into the Company, with the Company continuing as the surviving entity (the “ Merger ”), as a result of which (i) all of the issued and outstanding capital shares of the Company, immediately prior to the Effective Time, shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, in exchange for the right to receive a Pro Rata Share (as defined herein) of the Merger Consideration Shares (as defined herein), (ii) the Company’s options shall be assumed (with equitable adjustments to the number and exercise price of such assumed Company options) by Purchaser with the result that such assumed options shall be exercisable into ordinary shares of the Purchaser and (iii) the Company’s warrant holders immediately prior to the Effective Time shall be issued warrants of the Purchaser, exercisable into ordinary shares of the Purchaser on substantially similar terms and conditions of the original warrants of the Company (with equitable adjustments to the number and exercise price of such warrants), all upon the terms and subject to the conditions set forth in this Agreement and in accordance with the applicable provisions of the Companies Law (2016 Revision) of the Cayman Islands (as amended, “ Cayman Law ”), all in accordance with the terms of this Agreement;

F.      The Purchaser has received voting agreements signed by the Company and holders representing at least sixty-seven percent (67%) of the As-Converted Company Shares (as defined herein) entitled to vote on the matters relating to this Agreement, copies of which are attached as Exhibit A hereto (collectively, the “ Voting Agreements ”), as well as written consents from the Majority Series C Holders (as defined herein), the Key Series D Holders (as defined

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herein), and the Required Key Investors (as defined herein) (the “ Company Written Consents ”), copies of which Company Written Consents have been provided to the Purchaser;

G.      The Parties intend that the Merger will qualify as a tax-free “reorganization” within the meaning of Section 368(a) of the Code (as defined herein);

H.     The Purchaser and the Company, working together, may conduct the PIPE Investment (as defined herein) prior to the Closing pursuant to which the Purchaser may enter into and consummate subscription agreements with investors to purchase the PIPE Shares (as defined herein); and

I.      Certain capitalized terms used herein are defined in Article XI hereof.

NOW, THEREFORE , in consideration of the premises set forth above, which are incorporated in this Agreement as if fully set forth below, and the representations, warranties, covenants and agreements contained in this Agreement, and intending to be legally bound hereby, the Parties hereto agree as follows:

Article I
MERGER

1.1           Merger . At the Effective Time (as defined in Section 1.2 below), and subject to and upon the terms and conditions of this Agreement, and in accordance with the applicable provisions of Cayman Law, Merger Sub and the Company shall consummate the Merger, pursuant to which Merger Sub shall be merged with and into the Company, following which Merger Sub shall be removed from the register of companies in the Cayman Islands and shall thereupon be dissolved and the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving company. The Company, as the surviving company after the Merger is hereinafter sometimes referred to as the “ Surviving Company ”. The Merger shall have the effects specified in Cayman Law.

1.2           Effective Time . On the Closing Date, Merger Sub and the Company shall execute a plan of merger in form and substance reasonably acceptable to the Purchaser and the Company (the “ Plan of Merger ”) and the Parties shall file the Plan of Merger and such other documents as required by the Cayman Law with the Registrar of Companies of the Cayman Islands as provided in Section 233 of the Cayman Law. The Merger shall become effective at the time on the Closing Date when the Plan of Merger is registered by the Registrar of Companies of the Cayman Islands (the “ Effective Time ”).

1.3           Effect of the Merger . At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Plan of Merger and the applicable provisions of the Cayman Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, agreements, powers and franchises, debts, Liabilities, duties and obligations of Merger Sub and the Company shall become the property, rights, privileges, agreements, powers and franchises, debts, Liabilities, duties and obligations of the Surviving Company, which shall include the assumption by the Surviving Company of any and all agreements, covenants, duties and obligations of Merger Sub and the Company set forth in this Agreement to be performed after the Effective Time.

1.4           Tax Consequence . For federal income tax purposes, the Merger is intended to constitute a “reorganization” within the meaning of Section 368 of the Code. The Parties to this Agreement adopt this Agreement as a “plan of reorganization” within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations.

1.5           Memorandum and Articles of Association of the Surviving Company . At the Effective Time, the Surviving Company shall adopt new memorandum and articles of association (collectively, the memorandum and articles of association of the Surviving Company, the “ Surviving Company Charter ”), which are substantially in the form of the memorandum and articles of association of Merger Sub, as in effect immediately prior to the Effective Time, as the memorandum of association and articles of association of the Surviving Company; provided , that at the Effective Time, (a) references therein to the name of the Surviving Company shall be amended to refer to “Borqs International Holding Corp”; and (b) references therein to the authorized share capital of the Surviving Company shall be amended to refer to the authorized share capital of the Surviving Company as approved in the Plan of Merger, if necessary.

1.6           Directors and Officers of the Surviving Company . Immediately after the Effective Time, the board of directors and executive officers of the Surviving Company shall be the board of directors and executive officers of the Purchaser after giving effect to Section 5.17 .

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1.7           Merger Consideration Shares . As consideration for the Merger, the Company Shareholders collectively shall be entitled to receive from the Purchaser, in the aggregate, the Merger Consideration Shares, with each Company Shareholder receiving a percentage of the Merger Consideration Shares equal to (A) the total number of As-Converted Company Shares held by such Company Shareholder immediately prior to the Effective Time, divided by (ii) the total number of As-Converted Company Shares (excluding any Company Securities described in Section 1.8(b) ) (such percentage being each such Company Shareholder’s “ Pro Rata Share ”); provided , that the Merger Consideration Shares are subject to the withholding of the Escrow Shares deposited in the Escrow Account in accordance with Section 1.14 .

1.8           Effect of Merger on Company Securities . At the Effective Time, by virtue of the Merger and without any action on the part of any Party or the Company Shareholders or the holders of any share capital of the Purchaser or Merger Sub:

(a)            Company Shares . Subject to clause (b) below, all Company Shares issued and outstanding immediately prior to the Effective Time will be cancelled and cease to exist in exchange for the right to receive the Merger Consideration Shares (subject to the withholding of the Escrow Shares), with each Company Shareholder receiving its Pro Rata Share of the Merger Consideration Shares, without interest, upon surrender of their certificates representing Company Ordinary Shares or Company Preferred Shares (the “ Company Certificates ”), if applicable, and delivery of the other Transmittal Documents required under Section 1.9. All Company Preferred Shares will be treated on an as converted to Company Ordinary Share basis. As of the Effective Time, each Company Shareholder shall cease to have any other rights in and to the Company or the Surviving Company (other than the rights set forth in Section 1.13 below) and the register of members of the Company will be updated to record the cancellation of the Company Shares.

(b)            Treasury Shares. Notwithstanding clause (a) above or any other provision of this Agreement to the contrary, at the Effective Time, if there are any Company Securities that are owned by the Company as treasury shares or any Company Securities owned by any direct or indirect Subsidiary of the Company immediately prior to the Effective Time, such Company Securities shall be canceled and shall cease to exist without any conversion thereof or payment therefor.

(c)            Dissenting Shares . Each of the Dissenting Shares issued and outstanding immediately prior to the Effective Time shall be cancelled and cease to exist in accordance with Section 1.13 and shall thereafter represent only the right to receive the applicable payments set forth in Section 1.13.

(d)            Company Warrants . Each outstanding Company Warrant shall be cancelled, retired and terminated and cease to represent a right to acquire Company Shares, and each holder thereof shall instead have the right to receive from the Purchaser a new warrant for shares of Purchaser Ordinary Shares (each, a “ Replacement Purchaser Warrant ”). Each Replacement Purchaser Warrant shall have, and be subject to, substantially the same terms and conditions set forth in the Purchaser Public Warrants, except that: (i) the number of Purchaser Ordinary Shares which can be purchased with each Replacement Purchaser Warrant shall equal a number of shares equal to (as rounded down to the nearest whole number) (A) the quotient of (I) the number of As-Converted Company Shares which the Company Warrant had the right to acquire immediately prior to the Effective Time, divided (II) by the number of As-Converted Company Shares outstanding immediately prior to the Effective Time (excluding any Company Securities described in Section 1.8(b)), multiplied by (B) the aggregate number of all Merger Consideration Shares, and (ii) the exercise price for each Replacement Purchaser Warrant shall be equal to (as rounded up to the nearest whole cent) (A) the product of (I) the exercise price of the Company Warrant (in U.S. Dollars), multiplied by (II) the number of As-Converted Company Shares outstanding immediately prior to the Effective Time (excluding any Company Securities described in Section 1.8(b)), divided by (B) the aggregate number of Merger Consideration Shares. The Purchaser shall take all corporate action necessary to reserve for future issuance, and shall maintain such reservation for so long as any of the Replacement Purchaser Warrants remain outstanding, a sufficient number of shares of Purchaser Ordinary Shares for delivery upon the exercise of such Replacement Purchaser Warrants.

(e)            Company Options . Each outstanding Company Option (whether vested or unvested) shall be assumed by Purchaser and automatically converted into an option for Purchaser Ordinary Shares (each, an “ Assumed Option ”). Each Assumed Option will be subject to the terms and conditions set forth in the Company Plan (except any references therein to the Company or Company Ordinary Shares will instead mean the Purchaser and Purchaser Ordinary Shares, respectively) and shall (i) have the right to acquire a number of Purchaser Ordinary Shares equal to (as rounded down to the nearest whole number) (A) the quotient of (I) the number of As-Converted Company

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Shares which the Company Option had the right to acquire immediately prior to the Effective Time, divided (II) by the number of As-Converted Company Shares outstanding immediately prior to the Effective Time (excluding any Company Securities described in Section 1.8(b)), multiplied by (B) the aggregate number of all Merger Consideration Shares, (ii) be subject to the same vesting schedule as the applicable Company Option, and (iii) the exercise price for each Assumed Option shall be equal to (as rounded up to the nearest whole cent) (A) the product of (I) the exercise price of the Company Option (in U.S. Dollars), multiplied by (II) the number of As-Converted Company Shares outstanding immediately prior to the Effective Time (excluding any Company Securities described in Section 1.8(b)), divided by (B) the aggregate number of Merger Consideration Shares. The Purchaser shall take all corporate action necessary to reserve for future issuance, and shall maintain such reservation for so long as any of the Assumed Options remain outstanding, a sufficient number of shares of Purchaser Ordinary Shares for delivery upon the exercise of such Assumed Option.

1.9           Surrender of Company Securities and Disbursement of Merger Consideration Shares .

(a)       Subject to Section 1.13, at the Effective Time, the Purchaser shall cause (i) the Merger Consideration Shares (less the Escrow Shares) to be issued to the Company Shareholders in consideration for the cancellation of their Company Shares, in each case in accordance with each Company Shareholder’s Pro Rata Share, and (ii) the Escrow Shares to be issued to the Escrow Agent in accordance with Section 1.14, as appropriate. Prior to the Effective Time, the Purchaser shall send to each Company Shareholder, a letter of transmittal for use in such exchange in the form attached hereto as Exhibit E (a “ Letter of Transmittal ”) (which shall specify that the delivery of share certificates in respect of the Merger Consideration Shares shall be effected, and risk of loss and title shall pass, only upon proper delivery of the Company Certificates to the Company (if share certificates representing such Company Shares were issued (or an affidavit and indemnity of loss in lieu of the Company Certificate as provided in Section 1.9(d)), for use in such exchange. The Purchaser shall make entries in its register of members to record and give effect to the issue and allotment of the Merger Consideration Shares (less the Escrow Shares) to the Company Shareholders, and the issue and allotment of the Escrow Shares to the Escrow Agent, in accordance with this Section 1.9(a) and Section 1.13, and shall deliver certified copies of such updated register of members to the Company Shareholders and the Escrow Agent forthwith after the Effective Time.

(b)            Each Company Shareholder shall be entitled to receive share certificates in respect of its Pro Rata Share of the Merger Consideration Shares (less the Escrow Shares) which are issued to it in consideration for the cancellation of its Company Shares (excluding any Company Securities described in Sections 1.8(b) or 1.8(c)), as soon as reasonably practicable after the Effective Time, but subject to the delivery to the Surviving Company (with copies to the Purchaser) of the following items prior to the Effective Time (collectively, the “ Transmittal Documents ”): (i) the Company Certificate(s) for its Company Shares if certificates representing such Company Shares were issued (or an affidavit and indemnity of loss in lieu of the Company Certificate as provided in ‎Section 1.9(d)), together with a properly completed and duly executed Letter of Transmittal and such other documents as may be reasonably requested by the Surviving Company or the Purchaser, (ii) a duly executed counterpart to the lock-up agreement with the Purchaser and the Purchaser Representative, effective as of the Effective Time, substantially in the form attached as Exhibit B hereto (each a “ Lock-Up Agreement ”), and (iii) a duly executed counterpart to the registration rights agreement (the “ Registration Rights Agreement ”), substantially in form attached as Exhibit C hereto. Until so surrendered, each Company Certificate shall represent after the Effective Time for all purposes only the right to receive such portion of the Merger Consideration Shares.

(c)            If any portion of the Merger Consideration Shares are to be issued to a Person other than the Person in whose name the relevant Company Shares were registered immediately prior to the Effective Time, it shall be a condition to such delivery that (i) the transfer of such Company Shares shall have been permitted in accordance with the terms of the Company Charter as in effect immediately prior to the Effective Time, (ii) such Company Certificate shall be properly endorsed or shall otherwise be in proper form for transfer and, (iii) the recipient such portion of the Merger Consideration Shares, or the Person in whose name such portion of the Merger Consideration Shares are issued, shall have already executed and delivered counterparts to the Lock-Up Agreement, Registration Rights Agreement, and such other Transmittal Documents as are reasonably deemed necessary by the Surviving Company or the Purchaser and (iv) the Person requesting such delivery shall pay to the Purchaser any transfer or other Taxes required as a result of such delivery to a Person other than the registered holder of such Company Certificate or establish to the satisfaction of the Surviving Company and the Purchaser that such Tax has been paid or is not payable.

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(d)            Notwithstanding anything to the contrary contained herein, in the event that any Company Certificate shall have been lost, stolen or destroyed, in lieu of delivery of a Company Certificate to the Company, the Company Shareholder may instead deliver to the Company an affidavit of lost certificate in form and substance reasonably acceptable to the Purchaser, which at the sole discretion of the Purchaser may include a requirement that the owner of such lost, stolen or destroyed Company Certificate to agree to indemnify against any claim that may be made against the Purchaser or the Surviving Company with respect to the Company Shares represented by the Company Certificates alleged to have been lost, stolen or destroyed. Any affidavit of lost Company Certificate properly delivered in accordance with this Section 1.9(d) shall be treated as a Company Certificate for all purposes of this Agreement.

(e)            After the Effective Time, there shall be no further registration of transfers of Company Shares. If, after the Effective Time, Company Certificates are presented to the Surviving Company or the Purchaser, they shall be canceled and exchanged for the applicable portion of the Merger Consideration Shares provided for, and in accordance with the procedures set forth in this Section 1.9. No dividends or other distributions declared or made after the date of this Agreement with respect to Purchaser Ordinary Shares with a record date after the Effective Time will be paid to the holders of any Company Certificates that have not yet been surrendered with respect to the Purchaser Ordinary Shares to be issued upon surrender thereof until the holders of record of such Company Certificates shall surrender such certificates (or provided an affidavit and indemnity of loss in lieu thereof), if applicable, and provide the other Transmittal Documents. Subject to applicable Law, following surrender of any such Company Certificates (or delivery of an affidavit and indemnity of loss in lieu thereof), if applicable, and delivery of the other Transmittal Documents, Purchaser shall promptly deliver to the record holders thereof, without interest, the certificates representing the Purchaser Ordinary Shares issued in exchange therefor and the amount of any such dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such Purchaser Ordinary Shares.

(f)             All Merger Consideration Shares issued upon the surrender and cancellation of Company Shares in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such Company Securities.

(g)            The Purchaser shall not issue Replacement Purchaser Warrants for Company Warrants until it shall have received from each holder thereof (i) a duly executed Letter of Transmittal with respect to such Company Warrants, (ii) a duly executed counterpart to the agreement for the Replacement Purchaser Warrant and (iii) a Lock-Up Agreement with respect to the Replacement Purchaser Warrant (as well as any Merger Consideration Shares to be received by such holder, if any).

(h)            Notwithstanding anything to the contrary contained herein, no fraction of a Purchaser Ordinary Share will be issued by virtue of the Merger or the transactions contemplated hereby, and each Person who would otherwise be entitled to a fraction of a Purchaser Ordinary Share (after aggregating all fractional Purchaser Ordinary Shares that otherwise would be received by such holder) shall instead have the number of Purchaser Ordinary Shares issued to such Person rounded down in the aggregate to the nearest whole Purchaser Ordinary Share.

1.10         Effect of Transaction on Merger Sub Shares . At the Effective Time, by virtue of the Merger and without any action on the part of any Party or the Company Shareholders or the holders of any shares of the Purchaser or Merger Sub, each Merger Sub Ordinary Share issued and outstanding immediately prior to the Effective Time shall be converted into an equal number of ordinary shares of the Surviving Company, with the same rights, powers and privileges as the shares so converted and shall constitute the only outstanding shares of the Surviving Company.

1.11         Closing Calculations .

(a)            Not later than three (3) Business Days prior to the Closing Date, the Purchaser shall deliver to the Company a statement (the “ Expense Statement ”) setting forth the estimated Excess Capped Expenses, if any, as of the Reference Time, which Excess Statement will be subject to the review and the reasonable approval by the Company. Promptly upon delivering the Expense Statement to the Company, the Purchaser will meet with the Company to review and discuss the Expense Statement and the Purchaser will consider in good faith the Company’s comments to the Expense Statement and make any appropriate adjustments to the Expense Statement prior to the Closing, which adjusted Expense Statement, as mutually approved by the Company and the Purchaser, shall thereafter become the Expense Statement for all purposes of this Agreement.

(b)            Not later than three (3) Business Days prior to the Closing Date, the Company shall deliver to the Purchaser a statement certified by the Company’s chief executive officer (the “ Closing Statement ”) setting

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forth (i) an estimated consolidated balance sheet of the Target Companies as of the Reference Time, prepared in good faith and in accordance with the Accounting Principles ( the Closing Balance Sheet ”), (ii) a good faith calculation of the Company’s estimate of the (A) amount of its Indebtedness less the amount of its cash and cash equivalents (the “ Closing Net Indebtedness ”) and (B) Net Working Capital (the “ Closing Net Working Capital ”), in each case, as of the Reference Time, and (iii) the resulting calculation of the number of Merger Consideration Shares (using the Excess Capped Expenses set forth in the Expense Statement) (each with reasonably detailed calculations), which Closing Statement will be subject to the review and the reasonable approval by the Purchaser. Promptly upon delivering the Closing Statement to the Purchaser, the Company will meet with the Purchaser to review and discuss the Closing Statement and the Company will consider in good faith the Purchaser’s comments to the Closing Statement and make any appropriate adjustments to the Closing Statement prior to the Closing, which adjusted Closing Statement, as mutually approved by the Company and the Purchaser, shall thereafter become the Closing Statement for all purposes of this Agreement. The Closing Statement and the determinations contained therein shall be prepared in accordance with the Accounting Principles and otherwise in accordance with this Agreement. The Closing Statement will also include with respect to (i) Indebtedness, the amount owed to each creditor of any of the Target Companies and (ii) Transaction Expenses, the amount owed to each payee thereof and payment instructions therefor.

(c)            Schedule 1.11 sets forth an illustrative statement (the “ Reference Statement ”) prepared in good faith by the Company in cooperation with the Purchaser setting forth the various line items used (or to be used) in, and illustrating for sample purposes only as of the date set forth therein, the calculation of Closing Net Indebtedness and Closing Net Working Capital, and the resulting Merger Consideration Shares, if the Closing had occurred on such date, in each case prepared and calculated in accordance with this Agreement (other than the use of such earlier date in lieu of the Reference Time).

1.12         Taking of Necessary Action; Further Action . If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Company with full right, title and possession to all assets, property, rights, privileges, powers and franchises of the Company and Merger Sub, the officers and directors of the Company and Merger Sub are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action, so long as such action is not inconsistent with this Agreement.

1.13         Appraisal and Dissenter’s Rights . No Company Shareholder who has validly exercised their rights to dissent from the Merger pursuant to Section 238 of the Cayman Law (collectively, the “ Dissenting Shareholders ”) shall be entitled to receive the Merger Consideration Shares with respect to the Company Shares owned by such Person (“ Dissenting Shares ”) unless and until such Person shall have lost such Person’s rights to dissent from the Merger under the Cayman Law. Each Dissenting Shareholder shall be entitled to receive from the Company (or after the Closing, the Surviving Company), only the payment resulting from the procedure in Section 238 of the Cayman Law with respect to Dissenting Shares owned by such Dissenting Shareholder. In the absence of agreement between the Company (or after the Closing, the Surviving Company) and Dissenting Shareholder as to the fair value of the Dissenting Shares, the Company (or after the Closing, the Surviving Company) and the Dissenting Shareholder shall takes all steps and actions within their respective control to ensure that the fair value of such Dissenting Shares is as determined by any one of Deloitte Touche Tohmatsu Limited, PricewaterhouseCoopers, Ernst & Young or KPMG, as appointed by the Company (or after the Closing, the Surviving Company) to do so. The Company shall give the Purchaser Representative (i) prompt notice of any written objections to the Merger or exercise of dissenter rights or demands for appraisal and any other instruments served pursuant to the Cayman Law that are received by the Company relating to its shareholders’ rights to dissent from the Merger and (ii) the opportunity to participate in all negotiations and proceedings with respect to the exercise of dissenter rights or demand for appraisal under the Cayman Law. The Company shall not, except with the prior written consent (not to be unreasonably withheld or delayed) of the Purchaser Representative, voluntarily make any payment with respect to the exercise of any rights to dissent from the Merger or any demands for appraisal, offer to settle or settle any such demands or approve any withdrawal of any such demands. In the event that any written notices of objection to the Merger are served by any Company Shareholder pursuant to Section 238(2) of the Cayman Law, the Company shall serve written notice of the authorization and approval of this Agreement, the Plan of Merger and the Merger on such shareholders pursuant to Section 238(4) of the Cayman Law within twenty (20) days of obtaining the Required Company Shareholder Approval. Notwithstanding anything to the contrary contained in this Agreement, for all purposes of this Agreement, the Merger Consideration Shares (and Escrow Shares) shall be reduced by the Pro Rata Share of any Dissenting Shareholders attributable to any Dissenting Shares and the Dissenting Shareholders shall have no rights to any Merger Consideration Shares (or Escrow Shares) with respect to any Dissenting Shares.

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1.14         Escrow.

(a)            At or prior to the Closing, the Purchaser Representative, the Seller Representative and an escrow agent mutually acceptable to the Company and the Purchaser, acting reasonably (the “ Escrow Agent ”), shall enter into an Escrow Agreement, effective as of the Effective Time, in form and substance reasonably satisfactory to the Parties (the “ Escrow Agreement ”), pursuant to which the Purchaser shall issue to the Escrow Agent four percent (4%) of the Merger Consideration Shares (together with any equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or converted, the “ Escrow Shares ”) to be held, along with any other dividends, distributions or other income on the Escrow Shares (together with the Escrow Shares, the “ Escrow Property ”), by the Escrow Agent in a segregated escrow account (the “ Escrow Account ”) and disbursed therefrom in accordance with the terms of Article VI hereof and the Escrow Agreement. The Escrow Property shall be allocated among and transferred to the Company Shareholders pro rata based on their respective Pro Rata Share. The Escrow Property shall serve as a security for, and a source of payment of, the Indemnified Parties’ indemnity rights pursuant to Article VI . Unless otherwise required by Law, all distributions made from the Escrow Account shall be treated by the Parties as an adjustment to the number of Merger Consideration Shares received by the Company Shareholders pursuant to Article I hereof.

(b)            The Escrow Property shall not be subject to any indemnification claim to the extent made after the date which is eighteen (18) months after the Closing Date (the “ Expiration Date ”); provided, however, with respect to any indemnification claims made in accordance with Article VI hereof on or prior to the Expiration Date (including those at are revised or adjusted in accordance with Article VI after the Expiration Date) that remain unresolved at the time of the Expiration Date (“ Pending Claims ”), all or a portion of the Escrow Property reasonably necessary to satisfy such Pending Claims (as determined based on the amount of the indemnification claim included in the Claim Notice provided by the Purchaser Representative under Article VI and the Purchaser Share Price as of the Expiration Date) shall remain in the Escrow Account until such time as such Pending Claim shall have been finally resolved pursuant to the provisions of Article VI . After the Expiration Date, any Escrow Property remaining in the Escrow Account that is not subject to Pending Claims, if any, and not subject to resolved but unpaid claims in favor of an Indemnified Party, shall be transferred by the Escrow Agent to the Company Shareholders that have previously delivered the Transmittal Documents to the Surviving Company or the Purchaser in accordance with Section 1.9 , with each such Company Shareholder receiving its Pro Rate Share of such Escrow Property. Promptly after the final resolution of all Pending Claims and payment of all indemnification obligations in connection therewith, the Escrow Agent shall transfer any Escrow Property remaining in the Escrow Account to the Company Shareholders that have previously delivered the Transmittal Documents to the Surviving Company or the Purchaser in accordance with Section 1.9 , with each such Company Shareholder receiving its Pro Rata Share of such Escrow Property.

Article II
CLOSING

2.1           Closing . Subject to the satisfaction or waiver of the conditions set forth in Article VII , the consummation of the transactions contemplated by this Agreement (the “ Closing ”) shall take place at the offices of Ellenoff Grossman & Schole, LLP, 1345 Avenue of the Americas, New York, NY 10105, on the second (2 nd ) Business Day after all the Closing conditions to this Agreement have been satisfied or waived at 10:00 a.m. local time, or at such other date, time or place as the Purchaser and the Company may agree (the date and time at which the Closing is actually held being the “ Closing Date ”).

Article III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

Except (i) as set forth in the disclosure schedules delivered by the Purchaser to the Company on the date hereof (the “ Purchaser Disclosure Schedules ”), the Section numbers of which are numbered to correspond to the Section numbers of this Agreement to which they refer, or (ii) as is expressly clear on the face of the SEC Reports that are available on the SEC’s website through EDGAR as of the date hereof (provided, however, that information contained in the SEC Reports shall not be deemed disclosed for purposes of Sections 3.1, 3.2, 3.4 and 3.8 below), the Purchaser represents and warrants to the Company, as of the date hereof and as of the Closing, as follows:

3.1           Due Organization and Good Standing . The Purchaser is a business company duly incorporated, validly existing and in good standing under the Laws of the British Virgin Islands. The Purchaser has all requisite corporate

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power and authority to own, lease and operate its properties and to carry on its business as now being conducted. The Purchaser is duly qualified or licensed and in good standing to do business in each jurisdiction in which the character of the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary. The Purchaser has heretofore made available to the Company accurate and complete copies of the Organizational Documents of the Purchaser, as currently in effect. The Purchaser is not in violation of any provision of its Organizational Documents.

3.2           Authorization; Binding Agreement . The Purchaser has all requisite corporate power and authority to execute and deliver this Agreement and each Ancillary Document to which it is a party, to perform the Purchaser’s obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and each Ancillary Document to which it is a party and the consummation of the transactions contemplated hereby and thereby (a) have been duly and validly authorized by the board of directors of the Purchaser, and (b) no other corporate proceedings, other than as set forth elsewhere in the Agreement, on the part of the Purchaser are necessary to authorize the execution and delivery of this Agreement and each Ancillary Document to which it is a party or to consummate the transactions contemplated hereby and thereby. This Agreement has been, and each Ancillary Document to which the Purchaser is a party shall be when delivered, duly and validly executed and delivered by the Purchaser and, assuming the due authorization, execution and delivery of this Agreement and such Ancillary Documents by the other parties hereto and thereto, constitutes, or when delivered shall constitute, the valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, except to the extent that enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws of general application affecting the enforcement of creditors’ rights generally or by any applicable statute of limitation or by any valid defense of set-off or counterclaim, and the fact that equitable remedies or relief (including the remedy of specific performance) are subject to the discretion of the court from which such relief may be sought (collectively, the “ Enforceability Exceptions ”).

3.3           Governmental Approvals . Except as otherwise described in Schedule 3.3 , no Consent of or with any Governmental Authority, on the part of the Purchaser is required to be obtained or made in connection with the execution, delivery or performance by the Purchaser of this Agreement and each Ancillary Document to which it is a party or the consummation by the Purchaser of the transactions contemplated hereby and thereby, other than (a) pursuant to Antitrust Laws, (b) such filings as contemplated by this Agreement, (c) any filings required with Nasdaq or the SEC with respect to the transactions contemplated by this Agreement, (d) applicable requirements, if any, of the Securities Act, the Exchange Act, and/or any state “blue sky” securities Laws, and the rules and regulations thereunder, and (e) where the failure to obtain or make such Consents or to make such filings or notifications, would not reasonably be expected to have a Material Adverse Effect on the Purchaser.

3.4           Non-Contravention . Except as otherwise described in Schedule 3.4 , the execution and delivery by the Purchaser of this Agreement and each Ancillary Document to which it is a party, the consummation by the Purchaser of the transactions contemplated hereby and thereby, and compliance by the Purchaser with any of the provisions hereof and thereof, will not (a) conflict with or violate any provision of the Purchaser’s Organizational Documents, (b) subject to obtaining the Consents from Governmental Authorities referred to in Section 3.3 hereof, and the waiting periods referred to therein having expired, and any condition precedent to such Consent or waiver having been satisfied, conflict with or violate any Law, Order or Consent applicable to the Purchaser or any of its properties or assets, or (c) (i) violate, conflict with or result in a breach of, (ii) constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, (iii) result in the termination, withdrawal, suspension, cancellation or modification of, (iv) accelerate the performance required by the Purchaser under, (v) result in a right of termination or acceleration under, (vi) give rise to any obligation to make payments or provide compensation under, (vii) result in the creation of any Lien upon any of the properties or assets of the Purchaser under, (viii) give rise to any obligation to obtain any third party Consent or provide any notice to any Person or (ix) give any Person the right to declare a default, exercise any remedy, claim a rebate, chargeback, penalty or change in delivery schedule, accelerate the maturity or performance, cancel, terminate or modify any right, benefit, obligation or other term under, any of the terms, conditions or provisions of, any Purchaser Material Contract, except for any deviations from any of the foregoing clauses (a), (b) or (c) that would not reasonably be expected to have a Material Adverse Effect on the Purchaser.

3.5           Capitalization .

(a)            The Purchaser is authorized to issue (i) an unlimited number of Purchaser Ordinary Shares and (ii) an unlimited number of preferred shares of no par value comprised within five (5) classes thereof. The issued

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and outstanding Purchaser Securities as of the date of this Agreement are set forth on Schedule 3.5(a). All outstanding Purchaser Ordinary Shares are duly authorized, validly issued, fully paid and non-assessable and not subject to or issued in violation of any purchase option, right of first refusal, preemptive right, subscription right or any similar right under any provision of the BVI Act, the Purchaser Charter or any Contract to which the Purchaser is a party. None of the outstanding Purchaser Securities has been issued in violation of any applicable securities Laws.

(b)            Prior to giving effect to the Merger, the authorized share capital of Merger sub consists of 50,000 Merger Sub Ordinary Shares, of which one (1) share is issued and outstanding, which is owned by the Purchaser. Prior to giving effect to the transactions contemplated by this Agreement, other than Merger Sub, the Purchaser does not have any Subsidiaries or own any equity interests in any other Person.

(c)            Except as set forth in Schedule 3.5(a), there are no (i) outstanding options, warrants, puts, calls, convertible securities, preemptive or similar rights, (ii) bonds, debentures, notes or other Indebtedness having general voting rights or that are convertible or exchangeable into securities having such rights or (iii) subscriptions or other rights, agreements, arrangements, Contracts or commitments of any character (other than this Agreement and the Ancillary Documents), (A) relating to the issued or unissued shares of the Purchaser or (b) obligating the Purchaser to issue, transfer, deliver or sell or cause to be issued, transferred, delivered, sold or repurchased any options or shares or securities convertible into or exchangeable for such shares, or (C) obligating the Purchaser to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment for such capital shares. Other than the Redemption or as expressly set forth in this Agreement, there are no outstanding obligations of the Purchaser to repurchase, redeem or otherwise acquire any shares of the Purchaser or to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any Person. Except as set forth in Schedule 3.5(c), there are no shareholders agreements, voting trusts or other agreements or understandings to which the Purchaser is a party with respect to the voting of any shares of the Purchaser.

(d)            All Indebtedness of the Purchaser is disclosed on Schedule 3.5(d). No Indebtedness of the Purchaser contains any restriction upon: (i) the prepayment of any of such Indebtedness, (ii) the incurrence of Indebtedness by the Purchaser or (iii) the ability of the Purchaser to grant any Lien on its properties or assets.

(e)            Since the date of formation of the Purchaser, and except as contemplated by this Agreement (including any redemptions that may occur in connection with the Extension), the Purchaser has not declared or paid any distribution or dividend in respect of its shares and has not repurchased, redeemed or otherwise acquired any of its shares, and the Purchaser’s board of directors has not authorized any of the foregoing.

3.6           SEC Filings and Purchaser Financials .

(a)            The Purchaser, since its formation, has filed all forms, reports, schedules, statements, registration statements, prospectuses and other documents required to be filed or furnished by the Purchaser with the SEC under the Securities Act and/or the Exchange Act, together with any amendments, restatements or supplements thereto, and will file all such forms, reports, schedules, statements and other documents required to be filed subsequent to the date of this Agreement. Except to the extent available on the SEC’s web site through EDGAR, the Purchaser has delivered to the Company copies in the form filed with the SEC of all of the following: (i) the Purchaser’s annual reports on Form 10-K for each fiscal year of the Purchaser beginning with the first year the Purchaser was required to file such a form, (ii) the Purchaser’s quarterly reports on Form 10-Q for each fiscal quarter that the Purchaser filed such reports to disclose its quarterly financial results in each of the fiscal years of the Purchaser referred to in clause (i) above, (iii) all other forms, reports, registration statements, prospectuses and other documents (other than preliminary materials) filed by the Purchaser with the SEC since the beginning of the first fiscal year referred to in clause (i) above (the forms, reports, registration statements, prospectuses and other documents referred to in clauses (i), (ii) and (iii) above, whether or not available through EDGAR, are collectively, the “ SEC Reports ”) and (iv) all certifications and statements required by (A) Rules 13a-14 or 15d-14 under the Exchange Act, and (B) 18 U.S.C. §1350 (Section 906 of SOX) with respect to any report referred to in clause (i) above (collectively, the “ Public Certifications ”). The SEC Reports (x) were prepared in all material respects in accordance with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations thereunder and (y) did not, as of their respective effective dates (in the case of SEC Reports that are registration statements filed pursuant to the requirements of the Securities Act) and at the time they were filed with the SEC (in the case of all other SEC Reports) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The Public Certifications are each true as of their respective dates of filing. As used in this Section 3.6, the term “file” shall be broadly construed to include any manner permitted by

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SEC rules and regulations in which a document or information is furnished, supplied or otherwise made available to the SEC. As of the date of this Agreement, (A) the Purchaser Public Units, the Purchaser Ordinary Shares, the Purchaser Public Rights and the Purchaser Public Warrants are listed on Nasdaq, (B) the Purchaser has not received any written deficiency notice from Nasdaq relating to the continued listing requirements of such Purchaser Securities, (C) there are no Actions pending or, to the Knowledge of the Purchaser, threatened against the Purchaser by the Financial Industry Regulatory Authority with respect to any intention by such entity to suspend, prohibit or terminate the quoting of such Purchaser Securities on Nasdaq and (D) such Purchaser Securities are in compliance with all of the applicable listing and corporate governance rules of Nasdaq.

(b)            The financial statements and notes contained or incorporated by reference in the SEC Reports (the “ Purchaser Financials ”), fairly present in all material respects the financial position and the results of operations, changes in shareholders’ equity, and cash flows of the Purchaser at the respective dates of and for the periods referred to in such financial statements, all in accordance with (i) GAAP methodologies applied on a consistent basis throughout the periods involved and (ii) Regulation S-X or Regulation S-K, as applicable (except as may be indicated in the notes thereto and for the omission of notes and audit adjustments in the case of unaudited quarterly financial statements to the extent permitted by Regulation S-X or Regulation S-K, as applicable).

(c)            Except as and to the extent reflected or reserved against in the Purchaser Financials, the Purchaser has not incurred any Liabilities or obligations of the type required to be reflected on a balance sheet in accordance with GAAP that is not adequately reflected or reserved on or provided for in the Purchaser Financials, other than Liabilities of the type required to be reflected on a balance sheet in accordance with GAAP that have been incurred since the Purchaser’s formation in the ordinary course of business.

3.7           Absence of Certain Changes . As of the date of this Agreement, except as set forth in Schedule 3.7 , the Purchaser has, (a) since its formation, not entered into any material contracts or material agreements, and has conducted no business other than its formation, the public offering of its securities (and the related private offerings), public reporting and its search for an initial Business Combination as described in the IPO Prospectus (including the investigation of the Target Companies and the negotiation and execution of this Agreement) and related activities and (b) since June 30, 2016, not been subject to a Material Adverse Effect.

3.8           Compliance with Laws . The Purchaser is, and has since its formation been, in compliance with all Laws applicable to it and the conduct of its business except for such noncompliance which would not reasonably be expected to have a Material Adverse Effect on the Purchaser, and the Purchaser has not received written notice alleging any violation of applicable Law in any material respect by the Purchaser.

3.9           Actions; Orders; Permits . There is no pending or, to the Knowledge of the Purchaser, threatened material Action to which the Purchaser is subject which would reasonably be expected to have a Material Adverse Effect on the Purchaser. There is no material Action that the Purchaser has pending against any other Person. The Purchaser is not subject to any material Orders of any Governmental Authority, nor are any such Orders pending. The Purchaser holds all material Permits necessary to lawfully conduct its business as presently conducted, and to own, lease and operate its assets and properties, all of which are in full force and effect, except where the failure to hold such Consent or for such Consent to be in full force and effect would not reasonably be expected to have a Material Adverse Effect on the Purchaser.

3.10         Taxes and Returns .

(a)            The Purchaser has or will have timely filed, or caused to be timely filed, all material Tax Returns required to be filed by it, which Tax Returns are true, accurate, correct and complete in all material respects, and has paid, collected or withheld, or caused to be paid, collected or withheld, all material Taxes required to be paid, collected or withheld, other than such Taxes for which adequate reserves in the Purchaser Financials have been established in accordance with GAAP. Schedule 3.10(a) sets forth each jurisdiction where the Purchaser files or is required to file a Tax Return. There are no audits, examinations, investigations or other proceedings pending against the Purchaser in respect of any Tax, and the Purchaser has not been notified in writing of any proposed Tax claims or assessments against the Purchaser (other than, in each case, claims or assessments for which adequate reserves in the Purchaser Financials have been established in accordance with GAAP or are immaterial in amount). There are no Liens with respect to any Taxes upon any of the Purchaser’s assets, other than Permitted Liens. The Purchaser has no outstanding waivers or extensions of any applicable statute of limitations to assess any material amount of Taxes. There are no outstanding requests by the Purchaser for any extension of time within which to file any Tax Return or within which to pay any Taxes shown to be due on any Tax Return.

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(b)            Since the date of its formation, the Purchaser has not (i) changed any Tax accounting methods, policies or procedures except as required by a change in Law, (ii) made, revoked, or amended any material Tax election, (iii) filed any amended Tax Returns or claim for refund or (iv) entered into any closing agreement affecting or otherwise settled or compromised any material Tax Liability or refund.

3.11         Employees and Employee Benefit Plans . The Purchaser does not (a) have any paid employees or (b) maintain, sponsor, contribute to or otherwise have any Liability under, any Benefit Plans.

3.12         Properties . The Purchaser does not own, license or otherwise have any right, title or interest in any material Intellectual Property. The Purchaser does not own or lease any material real property or Personal Property.

3.13         Material Contracts .

(a)            Except as set forth on Schedule 3.13(a), other than this Agreement and the Ancillary Documents, there are no Contracts to which the Purchaser is a party or by which any of its properties or assets may be bound, subject or affected, which (i) creates or imposes a Liability greater than $100,000, (ii) may not be cancelled by the Purchaser on less than sixty (60) days’ prior notice without payment of a material penalty or termination fee or (iii) prohibits, prevents, restricts or impairs in any material respect any business practice of the Purchaser as its business is currently conducted, any acquisition of material property by the Purchaser, or restricts in any material respect the ability of the Purchaser from engaging in business as currently conducted by it or from competing with any other Person (each, a “ Purchaser Material Contract ”). All Purchaser Material Contracts have been made available to the Company other than those that are exhibits to the SEC Reports.

(b)            With respect to each Purchaser Material Contract: (i) the Purchaser Material Contract was entered into at arms’ length and in the ordinary course of business; (ii) the Purchaser Material Contract is legal, valid, binding and enforceable in all material respects against the Purchaser and, to the Knowledge of the Purchaser, the other parties thereto, and is in full force and effect (except as such enforcement may be limited by the Enforceability Exceptions); (iii) the Purchaser is not in breach or default in any material respect, and no event has occurred that with the passage of time or giving of notice or both would constitute such a breach or default in any material respect by the Purchaser, or permit termination or acceleration by the other party, under such Purchaser Material Contract; and (iv) to the Knowledge of the Purchaser, no other party to any Purchaser Material Contract is in breach or default in any material respect, and no event has occurred that with the passage of time or giving of notice or both would constitute such a breach or default by such other party, or permit termination or acceleration by the Purchaser under any Purchaser Material Contract.

3.14         Transactions with Affiliates . Schedule 3.14 sets forth a true, correct and complete list of the Contracts and arrangements that are in existence as of the date of this Agreement under which there are any existing or future Liabilities or obligations between the Purchaser and any (a) present or former director, officer or employee or Affiliate of the Purchaser, or any family member of any of the foregoing, or (b) record or beneficial owner of more than five percent (5%) of the Purchaser’s outstanding Purchaser Ordinary Shares as of the date hereof.

3.15         Investment Company Act . The Purchaser is not an “investment company” or a Person directly or indirectly “controlled” by or acting on behalf of an “investment company”, in each case within the meaning of the Investment Company Act of 1940, as amended.

3.16         Finders and Brokers . Except as set forth on Schedule 3.16 , no broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission from the Purchaser, the Target Companies or any of their respective Affiliates in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of the Purchaser.

3.17         Ownership of Merger Consideration Shares . All Merger Consideration Shares to be issued and delivered to the Company Shareholders in accordance with Article I shall be, upon issuance and delivery of such Purchaser Ordinary Shares, fully paid and non-assessable, free and clear of all Liens, other than restrictions arising from applicable securities Laws, the Lock-Up Agreement, the Registration Rights Agreement, the Escrow Agreement, and any Liens incurred by the Company or any Company Shareholder, and the issuance and sale of such Purchaser Ordinary Shares pursuant hereto will not be subject to or give rise to any preemptive rights or rights of first refusal.

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3.18         Certain Business Practices .

(a)            Neither the Purchaser, nor any of its Representatives acting on its behalf, has (i) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees, to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, (iii) made any other unlawful payment or (iv) since the formation of the Purchaser, directly or indirectly, given or agreed to give any gift or similar benefit in any material amount to any customer, supplier, governmental employee or other Person who is or may be in a position to help or hinder the Purchaser or assist it in connection with any actual or proposed transaction.

(b)            The operations of the Purchaser are and have been conducted at all times in compliance with laundering statutes in all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Authority, and no Action involving the Purchaser with respect to the any of the foregoing is pending or, to the Knowledge of the Purchaser, threatened.

(c)            None of the Purchaser or any of its directors or officers, or, to the Knowledge of the Purchaser, any other Representative acting on behalf of the Purchaser is currently identified on the specially designated nationals or other blocked person list or otherwise currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“ OFAC ”), and the Purchaser has not, directly or indirectly, used any funds, or loaned, contributed or otherwise made available such funds to any Subsidiary, joint venture partner or other Person, in connection with any sales or operations in any country sanctioned by OFAC or for the purpose of financing the activities of any Person currently subject to, or otherwise in violation of, any U.S. sanctions administered by OFAC in the last five (5) fiscal years.

3.19         Insurance . Schedule 3.19 lists all insurance policies (by policy number, insurer, coverage period, coverage amount, annual premium and type of policy) held by the Purchaser relating to the Purchaser or its business, properties, assets, directors, officers and employees, copies of which have been provided to the Company. All premiums due and payable under all such insurance policies have been timely paid and the Purchaser is otherwise in material compliance with the terms of such insurance policies. All such insurance policies are in full force and effect, and to the Knowledge of the Purchaser, there is no threatened termination of, or material premium increase with respect to, any of such insurance policies. There have been no insurance claims made by the Purchaser. The Purchaser has each reported to its insurers all claims and pending circumstances that would reasonably be expected to result in a claim, except where such failure to report such a claim would not be reasonably likely to have a Material Adverse Effect on the Purchaser.

3.20         Independent Investigation . Without limiting Section 6.4(c) hereof, the Purchaser has conducted its own independent investigation, review and analysis of the business, results of operations, prospects, condition (financial or otherwise) or assets of the Target Companies, and acknowledge that it has been provided adequate access to the personnel, properties, assets, premises, books and records, and other documents and data of the Target Companies for such purpose. The Purchaser acknowledges and agrees that: (a) in making its decision to enter into this Agreement and to consummate the transactions contemplated hereby, it has relied solely upon its own investigation and the express representations and warranties of the Company set forth in Article IV (including the related portions of the Company Disclosure Schedules); and (b) none of the Company nor its respective Representatives have made any representation or warranty as to the Target Companies, or this Agreement, except as expressly set forth in Article IV (including the related portions of the Company Disclosure Schedules).

Article IV
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY

Except as set forth in the disclosure schedules delivered by the Company to the Purchaser on the date hereof (the “ Company Disclosure Schedules ”), the Section numbers of which are numbered to correspond to the Section numbers of this Agreement to which they refer, the Company hereby represents and warrants to the Purchaser, as of the date hereof and as of the Closing, as follows:

4.1           Due Organization and Good Standing . The Company is an exempted company duly incorporated, validly existing and in good standing under the Laws of the Cayman Islands and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Each Subsidiary of the Company is a corporation or other entity duly formed, validly existing and in good standing under the Laws of its

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jurisdiction of organization and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Except as set forth in Schedule 4.1 , each Target Company is duly qualified or licensed and in good standing in the jurisdiction in which it is incorporated or registered and in each other jurisdiction where it does business or operates to the extent that the character of the property owned, or leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary. Schedule 4.1 lists all jurisdictions in which any Target Company is qualified to conduct business and all names other than its legal name under which any Target Company does business. The Company has provided to the Purchaser accurate and complete copies of its Organizational Documents and the Organizational Documents of each of its Subsidiaries, each as amended to date and as currently in effect. No Target Company is in violation of any provision of its Organizational Documents.

4.2           Authorization; Binding Agreement . The Company has all requisite corporate power and authority to execute and deliver this Agreement and each Ancillary Document to which it is or is required to be a party, to perform the Company’s obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and each Ancillary Document to which the Company is or is required to be a party and the consummation of the transactions contemplated hereby and thereby, (i) have been duly and validly authorized by the Company’s board of directors, including the Majority Preference Share Director (as such term is defined in the Company Charter), in all cases only to the extent required by the Company Charter, Cayman Law, any other applicable Law or any Contract to which the Company or any of its shareholders is a party or by which or its securities are bound and (ii) other than the Company Shareholder Approval, no other corporate proceedings on the part of the Company are necessary to authorize the execution and delivery of this Agreement and each Ancillary Document to which it is a party or to consummate the transactions contemplated hereby and thereby. This Agreement has been, and each Ancillary Document to which the Company is or is required to be a party shall be when delivered, duly and validly executed and delivered by the Company and assuming the due authorization, execution and delivery of this Agreement and any such Ancillary Document by the other parties hereto and thereto, constitutes, or when delivered shall constitute, the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to the Enforceability Exceptions. The Voting Agreements delivered by the Company include holders representing at least sixty-seven percent (67%) of the As-Converted Company Shares entitled to vote on the matters relating to this Agreement, and such Voting Agreements are in full force and effect. The Company Written Consents include consents from the Majority Series C Holders, the Key Series D Holders, and the Required Key Investors, and are in full force and effect and have not been revoked.

4.3           Capitalization .

(a)            The Company is authorized to issue 309,651,804 Company Ordinary Shares, 54,500,000 of which shares are issued and outstanding, and is authorized to issue 205,236,218 Company Preferred Shares, 197,387,675 of which shares are issued and outstanding. With respect to the Company Preferred Shares, (i) 40,000,000 shares are designated as Series A Preferred Shares, of which 39,900,000 shares are issued and outstanding, (ii) 82,857,143 shares are designated as Series B Preferred Shares, of which 82,857,143 shares are issued and outstanding, (iii) 52,727,271 shares are designated as Series C Preferred Shares, of which 50,909,089 shares are issued and outstanding, (iv) 29,651,804 shares are designated as Series D Preferred Shares, of which 23,721,443 shares are issued and outstanding and (v) no other Company Preferred shares have been designated or issued. Prior to giving effect to the transactions contemplated by this Agreement, all of the issued and outstanding Company Shares and other equity interests of the Company are set forth on Schedule 4.3(a) , along with the legal (registered) and beneficial owners thereof, all of which shares and other equity interests are owned free and clear of any Liens other than those imposed under the Company Charter. All of the outstanding shares and other equity interests in or of the Company have been duly authorized, are fully paid and non-assessable and not in violation of any purchase option, right of first refusal, preemptive right, subscription right or any similar right under any provision of the Cayman Law, any other applicable Law, the Company Charter or any Contract to which the Company is a party or by which it or its securities are bound. The Company holds no shares or other equity interests in or of the Company in its treasury. None of the outstanding shares or other equity interests in or of the Company were issued in violation of any applicable securities Laws. The rights, privileges and preferences of the Company Preferred Shares are as stated in the Company Charter and as provided by Cayman Law.

(b)            Schedule 4.3(b) , sets forth the beneficial and record owners of all outstanding Company options and warrants (including in each case the grant date, number and type of shares issuable thereunder, the exercise price, the expiration date and any vesting schedule). Other than as set forth on Schedule 4.3(b) , there are no options,

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warrants or other rights to subscribe for or purchase any shares or other equity interests in or of the Company or securities convertible into or exchangeable for, or that otherwise confer on the holder any right to acquire any shares or other equity interests in or of the Company, or preemptive rights or rights of first refusal or first offer, nor are there any Contracts, commitments, arrangements or restrictions to which the Company or, to the Knowledge of the Company, any of its shareholders is a party or bound relating to any equity securities of the Company, whether or not outstanding. There are no outstanding or authorized equity appreciation, phantom equity or similar rights with respect to the Company. Except as set forth on Schedule 4.3(b) , there are no voting trusts, proxies, shareholder agreements or any other agreements or understandings with respect to the voting of the Company’s shares or other equity interests. Except as set forth in the Company Charter, there are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any shares or other equity interests or securities in or of the Company, nor has the Company granted any registration rights to any Person with respect to the Company’s equity securities. All of the Company’s securities have been granted, offered, sold and issued in compliance with all applicable securities Laws. As a result of the consummation of the transactions contemplated by this Agreement, no shares or other equity interests in or of the Company are issuable and no rights in connection with any interests, warrants, rights, options or other securities of the Company accelerate or otherwise become triggered (whether as to vesting, exercisability, convertibility or otherwise).

(c)            Except as set forth on Schedule 4.3(c) , since January 1, 2010, the Company has not declared or paid any distribution or dividend in respect of its shares or other equity interests and has not repurchased, redeemed or otherwise acquired any shares or other equity interests in or of the Company, and the board of directors of the Company has not authorized any of the foregoing.

4.4           Subsidiaries .

(a)            Schedule 4.4(a) sets forth the name of each Subsidiary of the Company, and with respect to each Subsidiary (a) its jurisdiction of organization, (b) its authorized shares or other equity interests (if applicable), and (c) the number of issued and outstanding shares or other equity interests and the record holders and beneficial owners thereof. All of the outstanding equity securities of each Subsidiary of the Company are duly authorized and validly issued, fully paid and non-assessable (if applicable), and were offered, sold and delivered in material compliance with all applicable securities Laws, and owned by the Company or one of its Subsidiaries free and clear of all Liens (other than those, if any, imposed by such Subsidiary’s Organizational Documents). There are no Contracts to which the Company or any of its Affiliates is a party or bound with respect to the voting (including voting trusts or proxies) of the shares or other equity interests of any Subsidiary of the Company other than the Organizational Documents of any such Subsidiary. There are no outstanding or authorized options, warrants, rights, agreements, subscriptions, convertible securities or commitments to which any Subsidiary of the Company is a party or which are binding upon any Subsidiary of the Company providing for the issuance or redemption of any shares or other equity interests in or of any Subsidiary of the Company. There are no outstanding equity appreciation, phantom equity, profit participation or similar rights granted by any Subsidiary of the Company. Except as set forth on Schedule 4.4(a) , no Subsidiary of the Company has any limitation on its ability to make any distributions or dividends to its equity holders, whether by Contract, Order or applicable Law. Except for the equity interests of the Subsidiaries listed on Schedule 4.4(a) , the Company does not own or have any rights to acquire, directly or indirectly, any shares or other equity interests of, or otherwise Control, any Person. None of the Company or its Subsidiaries is a participant in any joint venture, partnership or similar arrangement. There are no outstanding contractual obligations of the Company or its Subsidiaries to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any other Person.

(b)            Borqs HK is the legal and beneficial owner of one hundred percent (100%) of the issued and outstanding equity interests of the WFOE. There are no outstanding options, warrants, rights (including conversion rights, preemptive rights, rights of first refusal or similar rights) or agreements to purchase or acquire any equity interest, or any securities convertible into or exchangeable for an equity interest, of the WFOE. The WFOE is a party to certain variable interest entity contracts with each VIE Entity, and the shareholders thereof (the “ VIE Shareholders ”), which are set forth on Schedule 4.4(b) (the “ VIE Contracts ”), pursuant to which the profits of each VIE Entity are paid to the WFOE and each VIE Entity is contractually controlled by the WFOE. The WFOE operates its business in Beijing, China.

(c)            The capital and organizational structure of each Target Company organized or registered in the PRC (each, a “ PRC Target Company ”) are valid and in full compliance with the applicable PRC Laws. The registered capital of each PRC Target Company has been fully paid up in accordance with the schedule of payment

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stipulated in its articles of association, approval documents, certificates of approval and legal person business license (collectively, the “ PRC Establishment Documents ”) and in compliance with applicable PRC Laws, and there is no outstanding capital contribution commitment. The Establishment Documents of each PRC Target Company has been duly approved and filed in accordance with the laws of the PRC and are valid and enforceable. The business scope specified in the PRC Establishment Documents of the PRC Target Companies complies in all material respects with the requirements of all applicable PRC Laws, and the operation and conduct of business by, and the term of operation of the PRC Target Companies in accordance with the PRC Establishment Documents is in compliance in all material respects with applicable PRC Laws

4.5           Governmental Approvals . Except as otherwise described in Schedule 4.5 , no Consent of or with any Governmental Authority on the part of any Target Company is required to be obtained or made in connection with the execution, delivery or performance by the Company of this Agreement or any Ancillary Documents or the consummation by the Company of the transactions contemplated hereby or thereby other than (a) such filings as contemplated by this Agreement and (b) pursuant to Antitrust Laws.

4.6           Non-Contravention . Except as otherwise described in Schedule 4.6 , the execution and delivery by the Company (or any other Target Company, as applicable) of this Agreement and each Ancillary Document to which any Target Company is a party or otherwise bound, and the consummation by any Target Company of the transactions contemplated hereby and thereby and compliance by any Target Company with any of the provisions hereof and thereof, will not (a) conflict with or violate any provision of any Target Company’s Organizational Documents, (b) subject to obtaining the Consents from Governmental Authorities referred to in Section 4.5 hereof, the waiting periods referred to therein having expired, and any condition precedent to such Consent or waiver having been satisfied, conflict with or violate any Law, Order or Consent applicable to any Target Company or any of their properties or assets, or (c) (i) violate, conflict with or result in a breach of, (ii) constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, (iii) result in the termination, withdrawal, suspension, cancellation or modification of, (iv) accelerate the performance required by any Target Company under, (v) result in a right of termination or acceleration under, (vi) give rise to any obligation to make payments or provide compensation under, (vii) result in the creation of any Lien upon any of the properties or assets of any Target Company under, (viii) give rise to any obligation to obtain any third party Consent or provide any notice to any Person or (ix) give any Person the right to declare a default, exercise any remedy, claim a rebate, chargeback, penalty or change in delivery schedule, accelerate the maturity or performance, cancel, terminate or modify any right, benefit, obligation or other term under, any of the terms, conditions or provisions of any Company Material Contract, except for any deviations from any of the foregoing clauses (b) or (c), that would not reasonably be expected to have a Material Adverse Effect on any Target Company.

4.7           Financial Statements .

(a)            As used herein, the term “ Company Financials ” means the (i) audited consolidated financial statements of the Target Companies (including, in each case, any related notes thereto), consisting of the consolidated balance sheets of the Target Companies as of December 31, 2015 and December 31, 2014, and the related consolidated audited income statements, changes in shareholder equity and statements of cash flows for the years then ended, (ii) the Company prepared and auditor reviewed financial statements, consisting of the consolidated balance sheet of the Target Companies as of June 30, 2016 (the “ Interim Balance Sheet Date ”) and the related consolidated income statement, changes in shareholder equity and statement of cash flows for the six (6) months then ended, and (iii) the unaudited financial statements, consisting of the consolidated balance sheet of the Target Companies as of September 30, 2016 and the related unaudited consolidated income statement, changes in shareholder equity and statement of cash flows for the nine (9) months then ended. True and correct copies of the Company Financials have been provided to the Purchaser. The Company Financials (i) accurately reflect the books and records of the Target Companies as of the times and for the periods referred to therein, (ii) were prepared in accordance with GAAP, consistently applied throughout and among the periods involved (except that the unaudited statements exclude the footnote disclosures and other presentation items required for GAAP and exclude year-end adjustments which will not be material in amount), and (iii) fairly present in all material respects the consolidated financial position of the Target Companies as of the respective dates thereof and the consolidated results of the operations and cash flows of the Target Companies for the periods indicated.

(b)            Each Target Company maintains accurate books and records reflecting its assets and Liabilities and maintains proper and adequate internal accounting controls that provide reasonable assurance that (i) such Target Company does not maintain any off-the-book accounts and that such Target Company’s assets are used only

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in accordance with the Target Company’s management directives, (ii) transactions are executed with management’s authorization, (iii) transactions are recorded as necessary to permit preparation of the financial statements of such Target Company and to maintain accountability for such Target Company’s assets, (iv) access to such Target Company’s assets is permitted only in accordance with management’s authorization, (v) the reporting of such Target Company’s assets is compared with existing assets at regular intervals and verified for actual amounts, and (vi) accounts, notes and other receivables and inventory are recorded accurately, and proper and adequate procedures are implemented to effect the collection of accounts, notes and other receivables on a current and timely basis. No Target Company has been subject to or involved in any material fraud that involves management or other employees who have a significant role in the internal controls over financial reporting of any Target Company. Since January 1, 2013, no Target Company or its Representatives has received any written complaint, allegation, assertion or claim regarding the accounting or auditing practices, procedures, methodologies or methods of any Target Company or its internal accounting controls, including any material written complaint, allegation, assertion or claim that any Target Company has engaged in questionable accounting or auditing practices.

(c)            No Target Company has ever been subject to the reporting requirements of Sections 13(a) and 15(d) of the Exchange Act.

(d)            Except as disclosed on Schedule 4.7(d) , the Target Companies have no Indebtedness. Except as disclosed on Schedule 4.7(d) , no Indebtedness of any Target Company contains any restriction upon (i) the prepayment of any of such Indebtedness, (ii) the incurrence of Indebtedness by any Target Company, or (iii) the ability of the Target Companies to grant any Lien on their respective properties or assets.

(e)            Except as set forth on Schedule 4.7(e) , no Target Company is subject to any Liabilities or obligations (whether or not required to be reflected on a balance sheet prepared in accordance with GAAP), except for those that are either (i) adequately reflected or reserved on or provided for in the consolidated balance sheet of the Company and its Subsidiaries as of the Interim Balance Sheet Date contained in the Company Financials or (ii) not material and that were incurred after the Interim Balance Sheet Date in the ordinary course of business consistent with past practice (other than Liabilities for breach of any Contract or violation of any Law).

(f)             All financial projections with respect to the Target Companies that were delivered by or on behalf of the Company to the Purchaser or its Representatives were prepared in good faith using assumptions that the Company believes to be reasonable.

4.8           Absence of Certain Changes . Except as set forth on Schedule 4.8 , since June 30, 2016, each Target Company has (a) conducted its business only in the ordinary course of business consistent with past practice, (b) not been subject to a Material Adverse Effect and (c) has not taken any action or committed or agreed to take any action that would be prohibited by Section 5.2(b) (without giving effect to Schedule 5.2 ) if such action were taken on or after the date hereof without the consent of the Purchaser.

4.9           Compliance with Laws . Except as set forth on Schedule 4.9 , no Target Company is or has been in material conflict or material non-compliance with, or in material default or violation of, nor has any Target Company received, since January 1, 2010, any written or, to the Knowledge of the Company, oral notice of any material conflict or non-compliance with, or material default or violation of, any applicable Laws by which it or any of its properties, assets, employees, business or operations are or were bound or affected. The WFOE has complied in all material respects with all applicable PRC Laws in connection with foreign exchange.

4.10         Company Permits . Each Target Company (and its employees who are legally required to be licensed by a Governmental Authority in order to perform his or her duties with respect to his or her employment with any Target Company), holds all Permits necessary to lawfully conduct in all material respects its business as presently conducted and as currently contemplated to be conducted, and to own, lease and operate its assets and properties, including all Permits with the PRC State Administration of Foreign Exchange (collectively, the “ Company Permits ”). The Company has made available to the Purchaser true, correct and complete copies of all material Company Permits. All of the Company Permits are in full force and effect, and no suspension or cancellation of any of the Company Permits is pending or, to the Company’s Knowledge, threatened. No Target Company is in violation in any material respect of the terms of any Company Permit. All filings and registrations with PRC Governmental Authorities required in respect of each of the PRC Target Companies and its operations, including the registrations with the Ministry of Commerce, the State Administration of Industry and Commerce, the State Administration for Foreign Exchange, tax bureau, customs authorities, product registration authorities and health regulatory authorities, as applicable, have been duly completed in accordance with applicable PRC Law.

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4.11         Litigation . Except as described on Schedule 4.11 , there is no (a) Action of any nature pending or, to the Company’s Knowledge, threatened, nor is there any reasonable basis for any Action to be made (and no such Action has been brought or, to the Company’s Knowledge, threatened since January 1, 2013); or (b) Order pending now or rendered by a Governmental Authority since January 1, 2013, in either case of (a) or (b) by or against any Target Company, its current or former directors, officers or equity holders (provided, that any litigation involving the directors, officers or equity holders of a Target Company must be related to the Target Company’s business, equity securities or assets), its business, equity securities or assets. The items listed on Schedule 4.11 , if finally determined adverse to the Target Companies, will not have, either individually or in the aggregate, a Material Adverse Effect upon any Target Company. Since January 1, 2010, none of the current or former officers, senior management or directors of any Target Company have been charged with, indicted for, arrested for, or convicted of any felony or any crime involving fraud.

4.12         Material Contracts .

(a)            Schedule 4.12(a) sets forth a true, correct and complete list of, and the Company has made available to the Purchaser (including written summaries of oral Contracts), true, correct and complete copies of, each Contract to which any Target Company is a party or by which any Target Company, or any of its properties or assets are bound or affected (each contract required to be set forth on Schedule 4.12(a) , a “ Company Material Contract ”) that:

(i)             contains covenants that limit the ability of any Target Company (A) to compete in any line of business or with any Person or in any geographic area or to sell, or provide any service or product or solicit any Person, including any non-competition covenants, employee and customer non-solicit covenants, exclusivity restrictions, rights of first refusal or most-favored pricing clauses or (B) to purchase or acquire an interest in any other Person;

(ii)            involves any joint venture, profit-sharing, partnership, limited liability company or other similar agreement or arrangement relating to the formation, creation, operation, management or control of any partnership or joint venture;

(iii)           involves any exchange traded, over the counter or other swap, cap, floor, collar, futures contract, forward contract, option or other derivative financial instrument or Contract, based on any commodity, security, instrument, asset, rate or index of any kind or nature whatsoever, whether tangible or intangible, including currencies, interest rates, foreign currency and indices;

(iv)           evidences Indebtedness (whether incurred, assumed, guaranteed or secured by any asset) of any Target Company having an outstanding principal amount in excess of $50,000;

(v)            Other than outstanding Company Options, involves the acquisition or disposition, directly or indirectly (by merger or otherwise), of assets with an aggregate value in excess of $100,000 (other than in the ordinary course of business consistent with past practice) or shares or other equity interests in or of any Target Company or another Person;

(vi)           by its terms, individually or with all related Contracts, calls for aggregate payments or receipts by the Target Companies under such Contract or Contracts of at least $100,000 per year or $250,000 in the aggregate (provided, that the parties agree that solely for purposes of listing any such Contracts described in this clause (vi) on Schedule 4.12(a) (but not for purposes of the definition of “Company Material Contract”), the Company shall only be required to list Contracts of at least $1,000,000 per year of $1,000,000 in the aggregate);

(vii)          obligates the Target Companies to provide continuing indemnification or a guarantee of obligations of a third party after the date hereof in excess of $50,000;

(viii)         is between any Target Company and any directors, officers or employees of a Target Company (other than at-will employment arrangements with employees entered into in the ordinary course of business consistent with past practice), including all non-competition, severance and indemnification agreements, or any Related Person;

(ix)           is a VIE Contract or otherwise is between (A) the Company, Borqs HK and/or the WFOE, on the one hand, and (B) a VIE Entity or any Subsidiary of a VIE Entity or the shareholders of any of the foregoing, on the other hand;

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(x)            obligates the Target Companies to make any capital commitment or expenditure in excess of $50,000 (including pursuant to any joint venture);

(xi)           relates to a material settlement entered into within three (3) years prior to the date of this Agreement or under which any Target Company has outstanding obligations (other than monetary obligations for less than $100,000 in the aggregate or customary confidentiality obligations);

(xii)          provides another Person (other than another Target Company or any manager, director or officer of any Target Company) with a power of attorney;

(xiii)         relates to the development, ownership, licensing, or use by the Company of any Intellectual Property; or relates to the licensing or use by any Person of any Company owned Intellectual Property

(xiv)         is otherwise material to any Target Company and not described in clauses (i) through (xi i) a bove.

(b)            Except as disclosed in Schedule 4.12(b) , with respect to each Company Material Contract: (i) such Company Material Contract is valid and binding and enforceable in all respects against the Target Company party thereto (subject to the Enforceability Exceptions) and, to the Knowledge of the Company, each other party thereto, and is in full force and effect; (ii) the consummation of the transactions contemplated by this Agreement will not affect the validity or enforceability of any Company Material Contract; (iii) no Target Company is in breach or default in any material respect, and no event has occurred that with the passage of time or giving of notice or both would constitute a breach or default by any Target Company, or permit termination or acceleration by the other party thereto, under such Company Material Contract; (iv) to the Knowledge of the Company, no other party to such Company Material Contract is in breach or default in any respect, and no event has occurred that with the passage of time or giving of notice or both would constitute such a breach or default by such other party, or permit termination or acceleration by any Target Company, under such Company Material Contract; (v) no Target Company has received written or, to the Knowledge of the Company, oral notice of an intention by any party to any such Company Material Contract that provides for a continuing obligation by any party thereto to terminate such Company Material Contract or amend the terms thereof, other than modifications in the ordinary course of business that do not adversely affect any Target Company; and (vi) no Target Company has waived any rights under any such Material Contract.

4.13         Intellectual Property .

(a)            Schedule 4.13(a)(i) sets forth all Patents and Patent applications, Trademarks and service mark registrations and applications, copyright registrations and applications and registered Internet Assets and applications owned by a Target Company or otherwise used or held for use by a Target Company in which a Target Company is the owner, applicant or assignee (“ Company Registered IP ), specifying as to each item, as applicable, (A) the nature of the item, including the title, (B) the owner of the item, (C) the jurisdiction in which the item is registered or in which an application for issuance or registration has been filed and (D) the issuance, registration, or application numbers and dates; and (ii) all material unregistered Intellectual Property owned or purported to be owned by a Target Company. Schedule 4.13(a)(ii) sets forth all material Intellectual Property licenses, sublicenses, and other agreements or permissions that the Company has received (“ Company IP Licenses ”) (excluding “shrink wrap,” click wrap, and “off the shelf” software agreements for Software commercially available on reasonable terms to the public generally, with license, maintenance, support, and other fees of less than $50,000 per year (collectively, Off the Shelf Software Agreements ”), which are not required to be listed, although such licenses are “Company IP Licenses” as that term is used herein), under which a Target Company is a licensee or is authorized to use or practice any Intellectual Property. Each Target Company owns, free and clear of all Liens (other than Permitted Liens), has valid and enforceable rights in, and has the right to use, sell, license, transfer or assign, all Intellectual Property owned by or exclusively licensed to the Company that is currently used, licensed or held for use by such Target Company, except for the Intellectual Property that is the subject of the Company IP Licenses. Except as set forth on Schedule 4.13(a)(iii), all Company Registered IP is owned exclusively by the applicable Target Company without obligation to pay royalties, licensing fees or other fees, or otherwise account to any third party with respect to such Company Registered IP.

(b)            Each Target Company has a valid and enforceable license to use all Intellectual Property that is the subject of the Company IP Licenses applicable to such Target Company. The Company IP Licenses include all of the licenses, sublicenses and other agreements or permissions necessary to operate the Target Companies as presently conducted. Each Target Company is and has been in compliance in all material respects with all obligations imposed

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on it in the Company IP Licenses, and such Target Company is not, nor, to the Knowledge of the Company, is any other party thereto, in material breach or material default thereunder, nor, to the Knowledge of the Company, has any event occurred that with notice or lapse of time or both would constitute a default thereunder. All registrations for Copyrights, Patents, Trademarks and Internet Assets that are owned by or exclusively licensed to any Target Company are valid and in force, and all applications to register any Copyrights, Patents and Trademarks are pending and in good standing, all without challenge of any kind. No Target Company is party to any Contract that requires a Target Company to assign to any Person all of its rights in any Intellectual Property developed by a Target Company under such Contract.

(c)            With respect to all agreements under which a Target Company is a licensor (each, an “ Outbound IP License ”), each Target Company has performed all material obligations imposed on it in the Outbound IP Licenses, and such Target Company is not, nor, to the Knowledge of the Company, is any other party thereto, in breach or default thereunder, nor has any event occurred that with notice or lapse of time or both would constitute a default thereunder.

(d)            No Action is pending or, to the Company’s Knowledge, threatened against a Target Company that challenges the validity, enforceability, ownership, or right to use, sell, license or sublicense any Intellectual Property currently owned or licensed or purported to be owned or licensed by the Target Companies in any material respect. No Target Company has received any written or, to the Knowledge of the Company, oral notice or claim asserting or suggesting that any infringement, misappropriation, violation, dilution or unauthorized use of the Intellectual Property of any other Person is or may be occurring or has or may have occurred, as a consequence of the business activities of any Target Company. There are no Orders to which any Target Company is a party or its otherwise bound that (i) restrict the rights of a Target Company to use, transfer, license or enforce any Intellectual Property owned by a Target Company, (ii) restrict the conduct of the business of a Target Company in order to accommodate a third Person’s Intellectual Property, or (iii) other than the Outbound IP Licenses, grant any third Person any right with respect to any Intellectual Property owned by a Target Company. No Target Company is currently infringing, or has, in the past, infringed, misappropriated or violated any Intellectual Property of any other Person in any material respect in connection with the ownership, use or license of any Intellectual Property owned or purported to be owned by a Target Company, the foregoing representation being given to the Knowledge of the Company as to third party Patent rights and Trademark rights, or, to the Knowledge of the Company, otherwise in connection with the conduct of the respective businesses of the Target Companies. To the Company’s Knowledge, no third party is infringing upon, has misappropriated or is otherwise violating any Intellectual Property owned, licensed by, licensed to, or otherwise used or held for use by any Target Company (“ Company IP ”) in any material respect.

(e)            No current or former officers, employees or independent contractors of a Target Company have claimed any ownership interest in any Intellectual Property owned by a Target Company and that is related to such Target Company’s business. To the Knowledge of the Company, there has been no violation of a Target Company’s policies or practices related to protection of Company IP or any confidentiality or nondisclosure Contract relating to the Intellectual Property owned by a Target Company. The Company has made available to the Purchaser true and complete copies of all written Contracts referenced in subsections under which employees and independent contractors who developed or contributed Intellectual Property for a Target Company that is related to the Target Company’s business assigned their Intellectual Property to a Target Company. To the Company’s Knowledge, none of the employees of any Target Company is obligated under any Contract, or subject to any Order, that would materially interfere with the use of such employee’s best efforts to promote the interests of the Target Companies, or that would materially conflict with the business of any Target Company as presently conducted. Each Target Company has taken reasonable security measures in order to protect the secrecy, confidentiality and value of the material Company IP.

(f)             To the Knowledge of the Company, no Person has obtained unauthorized access to third party information and data in the possession of a Target Company, nor has there been any other material compromise of the security, confidentiality or integrity of such information or data. Each Target Company has complied with all applicable Laws relating to privacy, personal data protection, and the collection, processing and use of personal information and its own privacy policies and guidelines. The operation of the business of the Target Companies has not and does not violate any right to privacy or publicity of any third person, or constitute unfair competition or trade practices under applicable Law.

(g)            The consummation of any of the transactions contemplated by this Agreement will not result in the material breach, material modification, termination, suspension of, or acceleration of any payments with respect to, or release of source code because of (i) any Contract providing for the license or other use of Intellectual Property

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owned by a Target Company, or (ii) any Company IP License. Following the Closing, the Company shall be permitted to exercise, directly or indirectly through its Subsidiaries, all of the Target Companies’ rights under the Company IP Licenses to the same extent that the Target Companies would have been able to exercise had the transactions contemplated by this Agreement not occurred, without the payment of any additional amounts or consideration other than ongoing fees, royalties or payments which the Target Companies would otherwise be required to pay in the absence of such transactions.

4.14         Taxes and Returns .

(a)            Each Target Company has or will have timely filed, or caused to be timely filed, all material Tax Returns required to be filed by it (taking into account all available extensions), which Tax Returns are true, accurate, correct and complete in all material respects, and has paid, collected or withheld, or caused to be paid, collected or withheld, all material Taxes required to be paid, collected or withheld, other than such Taxes for which adequate reserves in the Company Financials have been established. Each Target Company has complied in all material respects with all applicable Laws relating to Tax.

(b)            There is no current pending or, to the Knowledge of the Company, threatened Action against a Target Company by a Governmental Authority in a jurisdiction where the Target Company does not file Tax Returns that it is or may be subject to taxation by that jurisdiction.

(c)            No Target Company is being audited by any Tax authority or has been notified in writing or, to the Knowledge of the Company, orally by any Tax authority that any such audit is contemplated or pending. There are no claims, assessments, audits, examinations, investigations or other Actions pending against a Target Company in respect of any Tax, and no Target Company has been notified in writing of any proposed Tax claims or assessments against it (other than, in each case, claims or assessments for which adequate reserves in the Company Financials have been established).

(d)            There are no Liens with respect to any Taxes upon any Target Company’s assets, other than Permitted Liens.

(e)            Each Target Company has collected or withheld all Taxes currently required to be collected or withheld by it, and all such Taxes have been paid to the appropriate Governmental Authorities or set aside in appropriate accounts for future payment when due.

(f)             No Target Company has any outstanding waivers or extensions of any applicable statute of limitations to assess any material amount of Taxes. There are no outstanding requests by a Target Company for any extension of time within which to file any Tax Return or within which to pay any Taxes shown to be due on any Tax Return.

(g)            No Target Company has made any change in accounting method (except as required by a change in Law) or received a ruling from, or signed an agreement with, any taxing authority that would reasonably be expected to have a material impact on its Taxes following the Closing.

(h)            No Target Company has participated in, or sold, distributed or otherwise promoted, any “reportable transaction,” as defined in Treasury Regulation section 1.6011-4.

(i)             No Target Company has any Liability for the Taxes of another Person (other than another Target Company) (i) under any applicable Tax Law, (ii) as a transferee or successor, or (iii) by contract, indemnity or otherwise (excluding commercial agreements entered into in the ordinary course of business the primary purpose of which was not the sharing of Taxes). No Target Company is a party to or bound by any Tax indemnity agreement, Tax sharing agreement or Tax allocation agreement or similar agreement, arrangement or practice (excluding commercial agreements entered into in the ordinary course of business the primary purpose of which was not the sharing of Taxes) with respect to Taxes (including advance pricing agreement, closing agreement or other agreement relating to Taxes with any Governmental Authority) that will be binding on such Target Company with respect to any period following the Closing Date.

(j)             No Target Company has requested, or is it the subject of or bound by any private letter ruling, technical advice memorandum, closing agreement or similar ruling, memorandum or agreement with any Governmental Authority with respect to any Taxes, nor is any such request outstanding.

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(k)            No Target Company: (i) has constituted either a “distributing corporation” or a “controlled corporation” (within the meaning of Section 355(a)(1)(A) of the Code) in a distribution of securities (to any Person or entity that is not a member of the consolidated group of which the Company is the common parent corporation) qualifying for, or intended to qualify for, Tax-free treatment under Section 355 of the Code (A) within the two-year period ending on the date hereof or (B) in a distribution which could otherwise constitute part of a “plan” or “series of related transactions” (within the meaning of Section 355(e) of the Code) in conjunction with the transactions contemplated by this Agreement; or (ii) is or has ever been (A) a U.S. real property holding corporation within the meaning of Section 897(c)(2) of the Code, or (B) a member of any consolidated, combined, unitary or affiliated group of corporations for any Tax purposes other than a group of which the Company is or was the common parent corporation.

(l)             No Target Company is treated as a domestic corporation under Section 7874(b) of the Code.

(m)           No Target Company is aware of any fact or circumstance that would reasonably be expected to prevent the Merger from qualifying as a “reorganization” within the meaning of Section 368(a) of the Code.

4.15         Real Property . With respect to any premises currently leased or subleased or otherwise used or occupied by a Target Company for the operation of the business of a Target Company, the Company has provided to the Purchaser a true and complete copy of all current leases, lease guarantees, agreements and documents related thereto, including all amendments, terminations and modifications thereof or waivers thereto (collectively, the “ Company Real Property Leases ”), and in the case of any oral Company Real Property Lease, a written summary of the material terms of such Company Real Property Lease. The Company Real Property Leases are valid, binding and enforceable in accordance with their terms and are in full force and effect. To the Knowledge of the Company, no event has occurred which (whether with or without notice, lapse of time or both or the happening or occurrence of any other event) would constitute a default on the part of a Target Company or any other party under any of the Company Real Property Leases, and no Target Company has received notice of any such condition. No Target Company owns or has ever owned any real property or any interest in real property (other than the leasehold interests in the Company Real Property Leases).

4.16         Personal Property . Except as set forth in Schedule 4.16 , all items of Personal Property with a book value or fair market value of greater than Twenty-Five Thousand Dollars ($25,000) are in good operating condition and repair (reasonable wear and tear excepted), and are suitable for their intended use in the business of the Target Companies. With respect to all Personal Property that is leased by a Target Company with a book value or fair market value of greater than Twenty-Five Thousand Dollars ($25,000), the Company has provided to the Purchaser a true and complete copy of all lease agreements and lease guarantees related thereto, including all amendments, terminations and modifications thereof or waivers thereto (the “ Company Personal Property Leases ”), and in the case of any oral Company Personal Property Lease, a written summary of the material terms of such Company Personal Property Lease. The Company Personal Property Leases are valid, binding and enforceable in accordance with their terms and are in full force and effect. To the Knowledge of the Company, no event has occurred which (whether with or without notice, lapse of time or both or the happening or occurrence of any other event) would constitute a default on the part of a Target Company or any other party under any of the Company Personal Property Leases, and no Target Company has received notice of any such condition.

4.17         Title to and Sufficiency of Assets . Each Target Company has good and marketable title to, or a valid leasehold interest in or right to use, all of its assets, free and clear of all Liens other than (a) Permitted Liens, (b) the rights of lessors under leasehold interests, (iii) Liens specifically identified on the Interim Balance Sheet and (d) Liens set forth on Schedule 4.17 . The assets (including Intellectual Property rights and contractual rights) of the Target Companies constitute all of the assets, rights and properties that are used in the operation of the businesses of the Target Companies as it is now conducted and presently proposed to be conducted or that are used or held by the Target Companies for use in the operation of the businesses of the Target Companies, and taken together, are adequate and sufficient for the operation of the businesses of the Target Companies as currently conducted and as presently proposed to be conducted.

4.18         Employee Matters .

(a)            Except as set forth in Schedule 4.18(a) , no Target Company is a party to any collective bargaining agreement or other Contract covering a group of employees, labor organization or other representative of any of the employees of any Target Company, and the Company has no Knowledge of any activities or proceedings of any labor union or other party to organize or represent such employees. There has not occurred or, to the Knowledge

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of the Company, been threatened any strike, slow-down, picketing, work-stoppage, or other similar labor activity with respect to any such employees. Schedule 4.18(a) sets forth all unresolved material labor controversies (including unresolved grievances and age or other discrimination claims), if any, that are pending or, to the Knowledge of the Company, reasonably threatened between any Target Company and Persons employed by or providing services to a Target Company. As of the date hereof, no current officer of a Target Company has provided any Target Company written or to the Knowledge of the Company, oral notice of his or her plan to terminate his or her employment with any Target Company.

(b)            Except as set forth in Schedule 4.18(b) , each Target Company (i) is and has been in compliance in all material respects with all applicable Laws respecting employment and employment practices, terms and conditions of employment, health and safety and wages and hours, and other Laws relating to discrimination, disability, labor relations, hours of work, payment of wages and overtime wages, pay equity, immigration, workers compensation, working conditions, employee scheduling, occupational safety and health, family and medical leave, and employee terminations, and have not received written notice that there is any pending Action involving unfair labor practices against a Target Company, (ii) is not liable for any material past due arrears of wages or any material penalty for failure to comply with any of the foregoing, and (iii) is not liable for any material payment to any Governmental Authority with respect to unemployment compensation benefits, social security or other benefits or obligations for employees, independent contractors or consultants (other than routine payments to be made in the ordinary course of business and consistent with past practice). There are no Actions pending or, to the Knowledge of the Company, reasonably threatened against a Target Company brought by or on behalf of any applicant for employment, any current or former employee, any Person alleging to be a current or former employee, or any Governmental Authority, relating to any such Law or regulation, or alleging breach of any express or implied contract of employment, wrongful termination of employment, or alleging any other discriminatory, wrongful or tortious conduct in connection with the employment relationship.

(c)            Schedule 4.18(c) hereto sets forth a complete and accurate list, as of the date hereof, of all employees of the Target Companies showing for each as of that date the employee’s name, job title, and location. Except as set forth on Schedule 4.18(c) , (i) no employee is a party to a written employment Contract with a Target Company and each employee located in China is employed with a “non-fixed term” in accordance with the Chinese Labor Contract Law, and (ii) the Target Companies have paid in full to all such employees all wages, salaries, commission, bonuses and other compensation due to their employees, including overtime compensation, and no Target Company has any obligations (whether or not contingent) with respect to severance payments to any such employees under the terms of any written or, to the Company’s Knowledge, oral agreement, or commitment or any applicable Law. Except as set forth in Schedule 4.18(c) , each current employee has entered into the Company’s standard form of employee non-disclosure, inventions and restrictive covenants agreement with one of the Target Companies (whether pursuant to a separate agreement or incorporated as part of such employee’s overall employment agreement), a copy of which has been made available to the Purchaser by the Company.

(d)            Schedule 4.18(d) contains a list of all independent contractors (including consultants) currently engaged by any Target Company in an executive or managerial capacity, along with the position, the entity engaging such Person, and rate of remuneration for each such Person. Except as set forth on Schedule 4.18(d) , all of such independent contractors are a party to a written Contract with a Target Company. Except as set forth on Schedule 4.18(d) , each such independent contractor has entered into customary covenants regarding confidentiality and assignment of inventions in such Person’s agreement with a Target Company, a copy of which has been provided to the Purchaser by the Company. For the purposes of applicable Law, including the Code, all independent contractors who are currently, or within the last three (3) years have been, engaged by a Target Company are bona fide independent contractors and not employees of a Target Company.

4.19         Benefit Plans .

(a)            Set forth on Schedule 4.19(a) is a true and complete list of each Foreign Plan of a Target Company (each, a “ Company Benefit Plan ”). No Target Company has ever maintained or contributed to (or had an obligation to contribute to) any “employee benefit plan” (as defined in Section 3(3) of ERISA).

(b)            With respect to each Company Benefit Plan which covers any current or former officer, director, consultant or employee (or beneficiary thereof) of a Target Company, the Company has made available to the Purchaser accurate and complete copies, if applicable, of: (i) all Company Benefit Plans and related trust agreements or annuity Contracts (including any amendments, modifications or supplements thereto); (ii) the most recent annual and periodic

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accounting of plan assets; (iii) the most recent actuarial valuation; and (iv) all communications with any Governmental Authority concerning any matter that is still pending or for which a Target Company has any outstanding Liability or obligation.

(c)            With respect to each Company Benefit Plan: (i) such Company Benefit Plan has been administered and enforced in all material respects in accordance with its terms and the requirements of all applicable Laws, and has been maintained, where required, in good standing with applicable regulatory authorities and Governmental Authorities; (ii) to the Knowledge of the Company, no breach of fiduciary duty has occurred; (iii) no Action is pending, or to the Company’s Knowledge, reasonably threatened (other than routine claims for benefits arising in the ordinary course of administration); and (iv) all material contributions and premiums required to be made with respect to a Company Benefit have been timely made. No Target Company has incurred any obligation in connection with the termination of, or withdrawal from, any Company Benefit Plan.

(d)            To the extent applicable, the present value of the accrued benefit liabilities (whether or not vested) under each Company Benefit Plan, determined as of the end of the Company’s most recently ended fiscal year on the basis of reasonable actuarial assumptions, each of which is reasonable, did not exceed the current value of the assets of such Company Benefit Plan allocable to such benefit liabilities.

(e)            The consummation of the transactions contemplated by this Agreement and the Ancillary Documents will not: (i) entitle any individual to material severance pay, unemployment compensation or other benefits or compensation; or (ii) accelerate the time of payment or vesting, or increase the amount of any compensation due, or in respect of, any employee or independent contractor of a Target Company.

(f)             Except to the extent required by applicable Law, no Target Company provides health or welfare benefits to any former or retired employee or is obligated to provide such benefits to any active employee following such employee’s retirement or other termination of employment or service.

4.20         Environmental Matters . Except as set forth in Schedule 4.20 :

(a)            Each Target Company is and has been in compliance in all material respects with all applicable Environmental Laws, including obtaining, maintaining in good standing, and complying with all material Permits required for its business and operations by Environmental Laws (“ Environmental Permits ”), no Action is pending or, to the Company’s Knowledge, threatened to revoke, modify, or terminate any such Environmental Permit, and, to the Company’s Knowledge, no facts, circumstances, or conditions currently exist that could adversely affect such continued compliance with Environmental Laws and Environmental Permits or require capital expenditures to achieve or maintain such continued compliance with Environmental Laws and Environmental Permits.

(b)            No Target Company is the subject of any outstanding Order or Contract with any Governmental Authority or other Person in respect of any (i) Environmental Laws, (ii) Remedial Action, or (iii) Release or threatened Release of a Hazardous Material. No Target Company has assumed, contractually or by operation of Law, any Liabilities or obligations under any Environmental Laws.

(c)            No Action has been made or is pending, or to the Company’s Knowledge, threatened against any Target Company or any assets of a Target Company alleging either or both that a Target Company may be in material violation of any Environmental Law or Environmental Permit or may have any material Liability under any Environmental Law.

(d)            No Target Company has manufactured, treated, stored, disposed of, arranged for or permitted the disposal of, generated, handled or Released any Hazardous Material, or owned or operated any property or facility, in a manner that has given or would reasonably be expected to give rise to any material Liability or obligation under applicable Environmental Laws. No fact, circumstance, or condition exists in respect of any Target Company or any property currently or formerly owned, operated, or leased by any Target Company or any property to which a Target Company arranged for the disposal or treatment of Hazardous Materials that could reasonably be expected to result in a Target Company incurring any material Environmental Liabilities.

(e)            There is no investigation of the business, operations, or currently owned, operated, or leased property of a Target Company or, to the Company’s Knowledge, previously owned, operated, or leased property of a Target Company pending or, to the Company’s Knowledge, threatened that could lead to the imposition of any Liens under any Environmental Law or material Environmental Liabilities.

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(f)             To the Knowledge of the Company, there is not located at any of the properties of a Target Company any (i) underground storage tanks, (ii) asbestos-containing material, or (iii) equipment containing polychlorinated biphenyls.

(g)            The Company has provided to the Purchaser all environmentally related site assessments, audits, studies, reports and results of investigations that have been performed in respect of the currently or previously owned, leased, or operated properties of any Target Company.

4.21         Transactions with Related Persons . Except as set forth on Schedule 4.21 , no Target Company nor any of its Affiliates, nor any officer, director, manager, employee, trustee or beneficiary of a Target Company or any of its Affiliates, nor any immediate family member of any of the foregoing (whether directly or indirectly through an Affiliate of such Person) (each of the foregoing, a “ Related Person ”) is presently, or in the past three (3) years, has been, a party to any transaction with a Target Company, including any Contract or other arrangement (a) providing for the furnishing of services by (other than as officers, directors or employees of the Target Company), (b) providing for the rental of real property or Personal Property from or (c) otherwise requiring payments to (other than for services or expenses as directors, officers or employees of the Target Company in the ordinary course of business consistent with past practice) any Related Person or any Person in which any Related Person has an interest as an owner, officer, manager, director, trustee or partner or in which any Related Person has any direct or indirect interest (other than the ownership of securities representing no more than two percent (2%) of the outstanding voting power or economic interest of a publicly traded company). Except as set forth on Schedule 4.21 , no Target Company has outstanding any Contract or other arrangement or commitment with any Related Person, and no Related Person owns any real property or Personal Property, or right, tangible or intangible (including Intellectual Property) which is used in the business of any Target Company. Schedule 4.21 specifically identifies all Contracts, arrangements or commitments set forth on such Schedule 4.21 that cannot be terminated upon sixty (60) days’ notice by the Target Companies without cost or penalty.

4.22         Insurance .

(a)            Schedule 4.22(a) lists all insurance policies (by policy number, insurer, coverage period, coverage amount, annual premium and type of policy) held by a Target Company relating to a Target Company or its business, properties, assets, directors, officers and employees, copies of which have been provided to the Purchaser. All premiums due and payable under all such insurance policies have been timely paid and the Target Companies are otherwise in material compliance with the terms of such insurance policies. All such insurance policies are in full force and effect, and to the Knowledge of the Company, there is no threatened termination of, or material premium increase with respect to, any of such insurance policies. No Target Company has any self-insurance or co-insurance programs.

(b)            Schedule 4.22(b) identifies each individual insurance claim in excess of $25,000 made by a Target Company since January 1, 2013. Each Target Company has reported to its insurers all claims and pending circumstances that would reasonably be expected to result in a claim, except where such failure to report such a claim would not be reasonably likely to be material to the Target Companies. No Target Company has made any claim against an insurance policy as to which the insurer is denying coverage.

4.23         Books and Records . All of the financial books and records of the Target Companies are complete and accurate in all material respects and have been maintained in the ordinary course consistent with past practice and in accordance with applicable Laws.

4.24         Top Customers and Suppliers . Schedule 4.24 lists, by dollar volume received or paid, as applicable, for each of (a) the twelve (12) months ended on the December 31, 2015 and (b) the period from January 1, 2016 through September 30, 2016, the ten (10) largest customers of the Target Companies (the “ Top Customers ”) and the ten largest suppliers of goods or services to the Target Companies (the “ Top Suppliers ”), along with the amounts of such dollar volumes. The relationships of each Target Company with such suppliers and customers are good commercial working relationships and (i) no Top Supplier or Top Customer within the last twelve (12) months has cancelled or otherwise terminated, or, to the Company’s Knowledge, intends to cancel or otherwise terminate, any relationships of such Person with a Target Company, (ii) no Top Supplier or Top Customer has during the last twelve (12) months decreased materially or, to the Company’s Knowledge, threatened to stop, decrease or limit materially, or intends to modify materially its relationships with a Target Company or, to the Company’s Knowledge, intends to stop, decrease or limit materially its products or services to any Target Company or its usage or purchase of the products or services of any Target Company, (iii) to the Company’s Knowledge, no Top Supplier or Top Customer intends to refuse to pay any amount due to any Target Company or seek to exercise any remedy against any Target Company, (iv) no Target Company

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has within the past two (2) years been engaged in any material dispute with any Top Supplier or Top Customer, and (v) to the Company’s Knowledge, the consummation of the transactions contemplated in this Agreement and the other Ancillary Documents will not affect the relationship of any Target Company with any Top Supplier or Top Customer.

4.25         Certain Business Practices .

(a)            No Target Company, nor any of their respective Representatives acting on their behalf has (a) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, (b) made any unlawful payment to foreign or domestic government officials or employees, to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977 or (c) made any other unlawful payment. No Target Company, nor any of their respective Representatives acting on their behalf has directly or indirectly, given or agreed to give any gift or similar benefit in any material amount to any customer, supplier, governmental employee or other Person who is or may be in a position to help or hinder any Target Company or assist any Target Company in connection with any actual or proposed transaction.

(b)            The operations of each Target Company are and have been conducted at all times in compliance with laundering statutes in all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Authority, and no Action involving a Target Company with respect to the any of the foregoing is pending or, to the Knowledge of the Company, threatened.

(c)            No Target Company or any of their respective directors or officers, or, to the Knowledge of the Company, any other Representative acting on behalf of a Target Company is currently identified on the specially designated nationals or other blocked person list or otherwise currently subject to any U.S. sanctions administered by OFAC, and, to the Company’s Knowledge, no Target Company has, directly or indirectly, used any funds, or loaned, contributed or otherwise made available such funds to any Subsidiary, joint venture partner or other Person, in connection with any sales or operations in Cuba, Iran, Syria, Sudan, Myanmar or any other country sanctioned by OFAC or for the purpose of financing the activities of any Person currently subject to, or otherwise in violation of, any U.S. sanctions administered by OFAC in the last five (5) fiscal years.

4.26         Investment Company Act . No Target Company is an “investment company” or a Person directly or indirectly “controlled” by or acting on behalf of an “investment company”, in each case within the meaning of the Investment Company Act of 1940, as amended.

4.27         Finders and Investment Bankers . Except as set forth in Schedule 4.27 , no Target Company has incurred or will incur any Liability for any brokerage, finder’s or other fee or commission in connection with the transactions contemplated hereby.

4.28         Independent Investigation . The Company has conducted its own independent investigation, review and analysis of the business, results of operations, prospects, condition (financial or otherwise) or assets of the Purchaser, and acknowledges that it has been provided adequate access to the personnel, properties, assets, premises, books and records, and other documents and data of the Purchaser for such purpose. The Company acknowledges and agrees that: (a) in making its decision to enter into this Agreement and to consummate the transactions contemplated hereby, it has relied solely upon its own investigation and the express representations and warranties of the Purchaser set forth in Article III (including the related portions of the Purchaser Disclosure Schedules); and (b) neither the Purchaser nor any of its Representatives have made any representation or warranty as to the Purchaser or this Agreement, except as expressly set forth in Article III (including the related portions of the Purchaser Disclosure Schedules).

4.29         Information Supplied . None of the information supplied or to be supplied by the Company expressly for inclusion or incorporation by reference: (a) in any current report on Form 8-K, and any exhibits thereto or any other report, form, registration or other filing made with any Governmental Authority with respect to the transactions contemplated by this Agreement or any Ancillary Documents; (b) in the Proxy Documents; or (c) in the mailings or other distributions to the Purchaser’s shareholders and/or prospective investors with respect to the consummation of the transactions contemplated by this Agreement or in any amendment to any of documents identified in (a) through (c), will, when filed, made available, mailed or distributed, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. None of the information supplied or to be supplied by the Company expressly for inclusion or incorporation by reference in any of the Signing Press Release, the

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Signing Filing, the Closing Filing and the Closing Press Release will, when filed or distributed, as applicable, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. Notwithstanding the foregoing, the Company makes no representation, warranty or covenant with respect to any information supplied by or on behalf of the Purchaser or its Affiliates.

Article V
COVENANTS

5.1           Access and Information .

(a)            The Company shall give, and shall direct its Representatives to give, the Purchaser and its Representatives, at reasonable times during normal business hours and upon reasonable intervals and notice, access to all offices and other facilities and to all employees, properties, Contracts, agreements, commitments, books and records, financial and operating data and other information (including Tax Returns, internal working papers, client files, client Contracts and director service agreements), of or pertaining to the Target Companies, as the Purchaser or its Representatives may reasonably request regarding the Target Companies and their respective businesses, assets, Liabilities, financial condition, prospects, operations, management, employees and other aspects (including unaudited quarterly financial statements, including a consolidated quarterly balance sheet and income statement, a copy of each material report, schedule and other document filed with or received by a Governmental Authority pursuant to the requirements of applicable securities Laws, and independent public accountants’ work papers (subject to the consent or any other conditions required by such accountants, if any)) and instruct each of the Company’s Representatives to reasonably cooperate with the Purchaser and its Representatives in their investigation; provided, however , that (A) the Purchaser and its Representatives shall conduct any such activities in such a manner as not to unreasonably interfere with the business or operations of the Target Companies; and (B) nothing herein shall require the Company to provide access to, or to disclose any information to, the Purchaser or any of its Representatives if such access or disclosure, in the good faith reasonable belief of the Company, (x) would waive any legal privilege or (y) would be in violation of applicable laws or regulations of any Governmental Authority (including any Antitrust Laws) or the provisions of any agreement to which a Target Company is a party (taking into account the confidential nature of the disclosure). Other than as expressly provided in this section, Purchaser is not authorized to and shall not (and shall cause its employees, agents, representatives and Affiliates not to) contact any officer, director, employee, customer, supplier, joint-venture partner, lessor, lender or other material business relation of the Target Companies prior to the Effective Time without the prior written consent of the Company, such consent not to be unreasonably withheld, delayed or conditioned. The Purchaser shall, and shall cause its Representatives to, abide by the terms of any confidentiality agreement with respect to such access and any information furnished to it or its Representatives.

(b)            The Purchaser shall give, and shall direct its Representatives to give, the Company and its Representatives, at reasonable times during normal business hours and upon reasonable intervals and notice, access to all offices and other facilities and to all employees, properties, Contracts, agreements, commitments, books and records, financial and operating data and other information (including Tax Returns, internal working papers, client files, client Contracts and director service agreements), of or pertaining to the Purchaser or its Subsidiaries, as the Company or its Representatives may reasonably request regarding the Purchaser, its Subsidiaries and their respective businesses, assets, Liabilities, financial condition, prospects, operations, management, employees and other aspects (including unaudited quarterly financial statements, including a consolidated quarterly balance sheet and income statement, a copy of each material report, schedule and other document filed with or received by a Governmental Authority pursuant to the requirements of applicable securities Laws, and independent public accountants’ work papers (subject to the consent or any other conditions required by such accountants, if any)) and instruct each of the Purchaser’s Representatives to reasonably cooperate with the Company and its Representatives in their investigation; provided, however, that (A) the Company and its Representatives shall conduct any such activities in such a manner as not to unreasonably interfere with the business or operations of the Purchaser or any of its Subsidiaries; and (B) nothing herein shall require the Purchaser to provide access to, or to disclose any information to, the Company or any of its Representatives if such access or disclosure, in the good faith reasonable belief of the Purchaser, (x) would waive any legal privilege or (y) would be in violation of applicable laws or regulations of any Governmental Authority (including any Antitrust Laws) or the provisions of any agreement to which a Target Company is a party (taking into account the confidential nature of the disclosure). Other than as expressly provided in this section, the Company is not

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authorized to and shall not (and shall cause its employees, agents, representatives and Affiliates not to) contact any officer, director, employee, customer, supplier, joint-venture partner, lessor, lender or other material business relation of the Purchaser prior to the Effective Time without the prior written consent of the Purchaser, such consent not to be unreasonably withheld, delayed or conditioned. The Company shall, and shall cause its Representatives to, abide by the terms of any confidentiality agreement with respect to such access and any information furnished to it or its Representatives.

5.2           Conduct of Business of the Company.

(a)            Unless the Purchaser shall otherwise consent in writing (such consent not to be unreasonably withheld, conditioned or delayed), during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement in accordance with Section 8.1 or the Closing (the “ Interim Period ”), except as expressly contemplated by this Agreement or as set forth on Schedule 5.2 , the Company shall, and shall cause the Target Companies to (i) conduct their respective businesses, in all material respects, in the ordinary course of business consistent with past practice, (ii) comply with all Laws applicable to the Target Companies and their respective businesses, assets and employees, and (iii) take all commercially reasonable measures necessary or appropriate to preserve intact, in all material respects, their respective business organizations, to keep available the services of their respective managers, directors, officers, employees and consultants, and to preserve the possession, control and condition of their respective material assets, all as consistent with past practice.

(b)            Without limiting the generality of Section 5.2(a) and except as contemplated by the terms of this Agreement or as set forth on Schedule 5.2, during the Interim Period, without the prior written consent of the Purchaser (such consent not to be unreasonably withheld, conditioned or delayed), the Company shall not, and shall cause its Subsidiaries to not:

(i)             amend, waive or otherwise change, in any respect, its Organizational Documents;

(ii)            authorize for issuance, issue, grant, sell, pledge, dispose of or propose to issue, grant, sell, pledge or dispose of any of its equity securities or any options, warrants, commitments, subscriptions or rights of any kind to acquire or sell any of its equity securities, or other securities, including any securities convertible into or exchangeable for any of its shares or other equity securities or securities of any class and any other equity-based awards, or engage in any hedging transaction with a third Person with respect to such securities except with respect to the granting of Company Options to employees consistent with past practice;

(iii)           split, combine, recapitalize or reclassify any of its shares or other equity interests or issue any other securities in respect thereof or pay or set aside any dividend or other distribution (whether in cash, equity or property or any combination thereof) in respect of its equity interests, or directly or indirectly redeem, purchase or otherwise acquire or offer to acquire any of its securities;

(iv)           incur, create, assume, prepay or otherwise become liable for any Indebtedness (directly, contingently or otherwise) in excess of $50,000 (individually or in the aggregate), make a loan or advance to or investment in any third party, or guarantee or endorse any Indebtedness, Liability or obligation of any Person in excess of $25,000 individually or $50,000 in the aggregate;

(v)            increase the wages, salaries or compensation of its employees other than in the ordinary course of business, consistent with past practice, and in any event not in the aggregate by more than five percent (5%), or make or commit to make any bonus payment (whether in cash, property or securities) to any employee outside of the ordinary course of business, or materially increase other benefits of employees generally, or enter into, establish, materially amend or terminate any Company Benefit Plan with, for or in respect of any current consultant, officer, manager director or employee, in each case other than as required by applicable Law, pursuant to the terms of any Company Benefit Plans or in the ordinary course of business consistent with past practice;

(vi)           make or rescind any material election relating to Taxes, settle any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, file any amended Tax Return or claim for refund, or make any material change in its accounting or Tax policies or procedures, in each case except as required by applicable Law or in compliance with GAAP;

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(vii)          transfer or exclusively license to any Person any Company IP owned by or exclusively licensed to any Target Company, or materially amend or modify, permit to lapse or fail to preserve any Company Registered IP, Company Licensed IP or other Company IP that is material to the business of any Target Company, or disclose to any Person who has not entered into a confidentiality agreement any Trade Secrets;

(viii)         terminate, or waive or assign any material right under, any Company Material Contract or enter into any Contract that would be a Company Material Contract outside of the ordinary course of business consistent with past practice;

(ix)           fail to maintain its books, accounts and records in all material respects in the ordinary course of business consistent with past practice;

(x)            establish any Subsidiary or enter into any new line of business;

(xi)           fail to use commercially reasonable efforts to keep in force insurance policies or replacement or revised policies providing insurance coverage with respect to its assets, operations and activities in such amount and scope of coverage as are currently in effect;

(xii)          revalue any of its material assets or make any change in accounting methods, principles or practices, except to the extent required to comply with GAAP and after consulting with the Company’s outside auditors;

(xiii)         waive, release, assign, settle or compromise any claim, action or proceeding (including any suit, action, claim, proceeding or investigation relating to this Agreement or the transactions contemplated hereby), other than waivers, releases, assignments, settlements or compromises that involve only the payment of monetary damages (and not the imposition of equitable relief on, or the admission of wrongdoing by, the Company or its Affiliates) not in excess of $50,000 (individually or in the aggregate), or otherwise pay, discharge or satisfy any Actions, Liabilities or obligations, unless such amount has been reserved in the Company Financials;

(xiv)         close or materially reduce its activities, or effect any layoff or other personnel reduction or change, at any of its facilities;

(xv)          acquire, including by merger, consolidation, acquisition of stock or assets, or any other form of business combination, any corporation, partnership, limited liability company, other business organization or any division thereof, or any material amount of assets outside the ordinary course of business consistent with past practice;

(xvi)         make capital expenditures in excess of $100,000 individually for any project (or set of related projects), or $250,000 in the aggregate;

(xvii)        adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization;

(xviii)       voluntarily incur any Liability or obligation (whether absolute, accrued, contingent or otherwise) in excess of $100,000 individually or $250,000 in the aggregate other than pursuant to the terms of a Company Material Contract or Company Benefit Plan;

(xix)         sell, lease, license, transfer, exchange or swap, mortgage or otherwise pledge or encumber (including securitizations), or otherwise dispose of any material portion of its properties, assets or rights;

(xx)          enter into any agreement, understanding or arrangement with respect to the voting of equity securities of the Company;

(xxi)         take any action that would reasonably be expected to significantly delay or impair the obtaining of any Consents or approvals of any Governmental Authority to be obtained in connection with this Agreement;

(xxii)        enter into, amend, waive or terminate (other than terminations in accordance with their terms) any transaction with any Related Person (other than compensation and benefits and advancement of expenses, in each case, provided in the ordinary course of business consistent with past practice); or

(xxiii)       authorize or agree to do any of the foregoing actions.

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5.3           Conduct of Business of the Purchaser.

(a)            Unless the Company shall otherwise consent in writing (such consent not to be unreasonably withheld, conditioned or delayed), during the Interim Period, except as expressly contemplated by this Agreement or as set forth on Schedule 5.3 , the Purchaser shall, and shall cause its Subsidiaries to, (i) conduct their respective businesses, in all material respects, in the ordinary course of business consistent with past practice, (ii) comply with all Laws applicable to the Purchaser and its Subsidiaries and their respective businesses, assets and employees, and (iii) take all commercially reasonable measures necessary or appropriate to preserve intact, in all material respects, their respective business organizations, to keep available the services of their respective managers, directors, officers, employees and consultants, and to preserve the possession, control and condition of their respective material assets, all as consistent with past practice.

(b)            Without limiting the generality of Section 5.3(a) and except as contemplated by the terms of this Agreement (including as contemplated by the PIPE Investment) or as set forth on Schedule 5.3 , during the Interim Period, without the prior written consent of the Company (such consent not to be unreasonably withheld, conditioned or delayed), the Purchaser shall not, and shall cause its Subsidiaries to not:

(i)             amend, waive or otherwise change, in any respect, its Organizational Documents;

(ii)            authorize for issuance, issue, grant, sell, pledge, dispose of or propose to issue, grant, sell, pledge or dispose of any of its equity securities or any options, warrants, commitments, subscriptions or rights of any kind to acquire or sell any of its equity securities, or other securities, including any securities convertible into or exchangeable for any of its equity securities or other security interests of any class and any other equity-based awards, or engage in any hedging transaction with a third Person with respect to such securities;

(iii)           split, combine, recapitalize or reclassify any of its shares or other equity interests or issue any other securities in respect thereof or pay or set aside any dividend or other distribution (whether in cash, equity or property or any combination thereof) in respect of its shares or other equity interests, or directly or indirectly redeem, purchase or otherwise acquire or offer to acquire any of its securities;

(iv)           incur, create, assume, prepay or otherwise become liable for any Indebtedness (directly, contingently or otherwise) in excess of $50,000 (individually or in the aggregate), make a loan or advance to or investment in any third party, or guarantee or endorse any Indebtedness, Liability or obligation of any Person (provided, that this Section 5.3(b)(iv) shall not prevent the Purchaser from borrowing funds necessary to finance its Expenses incurred in connection with the consummation of the Merger and the other transactions contemplated by this Agreement, including the PIPE Investment and any meeting for the Extension, up to aggregate additional Indebtedness during the Interim Period of $1,000,000);

(v)            make or rescind any material election relating to Taxes, settle any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, file any amended Tax Return or claim for refund, or make any material change in its accounting or Tax policies or procedures, in each case except as required by applicable Law or in compliance with GAAP;

(vi)           amend, waive or otherwise change the Trust Agreement in any manner adverse to the Purchaser;

(vii)          terminate, waive or assign any material right under any material agreement to which it is a party;

(viii)         fail to maintain its books, accounts and records in all material respects in the ordinary course of business consistent with past practice;

(ix)           establish any Subsidiary or enter into any new line of business;

(x)            fail to use commercially reasonable efforts to keep in force insurance policies or replacement or revised policies providing insurance coverage with respect to its assets, operations and activities in such amount and scope of coverage as are currently in effect;

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(xi)           revalue any of its material assets or make any change in accounting methods, principles or practices, except to the extent required to comply with GAAP and after consulting the Purchaser’s outside auditors;

(xii)          waive, release, assign, settle or compromise any claim, action or proceeding (including any suit, action, claim, proceeding or investigation relating to this Agreement or the transactions contemplated hereby), other than waivers, releases, assignments, settlements or compromises that involve only the payment of monetary damages (and not the imposition of equitable relief on, or the admission of wrongdoing by, the Purchaser) not in excess of $50,000 (individually or in the aggregate), or otherwise pay, discharge or satisfy any Actions, Liabilities or obligations, unless such amount has been reserved in the Purchaser Financials;

(xiii)         acquire, including by merger, consolidation, acquisition of stock or assets, or any other form of business combination, any corporation, partnership, limited liability company, other business organization or any division thereof, or any material amount of assets outside the ordinary course of business;

(xiv)         make capital expenditures in excess of $50,000 individually for any project (or set of related projects) or $150,000 in the aggregate (excluding for the avoidance of doubt, incurring any Expenses);

(xv)          adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization (other than with respect to the Merger);

(xvi)         voluntarily incur any Liability or obligation (whether absolute, accrued, contingent or otherwise) in excess of $50,000 individually or $150,000 in the aggregate (excluding the incurrence of any Expenses) other than pursuant to the terms of a material Contract in existence as of the date of this Agreement or entered into in the ordinary course of business or in accordance with the terms of this Section 5.3 during the Interim Period;

(xvii)        sell, lease, license, transfer, exchange or swap, mortgage or otherwise pledge or encumber (including securitizations), or otherwise dispose of any material portion of its properties, assets or rights;

(xviii)       enter into any agreement, understanding or arrangement with respect to the voting of Purchaser Securities;

(xix)         take any action that would reasonably be expected to significantly delay or impair the obtaining of any Consents or approvals of any Governmental Authority to be obtained in connection with this Agreement;

(xx)          fail to use commercially reasonable efforts to maintain the listing of the Purchaser Ordinary Shares on the Nasdaq under applicable Nasdaq listing requirements; or

(xxi)              authorize or agree to do any of the foregoing actions.

5.4           Annual and Interim Financial Statements . From the date hereof through the Closing Date, within thirty (30) calendar days following the end of each calendar month, each three-month quarterly period and each fiscal year, the Company shall deliver to the Purchaser an unaudited consolidated income statement and an unaudited consolidated balance sheet for the period from the Interim Balance Sheet Date through the end of such calendar month, quarterly period or fiscal year and the applicable comparative period in the preceding fiscal year, in each case accompanied by a certificate of the Chief Financial Officer of the Company to the effect that all such financial statements fairly present the consolidated financial position and results of operations of the Target Companies as of the date or for the periods indicated, in accordance with GAAP, subject to year-end audit adjustments and excluding footnotes. From the date hereof through the Closing Date, the Company will also promptly deliver to the Purchaser copies of any audited consolidated financial statements of the Target Companies that the Target Companies’ certified public accountants may issue.

5.5           Purchaser Public Filings . During the Interim Period, the Purchaser will keep current and timely file all of its public filings with the SEC and otherwise comply in all material respects with applicable securities Laws and shall use its commercially reasonable efforts to maintain the listing of the Purchaser Public Units, the Purchaser Ordinary Shares, the Purchaser Public Rights and the Purchaser Public Warrants on Nasdaq; provided, that the Parties acknowledge and agree that from and after the Closing, Purchaser intends to list on Nasdaq only the Purchaser Ordinary Shares and the Purchaser Public Warrants. During the Interim Period, if the Purchaser receives any written or, to the Knowledge of the Purchaser, oral notice from Nasdaq that the Purchaser has failed, or would reasonably be

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expected to fail, to meet the Nasdaq listing requirements as of the Effective Time or within six (6) months thereafter for any reason, then the Purchaser shall give prompt written notice of such Nasdaq notice to the Company, including a copy of any written notice received from Nasdaq or a summary of any oral notice received from Nasdaq.

5.6           Company Shareholder Meeting . The Company will call a shareholder meeting as promptly as practicable after the date of this Agreement to obtain the Required Company Shareholder Approval, and the Company shall use its reasonable best efforts to solicit from the Company Shareholders proxies in favor of the Required Company Shareholder Approval prior to such Company shareholder meeting, and to take all other actions necessary or advisable to secure the Required Company Shareholder Approval, including enforcing the Voting Agreements and the Company Written Consents.

5.7           No Solicitation .

(a)            For purposes of this Agreement, (i) an “ Acquisition Proposal ” means any inquiry, proposal or offer, or any indication of interest in making an offer or proposal, from any Person or group at any time relating to an Alternative Transaction, and (ii) an “ Alternative Transaction ” means (A) with respect to the Company and its Affiliates, a transaction (other than the transactions contemplated by this Agreement) concerning the sale of (x) all or any material part of the business or assets of the Target Companies (other than in the ordinary course of business consistent with past practice) or (y) any of the shares or other equity interests or profits of the Target Companies, in any case, whether such transaction takes the form of a sale of shares or other equity, assets, merger, consolidation, issuance of debt securities, management Contract, joint venture or partnership, or otherwise and (B) with respect to the Purchaser and its Affiliates, a transaction (other than the transactions contemplated by this Agreement) concerning a Business Combination.

(b)            During the Interim Period, in order to induce the other Parties to continue to commit to expend management time and financial resources in furtherance of the transactions contemplated hereby, each Party shall not, and shall cause its Representatives to not, without the prior written consent of the Company and the Purchaser, directly or indirectly, (i) solicit, assist, initiate or facilitate the making, submission or announcement of, or intentionally encourage, any Acquisition Proposal, (ii) furnish any non-public information regarding such Party or its Affiliates or their respective businesses, operations, assets, Liabilities, financial condition, prospects or employees to any Person or group (other than a Party to this Agreement or their respective Representatives) in connection with or in response to an Acquisition Proposal, (iii) engage or participate in discussions or negotiations with any Person or group with respect to, or that could be expected to lead to, an Acquisition Proposal, (iv) approve, endorse or recommend, or publicly propose to approve, endorse or recommend, any Acquisition Proposal, (v) negotiate or enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement related to any Acquisition Proposal, or (vi) release any third Person from, or waive any provision of, any confidentiality agreement to which such Party is a party.

(c)            Each Party shall notify the others as promptly as practicable (and in any event within 48 hours) orally and in writing of the receipt by such Party or any of its Representatives of (i) any bona fide inquiries, proposals or offers, requests for information or requests for discussions or negotiations regarding or constituting any Acquisition Proposal or any bona fide inquiries, proposals or offers, requests for information or requests for discussions or negotiations that could be expected to result in an Acquisition Proposal, and (ii) any request for non-public information relating to such Party or its Affiliates, specifying in each case, the material terms and conditions thereof (including a copy thereof if in writing or a written summary thereof if oral) and the identity of the party making such inquiry, proposal, offer or request for information. Each Party shall keep the others promptly informed of the status of any such inquiries, proposals, offers or requests for information. During the Interim Period, each Party shall, and shall cause its Representatives to, immediately cease and cause to be terminated any solicitations, discussions or negotiations with any Person with respect to any Acquisition Proposal and shall, and shall direct its Representatives to, cease and terminate any such solicitations, discussions or negotiations.

5.8           No Trading . The Company acknowledges and agrees that it is aware, and that the Company’s Affiliates are aware (and each of their respective Representatives is aware or, upon receipt of any material nonpublic information of the Purchaser, will be advised) of the restrictions imposed by the Federal Securities Laws and other applicable foreign and domestic Laws on a Person possessing material nonpublic information about a publicly traded company. The Company hereby agrees that, while it is in possession of such material nonpublic information, it shall not purchase or sell any securities of the Purchaser (other than to engage in the Merger in accordance with Article I ), communicate such information to any third party, take any other action with respect to the Purchaser in violation of such Laws, or cause or encourage any third party to do any of the foregoing.

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5.9           Notification of Certain Matters . During the Interim Period, each of the Parties shall give prompt notice to the other Parties if such Party or its Affiliates: (a) fails to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it or its Affiliates hereunder in any material respect; (b) receives any notice or other communication in writing from any third party (including any Governmental Authority) alleging (i) that the Consent of such third party is or may be required in connection with the transactions contemplated by this Agreement or (ii) any non-compliance with any Law by such Party or its Affiliates; (c) receives any notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement; (d) discovers any fact or circumstance that, or becomes aware of the occurrence or non-occurrence of any event the occurrence or non-occurrence of which, would reasonably be expected to cause or result in any of the conditions to set forth in Article VII not being satisfied or the satisfaction of those conditions being materially delayed; or (e) becomes aware of the commencement or threat, in writing, of any Action against such Party or any of its Affiliates, or any of their respective properties or assets, or, to the Knowledge of such Party, any officer, director, partner, member or manager, in his, her or its capacity as such, of such Party or of its Affiliates with respect to the consummation of the transactions contemplated by this Agreement. No such notice shall constitute an acknowledgement or admission by the Party providing the notice regarding whether or not any of the conditions to the Closing have been satisfied or in determining whether or not any of the representations, warranties or covenants contained in this Agreement have been breached.

5.10         Efforts .

(a)            Subject to the terms and conditions of this Agreement, each Party shall use its commercially reasonable efforts, and shall cooperate fully with the other Parties, to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws and regulations to consummate the transactions contemplated by this Agreement (including the receipt of all applicable Consents of Governmental Authorities) and to comply as promptly as practicable with all requirements of Governmental Authorities applicable to the transactions contemplated by this Agreement.

(b)            In furtherance and not in limitation of Section 5.10(a) , to the extent required under any Laws that are designed to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade (“ Antitrust Laws ”), each Party hereto agrees to make any required filing or application under Antitrust Laws, as applicable, at such Party’s sole cost and expense, with respect to the transactions contemplated hereby as promptly as practicable, to supply as promptly as reasonably practicable any additional information and documentary material that may be requested pursuant to Antitrust Laws and to take all other actions necessary, proper or advisable to cause the expiration or termination of the applicable waiting periods under Antitrust Laws as soon as practicable, including by requesting early termination of the waiting period provided for under the Antitrust Laws. Each Party shall, in connection with its efforts to obtain all requisite approvals and authorizations for the transactions contemplated by this Agreement under any Antitrust Law, use its commercially reasonable efforts to: (i) cooperate in all respects with each other Party or its Affiliates in connection with any filing or submission and in connection with any investigation or other inquiry, including any proceeding initiated by a private Person; (ii) keep the other Parties reasonably informed of any communication received by such Party or its Representatives from, or given by such Party or its Representatives to, any Governmental Authority and of any communication received or given in connection with any proceeding by a private Person, in each case regarding any of the transactions contemplated by this Agreement; (iii) permit a Representative of the other Parties and their respective outside counsel to review any communication given by it to, and consult with each other in advance of any meeting or conference with, any Governmental Authority or, in connection with any proceeding by a private Person, with any other Person, and to the extent permitted by such Governmental Authority or other Person, give a Representative or Representatives of the other Parties the opportunity to attend and participate in such meetings and conferences; (iv) in the event a Party’s Representative is prohibited from participating in or attending any meetings or conferences, the other Parties shall keep such Party promptly and reasonably apprised with respect thereto; and (v) use commercially reasonable efforts to cooperate in the filing of any memoranda, white papers, filings, correspondence or other written communications explaining or defending the transactions contemplated hereby, articulating any regulatory or competitive argument, and/or responding to requests or objections made by any Governmental Authority.

(c)            As soon as reasonably practicable following the date of this Agreement, the Parties shall cooperate in all respects with each other and use (and shall cause their respective Affiliates to use) their respective commercially reasonable efforts to prepare and file with Governmental Authorities requests for approval of the transactions contemplated by this Agreement and shall use all commercially reasonable efforts to have such Governmental Authorities approve the transactions contemplated by this Agreement. Each Party shall give prompt

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written notice to the other Parties if such Party or its Representatives receives any notice from such Governmental Authorities in connection with the transactions contemplated by this Agreement, and shall promptly furnish the other Parties with a copy of such Governmental Authority notice. If any Governmental Authority requires that a hearing or meeting be held in connection with its approval of the transactions contemplated hereby, whether prior to the Closing or after the Closing, each Party shall arrange for Representatives of such Party to be present for such hearing or meeting. If any objections are asserted with respect to the transactions contemplated by this Agreement under any applicable Law or if any Action is instituted (or threatened to be instituted) by any applicable Governmental Authority or any private Person challenging any of the transactions contemplated by this Agreement or any Ancillary Document as violative of any applicable Law or which would otherwise prevent, materially impede or materially delay the consummation of the transactions contemplated hereby or thereby, the Parties shall use their commercially reasonable efforts to resolve any such objections or Actions so as to timely permit consummation of the transactions contemplated by this Agreement and the Ancillary Documents, including in order to resolve such objections or Actions which, in any case if not resolved, could reasonably be expected to prevent, materially impede or materially delay the consummation of the transactions contemplated hereby or thereby. In the event any Action is instituted (or threatened to be instituted) by a Governmental Authority or private party challenging the transactions contemplated by this Agreement, or any Ancillary Document, the Parties shall, and shall cause their respective Representatives to, cooperate in all respects with each other and use their respective commercially reasonable efforts to contest and resist any such Action and to have vacated, lifted, reversed or overturned any Order, whether temporary, preliminary or permanent, that is in effect and that prohibits, prevents or restricts consummation of the transactions contemplated by this Agreement and the Ancillary Documents.

(d)            Prior to the Closing, each Party shall use its commercially reasonable efforts to obtain any Consents of Governmental Authorities or other third Persons as may be necessary for the consummation by such Party or its Affiliates of the transactions contemplated by this Agreement or required as a result of the execution or performance of, or consummation of the transactions contemplated by, this Agreement by such Party or its Affiliates, and the other Parties shall provide reasonable cooperation in connection with such efforts.

(e)            Notwithstanding anything herein to the contrary, no Party shall be required to agree to any term, condition or modification with respect to obtaining any Consents in connection with the transactions contemplated by this Agreement that would result in, or would be reasonably likely to result in: (i) a Material Adverse Effect to such Party or its Affiliates, or (ii) such Party having to cease, sell or otherwise dispose of any material assets or businesses (including the requirement that any such assets or business be held separate).

(f)             Without limiting anything to the contrary contained herein, during the Interim Period, the Purchaser may enter into and consummate subscription agreements with investors relating to a private equity investment in the Purchaser to purchase share capital of the Purchaser (the “ PIPE Shares ”) in connection with a private placement on terms mutually agreeable to the Company and Purchaser, acting reasonably (the “ PIPE Investment ”), and, if the Purchaser elects to seek the PIPE Investment, the Purchaser and the Company shall use commercially reasonable efforts to cause the PIPE Investment to occur.

5.11         Tax Matters . Each of the Parties shall use its reasonable best efforts to cause the Merger to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. None of the Parties shall (and each of the Parties shall cause their respective Subsidiaries not to) take any action, or fail to take any action, that could reasonably be expected to cause the Merger to fail to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. The Parties intend to report and, except to the extent otherwise required by Law, shall report, for federal income tax purposes, the Merger as a “reorganization” within the meaning of Section 368(a) of the Code.

5.12         Further Assurances . The Parties hereto shall further cooperate with each other and use their respective commercially reasonable efforts to take or cause to be taken all actions, and do or cause to be done all things, necessary, proper or advisable on their part under this Agreement and applicable Laws to consummate the transactions contemplated by this Agreement as soon as reasonably practicable, including preparing and filing as soon as practicable all documentation to effect all necessary notices, reports and other filings.

5.13         The Proxy Statement .

(a)            As promptly as practicable after the date hereof, and in consultation with the Company, the Purchaser shall prepare and file with the SEC a proxy statement (as amended or supplemented from time to time, the “ Proxy Statement ”) calling a special meeting of the Purchaser’s shareholders (the “ Shareholder Meeting ”), in

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accordance with the Purchaser Charter, seeking the approval of the Purchaser’s shareholders for the transactions contemplated by this Agreement and offering to redeem from the Public Shareholders their Purchaser Ordinary Shares in conjunction with a shareholder vote on the transactions contemplated by this Agreement (the “ Redemption ”), and each of the Purchaser and the Company shall use its commercially reasonable efforts to obtain and furnish the information required by the Exchange Act to be included in the Proxy Statement, all in accordance with and as required by the Purchaser’s Organizational Documents, the IPO Prospectus, applicable Law and any applicable rules and regulations of the SEC and Nasdaq. In the Proxy Statement, the Purchaser shall seek approval by the holders of Purchaser Ordinary Shares in accordance with the Purchaser’s Organizational Documents, the BVI Act, and the rules and regulations of the SEC and Nasdaq of (i) this Agreement and the transactions contemplated hereby or referred to herein (including, if required, the issuance of the PIPE Shares), (ii) if required to be approved by the Purchaser’s shareholders, adoption and approval of an Amended and Restated Memorandum and Articles of Association of the Purchaser in form and substance reasonably acceptable to the Purchaser and the Company (the “ Amended Charter ”) (which Amended Charter, if appropriate as determined by the Purchaser, will be adopted by the Purchaser in two separate amendments, one prior to the consummation of the PIPE Investment in order to further detail the rights of any PIPE Shares, as necessary, and the other to become effective at the time of the Closing and upon registration by the BVI Registry to, among other things, change the name of the Purchaser effective as of the Closing to “Borqs Technologies, Inc.”, (iii) adoption and approval of a new equity incentive plan in a form to be agreed by the Purchaser and the Company, acting reasonably (the “ Purchaser Equity Plan ”), and which will provide for awards for a number of Purchaser Ordinary Shares (including those for the Assumed Options) equal to the difference between (A) thirteen and one-half percent (13.5%) of the aggregate number of Purchaser Ordinary Shares issued and outstanding immediately after the Closing, less (B) the number of Purchaser Ordinary Shares that are subject to the Assumed Options, (iv) to appoint, and designate the classes of, the members of the board of directors of the Purchaser, and appoint the members of any committees thereof, in each case in accordance with Section 5.17 hereof, (v) to obtain any and all other approvals necessary or advisable to effect the consummation of the transactions contemplated by this Agreement and the Ancillary Documents (the approvals described in the foregoing clauses (i) through (v), collectively, the “ Shareholder Approval Matters ”), and (vi) the adjournment of the Shareholder Meeting, if necessary or desirable in the reasonable determination of the Purchaser. In connection with the Proxy Statement, the Purchaser will also file with the SEC financial and other information about the transactions contemplated by this Agreement in accordance with applicable proxy solicitation rules set forth in the Purchaser’s Organizational Documents, the BVI Act and the rules and regulations of the SEC and Nasdaq (such Proxy Statement and the documents included or referred to therein pursuant to which the Redemption will be made, together with any additional soliciting materials, supplements, amendments and/or exhibits thereto, the “ Proxy Documents ”).

(b)            Except with respect to the information provided by or on behalf of the Target Companies for inclusion in the Proxy Statement and other Proxy Documents, the Purchaser shall ensure that, when filed, the Proxy Statement and other Proxy Documents complies in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder. As soon as reasonably practicable after receiving clearance from the SEC, the Purchaser shall cause the Proxy Documents to be disseminated as promptly as practicable to the Purchaser’s shareholders as and to the extent such dissemination is required by U.S. federal securities laws and the rules and regulations of the SEC and Nasdaq promulgated thereunder or otherwise (the “ Federal Securities Laws ”). The Company shall as promptly as possible provide to the Purchaser such information concerning the Company Shareholders, the Target Companies and their respective businesses, operations, condition (financial or otherwise), assets, Liabilities, properties, officers, directors and employees as is either required by Federal Securities Laws or reasonably requested by the Purchaser for inclusion in the Proxy Documents. Subject to compliance by the Company with the immediately preceding sentence with respect to the information provided or to be provided by or on behalf of them for inclusion in the Proxy Documents, the Purchaser shall cause the Proxy Documents to comply in all material respects with the Federal Securities Laws. The Purchaser shall provide copies of the proposed forms of the Proxy Documents (including, in each case, any amendments or supplements thereto) to Company such that the Company and its Representatives are afforded a reasonable amount of time prior to the dissemination or filing thereof to review such material and comment thereon prior to such dissemination or filing, and the Purchaser shall reasonably consider in good faith any comments of the Company and its Representatives. The Purchaser, in consultation with the Company and its Representatives, shall respond promptly to any comments of the SEC or its staff with respect to the Proxy Documents and promptly correct any information provided by it for use in the Proxy Documents if and to the extent that such information shall have become false or misleading in any material respect or as otherwise required by the Federal Securities Laws. The Purchaser shall amend or supplement the Proxy Documents and cause the Proxy Documents, as so amended or supplemented, to be filed with the SEC and to be disseminated to the Purchaser’s shareholders, in each case as and

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to the extent required by the Federal Securities Laws and subject to the terms and conditions of this Agreement and the Purchaser Organizational Documents. The Purchaser shall provide the Company and its Representatives with copies of any written comments, and shall inform them of any material oral comments, that the Purchaser or any of its Representatives receive from the SEC or its staff with respect to the Proxy Documents promptly after the receipt of such comments and shall give the Company a reasonable opportunity under the circumstances to review and comment on any proposed written or oral responses to such comments. The Company shall, and shall cause each of the Target Companies to, make their respective directors, officers and employees, upon reasonable advance notice, available to the Purchaser and its Representatives in connection with the drafting of the public filings with respect to the transactions contemplated by this Agreement, including the Proxy Documents and responding in a timely manner to comments from the SEC. As promptly as reasonably practicable after the Proxy Statement has “cleared” comments from the SEC, the Purchaser shall cause the definitive Proxy Statement to be filed with the SEC and disseminated to the Purchaser’s shareholders, and shall duly call, give notice of, convene and hold the Shareholder Meeting.

(c)            If at any time prior to the Closing, any information relating to the Purchaser, on the one hand, or the Target Companies, on the other hand, or any of their respective Affiliates, businesses, operations, condition (financial or otherwise), assets, Liabilities, properties, officers, directors or employees, should be discovered by the Purchaser, on the one hand, or the Target Companies, on the other hand, that should be set forth in an amendment or supplement to the Proxy Documents so that such documents would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the Party which discovers such information shall promptly notify each other Party and shall cooperate with the other Parties to ensure that an appropriate amendment or supplement describing such information shall be promptly filed with the SEC and, to the extent required by law, disseminated to the Purchaser’s shareholders.

5.14         Public Announcements .

(a)            The Parties agree that no public release, filing or announcement concerning this Agreement or the Ancillary Documents or the transactions contemplated hereby or thereby shall be issued by any Party or any of their Affiliates without the prior written consent of the Purchaser, the Company and the Purchaser Representative (which consent shall not be unreasonably withheld, conditioned or delayed), except as such release or announcement may be required by applicable Law or the rules or regulations of any securities exchange, in which case the applicable Party shall use commercially reasonable efforts to allow the other Parties reasonable time to comment on, and arrange for any required filing with respect to, such release or announcement in advance of such issuance.

(b)            The Parties shall mutually agree upon and, as promptly as practicable after the execution of this Agreement (but in any event within four (4) Business Days thereafter), issue a press release announcing the execution of this Agreement (the “ Signing Press Release ”). Promptly after the issuance of the Signing Press Release, the Purchaser shall file a current report on Form 8-K (the “ Signing Filing ”) with the Signing Press Release and a description of this Agreement as required by Federal Securities Laws, which the Company shall review, comment upon and approve (which approval shall not be unreasonably withheld, conditioned or delayed) prior to filing (with the Purchaser providing a draft of the Signing Filing to the Company promptly, and in any event no later than the first (1 st ) Business Day after the execution of this Agreement, and with the Company reviewing, commenting upon and approving such Signing Filing in any event no later than the third (3 rd ) Business Day after the execution of this Agreement). The Parties shall mutually agree upon and, as promptly as practicable after the Closing (but in any event within four (4) Business Days thereafter), issue a press release announcing the consummation of the transactions contemplated by this Agreement (the “ Closing Press Release ”). Promptly after the issuance of the Closing Press Release, the Purchaser shall file a current report on Form 8-K (the “ Closing Filing ”) with the Closing Press Release and a description of the Closing as required by Federal Securities Laws which the Seller Representative and the Purchaser Representative shall review, comment upon and approve (which approval shall not be unreasonably withheld, conditioned or delayed) prior to filing (with the Purchaser providing a draft of the Closing Filing to the Seller Representative and the Purchaser Representative promptly, and in any event no later than the first (1 st ) Business Day after the Closing, and with each of the Seller Representative and Purchaser Representative reviewing, commenting upon and approving such Closing Filing in any event no later than the third (3 rd ) Business Day after the Closing). In connection with the preparation of the Signing Press Release, the Signing Filing, the Closing Filing, the Closing Press Release, or any other report, statement, filing notice or application made by or on behalf of a Party to any Governmental Authority or other third party in connection with the transactions contemplated hereby, each Party shall, upon request by any other Party, furnish the Parties with all information concerning themselves, their respective directors, officers and equity holders,

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and such other matters as may be reasonably necessary or advisable in connection with the transactions contemplated hereby, or any other report, statement, filing, notice or application made by or on behalf of a Party to any third party and/or any Governmental Authority in connection with the transactions contemplated hereby.

5.15         Confidential Information .

(a)            The Company hereby agrees that during the Interim Period and, in the event this Agreement is terminated in accordance with Article VIII , for a period of two (2) years after such termination, it shall, and shall cause its Representatives to: (i) treat and hold in strict confidence any Purchaser Confidential Information, and will not use for any purpose (except in connection with the consummation of the transactions contemplated by this Agreement or the Ancillary Documents, performing their obligations hereunder or thereunder, enforcing their rights hereunder or thereunder, or in furtherance of their authorized duties on behalf of the Purchaser or its Subsidiaries), nor directly or indirectly disclose, distribute, publish, disseminate or otherwise make available to any third party any of the Purchaser Confidential Information without the Purchaser’s prior written consent; and (ii) in the event that the Company or any of its Affiliates or Representatives, during the Interim Period or, in the event this Agreement is terminated in accordance with Article VIII , for a period of two (2) years after such termination, becomes legally compelled to disclose any Purchaser Confidential Information, (A) provide the Purchaser with prompt written notice of such requirement so that the Purchaser or an Affiliate thereof may seek a protective Order or other remedy or waive compliance with this Section 5.15(a) , and (B) in the event that such protective Order or other remedy is not obtained, or the Purchaser waives compliance with this Section 5.15(a) , furnish only that portion of such Purchaser Confidential Information which is legally required to be provided as advised in writing by outside counsel and to exercise its commercially reasonable efforts to obtain assurances that confidential treatment will be accorded such Purchaser Confidential Information. In the event that this Agreement is terminated and the transactions contemplated hereby are not consummated, the Company shall, and shall cause its Affiliates and Representatives to, promptly deliver to the Purchaser any and all copies (in whatever form or medium) of Purchaser Confidential Information and destroy all notes, memoranda, summaries, analyses, compilations and other writings related thereto or based thereon.

(b)            The Purchaser hereby agrees that during the Interim Period and, in the event this Agreement is terminated in accordance with Article VIII , for a period of two (2) years after such termination, it shall, and shall cause its Representatives to: (i) treat and hold in strict confidence any Company Confidential Information, and will not use for any purpose (except in connection with the consummation of the transactions contemplated by this Agreement or the Ancillary Documents, performing its obligations hereunder or thereunder or enforcing its rights hereunder or thereunder), nor directly or indirectly disclose, distribute, publish, disseminate or otherwise make available to any third party any of the Company Confidential Information without the Company’s prior written consent; and (ii) in the event that the Purchaser or any of its Representatives, during the Interim Period or, in the event this Agreement is terminated in accordance with Article VIII , for a period of two (2) years after such termination, becomes legally compelled to disclose any Company Confidential Information, (A) provide the Company with prompt written notice of such requirement so that the Company may seek a protective Order or other remedy or waive compliance with this Section 5.15(b) and (B) in the event that such protective Order or other remedy is not obtained, or the Company waives compliance with this Section 5.15(b) , furnish only that portion of such Company Confidential Information which is legally required to be provided as advised in writing by outside counsel and to exercise its commercially reasonable efforts to obtain assurances that confidential treatment will be accorded such Company Confidential Information. In the event that this Agreement is terminated and the transactions contemplated hereby are not consummated, the Purchaser shall, and shall cause its Representatives to, promptly deliver to the Company any and all copies (in whatever form or medium) of Company Confidential Information and destroy all notes, memoranda, summaries, analyses, compilations and other writings related thereto or based thereon. Notwithstanding the foregoing, the Purchaser and its Representatives shall be permitted to disclose any and all Company Confidential Information to the extent required by the Federal Securities Laws.

5.16         Documents and Information . After the Closing Date, the Purchaser shall, and shall cause its Subsidiaries (including the Surviving Company) to, until the seventh (7 th ) anniversary of the Closing Date, retain all books, records and other documents pertaining to the business of the Company and its Subsidiaries in existence on the Closing Date and make the same available for inspection and copying by the Purchaser Representative during normal business hours of the Company and its Subsidiaries, as applicable, upon reasonable request and upon reasonable notice. No such books, records or documents shall be destroyed after the seventh (7 th ) anniversary of the Closing Date by the Purchaser or its Subsidiaries (including any Target Company) without first advising the Purchaser Representative in writing and giving the Purchaser Representative a reasonable opportunity to obtain possession thereof.

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5.17         Post-Closing Board of Directors and Executive Officers .

(a)            The Parties shall take all necessary action, including causing the directors of the Purchaser to resign, so that effective as of the Closing, the Purchaser’s board of directors (the “ Post-Closing Purchaser Board ”) will consist of seven (7) individuals. Immediately after the Closing, the Parties shall take all necessary action to designate and appoint to the Post-Closing Purchaser Board (i) the two (2) persons that are designated by the Purchaser prior to the Closing (the “ Purchaser Directors ”) at least one of whom shall qualify as an independent director under Nasdaq rules, (ii) the three (3) persons that are designated by the Company prior to the Closing (the “ Company Directors ”), at least one (1) of whom shall be required to qualify as an independent director under Nasdaq rules; and (iii) two (2) persons who are mutually agreed upon by the Purchaser and the Company prior to the Closing (the “ Mutual Directors ”) both of whom shall qualify as independent directors under Nasdaq rules. Pursuant to the Amended Charter as in effect as of the Closing, the Post-Closing Purchaser Board will be a classified board with three classes of directors, with (I) one class of directors, the Class I Directors, initially serving a one (1) year term, such term effective from the Closing (but any subsequent Class I Directors serving a three (3) year term) and with such class consisting of the two Mutual Directors, (II) a second class of directors, the Class II Directors, initially serving a two (2) year term, such term effective from the Closing (but any subsequent Class II Directors serving a three (3) year term), and with such class consisting of one independent Purchaser Director and one independent Company Director and (III) a third class of directors, the Class III Directors, serving a three (3) year term, such term effective from the Closing, and with such class consisting of the remaining two Company Directors and the remaining one Purchaser Director. In accordance with the Amended Charter as in effect at the Closing, no director on the Post-Closing Purchaser Board may be removed without cause. Subject to resignations provided by the Company’s directors, the board of directors of the Surviving Company immediately after the Closing shall be the same as the board of directors of the Company immediately prior to the Closing. At or prior to the Closing, the Company will provide each Purchaser Director with a customary director indemnification agreement, in form and substance reasonable acceptable to such Purchaser Director.

(b)            The Parties shall take all action necessary, including causing the executive officers of the Purchaser to resign, so that the individuals serving as executive officers of the Purchaser immediately after the Closing will be the same individuals (in the same offices) as those of the Company immediately prior to the Closing.

5.18         Use of Trust Account Proceeds After the Closing . The Parties agree that after the Closing, the funds in the Trust Account and any proceeds received by the Purchaser from the PIPE Investment, after taking into account payments for the Redemption, shall first be used (i) to pay the Purchaser’s accrued Expenses (the “ Purchaser Expenses ”) and (ii) to pay the Purchaser’s deferred Expenses (including cash amounts payable to EBC and any legal fees) of the IPO (the “ Deferred Expenses ”). Such Expenses, as well as any Expenses that are required to be paid by delivery of the Purchaser’s securities, will be paid at the Closing. Any remaining cash will be used for general corporate purposes.

5.19         Purchaser Policies . During the Interim Period, the Purchaser will consult with the Company, and the Purchaser and the Company will adopt, effective as of the Closing, corporate and operational policies for the Purchaser, the Company and their respective Subsidiaries, including the Target Companies appropriate for a company publicly traded in the United States with active business and operations in the industries and regions in which the Target Companies operate and contemplate operating as of the Closing. Such policies will include a conflicts of interest policy establishing, among other matters, proper procedures and limitations for related party loans involving the Purchaser or any of its Subsidiaries, including the Target Companies (the “ Conflicts of Interest Policy ”).

5.20         Disclosure Schedule Updates . During the Interim Period, the Company will have the right, but not the duty, to update the Company Disclosure Schedules, and the Purchaser will have the right, but not the duty, to update the Purchaser Disclosure Schedules, in each case by providing notice to the other in accordance with the terms of this Agreement, to add disclosures with respect to actions taken by or on behalf of such Party or its Subsidiaries after the date of this Agreement that are either (i) expressly contemplated by the terms of this Agreement or (ii) in the ordinary course of business and expressly permitted under the terms of this Agreement, including entering into new Company Material Contracts or Purchaser Material Contracts, as applicable. Any such update, so long as it is provided at least two (2) Business Days prior to the Closing and otherwise fulfills the requirements of this Section 5.20 , will be deemed to cure any inaccuracy or breach as of the Closing Date with respect to such matters, except to the extent that such matters would constitute, individually or in the aggregate, a Material Adverse Effect with respect to the disclosing Party.

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Article VI
SURVIVAL AND INDEMNIFICATION

6.1           Survival .

(a)            All representations and warranties of the Company contained in this Agreement (including all schedules and exhibits hereto and all certificates, documents, instruments and undertakings furnished pursuant to this Agreement) shall survive the Closing through and until and including the Expiration Date; provided, however, that Fraud Claims against the Company shall survive indefinitely. If a Claim Notice for a claim of a breach of any representation or warranty has been given before the applicable date when such representation or warranty no longer survives in accordance with this Section 6.1(a) , then the relevant representations and warranties shall survive as to such claim, until the claim has been finally resolved. All covenants, obligations and agreements of the Company contained in this Agreement (including all schedules and exhibits hereto and all certificates, documents, instruments and undertakings furnished by the Company pursuant to this Agreement), including any indemnification obligations, shall survive the Closing and continue until fully performed in accordance with their terms. For the avoidance of doubt, a claim for indemnification under any subsection of Section 6.2 other than clauses (a) or (b) thereof may be made at any time.

(b)            The representations and warranties of the Purchaser contained in this Agreement or in any certificate or instrument delivered by or on behalf of Purchaser or the Purchaser Representative pursuant to this Agreement shall not survive the Closing, and from and after the Closing, the Purchaser, the Purchaser Representative, and their respective Representatives shall not have any further obligations, nor shall any claim be asserted or action be brought against the Purchaser, the Purchaser Representative or their respective Representatives with respect thereto. The covenants and agreements made by the Purchaser and/or the Purchaser Representative in this Agreement or in any certificate or instrument delivered pursuant to this Agreement, including any rights arising out of any breach of such covenants or agreements, shall not survive the Closing, except for those covenants and agreements contained herein and therein that by their terms apply or are to be performed in whole or in part after the Closing (which such covenants shall survive the Closing and continue until fully performed in accordance with their terms).

6.2           Indemnification by the Company Shareholders .

(a)            Subject to the terms and conditions of this Article VI , from and after the Closing, the Company Shareholders and their respective successors and assigns (each, with respect to any claim made pursuant to this Agreement, an “ Indemnifying Party ”) will severally indemnify, defend and hold harmless the Purchaser, the Purchaser Representative, their respective Affiliates and their respective officers, directors, managers, employees, successors and permitted assigns (each, with respect to any claim made pursuant to this Agreement, an “ Indemnified Party ”) from and against any and all losses, Actions, Orders, Liabilities, damages, diminution in value, Taxes, interest, penalties, Liens, amounts paid in settlement, costs and expenses (including reasonable expenses of investigation and court costs and reasonable attorneys’ fees and expenses), (any of the foregoing, a “ Loss ”) paid, suffered or incurred by, or imposed upon any Indemnified Party to the extent arising in whole or in part out of or resulting directly or indirectly from (whether or not involving a Third Party Claim): (a) the breach of any representation or warranty made by the Company set forth in this Agreement or in any certificate delivered by the Company or the Seller Representative; (b) the breach of any covenant or agreement on the part of the Company or, after the Closing, the Purchaser, set forth in this Agreement or in any certificate delivered by the Company, the Seller Representative; or (c) any Action by Person(s) who were holders of equity securities of a Target Company, including options, warrants, convertible debt or other convertible securities or other rights to acquire equity securities of a Target Company, prior to the Closing arising out of the sale, purchase, termination, cancellation, expiration, redemption or conversion of any such securities; or (d) any Indebtedness of the Target Companies as of the Closing which were not shown on the final Closing Statement pursuant to Section 1.11 .

(b)            Notwithstanding the foregoing, except for Fraud Claims against a Target Company, (i) the Indemnified Parties shall not assert any claim and shall not be entitled to indemnification unless and until the aggregate amount of Losses that would be payable pursuant to such claim together with all related claims, exceeds an amount equal to $10,000 (the “ Mini Basket ”), in which event the Indemnifying Party(ies) shall be responsible for the aggregate amount of all Losses, regardless of the Mini Basket, and no claims other than related claims shall be aggregated for purposes of this clause (i); and (ii) the Indemnified Parties shall not assert any claim, and shall not be entitled to indemnification, unless and until the aggregate amount of all Losses indemnifiable hereunder exceeds on a cumulative basis an amount equal to $1,000,000 (the “ Threshold ”), in which event the Indemnifying Party(ies) shall be responsible

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for the aggregate amount of all Losses from the first dollar, regardless of the Threshold; provided that (x) the aggregate Liability in respect of such Losses (other than Losses related to Fraud Claims against a Target Company) shall in no event exceed the Escrow Property then remaining in the Escrow Account, (y) all claims by the Indemnified Parties in respect of such Losses (other than Losses related to Fraud Claims against a Target Company and other than as set forth in Section 10.7 ) shall be asserted solely and exclusively against the Escrow Property then remaining in the Escrow Account, and (z) other than for Fraud Claims against a Target Company and other than as set forth in Section 10.7 , the Escrow Property then remaining in the Escrow Account shall be the Indemnified Parties’ sole and exclusive source of recovery for any amounts owed to Indemnified Parties pursuant thereto.

(c)            In no event shall any Indemnified Party be entitled to recover or make a claim for any amounts in respect of, and in no event shall “Losses” be deemed to include, (i) any punitive, special or exemplary damages except to the extent actually paid to a third party in a Third Party Claim or (ii) any loss, liability, damage or expense to the extent included in the calculation of Closing Net Working Capital or Closing Net Indebtedness and resulting in an adjustment to the Adjusted Merger Consideration.

6.3           Payment from Escrow Account . Any indemnification claims shall first be paid with the Escrow Shares then remaining in the Escrow Account, and then any other Escrow Property then remaining in the Escrow Account. With respect to any indemnification payment, the value of each Escrow Share for purposes of determining the indemnification payment shall be the Purchaser Share Price on the date that the indemnification claim is finally determined in accordance with this Article VI . For successful indemnification claims by an Indemnified Party, within five (5) Business Days after the indemnification claim is finally determined in accordance with this Article VI , the Escrow Agent shall disburse a number of Escrow Shares, valued at the Purchaser Share Price, together with any other Escrow Property, equal to the amount of such indemnification claim (as determined in accordance with this Article VI ) from the Escrow Account to the Purchaser (and the Purchaser Representative and the Seller Representative will provide or cause to be provided to the Escrow Agent any written instructions or other information or documents required by the Escrow Agent to do so). The Purchaser will cancel any Escrow Shares distributed to the Purchaser from the Escrow Account promptly after its receipt thereof.

6.4           Limitations and General Indemnification Provisions .

(a)            Except for Fraud Claims against a Target Company, the maximum aggregate amount of indemnification payments which the Indemnifying Parties will be obligated to pay in the aggregate under Section 6.2 shall not exceed an amount equal to the value of the Escrow Shares in the Escrow Account at the Purchaser Share Price, plus the other Escrow Property.

(b)            Solely for purposes of determining the amount of Losses under this Article VI (and, for the avoidance of doubt, not for purposes of determining whether there has been a breach giving rise to the indemnification claim), all of the representations, warranties and covenants set forth in this Agreement (including the disclosure schedules hereto) or any Ancillary Document that are qualified by materiality, Material Adverse Effect or words of similar import or effect will be deemed to have been made without any such qualification.

(c)            No investigation or knowledge by an Indemnified Party or the Purchaser Representative or their respective Representatives of a breach of a representation, warranty, covenant or agreement of an Indemnifying Party shall affect the representations, warranties, covenants and agreements of the Indemnifying Party or the recourse available to the Indemnified Parties under any provision of this Agreement, including this Article VI , with respect thereto.

(d)            The amount of any Losses suffered or incurred by any Indemnified Party shall be reduced by the amount of any insurance proceeds or other third party sources of indemnity or recovery paid to the Indemnified Party or any Affiliate thereof as a reimbursement with respect to such Losses (and no right of subrogation shall accrue to any insurer hereunder, except to the extent that such waiver of subrogation would prejudice any applicable insurance coverage), net of the costs of collection and the increases in insurance premiums resulting from such Loss or insurance payment.

(e)            Each Indemnified Party agrees that in the event of any breach giving rise to an indemnification obligation under this Article VI , such Indemnified Party shall take and shall cause its Affiliates to take, or cooperate with the Indemnifying Party if so requested by the Indemnifying Party, in order to take, commercially reasonable

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measures to mitigate the consequences of the related breach (including taking commercially reasonable steps to prevent any contingent liability from becoming an actual liability).

6.5           Indemnification Procedures .

(a)            The Purchaser Representative shall have the sole right to act on behalf of the Indemnified Parties with respect to any indemnification claims made pursuant to this Article VI , including bringing and settling any indemnification claims hereunder and receiving any notices on behalf of the Indemnified Parties. The Seller Representative shall have the sole right to act on behalf of the Indemnifying Parties with respect to any indemnification claims made pursuant to this Article VI , including defending and settling any indemnification claims hereunder and receiving any notices on behalf of the Indemnifying Parties, provided , however, that, following the Closing, the Purchaser shall have the right to defend and settle Third Party Claims pursuant to subsection (c) below.

(b)            Subject to subsection (c) below, in order to make a claim for indemnification hereunder, the Purchaser Representative on behalf of an Indemnified Party must provide written notice (a “ Claim Notice ”) of such claim to the Seller Representative on behalf of the Indemnifying Parties and to the Escrow Agent, which Claim Notice shall include (i) a reasonable description of the facts and circumstances which relate to the subject matter of such indemnification claim to the extent then known and (ii) the amount of Losses suffered by the Indemnified Party in connection with the claim to the extent known or reasonably estimable (provided, that the Purchaser Representative may thereafter in good faith adjust the amount of Losses with respect to the claim by providing a revised Claim Notice to the Seller Representative and the Escrow Agent); provided , that the copy of any Claim Notice provided to the Escrow Agent shall be redacted for any confidential or proprietary information of the Indemnifying Party or the Indemnified Party described in clause (i).

(c)            The Purchaser will promptly (but in any event within twenty (20) days) notify the Purchaser Representative and the Seller Representative in writing in the event that it becomes aware of any claim of a third party (including any Governmental Authority) (a “ Third Party Claim ”) that might reasonably result in a claim for indemnification under this Article VI ; provided , that the failure to give such notice will not relieve the Indemnifying Party of its indemnification obligations. Upon receipt of notice of such Third Party Claim or upon otherwise becoming aware of a Third Party Claim, the Purchaser Representative may provide a Claim Notice in accordance with subsection (b) above, with the final determination of the amount of indemnification to be provided thereunder, if any, subject to such Third Party Claim becoming a Resolved Third Party Claim. The Purchaser will have the right to defend and to direct the defense against any such Third Party Claim, at its expense and with counsel it selects, with the Post-Closing Purchaser Board managing all such Third Party Claims on behalf of Purchaser; provided , that Purchaser shall not have such right with respect to a Third Party Claim against an Indemnified Party other than the Purchaser (or its successor or assignee) where such claim is criminal in nature, could reasonably be expected to lead to criminal proceedings or seeks an injunction or other equitable relief. The Purchaser shall control the defense, including the potential compromise and settlement of, such Third Party Claim; provided , that the Purchaser shall keep the Purchaser Representative and the Seller Representative reasonably informed of the status of such Third Party Claim (including any material developments and any information reasonably requested by the Purchaser Representative or the Seller Representative). Once a Third Party Claim has been settled or has matured by a final, non-appealable Order (a “ Resolved Third Party Claim ”), the Purchaser shall inform the Purchaser Representative and the Seller Representative in writing of the resolution of the Third Party Claim, and provide to the Purchaser Representative and the Seller Representative any other information regarding such Resolved Third Party Claim that the Purchaser Representative, the Seller Representative or any Indemnified Party may reasonably request regarding such Third Party Claim.

(d)            With respect to any (i) direct indemnification claim that is not a Third Party Claim, the Seller Representative on behalf of the Indemnifying Party will have a period of thirty (30) days after receipt of the Claim Notice to respond thereto, or (ii) Third Party Claim that has become a Resolved Third Party Claim, the Seller Representative on behalf of the Indemnifying Party will have a period of third (30) days after such Third Party Claims has become a Resolved Third Party Claim and notice of such Resolved Third Party Claim has been given to the Purchaser Representative and the Seller Representative in accordance with Section 6.5(c) hereof to respond to the Claim Notice (as it may have been updated) sent for such Third Party Claim. If the Seller Representative does not respond within such thirty (30) days, the Seller Representative on behalf of the Indemnifying Party will be deemed to have accepted responsibility for the Losses set forth in such Claim Notice (as updated) subject to the limitations on indemnification set forth in this Article VI and will have no further right to contest the validity of such Claim Notice. If the Seller Representative responds within such thirty (30) days and rejects such claim in whole or in part, the Purchaser

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Representative on behalf of the Indemnified Party will be free to pursue such remedies as may be available under this Agreement (subject to Section 10.4 ), any Ancillary Documents or applicable Law.

6.6           Exclusive Remedy . From and after the Closing, except with respect to Fraud Claims against a Target Company, or claims seeking injunctions or specific performance (including pursuant to Section 10.7 ), or claims under the terms of the Letters of Transmittal or other Ancillary Documents, indemnification pursuant to this Article VI shall be the sole and exclusive remedy for the Parties with respect to matters arising under this Agreement of any kind or nature, including for any misrepresentation or breach of any warranty, covenant, or other provision contained in this Agreement or in any certificate or instrument delivered pursuant to this Agreement or otherwise relating to the subject matter of this Agreement, including the negotiation and discussion thereof.

Article VII
CLOSING CONDITIONS

7.1           Conditions to Each Party’s Obligations . The obligations of each Party to consummate the Merger and the other transactions described herein shall be subject to the satisfaction or written waiver (where permissible) by the Company and the Purchaser of the following conditions:

(a)            Required Purchaser Shareholder Approval . The Shareholder Approval Matters that are submitted to the vote of the shareholders of the Purchaser at the Shareholder Meeting in accordance with the Proxy Statement shall have been approved by the requisite vote of the shareholders of the Purchaser at the Shareholder Meeting in accordance with the Proxy Statement (the “ Required Purchaser Shareholder Approval ”).

(b)            Company Shareholder Vote . In accordance with Cayman Law and the Company Charter, a duly called meeting of the Company Shareholders shall have been called and at such meeting, both (i) by way of a special resolution (as defined in the Cayman Law), the Company Shareholders shall have passed by the affirmative vote of at least sixty-seven percent (67%) of the As-Converted Company Shares entitled to vote on the matters relating to this Agreement, and (ii) the prior written consent, evidencing prior approval from the Majority Series C Holders, the Key Series D Holders, and the Required Key Investors shall have been obtained by the Company, and the Company Shareholders shall have authorized, approved and consented to, the execution, delivery and performance of this Agreement, the Plan of Merger and each of the Ancillary Documents to which the Company is a party or bound, and the consummation of the transactions contemplated hereby and thereby, including the Merger and the adoption of the Surviving Company Charter (the “ Required Company Shareholder Approval ”).

(c)            Antitrust Laws. Any waiting period (and any extension thereof) applicable to the consummation of this Agreement under any Antitrust Laws shall have expired or been terminated.

(d)            Requisite Regulatory Approvals . All Consents required to be obtained from or made with any Governmental Authority in order to consummate the transactions contemplated by this Agreement that are set forth in Schedule 7.1(d) shall have been obtained or made.

(e)            Requisite Consents . The Consents required to be obtained from or made with any third Person (other than a Governmental Authority and the Company Shareholder Approval) in order to consummate the transactions contemplated by this Agreement that are set forth in Schedule 7.1(e) shall have each been obtained or made.

(f)             Creditor Consent . The prior written consent of each holder of a fixed or floating security interest of the Company, as set forth on Schedule 7.1(f) , shall have been obtained by the Company in accordance with Section 233(8) of the Cayman Law.

(g)            No Law or Order . No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any Law (whether temporary, preliminary or permanent) or Order that is then in effect and which has the effect of making the transactions or agreements contemplated by this Agreement illegal or which otherwise prevents or prohibits consummation of the transactions contemplated by this Agreement.

(h)            Plan of Merger . The Plan of Merger shall have been filed with the appropriate Governmental Authorities under the Cayman Law and shall be in full force and effect.

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(i)             Net Tangible Assets Test. Upon the Closing, and after giving effect to the completion of the Redemption and the PIPE Investment, the Purchaser shall have net tangible assets of at least $5,000,001, excluding any assets or liabilities of the Target Companies.

7.2           Conditions to Obligations of the Company . In addition to the conditions specified in Section 7.1 , the obligations of the Company to consummate the Merger and the other transactions contemplated by this Agreement are subject to the satisfaction or written waiver (by the Company) of the following conditions:

(a)            Representations and Warranties . All of the representations and warranties of the Purchaser set forth in this Agreement and in any certificate delivered by the Purchaser pursuant hereto, shall be true and correct on and as of the date of this Agreement and on and as of the Closing Date as if made on the Closing Date, except for (i) those representations and warranties that address matters only as of a particular date (which representations and warranties shall have been accurate as of such date), and (ii) any failures to be true and correct that (without giving effect to any qualifications or limitations as to materiality or Material Adverse Effect), individually or in the aggregate, have not had and would not reasonably be expected to have a Material Adverse Effect on, or with respect to, the Purchaser.

(b)            Agreements and Covenants . The Purchaser shall have performed in all material respects all of the Purchaser’s obligations and complied in all material respects with all of the Purchaser’s agreements and covenants under this Agreement to be performed or complied with by it on or prior to the Closing Date.

(c)            No Material Adverse Effect . No Material Adverse Effect shall have occurred with respect to the Purchaser since the date of this Agreement.

(d)            Closing Deliveries .

(i)             Officer Certificate . The Purchaser shall have delivered to the Company a certificate, dated the Closing Date, signed by an executive officer of the Purchaser in such capacity, certifying as to the satisfaction of the conditions specified in Sections 7.2(a) , 7.2(b) and 7.2(c) .

(ii)            Secretary Certificate . The Purchaser shall have delivered to the Company a certificate from its secretary or other executive officer certifying as to, and attaching, (A) copies of the Purchaser’s Organizational Documents as in effect as of the Closing Date, (B) the resolutions of the Purchaser’s board of directors authorizing the execution, delivery and performance of this Agreement and each of the Ancillary Documents to which it is a party or by which it is bound, and the consummation of the transactions contemplated hereby and thereby, (C) evidence that the Required Purchaser Shareholder Approval shall have been obtained and (D) the incumbency of officers authorized to execute this Agreement or any Ancillary Document to which the Purchaser is or is required to be a party or otherwise bound.

(iii)           Good Standing . The Purchaser shall have delivered to the Company a good standing certificate (or similar documents applicable for such jurisdictions) for the Purchaser certified as of a date no later than sixty (60) days prior to the Closing Date from the proper Governmental Authority of the Purchaser’s jurisdiction of organization and from each other jurisdiction in which the Purchaser is qualified to do business as a foreign entity as of the Closing, in each case to the extent that good standing certificates or similar documents are generally available in such jurisdictions.

(iv)           Escrow Agreement . The Company shall have received a copy of the Escrow Agreement, duly executed by the Purchaser Representative and the Escrow Agent.

(v)            Non - Competition Agreements. The Company shall have received a copy of each Non-Competition Agreement, duly executed by the Purchaser.

(vi)           Lock-Up Agreements. The Company shall have received a copy of each Lock-Up Agreement, duly executed by the Purchaser and the Purchaser Representative.

(vii)          Registration Rights Agreement. The Company shall have received a copy of the Registration Rights Agreement, duly executed by the Purchaser and the Purchaser Representative.

(viii)         Payoff Letters . The Company shall have received duly executed copies of payoff letters with respect to the Purchaser Expenses and Deferred Expenses listed on Schedule 7.2(d)(viii) .

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(e)            Nasdaq Listing . Immediately following the Effective Time and after giving effect to the Redemption, the Purchaser Ordinary Shares will be listed on Nasdaq. As of the Effective Time, the Purchaser shall not have received any written notice from Nasdaq that it has failed, or would reasonably be expected to fail, to meet the Nasdaq listing requirements as of the Effective Time or within six (6) months thereafter for any reason (other than a failure due solely to having fewer than the requisite number of shareholders), where such notice has not been subsequently withdrawn by Nasdaq or the underlying failure appropriately remedied or satisfied.

(f)             Minimum Cash Condition. Immediately prior to the Closing, and giving effect to the completion of the Redemption, but excluding the payment by the Purchaser of its reasonable Expenses, the amount in the Trust Account, together with the proceeds from the PIPE Investment, shall be no less than Twenty-Four Million U.S. Dollars ($24,000,000).

7.3           Conditions to Obligations of the Purchaser . In addition to the conditions specified in Section 7.1 , the obligations of the Purchaser (and Merger Sub) to consummate the Merger and the other transactions contemplated by this Agreement are subject to the satisfaction or written waiver (by the Purchaser) of the following conditions:

(a)            Representations and Warranties . All of the representations and warranties of the Company set forth in this Agreement and in any certificate delivered by the Company, shall be true and correct on and as of the date of this Agreement and on and as of the Closing Date as if made on the Closing Date, except for (i) those representations and warranties that address matters only as of a particular date (which representations and warranties shall have been accurate as of such date), and (ii) any failures to be true and correct that (without giving effect to any qualifications or limitations as to materiality or Material Adverse Effect), individually or in the aggregate, have not had and would not reasonably be expected to have a Material Adverse Effect on, or with respect to, any Target Company.

(b)            Agreements and Covenants . The Company shall have performed in all material respects all of its obligations and complied in all material respects with all of its agreements and covenants under this Agreement to be performed or complied with by it on or prior to the Closing Date.

(c)            No Material Adverse Effect . No Material Adverse Effect shall have occurred with respect to any Target Company since the date of this Agreement.

(d)            Closing Deliveries .

(i)             Officer Certificate . The Purchaser shall have received a certificate from the Company, dated as the Closing Date, signed by an executive officer of the Company in such capacity, certifying as to the satisfaction of the conditions specified in Sections 7.3(a) , 7.3(b) and 7.3(c)

(ii)            Secretary Certificate of the Company . The Company shall have delivered to the Purchaser, a certificate executed by the Company’s secretary or other executive officer, certifying as to the validity and effectiveness of, and attaching, each of the following: (A) a copy of the Company Charter as in effect as of the Closing Date (immediately prior to the Effective Time), (B) the requisite resolutions of the Company’s board of directors authorizing and approving the execution, delivery and performance of this Agreement, the Plan of Merger and each Ancillary Document to which the Company is a party or bound, the consummation of the Merger and the other transactions contemplated hereby and thereby and the adoption of the Surviving Company Charter, and recommending the approval and adoption of the same by the Company Shareholders at a duly called meeting of Company Shareholders, (C) the Required Company Shareholder Approval (including the Company Written Consents) and (D) the incumbency of officers of the Company authorized to execute this Agreement and any Ancillary Document to which the Company is or is required to be a party or otherwise bound.

(iii)           Good Standing . The Company shall have delivered to the Purchaser good standing certificates (or similar documents applicable for such jurisdictions) for each Target Company certified as of a date no later than sixty (60) days prior to the Closing Date from the proper Governmental Authority of the Target Company’s jurisdiction of organization and from each other jurisdiction in which the Target Company is qualified to do business as a foreign corporation or other entity as of the Closing, in each case to the extent that good standing certificates or similar documents are generally available in such jurisdictions.

(iv)           Certified Company Charter . The Company shall have delivered to the Purchaser a copy of the Company Charter, as in effect immediately prior to the Effective Time, certified by the appropriate Governmental Authority of the Cayman Islands as of a date no more than ten (10) Business Days prior to the Closing Date.

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(v)            Employment Agreements . The Purchaser shall have received employment agreements, in each case effective as of the Closing, in form and substance reasonably acceptable to the Company and the Purchaser, between each of the persons set forth Schedule 7.3(d)(v) hereto and the applicable Target Company or the Purchaser, as noted in Schedule 7.3(d)(v) , each such employment agreement duly executed by the parties thereto.

(vi)           Escrow Agreement . The Purchaser shall have received a copy of the Escrow Agreement, duly executed by the Seller Representative and the Escrow Agent.

(vii)          Legal Opinion . Purchaser shall have received a duly executed opinion from the Company’s counsel or counsels, in form and substance reasonably satisfactory to the Purchaser, addressed to the Purchaser and dated as of the Closing Date.

(viii)         Share Certificates and Transfer Instruments . The Purchaser shall have received from each Company Shareholder: (A) the Company Certificates representing the Company Shares (or duly executed affidavits of lost stock certificates in form and substance reasonably acceptable to the Purchaser), if applicable, (B) a properly completed and duly executed Letter of Transmittal, and (C) all other Transmittal Documents, each in form reasonably acceptable for transfer on the books of the Company.

(ix)           Resignations. The Purchaser shall have received written resignations, effective as of the Closing, of each of the directors and officers of the Company as requested by the Purchaser prior to the Closing.

(x)            Registered Agent Letter. The Purchaser shall receive a copy of the letter, executed by all parties thereto, in the agreed form, to the Cayman Islands registered agent of the Company from the client of record of such registered agent instructing it to take instruction from the Purchaser (or its nominees) from Closing.

(xi)           Non-Competition Agreements . The Purchaser shall have received Non-Competition and Non-Solicitation Agreements from each of the Persons set forth on Schedule 7.3(d)(xi) in favor of and for the benefit of the Purchaser, the Company and each of the other Covered Parties (as defined therein) in substantially the form attached as Exhibit D hereto (each, a “ Non-Competition Agreement ”), duly executed by each such Person and the Company

(xii)          Lock-Up Agreements . The Purchaser shall have received a Lock-Up Agreement for each Company Shareholder and each holder of a Company Warrant, duly executed by such Company Shareholder or holder of a Company Warrant.

(xiii)         Registration Rights Agreement . The Purchaser shall have received a copy of the Registration Rights Agreement, duly executed by all Company Shareholders.

(e)       Appointment to the Board . The members of Purchaser’s board of directors shall have been elected or appointed to the Post-Closing Board of Directors as of the Closing consistent with the requirements of Section 5.17 .

7.4           Frustration of Conditions . Notwithstanding anything contained herein to the contrary, no Party may rely on the failure of any condition set forth in this Article VII to be satisfied if such failure was caused by the failure of such Party or its Affiliates (or with respect to the Company, any Target Company or Company Shareholder) failure to comply with or perform any of its covenants or obligations set forth in this Agreement.

Article VIII
TERMINATION AND EXPENSES

8.1           Termination . This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing as follows:

(a)            by mutual written consent of the Purchaser and the Company;

(b)            by written notice by the Purchaser or the Company if any of the conditions to the Closing set forth in Article VII have not been satisfied or waived by April 20, 2017 (the “ Outside Date ”) (provided, that if the Purchaser seeks and receives the approval of its shareholders to extend the deadline for the Purchaser to consummate its initial Business Combination (the “ Extension ”), the Outside Date shall be extended to the earlier of (i) such extended date before which the Purchaser must complete its initial Business Combination and (ii) July 20, 2017); provided , however , the right to terminate this Agreement under this Section 8.1(b) shall not be available to a Party if

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the breach or violation by such Party or its Affiliates of any representation, warranty, covenant or obligation under this Agreement was the cause of, or resulted in, the failure of the Closing to occur on or before the Outside Date;

(c)            by written notice by either the Purchaser or the Company if a Governmental Authority of competent jurisdiction shall have issued an Order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such Order or other action has become final and non-appealable; provided , however , that the right to terminate this Agreement pursuant to this Section 8.1(c) shall not be available to a Party if the failure by such Party or its Affiliates to comply with any provision of this Agreement has been a substantial cause of, or substantially resulted in, such action by such Governmental Authority;

(d)            by written notice by the Company, if (i) there has been a material breach by the Purchaser of any of its representations, warranties, covenants or agreements contained in this Agreement, or if any representation or warranty of the Purchaser shall have become materially untrue or materially inaccurate, in any case, which would result in a failure of a condition set forth in Section 7.2(a) or Section 7.2(b) to be satisfied (treating the Closing Date for such purposes as the date of this Agreement or, if later, the date of such breach), and (ii) the breach or inaccuracy is incapable of being cured or is not cured within the earlier of (A) twenty (20) days after written notice of such breach or inaccuracy is provided by the Company or (B) the Outside Date; provided that the Company shall not have the right to terminate this Agreement pursuant to this Section 8.1(d) if at such time the Company is in material breach of this Agreement;

(e)            by written notice by the Purchaser, if (i) there has been a breach by the Company of any of its representations, warranties, covenants or agreements contained in this Agreement, or if any representation or warranty of such Parties shall have become untrue or inaccurate, in any case, which would result in a failure of a condition set forth in Section 7.3(a) or Section 7.3(b) to be satisfied (treating the Closing Date for such purposes as the date of this Agreement or, if later, the date of such breach), and (ii) the breach or inaccuracy is incapable of being cured or is not cured within the earlier of (A) twenty (20) days after written notice of such breach or inaccuracy is provided by the Purchaser or (B) the Outside Date; provided that Purchaser shall not have the right to terminate this Agreement pursuant to this Section 8.1(e) if at such time Purchaser is in material breach of this Agreement;

(f)             by written notice by the Purchaser if there shall have been a Material Adverse Effect on the Company or its Subsidiaries following the date of this Agreement which is uncured and continuing;

(g)            by written notice by either the Company or the Purchaser, if the meeting of the Company Shareholders described in Section 5.6 (including any adjournment or postponement thereof) has concluded, the Company Shareholders have duly voted, and the Required Company Shareholder Approval was not obtained; or

(h)            by written notice by either the Company or the Purchaser, if the Shareholder Meeting described in Section 7.1(a) (including any adjournment or postponement thereof) has concluded, the shareholders of the Purchaser have duly voted, and the Required Purchaser Shareholder Approval was not obtained.

8.2           Effect of Termination . This Agreement may only be terminated in the circumstances described in Section 8.1 and pursuant to a written notice delivered by the applicable Party to the other applicable Parties, which sets forth the basis for such termination, including the provision of Section 8.1 under which such termination is made. In the event of the valid termination of this Agreement pursuant to Section 8.1 , this Agreement shall forthwith become void, and there shall be no Liability on the part of any Party or any of their respective Representatives, and all rights and obligations of each Party shall cease, except: (i) Sections 5.14 , 5.15 , 8.3 , 8.4 , 9.1 , Article X and this Section 8.2 shall survive the termination of this Agreement, and (ii) nothing herein shall relieve any Party from Liability for any willful breach of any representation, warranty, covenant or obligation under this Agreement or any Fraud Claim against such Party, in either case, prior to termination of this Agreement (in each case of clauses (i) and (ii) above, subject to Article IX ). Without limiting the foregoing, and except as provided in Sections 8.3 and 8.4 and this Section 8.2 (but subject to Section 9.1) , and subject to the right to seek injunctions, specific performance or other equitable relief in accordance with Section 10.7 , the Parties’ sole right prior to the Closing with respect to any breach of any representation, warranty, covenant or other agreement contained in this Agreement by another Party or with respect to the transactions contemplated by this Agreement shall be the right, if applicable, to terminate this Agreement pursuant to Section 8.1 .

8.3           Fees and Expenses . Subject to Sections 8.4 , 9.1 , 10.14 and 10.15 all Expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expenses. As used in this Agreement, “ Expenses ” shall include all out-of-pocket expenses (including all fees and expenses of

45

counsel, accountants, investment bankers, financial advisors, financing sources, experts and consultants to a Party hereto or any of its Affiliates) incurred by a Party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution or performance of this Agreement or any Ancillary Document related hereto and all other matters related to the consummation of this Agreement. With respect to the Purchaser, Expenses shall include any and all deferred expenses (including fees or commissions payable to the underwriters and any legal fees) of the IPO upon consummation of a Business Combination, as well as any costs and expenses incurred in connection with the PIPE Investment or the Extension, if any.

8.4           Termination Fee .

(a)            Notwithstanding Section 8.3 above, in the event that there is a valid and effective termination of this Agreement by the Company pursuant to Section 8.1(d) , then the Purchaser shall pay to the Company a termination fee in an amount in cash equal to $5,000,000 (the “ Termination Fee ”), payable by the Purchaser within ten (10) Business Days after such termination by wire transfer of immediately available funds to an account designated in writing by the Company.

(b)            Notwithstanding Section 8.3 above, in the event that there is a valid and effective termination of this Agreement by the Purchaser pursuant to Section 8.1(e) , then the Company shall pay to the Purchaser an amount in cash equal to the Termination Fee, payable by the Company within ten (10) Business Days after such termination by wire transfer of immediately available funds to an account designated in writing by the Purchaser.

(c)            Notwithstanding anything to the contrary in this Agreement, the Parties expressly acknowledge and agree that, with respect to any termination of this Agreement in circumstances where a Termination Fee is payable under this Section 8.4 , the payment of the Termination Fee shall, in light of the difficulty of accurately determining actual damages, constitute liquidated damages with respect to any claim for damages or any other claim which the Purchaser or the Company, as the case may be, would otherwise be entitled to assert against the other Party or its Affiliates or any of their respective assets, or against any of their respective directors, officers, employees or shareholders with respect to this Agreement and the transactions contemplated hereby and shall constitute the sole and exclusive remedy available to the Purchaser or the Company, as the case may be, provided, that the foregoing shall not limit (x) any claim for fraud prior to termination of this Agreement or (y) the rights of the Purchaser or the Company to seek specific performance or other injunctive relief in lieu of terminating this Agreement.

Article IX
WAIVERS AND RELEASES

9.1           Waiver of Claims Against Trust . Reference is made to the IPO Prospectus. The Company warrants and represents that it has read the IPO Prospectus and understands that Purchaser has established the Trust Account containing the proceeds of the IPO (including interest accrued from time to time thereon) for the benefit of Purchaser’s public stockholders (including overallotment shares acquired by Purchaser’s underwriters) (the “ Public Shareholders ”) and that, except as otherwise described in the IPO Prospectus, Purchaser may disburse monies from the Trust Account only: (a) to the Public Shareholders in the event they elect to redeem their Purchaser Ordinary Shares in connection with the consummation of its initial business combination (as such term is used in the IPO Prospectus) (“ Business Combination ”), (b) to the Public Shareholders if the Purchaser fails to consummate a Business Combination within eighteen (18) months after the closing of the IPO, (c) to pay any taxes and for working capital purposes from the interest accrued in the Trust Account, and (d) to the Purchaser after or concurrently with the consummation of its Business Combination. For and in consideration of Purchaser entering into this Agreement and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company hereby agrees on behalf of itself and its Affiliates that, notwithstanding anything to the contrary in this Agreement, neither the Company nor its Affiliates does now or shall at any time hereafter have any right, title, interest or claim of any kind in or to any monies in the Trust Account or distributions therefrom, or make any claim against the Trust Account (including any distributions therefrom), regardless of whether such claim arises as a result of, in connection with or relating in any way to, any proposed or actual business relationship between the Purchaser or its Representatives, on the one hand, and the Company or its Representatives, on the other hand, this Agreement or any other matter, and regardless of whether such claim arises based on contract, tort, equity or any other theory of legal liability (any and all such claims are collectively referred to hereafter as the “ Released Claims ”). The Company on behalf of itself and its Affiliates hereby irrevocably waives any Released Claims that the Company or its Affiliates may have against the Trust Account (including any distributions therefrom) now or in the future as a result of, or arising out of, any negotiations, contracts

46

or agreements with Purchaser or its Representatives and will not seek recourse against the Trust Account (including any distributions therefrom) for any reason whatsoever (including for an alleged breach of this Agreement or any other agreement with Purchaser or its Affiliates). The Company agrees and acknowledges that such irrevocable waiver is material to this Agreement and specifically relied upon by the Purchaser and its Affiliates to induce Purchaser to enter in this Agreement, and the Company further intends and understands such waiver to be valid, binding and enforceable under applicable Law. To the extent the Company or any of its Affiliates commences any action or proceeding based upon, in connection with, relating to or arising out of any matter relating to the Purchaser or its Representatives, which proceeding seeks, in whole or in part, monetary relief against the Purchaser or its Representatives, the Company hereby acknowledges and agrees its sole remedy shall be against funds held outside of the Trust Account and that such claim shall not permit any the Company or its Affiliates (or any Person claiming on any of their behalves or in lieu of them) to have any claim against the Trust Account (including any distributions therefrom) or any amounts contained therein. In the event that the Company or any of its Affiliates commences Action based upon, in connection with, relating to or arising out of any matter relating to the Purchaser or its Representatives which proceeding seeks, in whole or in part, relief against the Trust Account (including any distributions therefrom) or the Public Shareholders, whether in the form of money damages or injunctive relief, the Purchaser and its Representatives shall be entitled to recover from the Company, its Affiliates, and the Company Shareholders, the associated legal fees and costs in connection with any such Action, in the event the Purchaser or its Representatives, as applicable, prevails in such Action. For the avoidance of doubt, the Sponsor shall be deemed to be an Affiliate of Purchaser prior to the Closing. This Section 9.1 shall survive termination of this Agreement for any reason.

Article X
MISCELLANEOUS

10.1         Notices . All notices, consents, waivers and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered (i) in person, (ii) by facsimile or other electronic means, with affirmative confirmation of receipt, (iii) one Business Day after being sent, if sent by reputable, nationally recognized overnight courier service or (iv) three (3) Business Days after being mailed, if sent by registered or certified mail, pre-paid and return receipt requested, in each case to the applicable Party at the following addresses (or at such other address for a Party as shall be specified by like notice):

If to the Purchaser or Merger Sub at or prior to the Closing, or to the Sponsor or Purchaser Representative, to:

c/o Zhengqi International Holding Limited
855 Pudong South Road
The World Plaza, 27 th Floor
Pudong, Shanghai 200120, China
Attn: Yaqi (Sophie) Feng, COO
Facsimile No.: 86-21-8012-9882
Telephone No: 86-21-8012-9878
Email: fengyq@tpyzq.com

 

with a copy (which will not constitute notice) to:

Ellenoff Grossman & Schole LLP
1345 Avenue of the Americas, 11th Floor
New York, New York 10105
Attn: Douglas Ellenoff, Esq.
Stuart Neuhauser, Esq.
Facsimile No.: (212) 370-7889
Telephone No.: (212) 370-1300
Email: ellenoff@egsllp.com sneuhauser@egsllp.com

 

 

 

If to the Company or the Surviving Company, to:

Borqs International Holding Corp
Tower A, Building B23
Universal Business Park
No. 10 Jiuxiangqiao Road
Chaoyang District, Beijing 100015, China
Attn: Pat Chan, CEO
Facsimile No.: 86-10-5975-6363
Telephone No: 86-10-5975-6336
Email: pat.chan@borqs.com

 

with a copy (which will not constitute notice) to:

Fenwick & West LLP
801 California Street
Mountain View, CA 94041
Attn: Eva Wang
Facsimile No.: (650) 938-5200
Telephone No.: (650) 335-7878
Email: ewang@fenwick.com

 

 

 

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If to the Seller Representative to:

Zhengdong Zou
28/F, Jing Guang Centre, Hu Jia Lou
No. 1 East Third Ring Road
Chaoyang District, Beijing 100020, China
Facsimile No.: 86-10-6554-4123
Telephone No: 86-10-6597-0811
Email: zouzhendong@sinowinglaw.com

 

with a copy (which will not constitute notice) to:

Fenwick & West LLP
801 California Street
Mountain View, CA 94041
Attn: Eva Wang
Facsimile No.: (650) 938-5200
Telephone No.: (650) 335-7878
Email: ewang@fenwick.com

 

 

 

If to the Purchaser after the Closing, to:

Borqs Technologies, Inc.
Tower A, Building B23
Universal Business Park
No. 10 Jiuxiangqiao Road
Chaoyang District, Beijing 100015 China
Attn: Pat Chan, CEO
Facsimile No.: 86-10-5975-6363
Telephone No: 86-10-5975-6336
Email: pat.chan@borqs.com

 

with a copy (which will not constitute notice) to:

Fenwick & West LLP
801 California Street
Mountain View, CA 94041
Attn: Eva Wang
Facsimile No.: (650) 938-5200
Telephone No.: (650) 335-7878
Email: ewang@fenwick.com

and

Ellenoff Grossman & Schole LLP
1345 Avenue of the Americas, 11th Floor
New York, New York 10105
Attn: Douglas Ellenoff, Esq.
Stuart Neuhauser, Esq.
Facsimile No.: (212) 370-7889
Telephone No.: (212) 370-1300
Email: ellenoff@egsllp.com
sneuhauser@egsllp.com

10.2         Binding Effect; Assignment . This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns. This Agreement shall not be assigned by operation of Law or otherwise without the prior written consent of the Purchaser, the Company, the Purchaser Representative and the Seller Representative, and any assignment without such consent shall be null and void; provided that no such assignment shall relieve the assigning Party of its obligations hereunder.

10.3         Third Parties . Nothing contained in this Agreement or in any instrument or document executed by any party in connection with the transactions contemplated hereby shall create any rights in, or be deemed to have been executed for the benefit of, any Person that is not a Party hereto or thereto or a successor or permitted assign of such a Party.

10.4         Arbitration . Any and all disputes, controversies and claims (other than applications for a temporary restraining order, preliminary injunction, permanent injunction or other equitable relief or application for enforcement of a resolution under this Section 10.4 ) arising out of, related to, or in connection with this Agreement or the transactions contemplated hereby (a “ Dispute ”) shall be governed by this Section 10.4 . A party must, in the first instance, provide written notice of any Disputes to the other parties subject to such Dispute, which notice must provide a reasonably detailed description of the matters subject to the Dispute. The parties involved in such Dispute shall seek to resolve the Dispute on an amicable basis within ten (10) Business Days of the notice of such Dispute being received by such other parties subject to such Dispute (the “ Resolution Period ”); provided , that if any Dispute would reasonably be expected to have become moot or otherwise irrelevant if not decided within sixty (60) days after the occurrence of such Dispute, then there shall be no Resolution Period with respect to such Dispute. Any Dispute that is not resolved during the Resolution Period may immediately be referred to and finally resolved by arbitration pursuant to the then-existing Expedited Procedures (as defined in the AAA Procedures) of the Commercial Arbitration Rules (the “ AAA Procedures ”) of the American Arbitration Association (the “ AAA ”). Any party involved in such Dispute may submit the Dispute to the AAA to commence the proceedings after the Resolution Period. To the extent that the AAA Procedures and this Agreement are in conflict, the terms of this Agreement shall control. The arbitration shall be conducted by one arbitrator nominated by the AAA promptly (but in any event within five (5) Business Days) after the

48

submission of the Dispute to the AAA and reasonably acceptable to each party subject to the Dispute, which arbitrator shall be a commercial lawyer with substantial experience arbitrating disputes under acquisition agreements. The arbitrator shall accept his or her appointment and begin the arbitration process promptly (but in any event within five (5) Business Days) after his or her nomination and acceptance by the parties subject to the Dispute. The proceedings shall be streamlined and efficient. The arbitrator shall decide the Dispute in accordance with the substantive law of the state of Delaware. Time is of the essence. Each party shall submit a proposal for resolution of the Dispute to the arbitrator within twenty (20) days after confirmation of the appointment of the arbitrator. The arbitrator shall have the power to order any party to do, or to refrain from doing, anything consistent with this Agreement, the Ancillary Documents and applicable Law, including to perform its contractual obligation(s); provided, that the arbitrator shall be limited to ordering pursuant to the foregoing power (and, for the avoidance of doubt, shall order) the relevant party (or parties, as applicable) to comply with only one or the other of the proposals. The arbitrator’s award shall be in writing and shall include a reasonable explanation of the arbitrator’s reason(s) for selecting one or the other proposal. The seat of arbitration shall be in New York County, State of New York. The language of the arbitration shall be English.

10.5         Governing Law; Jurisdiction . This Agreement shall be governed by, construed and enforced in accordance with the Laws of the State of Delaware without regard to the conflict of laws principles thereof. Subject to Section 10.4 , all Actions arising out of or relating to this Agreement shall be heard and determined exclusively in any state or federal court located in New York, New York (or in any court in which appeal from such courts may be taken) (the “ Specified Courts ”). Subject to Section 10.4 , each Party hereto hereby (a) submits to the exclusive jurisdiction of any Specified Court for the purpose of any Action arising out of or relating to this Agreement brought by any Party hereto and (b) irrevocably waives, and agrees not to assert by way of motion, defense or otherwise, in any such Action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the Action is brought in an inconvenient forum, that the venue of the Action is improper, or that this Agreement or the transactions contemplated hereby may not be enforced in or by any Specified Court. Each Party agrees that a final judgment in any Action shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Each Party irrevocably consents to the service of the summons and complaint and any other process in any other Action relating to the transactions contemplated by this Agreement, on behalf of itself, or its property, by personal delivery of copies of such process to such Party at the applicable address set forth in Section 10.1 . Nothing in this Section 10.5 shall affect the right of any Party to serve legal process in any other manner permitted by Law.

10.6         WAIVER OF JURY TRIAL . EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY ACTION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF ANY ACTION, SEEK TO ENFORCE THAT FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTIO N 10.6 .

10.7         Specific Performance . Each Party acknowledges that the rights of each Party to consummate the transactions contemplated hereby are unique, recognizes and affirms that in the event of a breach of this Agreement by any Party, money damages may be inadequate and the non-breaching Parties may have not adequate remedy at law, and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed by an applicable Party in accordance with their specific terms or were otherwise breached. Accordingly, each Party shall be entitled to seek an injunction or restraining order to prevent breaches of this Agreement and to seek to enforce specifically the terms and provisions hereof, without the requirement to post any bond or other security or to prove that money damages would be inadequate, this being in addition to any other right or remedy to which such Party may be entitled under this Agreement, at law or in equity.

10.8         Severability . In case any provision in this Agreement shall be held invalid, illegal or unenforceable in a jurisdiction, such provision shall be modified or deleted, as to the jurisdiction involved, only to the extent necessary to render the same valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby nor shall the validity, legality or enforceability of such provision be affected thereby in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties will substitute for any invalid, illegal or unenforceable

49

provision a suitable and equitable provision that carries out, so far as may be valid, legal and enforceable, the intent and purpose of such invalid, illegal or unenforceable provision.

10.9         Amendment . This Agreement may be amended, supplemented or modified only by execution of a written instrument signed by the Purchaser, the Company, the Purchaser Representative and the Seller Representative.

10.10        Waiver . The Purchaser on behalf of itself and its Affiliates, the Company on behalf of itself and its Affiliates, and the Seller Representative on behalf of itself and the Company Shareholders, may in its sole discretion (i) extend the time for the performance of any obligation or other act of any other non-Affiliated Party hereto, (ii) waive any inaccuracy in the representations and warranties by such other non-Affiliated Party contained herein or in any document delivered pursuant hereto and (iii) waive compliance by such other non-Affiliated Party with any covenant or condition contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the Party or Parties to be bound thereby (including by the Purchaser Representative or Seller Representative in lieu of such Party to the extent provided in this Agreement). Notwithstanding the foregoing, no failure or delay by a Party in exercising any right hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise of any other right hereunder. Notwithstanding the foregoing, any waiver of any provision of this Agreement after the Closing shall also require the prior written consent of the Purchaser Representative.

10.11        Entire Agreement . This Agreement and the documents or instruments referred to herein, including any exhibits and schedules attached hereto, which exhibits and schedules are incorporated herein by reference, together with the Ancillary Documents, embody the entire agreement and understanding of the Parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein or the documents or instruments referred to herein, which collectively supersede all prior agreements and the understandings among the Parties with respect to the subject matter contained herein.

10.12        Interpretation . The table of contents and the Article and Section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the Parties and shall not in any way affect the meaning or interpretation of this Agreement. In this Agreement, unless the context otherwise requires: (a) any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and words in the singular, including any defined terms, include the plural and vice versa; (b) reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity; (c) any accounting term used and not otherwise defined in this Agreement or any Ancillary Document has the meaning assigned to such term in accordance with GAAP; (d) “including” (and with correlative meaning “include”) means including without limiting the generality of any description preceding or succeeding such term and shall be deemed in each case to be followed by the words “without limitation”; (e) the words “herein,” “hereto,” and “hereby” and other words of similar import in this Agreement shall be deemed in each case to refer to this Agreement as a whole and not to any particular Section or other subdivision of this Agreement; (f) the word “if” and other words of similar import when used herein shall be deemed in each case to be followed by the phrase “and only if”; (g) the term “or” means “and/or”; (h) any reference to the term “ordinary course” or “ordinary course of business” shall be deemed in each case to be followed by the words “consistent with past practice”; (i) any agreement, instrument, insurance policy, Law or Order defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument, insurance policy, Law or Order as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes, regulations, rules or orders) by succession of comparable successor statutes, regulations, rules or orders and references to all attachments thereto and instruments incorporated therein; (j) except as otherwise indicated, all references in this Agreement to the words “Section,” “Article”, “Schedule” and “Exhibit” are intended to refer to Sections, Articles, Schedules and Exhibits to this Agreement; and (k) the term “Dollars” or “$” means United States dollars. Any reference in this Agreement or any Ancillary Document to a Person’s directors shall including any member of such Person’s governing body and any reference in this Agreement to a Person’s officers shall including any Person filling a substantially similar position for such Person. Any reference in this Agreement or any Ancillary Document to a Person’s shareholders shall include any applicable owners of the equity interests of such Person, in whatever form, including with respect to the Purchaser its members under the BVI Act or its Organizational Documents. The Parties have participated jointly in the negotiation

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and drafting of this Agreement. Consequently, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement. To the extent that any Contract, document, certificate or instrument is represented and warranted to by the Company to be given, delivered, provided or made available by the Company, in order for such Contract, document, certificate or instrument to have been deemed to have been given, delivered, provided and made available to the Purchaser or its Representatives, such Contract, document, certificate or instrument shall have been posted to the electronic data site maintained on behalf of the Company for the benefit of the Purchaser and its Representatives and the Purchaser and its Representatives have been given access to the electronic folders containing such information.

10.13        Counterparts . This Agreement may be executed and delivered (including by facsimile or other electronic transmission) in one or more counterparts, and by the different Parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.

10.14        Purchaser Representative .

(a)            The Purchaser, on behalf of itself and its Subsidiaries, successors and assigns, by execution and delivery of this Agreement, hereby irrevocably appoints Zhengqi International Holding Limited, in its capacity as the Purchaser Representative, as each such Person’s agent, attorney-in-fact and representative, with full power of substitution to act in the name, place and stead of such Person, to act on behalf of such Person from and after the Closing in connection with: (i) bringing, managing, controlling, defending and settling on behalf of a Indemnified Party any indemnification claims by any of them under Article VI ; (ii) acting on behalf of such Person under the Escrow Agreement; (iii) terminating, amending or waiving on behalf of such Person any provision of this Agreement or any Ancillary Documents to which the Purchaser Representative is a party; (iv) signing on behalf of such Person any releases or other documents with respect to any dispute or remedy arising under this Agreement or any Ancillary Documents to which the Purchaser Representative is a party; (v) employing and obtaining the advice of legal counsel, accountants and other professional advisors as the Purchaser Representative, in its reasonable discretion, deems necessary or advisable in the performance of its duties as the Purchaser Representative and to rely on their advice and counsel; (vi) incurring and paying reasonable out-of-pocket costs and expenses, including fees of brokers, attorneys and accountants incurred pursuant to the transactions contemplated hereby, and any other reasonable out-of-pocket fees and expenses allocable or in any way relating to such transaction or any indemnification claim; and (vii) otherwise enforcing the rights and obligations of any such Persons under this Agreement and the Ancillary Documents to which the Purchaser Representative is a party, including giving and receiving all notices and communications hereunder or thereunder on behalf of such Person; provided , that the Parties acknowledge that the Purchaser Representative is specifically authorized and directed to act on behalf of, and for the benefit of, the holders of Purchaser Securities (other than the Company Shareholders immediately prior to the Effective Time and their respective successors and assigns). All decisions and actions by the Purchaser Representative, including any agreement between the Purchaser Representative and the Company, Seller Representative, any Company Shareholder or Indemnifying Party relating to the defense or settlement of any indemnification claims for which an Indemnifying Party may be required to indemnify an Indemnified Party pursuant to Article VI , shall be binding upon the Purchaser and its Subsidiaries, successors and assigns, and they (nor any other Party) shall have the right to object, dissent, protest or otherwise contest the same. The provisions of this Section 10.14 are irrevocable and coupled with an interest. The Purchaser Representative hereby accepts its appointment and authorization as the Purchaser Representative under this Agreement.

(b)            The Purchaser Representative shall not be liable for any act done or omitted under this Agreement or any Ancillary Document as the Purchaser Representative while acting in good faith and without willful misconduct or gross negligence, and any act done or omitted pursuant to the advice of counsel shall be conclusive evidence of such good faith. The Purchaser shall indemnify, defend and hold harmless the Purchaser Representative from and against any and all Losses incurred without gross negligence, bad faith or willful misconduct on the part of the Purchaser Representative (in its capacity as such) and arising out of or in connection with the acceptance or administration of the Purchaser Representative’s duties under this Agreement or any Ancillary Document, including the reasonable out-of-pocket fees and expenses of any legal counsel retained by the Purchaser Representative. In no event shall the Purchaser Representative in such capacity be liable hereunder or in connection herewith for any indirect, punitive, special or consequential damages. The Purchaser Representative shall be fully protected in relying upon any written notice, demand, certificate or document that it in good faith believes to be genuine, including facsimiles or

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copies thereof, and no Person shall have any Liability for relying on the Purchaser Representative in the foregoing manner. In connection with the performance of its rights and obligations hereunder, the Purchaser Representative shall have the right at any time and from time to time to select and engage, at the reasonable cost and expense of the Purchaser, attorneys, accountants, investment bankers, advisors, consultants and clerical personnel and obtain such other professional and expert assistance, maintain such records and incur other reasonable out-of-pocket expenses, as the Purchaser Representative may reasonably deem necessary or appropriate from time to time. All of the indemnities, immunities, releases and powers granted to the Purchaser Representative under this Section 10.14 shall survive the Closing and continue indefinitely.

(c)            The Person serving as the Purchaser Representative may resign upon ten (10) days’ prior written notice to the Purchaser and the Seller Representative, provided, that the Purchaser Representative appoints in writing a replacement Purchaser Representative. Each successor Purchaser Representative shall have all of the power, authority, rights and privileges conferred by this Agreement upon the original Purchaser Representative, and the term “Purchaser Representative” as used herein shall be deemed to include any such successor Purchaser Representatives.

10.15        Seller Representative .

(a)            By the execution and delivery of this Agreement (and with respect to Company Shareholders, by delivery of a Letter of Transmittal), the Company (solely with respect to periods prior to the Effective Time) and each Company Shareholder on behalf of itself and its successors and assigns, hereby irrevocably constitutes and appoints Zhengdong Zou in its capacity as the Seller Representative, as the true and lawful agent and attorney-in-fact of the Company and such Company Shareholder with full powers of substitution to act in the name, place and stead of thereof with respect to the performance on behalf of such Person under the terms and provisions of this Agreement and the Ancillary Documents to which the Seller Representative is a party, as the same may be from time to time amended, and to do or refrain from doing all such further acts and things, and to execute all such documents on behalf of such Person, if any, as the Seller Representative will deem necessary or appropriate in connection with any of the transactions contemplated under this Agreement or any of the Ancillary Documents to which the Seller Representative is a party, including: (i) managing, controlling, defending and settling on behalf of an Indemnifying Party certain indemnification claims against any of them under Article VI ; (ii) acting on behalf of such Person under the Escrow Agreement; (iii) terminating, amending or waiving on behalf of such Person any provision of this Agreement or any Ancillary Documents to which the Seller Representative is a party (provided, that any such action, if material to the rights and obligations of the Company Shareholders in the reasonable judgment of the Seller Representative, will be taken in the same manner with respect to all Company Shareholders unless otherwise agreed by each Company Shareholder who is subject to any disparate treatment of a potentially adverse nature); (iv) signing on behalf of such Person any releases or other documents with respect to any dispute or remedy arising under this Agreement or any Ancillary Documents to which the Seller Representative is a party; (v) employing and obtaining the advice of legal counsel, accountants and other professional advisors as the Seller Representative, in its reasonable discretion, deems necessary or advisable in the performance of its duties as the Seller Representative and to rely on their advice and counsel; (vi) incurring and paying reasonable out-of-pocket costs and expenses, including fees of brokers, attorneys and accountants incurred pursuant to the transactions contemplated hereby, and any other reasonable out-of-pocket fees and expenses allocable or in any way relating to such transaction or any indemnification claim, whether incurred prior or subsequent to Closing; (vii) receiving all or any portion of the consideration provided to the Company Shareholders under this Agreement and to distribute the same to the Company Shareholders in accordance with their Pro Rata Share; and (viii) otherwise enforcing the rights and obligations of any such Persons under this Agreement and the Ancillary Documents to which the Seller Representative is a party, including giving and receiving all notices and communications hereunder or thereunder on behalf of such Person. All decisions and actions by the Seller Representative, including any agreement between the Seller Representative and the Purchaser Representative, the Purchaser or any Indemnified Party relating to the defense or settlement of any indemnification claims for which an Indemnifying Party may be required to indemnify an Indemnified Party pursuant to Article VI , shall be binding upon the Company, each Company Shareholder and their respective successors and assigns, and they (nor any other Party) shall not have the right to object, dissent, protest or otherwise contest the same. The provisions of this Section 10.15 are irrevocable and coupled with an interest. The Seller Representative hereby accepts its appointment and authorization as the Seller Representative under this Agreement.

(b)            Any other Person, including the Purchaser Representative, the Purchaser, the Company and the Indemnified Parties and the Indemnifying Parties may conclusively and absolutely rely, without inquiry, upon

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any actions of the Seller Representative as the acts of the Company and the Company Shareholders hereunder or any Ancillary Document to which the Seller Representative is a party. The Purchaser Representative, the Purchaser, the Company and each Indemnified Party and Indemnifying Party shall be entitled to rely conclusively on the instructions and decisions of the Seller Representative as to (i) the settlement of any indemnification claims by an Indemnified Party pursuant to Article VI , (ii) any payment instructions provided by the Seller Representative or (iii) any other actions required or permitted to be taken by the Seller Representative hereunder, and neither the Company, any Company Shareholder nor any Indemnifying Party shall have any cause of action against the Purchaser Representative, the Purchaser, the Company or any other Indemnified Party for any action taken by any of them in reliance upon the instructions or decisions of the Seller Representative. The Purchaser Representative, the Purchaser, the Company and the other Indemnified Parties shall not have any Liability to the Company or any Company Shareholder or Indemnifying Party for any allocation or distribution among the Company Shareholders by the Seller Representative of payments made to or at the direction of the Seller Representative. All notices or other communications required to be made or delivered to the Company or a Company Shareholder under this Agreement or any Ancillary Document to which the Seller Representative is a party shall be made to the Seller Representative for the benefit of such Company Shareholder, and any notices so made shall discharge in full all notice requirements of the other parties hereto or thereto to such Company Shareholder with respect thereto. All notices or other communications required to be made or delivered by the Company or a Company Shareholder shall be made by the Seller Representative (except for a notice under Section 10.15(d) of the replacement of the Seller Representative).

(c)            The Seller Representative will act for the Company and the Company Shareholders on all of the matters set forth in this Agreement in the manner the Seller Representative believes to be in the best interest of the Company and the Company Shareholders, but the Seller Representative will not be responsible to Company or the Company Shareholders for any Losses that Company or the Company Shareholders or Indemnifying Party may suffer by reason of the performance by the Seller Representative of the Seller Representative’s duties under this Agreement, other than Losses arising from the bad faith, gross negligence or willful misconduct by the Seller Representative in the performance of its duties under this Agreement. The Purchaser shall indemnify, defend and hold harmless the Seller Representative from and against any and all Losses incurred without gross negligence, bad faith or willful misconduct on the part of the Seller Representative (in its capacity as such) and arising out of or in connection with the acceptance or administration of the Seller Representative’s duties under this Agreement or any Ancillary Document, including the reasonable out-of-pocket fees and expenses of any legal counsel retained by the Seller Representative. In no event shall the Seller Representative in such capacity be liable hereunder or in connection herewith for any indirect, punitive, special or consequential damages. The Seller Representative shall not be liable for any act done or omitted under this Agreement or any Ancillary Document as the Seller Representative while acting in good faith and without willful misconduct or gross negligence, and any act done or omitted pursuant to the advice of counsel shall be conclusive evidence of such good faith. The Seller Representative shall be fully protected in relying upon any written notice, demand, certificate or document that it in good faith believes to be genuine, including facsimiles or copies thereof, and no Person shall have any Liability for relying on the Seller Representative in the foregoing manner. In connection with the performance of its rights and obligations hereunder, the Seller Representative shall have the right at any time and from time to time to select and engage, at the reasonable cost and expense of the Purchaser, attorneys, accountants, investment bankers, advisors, consultants and clerical personnel and obtain such other professional and expert assistance, maintain such records and incur other reasonable out-of-pocket expenses, as the Seller Representative may reasonably deem necessary or appropriate from time to time. All of the indemnities, immunities, releases and powers granted to the Seller Representative under this Section 10.15 shall survive the Closing and continue indefinitely.

(d)            If the Seller Representative shall die, become disabled, dissolve, resign or otherwise be unable or unwilling to fulfill its responsibilities as representative and agent of Company Shareholders, then the Company Shareholders shall, within ten (10) days after such death, disability, dissolution, resignation or other event, appoint a successor Seller Representative (by vote or written consent of the Company Shareholders holding in the aggregate a Pro Rata Share in excess of fifty percent (50%)), and promptly thereafter (but in any event within two (2) Business Days after such appointment) notify the Purchaser Representative and the Purchaser in writing of the identity of such successor. Any such successor so appointed shall become the “Seller Representative” for purposes of this Agreement.

10.16        Termination Fee Guarantee . The Sponsor irrevocably and unconditionally guarantees to the Company the prompt payment of the Termination Fee if required to be paid by Purchaser pursuant to Section 8.4(a) . The obligations of the Sponsor pursuant to this clause will be continuing obligations of the Sponsor and will not be satisfied, discharged or affected by any intermediate payment or settlement of account (other than complete payment of the Termination Fee), or any change in the constitution or control of, or the insolvency of, or any bankruptcy, winding

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up or analogous proceedings relating to the Purchaser. The Sponsor represents and warrants that it has all requisite corporate power and authority to execute and deliver this guarantee under this Agreement.

Article XI
DEFINITIONS

11.1         Certain Definitions . For purpose of this Agreement, the following capitalized terms have the following meanings:

Accounting Principles ” means in accordance with GAAP as in effect at the date of the financial statement to which it refers or if there is no such financial statement, then as of the Closing Date, using and applying the same accounting principles, practices, procedures, policies and methods (with consistent classifications, judgments, elections, inclusions, exclusions and valuation and estimation methodologies) used and applied by the Target Companies in the preparation of the latest audited Financial Statements and as set forth in the Reference Statement. To the extent that the latest audited Financial Statements are inconsistent with the Reference Statement and such inconsistencies are expressly identified and referenced therein, the accounting principles, practices, procedures, policies and methods set forth on the Reference Statement shall control. In any event, the Accounting Principles (i) shall not include any purchase accounting or other adjustment arising out of the consummation of the transactions contemplated by this Agreement, (ii) shall be based on facts and circumstances as they exist at or prior to the Closing and shall exclude the effect of any act, decision or event occurring after the Closing and (iii) shall follow the defined terms contained in this Agreement.

Action ” means any notice of noncompliance or violation, or any claim, demand, charge, action, suit, litigation, audit, settlement, complaint, stipulation, assessment or arbitration, or any request (including any request for information), inquiry, hearing, proceeding or investigation, by or before any Governmental Authority.

Adjusted Merger Consideration ” means an amount equal to the following, all as determined in accordance with Section 1.11 :

(i)             the Base Merger Consideration, minus

(ii)            the amount of Closing Net Indebtedness, plus

(iii)           the amount, if any, by which the Closing Net Working Capital exceeds the Target Maximum Net Working Capital Amount, minus

(iv)           the amount, if any, by which the Target Minimum Net Working Capital Amounts exceeds the Closing Net Working Capital, plus

(v)            the amount of the Excess Capped Expenses, if any.

Affiliate ” means, with respect to any Person, any other Person directly or indirectly Controlling, Controlled by, or under common Control with such Person. Notwithstanding anything to the contrary contained herein, the WFOE, the VIE Entity, and each of their respective Subsidiaries will be deemed to be Affiliates of the Company for all purposes of this Agreement.

Ancillary Documents ” means each agreement, instrument or document attached hereto as an Exhibit and the other agreements, certificates and instruments to be executed or delivered by any of the parties hereto in connection with or pursuant to this Agreement.

As-Converted Company Shares ” means the Company Ordinary Shares treating all Company Preferred Shares as converted into Company Ordinary Shares in accordance with the Company Charter.

Base Merger Consideration ” means Three Hundred and Three Million U.S. Dollars ($303,000,000).

Benefit Plans ” of any Person means any and all deferred compensation, executive compensation, incentive compensation, equity purchase or other equity-based compensation plan, employment or consulting, severance or termination pay, holiday, vacation or other bonus plan or practice, hospitalization or other medical, life or other insurance, supplemental unemployment benefits, profit sharing, pension, or retirement plan, program, agreement, commitment or arrangement, and each other employee benefit plan, program, agreement or arrangement, including each “employee benefit plan” as such term is defined under Section 3(3) of ERISA, maintained or contributed to or

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required to be contributed to by a Person for the benefit of any employee or terminated employee of such Person, or with respect to which such Person has any Liability, whether direct or indirect, actual or contingent, whether formal or informal, and whether legally binding or not.

BVI Act ” means the British Virgin Islands Business Companies Act, 2004, as amended.

Business Day ” means any day other than a Saturday, Sunday or a legal holiday on which commercial banking institutions in New York, New York are authorized to close for business.

Capped Purchaser Expenses ” means the U.S. dollar amount of out-of-pocket expenses incurred by Purchaser solely from its outside accounting firm and outside legal counsel in connection the negotiation, preparation and consummation of this Agreement, as of the Reference Time. For the avoidance of doubt, Capped Purchaser Expenses excludes any other costs or Expenses, including all fees and expenses of EBC, other investment bankers, underwriters, financial advisors, financing sources, experts and consultants to a Purchaser or any of its Affiliates and any costs and expenses (including all legal and accounting expenses) incurred by Purchaser in connection with the PIPE Investment or similar transaction or the Extension, if any.

Code ” means the Internal Revenue Code of 1986, as amended, and any successor statute thereto, as amended. Reference to a specific section of the Code shall include such section and any valid treasury regulation promulgated thereunder.

Company Charter ” means the memorandum and articles of association of the Company, as amended and effective under the Cayman Law.

Company Confidential Information ” means all confidential or proprietary documents and information concerning the Target Companies or any of their respective Representatives, furnished in connection with this Agreement or the transactions contemplated hereby; provided , however , that Company Confidential Information shall not include any information which, (i) at the time of disclosure by the Purchaser or its Representatives, is generally available publicly and was not disclosed in breach of this Agreement or (ii) at the time of the disclosure by the Company or its Representatives to the Purchaser or its Representatives was previously known by such receiving party without violation of Law or any confidentiality obligation by the Person receiving such Company Confidential Information.

Company Ordinary Shares means the Company’s ordinary shares, par value $0.001 per share.

Company Options ” means an option to purchase Company Ordinary Shares that was granted pursuant to the Company Plan.

Company Plan ” means the Borqs International Holding Corp Amended and Restated 2007 Global Share Plan.

Company Preferred Shares ” means, collectively, the Company’s preferred shares, par value $0.001, per share.

Company Securities ” means, collectively, the Company Shares, the Company Options, and the Company Warrants.

Company Series A Preferred Shares ” means Series A Preference Shares of the Company, par value $0.001 per share.

Company Series B Preferred Shares ” means Series B Preference Shares of the Company, par value $0.001 per share.

Company Series C Preferred Shares ” means Series C Preference Shares of the Company, par value $0.001 per share.

Company Series D Preferred Shares ” means Series D Preference Shares of the Company, par value $0.001 per share.

Company Shareholders ” means the holders of record of Company Shares.

Company Shares ” means, collectively, the Company Ordinary Shares and the Company Preferred Shares.

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Company Warrants ” means those warrants entitling the holders thereof to purchase Company Preferred Shares or Company Ordinary Shares.

Consent ” means any consent, approval, waiver, authorization or Permit of, or notice to or declaration or filing with any Governmental Authority or any other Person.

Contracts ” means all contracts, agreements, binding arrangements, bonds, notes, indentures, mortgages, debt instruments, purchase order, licenses (and all other contracts, agreements or binding arrangements concerning Intellectual Property), franchises, leases and other instruments or obligations of any kind, written or oral (including any amendments and other modifications thereto).

Control ” of a Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract, or otherwise. “Controlled”, “Controlling” and “under common Control with” have correlative meanings. Without limiting the foregoing a Person (the “ Controlled Person ”) shall be deemed Controlled by (a) any other Person (the “ 10% Owner ”) (i) owning beneficially, as meant in Rule 13d-3 under the Exchange Act, securities entitling such Person to cast ten percent (10%) or more of the votes for election of directors or equivalent governing authority of the Controlled Person or (ii) entitled to be allocated or receive ten percent (10%) or more of the profits, losses, or distributions of the Controlled Person; (b) an officer, director, general partner, partner (other than a limited partner), manager, or member (other than a member having no management authority that is not a 10% Owner) of the Controlled Person; or (c) a spouse, parent, lineal descendant, sibling, aunt, uncle, niece, nephew, mother-in-law, father-in-law, sister-in-law, or brother-in-law of an Affiliate of the Controlled Person or a trust for the benefit of an Affiliate of the Controlled Person or of which an Affiliate of the Controlled Person is a trustee.

Copyrights ” means any works of authorship, mask works and all copyrights therein, including all renewals and extensions, copyright registrations and applications for registration and renewal, and non-registered copyrights.

EBC ” means Early Bird Capital, Inc., the lead underwriter in Purchaser’s IPO.

Environmental Law ” means any Law in any way relating to (a) the protection of human health and safety, (b) the protection, preservation or restoration of the environment and natural resources (including air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or (c) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Materials.

Environmental Liabilities ” means, in respect of any Person, all Liabilities, obligations, responsibilities, Remedial Actions, Losses, damages, costs, and expenses (including all reasonable fees, disbursements, and expenses of counsel, experts, and consultants and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand by any other Person or in response to any violation of Environmental Law, whether known or unknown, accrued or contingent, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, to the extent based upon, related to, or arising under or pursuant to any Environmental Law, Environmental Permit, Order, or Contract with any Governmental Authority or other Person, that relates to any environmental, health or safety condition, violation of Environmental Law, or a Release or threatened Release of Hazardous Materials.

ERISA ” means the Employee Retirement Income Security Act of 1974, as amended.

Exchange Act ” means the Securities Exchange Act of 1934, as amended.

Excess Capped Expenses means the U.S. dollar amount by which the Capped Purchaser Expenses exceeds $1,000,000.

Foreign Plan ” means any plan, fund (including any superannuation fund) or other similar program or arrangement established or maintained outside the United States by the Company or any one or more of its Subsidiaries primarily for the benefit of employees of the Company or such Subsidiaries residing outside the United States, which plan, fund or other similar program or arrangement provides, or results in, retirement income, a deferral of income in contemplation of retirement or payments to be made upon termination of employment, and which plan is not subject to ERISA or the Code.

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Fraud Claim ” means any claim based in whole or in part upon fraud, willful misconduct or intentional misrepresentation.

GAAP ” means generally accepted accounting principles as in effect in the United States of America.

Governmental Authority ” means any federal, state, local, foreign or other governmental, quasi-governmental or administrative body, instrumentality, department or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body.

Hazardous Material ” means any waste, gas, liquid or other substance or material that is defined, listed or designated as a “hazardous substance”, “pollutant”, “contaminant”, “hazardous waste”, “regulated substance”, “hazardous chemical”, or “toxic chemical” (or by any similar term) under any Environmental Law, or any other material regulated, or that could result in the imposition of Liability or responsibility, under any Environmental Law, including petroleum and its by-products, asbestos, polychlorinated biphenyls, radon, mold, and urea formaldehyde insulation.

Indebtedness ” of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money (including the outstanding principal and accrued but unpaid interest), (b) obligations for the deferred purchase price of property or services (other than trade payables and other expenses incurred in the ordinary course of business), (c) any other indebtedness of such Person that is evidenced by a note, bond, debenture, credit agreement or similar instrument, (d) all obligations of such Person under leases that should be classified as capital leases in accordance with GAAP, (e) all obligations of such Person for the reimbursement of any obligor on any line or letter of credit, banker’s acceptance, guarantee or similar credit transaction, in each case, that has been drawn or claimed against, (f) all obligations of such Person in respect of acceptances issued or created, (g) all interest rate and currency swaps, caps, collars and similar agreements or hedging devices under which payments are obligated to be made by such Person, whether periodically or upon the happening of a contingency, (h) all obligations secured by an Lien on any property of such Person, (i) any premiums, prepayment fees or other penalties, fees, costs or expenses associated with payment of any Indebtedness of such Person and (j) all obligation described in clauses (a) through (i) above of any other Person which is directly or indirectly guaranteed by such Person or which such Person has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which it has otherwise assured a creditor against loss.

Intellectual Property ” means all of the following as they exist in any jurisdiction throughout the world: Patents, Trademarks, Copyrights, Trade Secrets, Internet Assets, Software and other intellectual property, and all licenses, sublicenses and other agreements or permissions related to the preceding property.

Internet Assets ” means any all domain name registrations, web sites and web addresses and related rights, items and documentation related thereto.

IPO ” means the initial public offering of Purchaser Public Units pursuant to the IPO Prospectus, which was consummated on October 20, 2015.

IPO Prospectus ” means the final prospectus of the Purchaser, dated October 14, 2015, and filed with the SEC on October 15, 2015 (File No. 333-206435).

Key Investors ” has the meaning given to such term in the Company Charter.

Key Series D Holders ” means the holders of more than fifty percent (50%) of the outstanding Company’s Series D Preference Shares (as such term is defined in the Company Charter).

Knowledge ” means, with respect to (i) the Company, the actual knowledge of the executive officers or directors of any Target Company, after due inquiry or (ii) any other Party, the actual knowledge of its directors and executive officers, after due inquiry.

Law ” means any federal, state, local, municipal, foreign or other law, statute, legislation, principle of common law, ordinance, code, edict, decree, proclamation, treaty, convention, rule, regulation, directive, requirement, writ, injunction, settlement, Order or Consent that is or has been issued, enacted, adopted, passed, approved, promulgated, made, implemented or otherwise put into effect by or under the authority of any Governmental Authority.

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Liabilities ” means any and all liabilities, Indebtedness, Actions or obligations of any nature (whether absolute, accrued, contingent or otherwise, whether known or unknown, whether direct or indirect, whether matured or unmatured and whether due or to become due), including Tax liabilities due or to become due.

Lien ” means any mortgage, pledge, security interest, attachment, right of first refusal, option, proxy, voting trust, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof), restriction (whether on voting, sale, transfer, disposition or otherwise), any subordination arrangement in favor of another Person, any filing or agreement to file a financing statement as debtor under the Uniform Commercial Code or any similar Law.

Majority Series C Holders ” means the holders of a majority of the outstanding Company’s Series C Preference Shares (as such term is defined in the Company Charter).

Material Adverse Effect ” means, with respect to any specified Person, any fact, event, occurrence, change or effect that has had, or would reasonably be expected to have, individually or in the aggregate, a material adverse effect upon (a) the business, assets, Liabilities, results of operations, prospects or condition (financial or otherwise) of such Person and its Subsidiaries, taken as a whole, or (b) the ability of such Person or any of its Subsidiaries on a timely basis to consummate the transactions contemplated by this Agreement or the Ancillary Documents to which it is a party or bound or to perform its obligations hereunder or thereunder; provided , however , that for purposes of clause (a) above, any changes or effects directly or indirectly attributable to, resulting from, relating to or arising out of the following (by themselves or when aggregated with any other, changes or effects) shall not be deemed to be, constitute, or be taken into account when determining whether there has or may, would or could have occurred a Material Adverse Effect: (i) general changes in the financial or securities markets or general economic or political conditions in the country or region in which such Person or any of its Subsidiaries do business; (ii) changes, conditions or effects that generally affect the industries in which such Person or any of its Subsidiaries principally operate; (iii) changes in GAAP or other applicable accounting principles or mandatory changes in the regulatory accounting requirements applicable to any industry in which such Person and its Subsidiaries principally operate; (iv) conditions caused by acts of God, terrorism, war (whether or not declared) or natural disaster; (v) any failure in and of itself by such Person and its Subsidiaries to meet any internal or published budgets, projections, forecasts or predictions of financial performance for any period (provided that the underlying cause of any such failure may be considered in determining whether a Material Adverse Effect has occurred or would reasonably be expected to occur to the extent not excluded by another exception herein) and (vi), with respect to the Purchaser, the consummation and effects of the Redemption (or any redemption in connection with the Extension, if any); provided further , however , that any event, occurrence, fact, condition, or change referred to in clauses (i) - (iv) immediately above shall be taken into account in determining whether a Material Adverse Effect has occurred or could reasonably be expected to occur to the extent that such event, occurrence, fact, condition, or change has a disproportionate effect on such Person or any of its Subsidiaries compared to other participants in the industries in which such Person or any of its Subsidiaries primarily conducts its businesses. Notwithstanding the foregoing, with respect to the Purchaser, the amount of the Redemption (or any redemption in connection with the Extension, if any), or the failure to obtain the Required Purchaser Shareholder Approval or the Extension shall not be deemed to be a Material Adverse Effect on or with respect to the Purchaser.

Merger Consideration Shares ” means a total number of Purchaser Ordinary Shares equal to (i) the Adjusted Merger Consideration, divided by (ii) $10.40.

Merger Sub Ordinary Shares ” means the ordinary shares, par value $1.00 per share, of Merger Sub.

Nasdaq ” means the Nasdaq Capital Market.

Net Working Capital ” means (i) all current assets of the Target Companies (excluding, without duplication, cash and cash equivalents), on a consolidated basis, as of the Reference Time, minus (ii) all current liabilities of the Target Companies (excluding, without duplication, Indebtedness), on a consolidated basis, as of the Reference Time, determined in accordance with the Accounting Principles.

Order ” means any order, decree, ruling, judgment, injunction, writ, determination, binding decision, verdict, judicial award or other action that is or has been made, entered, rendered, or otherwise put into effect by or under the authority of any Governmental Authority.

58

Organizational Documents ” means, with respect to the Purchaser, the Purchaser Charter, and with respect to any other Party, its Certificate of Incorporation and Bylaws or similar organizational documents, in each case, as amended.

Patents ” means any patents, patent applications and the inventions, designs and improvements described and claimed therein, patentable inventions, and other patent rights (including any divisionals, provisionals, continuations, continuations-in-part, substitutions, or reissues thereof, whether or not patents are issued on any such applications and whether or not any such applications are amended, modified, withdrawn, or refiled).

Permits ” means all federal, state, local or foreign or other third-party permits, grants, easements, consents, approvals, authorizations, exemptions, licenses, franchises, concessions, ratifications, permissions, clearances, confirmations, endorsements, waivers, certifications, designations, ratings, registrations, qualifications or orders of any Governmental Authority or any other Person.

Permitted Liens ” means (a) Liens for Taxes or assessments and similar governmental charges or levies, which either are (i) not delinquent or (ii) being contested in good faith and by appropriate proceedings, and adequate reserves have been established with respect thereto, (b) other Liens imposed by operation of Law arising in the ordinary course of business for amounts which are not due and payable and as would not in the aggregate materially adversely affect the value of, or materially adversely interfere with the use of, the property subject thereto, (c) Liens incurred or deposits made in the ordinary course of business in connection with social security, (d) Liens on goods in transit incurred pursuant to documentary letters of credit, in each case arising in the ordinary course of business, or (v) Liens arising under this Agreement or any Ancillary Document.

Person ” means an individual, corporation, partnership (including a general partnership, limited partnership or limited liability partnership), limited liability company, association, trust or other entity or organization, including a government, domestic or foreign, or political subdivision thereof, or an agency or instrumentality thereof.

Personal Property ” means any machinery, equipment, tools, vehicles, furniture, leasehold improvements, office equipment, plant, parts and other tangible personal property.

Purchaser Charter ” means the memorandum and articles of association of the Purchaser, as amended and effective under the BVI Act.

Purchaser Confidential Information ” means all confidential or proprietary documents and information concerning the Purchaser or any of its Representatives; provided , however , that Purchaser Confidential Information shall not include any information which, (i) at the time of disclosure by the Company or its respective Representatives, is generally available publicly and was not disclosed in breach of this Agreement or (ii) at the time of the disclosure by the Purchaser or its Representatives to the Company or its Representatives, was previously known by such receiving party without violation of Law or any confidentiality obligation by the Person receiving such Purchaser Confidential Information. For the avoidance of doubt, from and after the Closing, Purchaser Confidential Information will include the confidential or proprietary information of the Target Companies.

Purchaser Ordinary Shares ” means the ordinary shares of no par value in the Purchaser.

Purchaser Private Right ” means one right that was included as part of each Purchaser Private Unit entitling the holder thereof to receive one-tenth (1/10 th ) of a Purchaser Ordinary Share upon the consummation by the Purchaser of an initial Business Combination.

Purchaser Private Warrant ” means one whole warrant that was included in as part of each Purchaser Private Unit, entitling the holder thereof to purchase one-half (1/2) of one (1) Purchaser Ordinary Share at a purchase price of $12.00 per full Purchaser Ordinary Share.

Purchaser Private Units ” means the units issued in private placements to EBC and Sponsor at the time of the consummation of the IPO and thereafter, which units consist of one (1) Purchaser Ordinary Share, one (1) Purchaser Private Right and one (1) Purchaser Private Warrant.

59

Purchaser Public Right ” means one right that was included as part of each Purchaser Public Unit entitling the holder thereof to receive one-tenth (1/10 th ) of a Purchaser Ordinary Share upon the consummation by the Purchaser of an initial Business Combination.

Purchaser Public Unit ” means the units issued in the IPO consisting of one (1) Purchaser Ordinary Share, one (1) Purchaser Public Right and one (1) Purchaser Public Warrant.

Purchaser Public Warrants ” means one whole warrant that was included in as part of each Purchaser Public Unit, entitling the holder thereof to purchase one-half (1/2) of a Purchaser Ordinary Share at a price of $12.00 per full share.

Purchaser Securities ” means the Purchaser Public Units, the Purchaser Ordinary Shares, the Purchaser Public Warrants, the Purchaser Private Rights, the Purchaser Public Rights, the Purchaser Private Units, the Purchaser Private Warrants and the Purchaser UPO, collectively.

Purchaser Share Price ” means an amount equal to the VWAP of the Purchaser Ordinary Shares over the twenty (20) Trading Days ending at the close of business on the principal securities exchange or securities market on which the Purchaser Ordinary Shares are then traded immediately prior to the date of determination, as equitably adjusted for stock splits, stock dividends, combinations, recapitalizations and the like after the date of this Agreement.

Purchaser UPO ” means the option issued to EBC and/or its designee to purchase up to 400,000 Purchaser Public Units at a price of $10.00 per unit, provided the exercise price per unit may be adjusted as stated in the option.

Reference Time ” means the close of business of the Company on the last Business Day prior to the Closing Date (but treating any Indebtedness, Transaction Expenses or other liabilities that are contingent upon the consummation of the Closing as currently due and owing without contingency as of the Reference Time).

Release ” means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, or leaching into the indoor or outdoor environment, or into or out of any property.

Remedial Action ” means all actions to (i) clean up, remove, treat, or in any other way address any Hazardous Material, (ii) prevent the Release of any Hazardous Material so it does not endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (iii) perform pre-remedial studies and investigations or post-remedial monitoring and care, or (iv) correct a condition of noncompliance with Environmental Laws.

Representative ” means, as to any Person, such Person’s Affiliates and its and their managers, directors, officers, employees, agents and advisors (including financial advisors, counsel and accountants).

Required Key Investors ” means a group of Key Investors who, in aggregate, hold at least sixty-seven percent (67%) of the Company Preferred Shares then held by the Key Investors, on an as converted to Company Ordinary Share basis.

SEC ” means the Securities and Exchange Commission (or any successor Governmental Authority).

Securities Act ” means the Securities Act of 1933, as amended.

Software ” means any computer software programs, including all source code, object code, and documentation related thereto and all software modules, tools and databases.

SOX ” means the Sarbanes-Oxley Act of 2002, as amended.

Subsidiary ” means, with respect to any Person, any corporation, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a partnership, association or other business entity, a majority of the partnership or other similar ownership interests thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons will be deemed to have a majority ownership interest in a partnership, association or other business entity if such Person or Persons

60

will be allocated a majority of partnership, association or other business entity gains or losses or will be or control the managing director, managing member, general partner or other managing Person of such partnership, association or other business entity. A Subsidiary of a Person will also include any variable interest entity which is consolidated with such Person under applicable accounting rules. Notwithstanding anything to the contrary contained herein, the WFOE and the VIE Entity will each be deemed to be Subsidiaries of the Company for all purposes of this Agreement.

Target Company ” means each of the Company and its direct and indirect Subsidiaries.

Target Maximum Net Working Capital Amount ” means $11,000,000.

Target Minimum Net Working Capital Amount ” means $9,000,000.

Tax Return ” means any return, declaration, report, claim for refund, information return or other documents (including any related or supporting schedules, statements or information) filed or required to be filed in connection with the determination, assessment or collection of any Taxes or the administration of any Laws or administrative requirements relating to any Taxes.

Taxes ” means (a) all direct or indirect federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, value-added, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, social security and related contributions due in relation to the payment of compensation to employees, excise, severance, stamp, occupation, premium, property, windfall profits, alternative minimum, estimated, customs, duties or other taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, (b) any Liability for payment of amounts described in clause (a) whether as a result of being a member of an affiliated, consolidated, combined or unitary group for any period or otherwise through operation of law and (c) any Liability for the payment of amounts described in clauses (a) or (b) as a result of any tax sharing, tax group, tax indemnity or tax allocation agreement with, or any other express or implied agreement to indemnify, any other Person.

Trade Secrets ” means any trade secrets, confidential business information, concepts, ideas, designs, research or development information, processes, procedures, techniques, technical information, specifications, operating and maintenance manuals, engineering drawings, methods, know-how, data, mask works, discoveries, inventions, modifications, extensions, improvements, and other proprietary rights (whether or not patentable or subject to copyright, trademark, or trade secret protection).

Trademarks ” means any trademarks, service marks, trade dress, trade names, brand names, internet domain names, designs, logos, or corporate names (including, in each case, the goodwill associated therewith), whether registered or unregistered, and all registrations and applications for registration and renewal thereof.

Trading Day ” means any day on which Purchaser Ordinary Shares are actually traded on the principal securities exchange or securities market on which the Purchaser Ordinary Shares are then traded.

Transaction Expenses ” means all fees and expenses of any of the Target Companies incurred or payable as of the Closing and not paid prior to the Closing (i) in connection with the consummation of the transactions contemplated hereby, including any amounts payable to professionals (including investment bankers, brokers, finders, attorneys, accountants and other consultants and advisors) retained by or on behalf of any of the Target Companies, (ii) any change in control bonus, transaction bonus, retention bonus, termination or severance payment or payment relating to terminated options, warrants or other equity appreciation, phantom equity, profit participation or similar rights, in any case, to be made to any current or former employee, independent contractor, director or officer of any of the Target Companies at or after the Closing pursuant to any agreement to which any of the Target Companies is a party prior to the Closing which become payable (including if subject to continued employment) as a result of the execution of this Agreement or the consummation of the transactions contemplated hereby and (iii) any Transfer Taxes.

Trust Account ” means the trust account established by Purchaser with the proceeds from the IPO pursuant to the Trust Agreement in accordance with the IPO Prospectus.

Trust Agreement ” means that certain Investment Management Trust Agreement, dated as of October 14, 2015, as it may be amended, by and between the Purchaser and the Trustee, as well as any other agreements entered into related to or governing the Trust Account.

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Trustee ” means Continental Stock Transfer & Trust Company, in its capacity as trustee under the Trust Agreement.

VWAP ” means, for any security as of any date(s), the dollar volume-weighted average price for such security on the principal securities exchange or securities market on which such security is then traded during the period beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as reported by Bloomberg through its “HP” function (set to weighted average) or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported by OTC Markets Group Inc. If the VWAP cannot be calculated for such security on such date(s) on any of the foregoing bases, the VWAP of such security on such date(s) shall be the fair market value as reasonably determined by Purchaser in good faith. All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination, recapitalization or other similar transaction during such period.

11.2         Section References . The following capitalized terms, as used in this Agreement, have the respective meanings given to them in the Section as set forth below adjacent to such terms:

Term

 

Section

AAA

 

10.4

AAA Procedures

 

10.4

Acquisition Proposal

 

5.7(a)

Agreement

 

Preamble

Alternative Transaction

 

5.7(a)

Amended Charter

 

5.13(a)

Antitrust Laws

 

5.10(b)

Assumed Option

 

1.8(e)

Borqs HK

 

Recitals

Business Combination

 

9.1

Cayman Law

 

Recitals

Claim Notice

 

6.5(b)

Closing

 

2.1

Closing Balance Sheet

 

1.11(b)

Closing Date

 

2.1

Closing Filing

 

5.14(b)

Closing Net Indebtedness

 

1.11(b)

Closing Net Working Capital

 

1.11(b)

Closing Press Release

 

5.14(b)

Closing Statement

 

1.11(b)

Company

 

Preamble

Company Benefit Plan

 

4.19(a)

Company Certificates

 

1.8(a)

Company Directors

 

5.17(a)

Company Disclosure Schedules

 

Article IV

Company Financials

 

4.7(a)

Company IP

 

4.7(d)

Company IP Licenses

 

4.13(a)

Company Material Contract

 

4.12(a)

Company Permits

 

4.10

Company Personal Property Leases

 

4.16

Company Real Property Leases

 

4.15

Company Registered IP

 

4.13(a)

Company Written Consents

 

Recitals

62

Term

 

Section

Conflicts of Interest Policy

 

5.19

Deferred Expenses

 

5.18

Dispute

 

10.4

Dissenting Shares

 

1.13

Dissenting Shareholders

 

1.13

Effective Time

 

1.2

Enforceability Exceptions

 

3.2

Environmental Permit

 

4.20(a)

Escrow Account

 

1.14(a)

Escrow Agent

 

1.14(a)

Escrow Agreement

 

1.14(a)

Escrow Property

 

1.14(a)

Escrow Shares

 

1.14(a)

Expense Statement

 

1.11(a)

Expenses

 

8.3

Expiration Date

 

1.14(b)

Extension

 

8.1(b)

Federal Securities Laws

 

5.13(b)

Indemnified Party

 

6.2

Indemnifying Party

 

6.2

Interim Balance Sheet Date

 

4.7(a)

Interim Period

 

5.2(a)

Letter of Transmittal

 

1.9(a)

Lock-Up Agreement

 

1.9(b)

Loss

 

6.2

Merger

 

Recitals

Merger Sub

 

Preamble

Mutual Directors

 

5.17(a)

Non-Competition Agreement

 

7.3(d)(xi)

OFAC

 

3.18(c)

Off-the-Shelf Software Agreements

 

4.13(a)

Outbound IP License

 

4.13(c)

Outside Date

 

8.1(b)

Party(ies)

 

Preamble

PIPE Investment

 

5.10(f)

PIPE Shares

 

5.10(f)

Pending Claims

 

1.14(b)

Plan of Merger

 

1.2

Post-Closing Purchaser Board

 

5.17(a)

PRC

 

Recitals

PRC Establishment Documents

 

4.4(c)

PRC Target Company

 

4.4(c)

Pro Rata Share

 

1.7

Proxy Documents

 

5.13(a)

Proxy Statement

 

5.13(a)

Public Certifications

 

3.6(a)

Public Shareholders

 

9.1

Purchaser

 

Preamble

Purchaser Directors

 

5.17(a)

Purchaser Equity Plan

 

5.13(a)

63

Term

 

Section

Purchaser Expenses

 

5.18

Purchaser Representative

 

Preamble

Purchaser Disclosure Schedules

 

Article III

Purchaser Financials

 

3.6(b)

Purchaser Material Contracts

 

3.13(a)

Redemption

 

5.13(a)

Reference Statement

 

1.11(c)

Registration Rights Agreement

 

1.9(b)

Related Person

 

4.21

Released Claims

 

9.1

Replacement Purchaser Warrant

 

1.8(d)

Required Company Shareholder Approval

 

7.1(b)

Required Purchaser Shareholder Approval

 

7.1(a)

Resolution Period

 

10.4

Resolved Third Party Claim

 

6.5(c)

SEC Reports

 

3.6(a)

Seller Representative

 

Preamble

Shareholder Approval Matters

 

5.13(a)

Shareholder Meeting

 

5.13(a)

Signing Filing

 

5.14(b)

Signing Press Release

 

5.14(b)

Specified Courts

 

10.5

Sponsor

 

Preamble

Surviving Company

 

1.1

Surviving Company Charter

 

1.5

Termination Fee

 

8.4(a)

Third Party Claim

 

6.5(c)

Top Customer

 

4.24

Top Supplier

 

4.24

Transmittal Documents

 

1.9(b)

VIE Contracts

 

4.4(b)

VIE Entity(ies)

 

Recitals

VIE Shareholders

 

4.4(b)

WFOE

 

Recitals

Voting Agreements

 

Recitals

64

IN WITNESS WHEREOF, each Party hereto has caused this Agreement to be signed and delivered as of the date first written above.

 

 

The Purchaser:

 

 

PACIFIC SPECIAL ACQUISITION CORP.

 

 

 

 

 

 

 

By:

 

/s/ Zhouhong Peng

 

 

Name:

 

Zhouhong Peng

 

 

Title:

 

Chief Executive Officer

 

 

 

 

 

 

 

The Purchaser Representative:

 

 

 

 

 

 

 

ZHENGQI INTERNATIONAL HOLDING LIMITED , solely in its capacity as the Purchaser Representative hereunder

 

 

 

 

 

 

 

By:

 

/s/ Zhouhong Peng

 

 

Name:

 

Zhouhong Peng

 

 

Title:

 

Director

 

 

 

 

 

 

 

Merger Sub:

 

 

 

 

 

 

 

PAAC MERGER SUBSIDIARY LIMITED

 

 

 

 

 

 

 

By:

 

/s/ Yaqi Feng

 

 

Name:

 

Yaqi Feng

 

 

Title:

 

Director

 

 

 

 

 

 

 

The Company:

 

 

 

 

 

 

 

BORQS INTERNATIONAL HOLDING CORP

 

 

 

 

 

 

 

By:

 

/s/ Pat Chan

 

 

Name:

 

Pat Chan

 

 

Title:

 

Chief Executive Officer

 

 

 

 

 

 

 

The Seller Representative:

 

 

 

 

 

 

 

Zhengdong Zou , solely in its capacity as the Seller Representative hereunder

 

 

 

 

 

 

 

By:

 

/s/ Zhengdong Zou

 

 

Name:

 

Zhengdong Zou

 

 

Title:

 

Self

 

 

 

 

 

 

 

The Sponsor:

 

 

 

 

 

 

 

Solely for purposes of Section 10.16 hereof (and the related enforcement and interpretive provisions):

 

 

 

 

 

 

 

ZHENGQI INTERNATIONAL HOLDING LIMITED

 

 

 

 

 

 

 

By:

 

/s/ Zhouhong Peng

 

 

Name:

 

Zhouhong Peng

 

 

Title:

 

Director

 [Signature Page to Merger Agreement]

65

First Amendment to Merger Agreement

This First Amendment to Merger Agreement (this “ Amendment ”), dated as of May 10, 2017, is entered into by and among (i) Pacific Special Acquisition Corp. , a British Virgin Islands business company with limited liability (the “ Purchaser ”), (ii) Zhengqi International Holding Limited , a company incorporated in the British Virgin Islands, in the capacity under the Agreement (as defined below) as the Purchaser Representative (the “ Purchaser Representative ”), (iii) Zhengdong Zou , in the capacity under the Agreement as the Seller Representative (the “ Seller Representative ”), and (iv) Borqs International Holding Corp , an exempted company incorporated under the laws of the Cayman Islands with limited liability (the “ Company ”).

Whereas , Purchaser, the Company, the Purchaser Representative, the Seller Representative, PAAC Merger Subsidiary Limited, an exempted company incorporated under the laws of the Cayman Islands with limited liability and a wholly-owned subsidiary of the Purchaser (“ Merger Su b ”), and, for limited purposes thereof, Zhengqi International Holding Limited, a business company incorporated in the British Virgin Islands with limited liability (“ Sponsor ”), are parties to that certain Merger Agreement, dated as of December 27, 2016 (the “ Agreement ”);

Whereas , Purchaser, the Company, the Purchaser Representative, and the Seller Representative desire to amend the Agreement on the terms and conditions set forth herein;

Whereas , Section 10.9 of the Agreement provides that the Agreement may be amended by authorized action of Purchaser, the Company, the Purchaser Representative, and the Seller Representative; and

Whereas , contemporaneously with the execution and delivery of this Amendment, the Purchaser and the Sponsor are entering into a Backstop and Subscription Agreement (the “ Backstop and Subscription Agreement ”).

Now, Therefore , in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth below and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows:

1.             Definitions . Capitalized terms used and not otherwise defined herein (including in the recitals hereto) shall have the meanings assigned to them in the Agreement.

2.             Amendments

a.             Section 11.1 of the Agreement is hereby amended as follows:

i.         The term “ Adjusted Net Income ” is inserted and defined as follows:

Adjusted Net Income ” means an amount equal to Net Income, as adjusted to exclude the following amounts:

(i)        Any extraordinary or non-recurring gains and losses (such as, but not limited to, gains and losses from a sale of a business or equipment or other asset outside of the ordinary course).

(ii)       (A) Transaction Expenses, Purchaser Expenses, and Deferred Expenses and (B) non-cash expenses incurred by the Purchaser or Merger Sub at the Closing directly relating to the assumption of the Assumed Options pursuant to Section 1.8(e) .

ii.        The term “ Backstop Guarantee Escrow Share Amount ” is inserted and defined as follows:

Backstop Guarantee Escrow Share Amount ” means the following portion of the Guarantee Escrow Shares:

(i)        if the Adjusted Net Income is less than the Net Income Floor, then 100% of the Guarantee Escrow Shares;

(ii)       if the Adjusted Net Income is greater than the Net Income Target, then zero (0); and

(iii)      if the Adjusted Net Income is greater than the Net Income Floor but less than the Net Income Target, a percentage of the Guarantee Escrow Shares equal to the difference

66

between (A) one hundred percent (100%) and (B) the Partial Net Income Achievement Percentage.

iii.       The definition of “ Base Merger Consideration ” is deleted in its entirety and replaced with the following:

Base Merger Consideration ” means Two Hundred and Seventy Million U.S. Dollars ($270,000,000).

iv.       The term “ Borqs Guarantee Escrow Share Amount ” is inserted and defined as follows:

Borqs Guarantee Escrow Share Amount ” means the following portion of the Guarantee Escrow Shares:

(i)        if the Adjusted Net Income is less than the Net Income Floor, then zero (0);

(ii)       if the Adjusted Net Income is greater than the Net Income Target, then 100% of the Guarantee Escrow Shares; and

(iii)      if the Adjusted Net Income is greater than the Net Income Floor but less than the Net Income Target, a percentage of the Guarantee Escrow Shares equal to the Partial Net Income Achievement Percentage.”

v.        The term “ Borqs Net Income Escrow Share Amount ” is inserted and defined as follows:

Borqs Net Income Escrow Share Amount ” means the following portion of the Net Income Escrow Shares:

(i)        if the Adjusted Net Income is less than the Net Income Floor, then zero (0);

(ii)       if the Adjusted Net Income is greater than the Net Income Target, then 100% of the Net Income Escrow Shares; and

(iii)      if the Adjusted Net Income is greater than the Net Income Floor but less than the Net Income Target, a percentage of the Net Income Escrow Shares equal to the Partial Net Income Achievement Percentage.

vi.       The term “ Earnout Period ” is inserted and defined as follows:

Earnout Period ” means the 12 month period beginning July 1, 2017 and ending June 30, 2018.

vii.      The term “ Guarantee Escrow Share Amount ” is inserted and defined as follows:

Guarantee Escrow Share Amount ” means a total number of Purchaser Ordinary Shares equal to 2,352,285.

viii.     The term “ Minimum Earnout Shares ” is inserted and defined as follows:

Minimum Earnout Shares ” means a total number of Purchaser Ordinary Shares equal to 2,352,285.

ix.       The definition of “ Net Income ” is inserted and defined as follows:

Net Income ” means consolidated net income of Purchaser and its Subsidiaries for the Earnout Period, determined in accordance with the Accounting Principles (but without giving effect to the last sentence of the definition of Accounting Principles in Section 11.1 ).

x.        The term “ Net Income Escrow Share Amount ” is inserted and defined as follows:

Net Income Escrow Share Amount ” means a total number of Purchaser Ordinary Shares equal to the greater of (a) zero (0) and (b) the difference of (i) the Total Available Earnout Shares less (ii) the Guarantee Escrow Share Amount.

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xi.       The term “ Net Income Floor ” is inserted and defined as follows:

Net Income Floor ” means $18,000,000.00, in U.S. Dollars.

xii.      The term “ Net Income Target ” is inserted and defined as follows:

Net Income Target ” means $20,000,000.00, in U.S. Dollars.

xiii.     The term “ Partial Net Income Achievement Percentage ” is inserted and defined as follows:

Partial Net Income Achievement Percentage ” means a percentage, not less than zero percent (0%) and not greater than one hundred percent (100%), equal to the quotient obtained by dividing (i) the difference of (A) Adjusted Net Income less (B) the Net Income Floor by (ii) $2,000,000.00 in U.S. Dollars

xiv.     The term “ Total Available Earnout Shares ” is inserted and defined as follows:

Total Available Earnout Shares ” means a total number of Purchaser Ordinary Shares equal to the lesser of (i) the sum of (a) the Minimum Earnout Shares plus (b) a number of Purchaser Ordinary Shares equal to the product obtained by multiplying (I) the Trust Account Excess by (II) 0.0445931045, and (ii) 3,846,154.

xv.      The term “ Trust Account Excess ” is inserted and defined as follows:

Trust Account Excess ” means an amount, in U.S. Dollars, equal to, immediately prior to the Closing (and after taking into account payments for the Redemption), the greater of (i) zero (0) and (ii) the following:

(a)       the funds, in U.S. Dollars, if any, remaining in the Trust Account, plus

(b)      the proceeds, in U.S. Dollars, if any, received by the Purchaser from the PIPE Investment, including pursuant to sales of any Backstop Shares (as defined in the Backstop and Subscription Agreement) purchased by the Sponsor (and/or any assignee of Sponsor under the Backstop and Subscription Agreement) under the Backstop and Subscription Agreement, less

(c)       Twenty-Four Million U.S. Dollars ($24,000,000).

b.             Section 1.14 of the Agreement is hereby amended and replaced to read in its entirety as follows:

“1.14       Escrow.

(a)       At or prior to the Closing, the Purchaser Representative, the Seller Representative and an escrow agent mutually acceptable to the Company and the Purchaser, acting reasonably (the “ Escrow Agent ”), shall enter into one or more Escrow Agreements, effective as of the Effective Time, in form and substance reasonably satisfactory to the Parties (each, an “ Escrow Agreement ”), pursuant to which the Purchaser shall (i) issue to the Escrow Agent four percent (4%) of the number of Merger Consideration Shares equal to (A) the Merger Consideration Shares less (B) the Guarantee Escrow Shares less (C) the Net Income Escrow Shares (if any) (such resulting Merger Consideration Shares, together with any equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or converted, the “ Indemnity Escrow Shares ”) to be held, along with any other dividends, distributions or other income on the Indemnity Escrow Shares (together with the Indemnity Escrow Shares, the “ Indemnity Escrow Property ”), by the Escrow Agent in a segregated escrow account (the “ Indemnity Escrow Account ”) and disbursed therefrom in accordance with the terms of Article VI hereof and such Escrow Agreement applicable to the Indemnity Escrow Shares, (ii) issue to the Escrow Agent a number of Merger Consideration Shares equal to the Guarantee Escrow Share Amount (together with any equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or converted, the “ Guarantee Escrow Shares ”) to be held by the Escrow Agent in a segregated escrow account (the “ Guarantee Escrow Account ”) and disbursed therefrom in accordance with the terms of Article XII hereof and such Escrow Agreement

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applicable to the Guarantee Escrow Shares, and (iii) if the Net Income Escrow Share Amount is not zero, issue to the Escrow Agent a number of Merger Consideration Shares equal to the Net Income Escrow Share Amount (together with any equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or converted, the “ Net Income Escrow Shares ”, and together with the Guarantee Escrow Shares and the Indemnity Escrow Shares, the “ Escrow Shares ”) to be held by the Escrow Agent in a segregated escrow account (the “ Net Income Escrow Account ” and, the Indemnity Escrow Account, the Guarantee Escrow Account, and the Net Income Escrow Account are collectively referred to herein as the “ Escrow Account ”) and disbursed therefrom in accordance with the terms of Article XII hereof and such Escrow Agreement applicable to the Net Income Escrow Shares.

(b)      The Indemnity Escrow Property shall be allocated among and transferred to the Company Shareholders pro rata based on their respective Pro Rata Share. The Indemnity Escrow Property shall serve as a security for, and a source of payment of, the Indemnified Parties’ indemnity rights pursuant to Article VI. Unless otherwise required by Law, all distributions made from the Indemnity Escrow Account shall be treated by the Parties as an adjustment to the number of Merger Consideration Shares received by the Company Shareholders pursuant to Article I hereof.

(c)       The Indemnity Escrow Property shall not be subject to any indemnification claim to the extent made after the date which is eighteen (18) months after the Closing Date (the “ Expiration Date ”); provided, however, with respect to any indemnification claims made in accordance with Article VI hereof on or prior to the Expiration Date (including those at are revised or adjusted in accordance with Article VI after the Expiration Date) that remain unresolved at the time of the Expiration Date (“ Pending Claims ”), all or a portion of the Indemnity Escrow Property reasonably necessary to satisfy such Pending Claims (as determined based on the amount of the indemnification claim included in the Claim Notice provided by the Purchaser Representative under Article VI and the Purchaser Share Price as of the Expiration Date) shall remain in the Indemnity Escrow Account until such time as such Pending Claim shall have been finally resolved pursuant to the provisions of Article VI . After the Expiration Date, any Indemnity Escrow Property remaining in the Indemnity Escrow Account that is not subject to Pending Claims, if any, and not subject to resolved but unpaid claims in favor of an Indemnified Party, shall be transferred by the Escrow Agent to the Company Shareholders that have previously delivered the Transmittal Documents to the Surviving Company or the Purchaser in accordance with Section 1.9 , with each such Company Shareholder receiving its Pro Rata Share of such Indemnity Escrow Property. Promptly after the final resolution of all Pending Claims and payment of all indemnification obligations in connection therewith, the Escrow Agent shall transfer any Indemnity Escrow Property remaining in the Indemnity Escrow Account to the Company Shareholders that have previously delivered the Transmittal Documents to the Surviving Company or the Purchaser in accordance with Section 1.9 , with each such Company Shareholder receiving its Pro Rata Share of such Indemnity Escrow Property.

(d)      The Guarantee Escrow Shares shall be allocated as between the Purchaser (for cancellation in connection with the issuance to the Company Shareholders of the Borqs Guarantee Issued Shares) and the Sponsor (and/or any assignee of Sponsor under the Backstop and Subscription Agreement) as set forth in Article XII . While the Guarantee Escrow Shares are held in the applicable Escrow Account, the Sponsor shall be entitled to (i) exercise voting rights with respect to such shares, and (ii) receive dividends (if declared) with respect to the Guarantee Escrow Shares (other than those paid in equity securities, which shall be included as part of the Guarantee Escrow Shares). The Parties shall treat the Sponsor as the owner of the Guarantee Escrow Shares for U.S. federal income Tax purposes. Unless otherwise required by applicable Law, all distributions from the Guarantee Escrow Account to the Sponsor shall be treated by the Parties for Tax purposes as adjustment to the basis of the Sponsor’s investment in Purchaser stock. In the event that the Guarantee Escrow Shares are surrendered by the Escrow Agent to the Purchaser, the surrender shall be treated by the parties as a shareholder contribution to capital for the Sponsor for U.S. federal income Tax purposes. The Guarantee Escrow Shares shall not be subject to release except in accordance with applicable Escrow Agreement and the release procedures set forth in Article XII . If all or any portion of the Guarantee Escrow Shares are allocated to the Purchaser for cancellation in connection with the issuance to the Company Shareholders of the Borqs Guarantee Issued Shares in accordance with A rticle XII , such Guarantee Escrow Shares shall be transferred by the Escrow Agent to the Purchaser by way of surrender or by

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way of compulsory redemption by the Purchaser for nil consideration (both of which methods are hereby agreed and accepted by all parties hereto and will also be agreed to by the Escrow Agent), and the Purchaser shall cancel such shares and issue the equivalent number of the Borqs Guarantee Issued Shares to the Company Shareholders that have previously delivered the Transmittal Documents to the Surviving Company or the Purchaser in accordance with Section 1.9 , with each such Company Shareholder receiving its Pro Rata Share of such shares.

(e)       The Net Income Escrow Shares, if any, shall be distributed to the Company Shareholders or released to the Purchaser (for the purpose of cancellation), as set forth in Article XII . While the Net Income Escrow Shares are held in the applicable Escrow Account, each Company Shareholder shall, according to such Company Shareholder’s Pro Rata Share of the Net Income Escrow Shares, be entitled to (i) exercise voting rights with respect to such shares and (ii) receive dividends (if declared) with respect to the Net Income Escrow Shares (other than those paid in equity securities, which shall be included as part of the Net Income Escrow Shares). The Parties shall treat the Company Shareholders as the owners of the Net Income Escrow Shares for U.S. federal income Tax purposes. Unless otherwise required by Law, all distributions made from the Net Income Escrow Account shall be treated by the Parties for Tax purposes as an adjustment to the number of Merger Consideration Shares received by the Company Shareholders pursuant to Article I hereof. The Net Income Escrow Shares shall not be subject to release except in accordance with the applicable Escrow Agreement and the release procedures set forth in Article XII . If all or any portion of the Net Income Escrow Shares are allocated to the Company Shareholders in accordance with Article XII , such Net Income Escrow Shares shall be transferred by the Escrow Agent to the Company Shareholders that have previously delivered the Transmittal Documents to the Surviving Company or the Purchaser in accordance with Section 1.9 , with each such Company Shareholder receiving its Pro Rata Share of such Net Income Escrow Shares. Any or all portions of the Net Income Escrow Shares that are not allocated to the Company Shareholders in accordance with Article XII shall be returned to the Purchaser by way of surrender or by way of compulsory redemption by the Purchaser for nil consideration (both of which methods are hereby agreed and accepted by all parties hereto and will also be agreed to by the Escrow Agent) and immediately cancelled by the Purchaser in accordance with Article XII .

c.             Section 5.18 of the Agreement is hereby amended to add the following immediately prior to the period at the end of the first sentence thereof: “and (iii) to pay any loans owed by the Purchaser to the Sponsor for any reasonable Expenses, Deferred Expenses or other administrative expenses incurred by the Purchaser”.

d.             Sections 6.3 and 6.4 of the Agreement is hereby amended such that all references to “Escrow Shares” in Section 6.3 and 6.4 shall instead be replaced with references to “Indemnity Escrow Shares”.

e.             Sections 6.2 , 6.3 and 6.4 of the Agreement is hereby amended such that all references to “Escrow Property” such sections shall instead be replaced with references to “Indemnity Escrow Property”.

f.              Sections 6.2 , 6.3 and 6.4 of the Agreement is hereby amended such that all references to “Escrow Account” such sections shall instead be replaced with references to “Indemnity Escrow Account”.

g.             Sections 7.2 and 7.3 of the Agreement is hereby amended such that all references to “the Escrow Agreement” in such sections shall instead be replaced with references to “one or more Escrow Agreements, either individually or collectively, as the case may be, governing the terms of the (A) Indemnity Escrow Property, (B) the Guarantee Escrow Shares, and (C) the Net Income Escrow Shares”.

h.             Section 7.2(f) of the Agreement is hereby amended to add after the word “Expenses” on the third line thereof the following: “or payment of any Deferred Expenses or other reasonable administrative expenses incurred by the Purchaser or loans owed by the Purchaser to the Sponsor for any of the foregoing”.

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i.               Sections 3.17 , 10.14 and 10.15 of the Agreement is hereby amended such that all references to “the Escrow Agreement” in Sections 3.17 , 10.14 and 10.15 shall instead be replaced with references to “each of the Escrow Agreements, as may be applicable from time to time”.

j.               A new Article XII is added to the Agreement to read in its entirety as follows:

ARTICLE XII. EARNOUT

12.1         Earnout Determination Procedures . The Adjusted Net Income and allocation of the Total Available Earnout Shares shall be calculated and determined, and the Total Available Earnout Shares distributed, in the following manner.

(a)       Within ninety (90) days after the end of the Earnout Period, the Purchaser shall, at its expense, prepare and deliver to the Seller Representative and the Purchaser Representative an audited consolidated income statement for the Earnout Period, prepared in accordance with the Accounting Principles and setting forth the Net Income, audited by the Purchaser’s independent auditors (or other independent auditors reasonably acceptable to the Purchaser Representative and the Seller Representative) (the “ Earnout Financials ”). The Earnout Financials shall be reasonably detailed with appropriate footnotes, including those reasonably necessary to calculate the adjustments to Net Income necessary to determine the Adjusted Net Income.

(b)      Promptly after its receipt of the Earnout Financials, but in any event, within thirty (30) days thereafter, the Seller Representative shall prepare in good faith and deliver to the Purchaser Representative a written statement (the “ Earnout Statement ”) showing in reasonable detail its calculations, based on the Earnout Financials and this Agreement of (i) the Adjusted Net Income for the Earnout Period and (ii) the resulting (A) Backstop Guarantee Escrow Share Amount, (B) Borqs Guarantee Escrow Share Amount, and (C) Borqs Net Income Escrow Share Amount (collectively, the Backstop Guarantee Escrow Share Amount, the Borqs Guarantee Escrow Share Amount, and the Borqs Net Income Escrow Share Amount are referred to herein as the “ Earnout Shares ”), in each case, as applicable and if any. The Earnout Statement shall be accompanied by appropriate and reasonable documentation supporting the amounts and number proposed in such statement reasonably sufficient for the Purchaser Representative to verify the information contained therein.

(c)       In the event of any objection by the Purchaser Representative with respect to any of the content or conclusions set forth in the Earnout Statement, the Purchaser Representative shall, within sixty (60) days after its receipt of the Earnout Statement, give written notice to the Seller Representative (with copy to the Purchaser) of such objection showing in reasonable detail the calculation thereof (an “ Earnout Dispute Notice ”). The Purchaser Representative and the Seller Representative shall thereafter attempt to amicably resolve any disputed items set forth in such Earnout Dispute Notice. If the Purchaser Representative does not timely delivery an Earnout Dispute Notice, then the calculation of the Adjusted Net Income and the Earnout Shares as set forth in the Earnout Statement shall be deemed to have been accepted and shall be final and binding on all parties hereto.

(d)      If, for any reason, the Purchaser Representative and the Seller Representative cannot resolve any disputed items indicated in an Earnout Dispute Notice within thirty (30) days of the date of delivery of the Earnout Dispute Notice, then such unresolved items shall be resolved at the Purchaser’s expense, by any one of Deloitte Touche Tohmatsu Limited, PricewaterhouseCoopers, Ernst & Young or KPMG or such other internationally recognized accounting firm reasonably acceptable to the Purchaser Representative and the Seller Representative, in each case, that is not the independent auditor for any of Purchaser, the Seller Representative, or Purchaser Representative, and is otherwise reasonably agreed by the Purchaser Representative and the Seller Representative to be independent and impartial, or any other internationally recognized accounting firm reasonably acceptable to the Purchaser Representative and the Seller Representative (the “ Referee ”).

(e)       The Referee shall issue a written report which shall include a revised Earnout Statement as adjusted (i) pursuant to any resolutions to objections agreed upon by the Purchaser Representative and the Seller Representative and (ii) pursuant to the Referee’s resolution of the unresolved objections. The Referee shall review only those matters specified in the unresolved objections and shall make no

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changes to the Earnout Statement, except as are required to resolve the unresolved objections. The award of the Referee shall set out the final Earnout Statement, shall be final and binding on all parties hereto, and may be enforced in any court of competent jurisdiction. The parties agree that the procedure set forth in this Section 12.1 for resolving disputes with respect to the Earnout Statement shall be the sole and exclusive method for resolving any such disputes.

(f)       In connection with the preparation and review of the Earnout Statement, and until the final resolution of the Earnout Statement, the Purchaser shall, and shall cause its Subsidiaries and Representatives to, (i) provide the Purchaser Representative and the Seller Representative, and each of their respective authorized Representatives with reasonable access, during normal business hours upon reasonable advance notice, to the relevant books and records for the purposes of the review and objection right contemplated herein and the determination of the Adjusted Net Income and the allocation of the Earnout Shares, the Purchaser’s and its accountants’ work papers, schedules and other supporting data, facilities and employees responsible for the preparation of the Earnout Statement as may reasonably be requested by the Purchaser Representative and/or the Seller Representative; and (ii) otherwise reasonably cooperate with the Purchaser Representative and the Seller Representative, and each of their respective authorized Representatives, including by providing on a timely basis information reasonably necessary in the determination of the calculations and amounts set forth in the Earnout Statement.

12.2         Earnout Release Procedures .

(a)       Promptly (and, in any case, within five (5) Business Days) after the Purchaser Representative and the Seller Representative agree to the Earnout Statement or receive from the Referee its final written report, as applicable, in each case pursuant to Section 12.1, the Purchaser Representative and the Seller Representative shall execute and deliver joint written instructions to the Escrow Agent instructing the Escrow Agent to release the applicable Earnout Shares (less any Additional Indemnity Escrow Shares (as defined below)) in accordance with the terms of this Agreement and the applicable Escrow Agreements.

(b)      If the Company Shareholders are entitled to receive the Borqs Guarantee Escrow Share Amount, the Escrow Agent shall deliver the applicable Guarantee Escrow Shares from the Escrow Account to the Purchaser by way of surrender or by way of compulsory redemption by the Purchaser for nil consideration (both of which methods are hereby agreed and accepted by all parties hereto and will also be agreed to by the Escrow Agent), for cancellation by the Purchaser (which cancellation shall occur within three (3) Business Days after the Purchaser’s receipt of such shares), and the Purchaser shall promptly thereafter (but in any event, within three (3) Business Days after the Purchaser’s receipt of such shares) authorize and issue a number of new Purchaser Ordinary Shares equal to the Borqs Guarantee Escrow Share Amount, with such shares equal and identical in all material respects (including in rights, voting, privileges, and preferences) as the Guarantee Escrow Shares (the “ Borqs Guarantee Issued Shares ”), to the Company Shareholders; provided, that notwithstanding the foregoing, the Purchaser shall deliver four percent (4%) of the Borqs Guarantee Issued Shares (the “ Guarantee Additional Indemnity Escrow Shares ”) to the Escrow Agent for deposit in the Indemnity Escrow Account, with such Guarantee Additional Indemnity Escrow Shares being treated and held as Indemnity Escrow Shares in accordance with this Agreement and the Escrow Agreement. The Borqs Guarantee Issued Shares shall be issued to each Company Shareholder that previously delivered the Transmittal Documents to the Surviving Company or the Purchaser in accordance with Section 1.9, with each such Company Shareholder receiving its Pro Rata Share of the Borqs Guarantee Issued Shares (less the Guarantee Additional Indemnity Escrow Shares).

(c)       Notwithstanding anything to the contrary in this Agreement, upon release from the Net Income Escrow Account, the Escrow Agent shall retain four percent (4%) of the Borqs Net Income Escrow Share Amount (the “ Net Income Additional Indemnity Escrow Shares ” and together with the Guarantee Additional Indemnity Escrow Shares, the “ Additional Indemnity Escrow Shares ”) and deposit such Net Income Additional Indemnity Escrow Shares in the Indemnity Escrow Account, with such shares being treated and held as Indemnity Escrow Shares in accordance with this Agreement and the Escrow Agreement.

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(d)      For the avoidance of doubt, (i) Sponsor (and/or any assignee of Sponsor under the Backstop and Subscription Agreement) shall receive the Backstop Guarantee Escrow Share Amount, if any, (ii) the Company Shareholders shall receive the Borqs Guarantee Escrow Share Amount (through the Borqs Guarantee Issued Shares from the Purchaser) and the Borqs Net Income Escrow Share Amount, with each Company Shareholder receiving its Pro Rata Share, in each case, less the Additional Indemnity Escrow Shares, and (iii) the portion, if any, of the Net Income Escrow Shares that is not the Borqs Net Income Escrow Share Amount shall be released to the Purchaser by way of surrender or by way of compulsory redemption by the Purchaser for nil consideration (both of which methods are hereby agreed and accepted by all parties hereto and will also be agreed to by the Escrow Agent), and the Purchaser shall immediately cancel such shares.

(e)       The Parties acknowledge and agree that, for Tax purposes, the delivery or issuance of the Earnout Shares (if any) to the Company Shareholders will be treated as an adjustment to the Merger Consideration Shares subject to any portion of such amount payable to the Company Shareholders with respect to the Borqs Guarantee Escrow Share Amount being treated as interest under Section 483 of the Code; provided, however, that for the avoidance of doubt, no interest will be imputed with respect to the Borqs Net Income Escrow Share Amount.

12.3         Future Operations . Following the Closing (including during the Earnout Period), the Purchaser and its Affiliates, including the Target Companies, will be entitled to operate their respective businesses based upon the business requirements of the Purchaser and its Affiliates. Each of the Purchaser and its Affiliates, including the Target Companies, will be permitted, following the Closing (including during the Earnout Period), to make changes at their sole discretion to their operations, organization, personnel, accounting practices and other aspects of their business, including actions that may have an impact on the Adjusted Net Income and the ability of the Company Shareholders to earn the Earnout Shares, and neither the Company Shareholders nor any other Person will have no right to claim the loss of all or any portion of an Earnout Shares or other damages as a result of such decisions; provided, that the Purchaser shall comply with the terms of the Amended Charter.

12.4         Future Operations . Without limiting Sections 5.13(a) and 5.17(a) hereof, the Parties agree that the Amended Charter will contain, subject to any applicable Law, a provision providing that with respect to any acquisition of a business or entity from a third party during the Earnout Period by Purchaser or its Subsidiaries, including by merger, consolidation, acquisition of stock or assets, or any other form of business combination, of any entity or any division thereof, or any material amount of assets outside the ordinary course of business (any of the foregoing, an “ Earnout Period Acquisition ”): (i) if such Earnout Period Acquisition involves aggregate consideration payable by the Purchaser and its Subsidiaries (in whatever form) in excess of sixty million U.S. dollars ($60,000,000), such Earnout Period Acquisition will need to be approved by at least two-thirds (2/3rds) of the then-serving directors on the Post-Closing Purchaser Board; (ii) the Purchaser will need to notify the Sponsor and the Purchaser Representative about such Earnout Period Acquisition, including the counterparties and the material terms thereof, reasonably in advance of entering into a binding commitment for or consummating such Earnout Period Acquisition, and will keep them reasonably informed as to the status of the potential Earnout Period Acquisition, including any material changes to the price or other material terms thereof; and (iii) prior to entering into a binding commitment for or consummating such Earnout Period Acquisition, if requested by the Sponsor or the Purchaser Representative, the Purchaser will obtain a fairness opinion with respect to such potential Earnout Period Acquisition from an internationally or United States nationally recognized third party valuation expert reasonably acceptable to each of the Purchaser, the Sponsor and the Purchaser Representative.”

3.             Effect of Amendment . The provisions of the Agreement are amended and modified by the provisions of this Amendment. If any provision of the Agreement is materially different from or inconsistent with any provision of this Amendment, the provision of this Amendment shall control, and the provision of the Agreement shall, to the extent of such difference or inconsistency, be disregarded. Except as expressly provided in this Amendment, all of the terms and provisions in the Agreement and the Ancillary Documents are and shall remain in full force and effect, on the terms and subject to the conditions set forth therein. This Amendment does not constitute, directly or by implication, an amendment or waiver of any provision of the Agreement or any Ancillary Document, or any other right,

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remedy, power or privilege of any party thereto, except as expressly set forth herein. For the avoidance of doubt, and notwithstanding anything in this Amendment, to the extent any of the provisions of this Amendment, or any of the matters contemplated hereby, conflict with, or require (or are subject to) disclosure by the Company, the Purchaser or Merger Sub pursuant to the Agreement, or if any such non-disclosure or any other term of this Amendment would constitute an inaccuracy or breach of any of the representations, warranties or covenants of the Company, the Purchaser or Merger Sub in the Agreement, such conflict, requirement or breach is hereby waived.

4.             Single Agreement . This Amendment and the Agreement, as amended and modified by the provisions of this Amendment, shall constitute and shall be construed as a single agreement. The provisions of the Agreement, as amended and modified by the provisions of this Amendment, are incorporated herein by this reference and are ratified and affirmed. The term “Agreement” as used in the Agreement shall be deemed to refer to the Agreement as amended hereby.

5.             Entire Agreement . The Agreement, as amended and modified by this Amendment, and the documents or instruments referenced herein, including the Backstop and Subscription Agreement to the extent incorporated herein, constitutes the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements and understandings, both oral and written, between the parties with respect to its subject matter.

6.             Miscellaneous . Sections 10.1 through 10.10 , 10.12 and 10.13 of the Agreement are hereby incorporated herein by reference and apply to this Amendment as if all references to the “Agreement” contained therein were instead references to this Amendment.

[Signature Page to Follow]

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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.

 

 

The Purchaser:

 

 

 

 

 

 

 

PACIFIC SPECIAL ACQUISITION CORP.

 

 

 

 

 

 

 

By:

 

/s/ Yaqi Feng

 

 

 

 

Name: Yaqi Feng

 

 

 

 

Title: COO

 

 

 

 

 

 

 

The Purchaser Representative:

 

 

 

 

 

 

 

ZHENGQI INTERNATIONAL HOLDING LIMITED ,
solely in its capacity as the Purchaser Representative

 

 

 

 

 

 

 

By:

 

/s/ Zhouhong Peng

 

 

 

 

Name: Zhouhong Peng, for and on behalf of Zhengqi International Holding Limited

 

 

 

 

Title: Director

 

 

 

 

 

 

 

The Company:

 

 

 

 

 

 

 

BORQS INTERNATIONAL HOLDING CORP

 

 

 

 

 

 

 

By:

 

/s/ Pat Chan

 

 

 

 

Name: Pat Chan

 

 

 

 

Title: Chief Executive Officer

 

 

 

 

 

 

 

The Seller Representative:

 

 

 

 

 

 

 

/s/ Zhengdong Zou

 

 

Zhengdong Zou , solely in its capacity as the Seller Representative

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Second Amendment to Merger Agreement

This Second Amendment to Merger Agreement (this “ Amendment ”), dated as of June 29, 2017, is entered into by and among (i) Pacific Special Acquisition Corp. , a British Virgin Islands business company with limited liability (the “ Purchaser ”), (ii) Zhengqi International Holding Limited , a company incorporated in the British Virgin Islands, in the capacity under the Agreement (as defined below) as the Purchaser Representative (the “ Purchaser Representative ”), (iii) Zhengdong Zou , in the capacity under the Agreement as the Seller Representative (the “ Seller Representative ”), and (iv) Borqs International Holding Corp , an exempted company incorporated under the laws of the Cayman Islands with limited liability (the “ Company ”).

Whereas , Purchaser, the Company, the Purchaser Representative, the Seller Representative, PAAC Merger Subsidiary Limited, an exempted company incorporated under the laws of the Cayman Islands with limited liability and a wholly-owned subsidiary of the Purchaser (“ Merger Su b ”), and, for limited purposes thereof, Zhengqi International Holding Limited, a business company incorporated in the British Virgin Islands with limited liability (“ Sponsor ”), are parties to that certain Merger Agreement, dated as of December 27, 2016 (as amended by the First Amendment to Merger Agreement, dated as of May 10, 2017 (the “ First Amendment ”), the “ Agreement ”);

Whereas , Purchaser, the Company, the Purchaser Representative, and the Seller Representative desire to amend the Agreement on the terms and conditions set forth herein;

Whereas , Section 10.9 of the Agreement provides that the Agreement may be amended by authorized action of Purchaser, the Company, the Purchaser Representative, and the Seller Representative; and

Whereas , as contemplated by the PIPE Investment referenced in the Agreement, the parties are seeking potential third party equity financing pursuant to private placements or commitments made by qualified institutional buyers or institutional accredited investors under backstop and subscription agreements to be entered into by Purchaser and such investors, pursuant to which each such investor will agree to purchase or otherwise continue to own through the Closing and not redeem in connection with the Redemption (or otherwise) a certain specified dollar amount of Purchaser Ordinary Shares as set forth therein, with such purchases being through (i) open market or privately negotiated transactions with third parties (with such investor not obligated to pay a price of greater than $10.40 per share), (ii) a private placement at a price of $10.40 per share to be consummated concurrently with the Closing or (iii) a combination thereof.

Now, Therefore , in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth below and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows:

1.              Definitions . Capitalized terms used and not otherwise defined herein (including in the recitals hereto) shall have the meanings assigned to them in the Agreement.

2.              Amendments .

a.              Section 11.1 of the Agreement is hereby amended as follows:

i.          to insert the following defined terms, each defined as follows:

Aggregate Satisfied Commitment Amount ” means the aggregate of the Satisfied Commitment Amounts under all Commitment Agreements.

Borqs Commitment Escrow Share Amount ” means the following portion of the Commitment Escrow Shares:

(i)      if the Adjusted Net Income is less than the Net Income Floor, then zero (0);

(ii)       if the Adjusted Net Income is greater than the Net Income Target, then 100% of the Commitment Escrow Shares; and

(iii)      if the Adjusted Net Income is greater than the Net Income Floor but less than the Net Income Target, a percentage of the Commitment Escrow Shares equal to the Partial Net Income Achievement Percentage.

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Commitment Agreement ” means a backstop and subscription agreement to be entered into by the Purchaser and a Commitment Investor, in form and substance reasonably acceptable to the Purchaser and the Company, pursuant to which the Commitment Investor will commit to purchase or otherwise continue to own Purchaser Ordinary Shares through the Closing and not redeem in connection with the Redemption (or otherwise), with such purchases being through (i) open market or privately negotiated transactions with third parties (with the Commitment Investor not obligated to pay a price of greater than $10.40 per share), (ii) a private placement at a price of $10.40 per share to be consummated concurrently with the Closing or (iii) a combination thereof.

Commitment Escrow Share Amount ” means a total number of Purchaser Ordinary Shares equal to the product of (i) the Aggregate Satisfied Commitment Amount, multiplied by (ii) the Earnout Share Ratio.

Commitment Escrow Shares Sourced from the Guarantee Escrow ” means a number of Purchaser Ordinary Shares equal to the product of (i) the Commitment Escrow Share Amount, multiplied by (ii) the quotient of (A) the difference between the (I) the Aggregate Satisfied Commitment Amount less (II) the amount, if any, by which the Public Shareholders Funded Amount exceeds $24,000,000, divided by (B) the Aggregate Satisfied Commitment Amount; provided , that (Y) if the Aggregate Satisfied Commitment Amount is equal to zero (0), then the Commitment Escrow Shares Sourced from the Guarantee Escrow will be equal to zero (0), and (Z) in no case shall the Commitment Escrow Shares Sourced from the Guarantee Escrow be less than zero (0).

Commitment Investor ” means a qualified institutional buyer or institutional accredited investor who enters into a Commitment Agreement with the Purchaser.

Commitment Investor Percentage ” means, with respect to each Commitment Investor, a fraction, expressed as a percentage, equal to (i) the Satisfied Commitment Amount for such Commitment Investor, divided by (ii) the Aggregate Satisfied Commitment Amount.

Commitment Investors Commitment Escrow Share Amount ” means the following portion of the Commitment Escrow Shares:

(i)      if the Adjusted Net Income is less than the Net Income Floor, then 100% of the Commitment Escrow Shares;

(ii)     if the Adjusted Net Income is greater than the Net Income Target, then zero (0); and

(iii)    if the Adjusted Net Income is greater than the Net Income Floor but less than the Net Income Target, a percentage of the Commitment Escrow Shares equal to the difference between (A) one hundred percent (100%) and (B) the Partial Net Income Achievement Percentage.

Earnout Share Ratio ” means 0.0445931045.

Minimum Guarantee Escrow Share Amount ” means 1,282,051 Purchaser Ordinary Shares.

Post-Redemption ” means the time immediately prior to the Closing after giving effect to the Redemption or other pre-Closing Purchaser redemptions (if any).

Public Shareholders Funded Amount ” means the funds, in U.S. Dollars, if any, remaining in the Trust Account as of Post-Redemption (but excluding any payments for amounts as contemplated by Section 5.18 of the Agreement) that are not attributable to Purchaser Ordinary Shares held by (i) the Commitment Investors under the Commitment Agreements or (ii) the Sponsor (and/or any assignee of Sponsor) under the Backstop Agreement.

Satisfied Commitment Amount ” means, for each Commitment Investor, the U.S. dollar amount of Purchaser Ordinary Shares that such Commitment Investor (i) committed under its Commitment Agreement to purchase or otherwise continue to own through the Closing and not redeem in connection with the Redemption or any redemption in connection with the Extension (if any) and (ii) actually owns Post-Redemption (on the same cost basis).

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ii.                   to amend each of the defined terms “Guarantee Escrow Share Amount” and “Net Income Escrow Share Amount” by deleting such definitions in their entirety and replacing such definitions with the following:

Guarantee Escrow Share Amount ” means a total number of Purchaser Ordinary Shares equal to the difference between (i) 2,352,285 less (ii) the Commitment Escrow Shares Sourced from the Guarantee Escrow; provided , that the Guarantee Escrow Share Amount shall in no case be less than the Minimum Guarantee Escrow Share Amount.

Net Income Escrow Share Amount ” means a total number of Purchaser Ordinary Shares equal to the greater of (a) zero (0) and (b) the difference of (i) the Total Available Earnout Shares less (ii) the sum of (A) the Guarantee Escrow Share Amount, plus (B) the Commitment Escrow Share Amount.

b.              Section 1.14 of the Agreement is hereby amended as follows:

i.          to delete subsection (a) thereof and replace it entirety with the following:

“(a)     At or prior to the Closing, the Purchaser Representative, the Seller Representative and an escrow agent mutually acceptable to the Company and the Purchaser, acting reasonably (the “ Escrow Agent ”), shall enter into one or more Escrow Agreements, effective as of the Effective Time, in form and substance reasonably satisfactory to the Parties (each, an “ Escrow Agreement ”), pursuant to which the Purchaser shall (i) issue to the Escrow Agent four percent (4%) of the number of Merger Consideration Shares equal to (A) the Merger Consideration Shares less (B) the Guarantee Escrow Shares, less (C) the Commitment Escrow shares, less (D) the Net Income Escrow Shares (if any) (such resulting Merger Consideration Shares, together with any equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or converted, the “ Indemnity Escrow Shares ”) to be held, along with any other dividends, distributions or other income on the Indemnity Escrow Shares (together with the Indemnity Escrow Shares, the “ Indemnity Escrow Property ”), by the Escrow Agent in a segregated escrow account (the “ Indemnity Escrow Account ”) and disbursed therefrom in accordance with the terms of Article VI hereof and such Escrow Agreement applicable to the Indemnity Escrow Shares, (ii) issue to the Escrow Agent a number of Merger Consideration Shares equal to the Guarantee Escrow Share Amount (together with any equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or converted, the “ Guarantee Escrow Shares ”) to be held by the Escrow Agent in a segregated escrow account (the “ Guarantee Escrow Account ”) and disbursed therefrom in accordance with the terms of Article XII hereof and such Escrow Agreement applicable to the Guarantee Escrow Shares, (iii) if the Commitment Escrow Share Amount is not zero, issue to the Escrow Agent a number of Merger Consideration Shares equal to the Commitment Escrow Share Amount (together with any equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or converted, the “ Commitment Escrow Shares ”) to be held by the Escrow Agent in a segregated escrow account (the “ Commitment Escrow Account ”) and disbursed therefrom in accordance with the terms of Article XII hereof and such Escrow Agreement applicable to the Commitment Escrow Shares, and (iv) if the Net Income Escrow Share Amount is not zero, issue to the Escrow Agent a number of Merger Consideration Shares equal to the Net Income Escrow Share Amount (together with any equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or converted, the “ Net Income Escrow Shares ”, and together with the Guarantee Escrow Shares, the Commitment Escrow Shares and the Indemnity Escrow Shares, the “ Escrow Shares ”) to be held by the Escrow Agent in a segregated escrow account (the “ Net Income Escrow Account ” and, the Indemnity Escrow Account, the Guarantee Escrow Account, the Commitment Escrow Account and the Net Income Escrow Account are collectively referred to herein as the “ Escrow Account ”) and disbursed therefrom in accordance with the terms of Article XII hereof and such Escrow Agreement applicable to the Net Income Escrow Shares.”

ii.   to add the following new subsection (f):

“(f)     The Commitment Escrow Shares shall be allocated as between the Purchaser (for cancellation in connection with the issuance to the Company Shareholders of the Borqs Commitment Issued Shares) and the Commitment Investors as set forth in Article XII . While the Commitment Escrow Shares are held in the Commitment Escrow Account, each Commitment Investor shall, in

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accordance with its Commitment Investor Percentage of the Commitment Escrow Shares, be entitled to (i) exercise voting rights with respect to such shares, and (ii) receive dividends (if declared) with respect to the Commitment Escrow Shares (other than those paid in equity securities, which shall be included as part of the Commitment Escrow Shares). The Parties shall treat the Commitment Investors as the owner of the Commitment Escrow Shares for U.S. federal income Tax purposes. Unless otherwise required by applicable Law, all distributions from the Commitment Escrow Account to the Commitment Investors shall be treated by the Parties for Tax purposes as adjustment to the basis of the Commitment Investors’ investment in Purchaser stock. In the event that the Commitment Escrow Shares are surrendered by the Escrow Agent to the Purchaser, the surrender shall be treated by the parties as a shareholder contribution to capital for the Commitment Investors for U.S. federal income Tax purposes. The Commitment Escrow Shares shall not be subject to release except in accordance with applicable Escrow Agreement and the release procedures set forth in Article XII . If all or any portion of the Commitment Escrow Shares are allocated to the Purchaser for cancellation in connection with the issuance to the Company Shareholders of the Borqs Commitment Issued Shares in accordance with Article XII , such Commitment Escrow Shares shall be transferred by the Escrow Agent to the Purchaser by way of surrender or by way of compulsory redemption by the Purchaser for nil consideration (both of which methods are hereby agreed and accepted by all parties hereto and will also be agreed to by the Escrow Agent), and the Purchaser shall cancel such shares and issue the equivalent number of the Borqs Commitment Issued Shares to the Company Shareholders that have previously delivered the Transmittal Documents to the Surviving Company or the Purchaser in accordance with Section 1.9 , with each such Company Shareholder receiving its Pro Rata Share of such shares.”

c.              Sections 7.2 and 7.3 of the Agreement (as amended by the First Amendment) is hereby amended to replace the following phrase each time it appears therein “and (C) the Net Income Escrow Shares” with the following “(C) the Commitment Escrow Shares, and (D) the Net Income Escrow Shares”.

d.              Section 12.1(b) of the Agreement is hereby amended to delete such section in its entirety and replace it with the following:

“(b)     Promptly after its receipt of the Earnout Financials, but in any event, within thirty (30) days thereafter, the Seller Representative shall prepare in good faith and deliver to the Purchaser Representative a written statement (the “ Earnout Statement ”) showing in reasonable detail its calculations, based on the Earnout Financials and this Agreement of (i) the Adjusted Net Income for the Earnout Period and (ii) the resulting (A) Backstop Guarantee Escrow Share Amount, (B) Borqs Guarantee Escrow Share Amount, (C), Commitment Investors Commitment Escrow Share Amount, (D) Borqs Commitment Escrow Share Amount, (E) Borqs Net Income Escrow Share Amount and (F) portion, if any, of the Net Income Escrow Shares that is not the Borqs Net Income Escrow Share Amount (collectively, with the Backstop Guarantee Escrow Share Amount, the Borqs Guarantee Escrow Share Amount, the Commitment Investors Commitment Escrow Share Amount, the Borqs Commitment Escrow Share Amount and the Borqs Net Income Escrow Share Amount, the “ Earnout Shares ”), in each case, as applicable and if any. The Earnout Statement shall be accompanied by appropriate and reasonable documentation supporting the amounts and number proposed in such statement reasonably sufficient for the Purchaser Representative to verify the information contained therein.”

e.              Section 12.2 of the Agreement is hereby amended as follows:

i.    to amend subsection (c) thereof to add after the phrase “Guarantee Additional Indemnity Escrow Shares” the following: “and the Commitment Additional Indemnity Escrow Shares”.

ii.   to delete subsection (d) thereof in its entirety and replace it with the following

“(d)     For the avoidance of doubt, (i) Sponsor (and/or any assignee of Sponsor under the Backstop Agreement) shall receive the Backstop Guarantee Escrow Share Amount, if any, (ii) each Commitment Investor shall receive its Commitment Investor Percentage of the Commitment Investors Commitment Escrow Share Amount, if any, (iii) the Company Shareholders shall receive (A) the Borqs Guarantee Escrow Share Amount (through the Borqs Guarantee Issued Shares from the Purchaser), (B) the Borqs Commitment Escrow Share Amount (through the Borqs Commitment Issued Shares (as defined below) from the Purchaser), and (C) the Borqs Net Income Escrow Share Amount, in each case

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if any, with each Company Shareholder receiving its Pro Rata Share, in each case, less the Additional Indemnity Escrow Shares, and (iv) the portion, if any, of the Net Income Escrow Shares that is not the Borqs Net Income Escrow Share Amount shall be released to the Purchaser by way of surrender or by way of compulsory redemption by the Purchaser for nil consideration (both of which methods are hereby agreed and accepted by all parties hereto and will also be agreed to by the Escrow Agent), and the Purchaser shall immediately cancel such shares.”

iii. to amend subjection (e) thereof to add after the phrase “the Borqs Guarantee Escrow Share Amount” the following: “or the Borqs Commitment Escrow Share Amount”.

iv. to add the following new subsection (f):

(f)       If the Company Shareholders are entitled to receive the Borqs Commitment Escrow Share Amount, the Escrow Agent shall deliver the applicable Commitment Escrow Shares from the Escrow Account to the Purchaser by way of surrender or by way of compulsory redemption by the Purchaser for nil consideration (both of which methods are hereby agreed and accepted by all parties hereto and will also be agreed to by the Escrow Agent), for cancellation by the Purchaser (which cancellation shall occur within three (3) Business Days after the Purchaser’s receipt of such shares), and the Purchaser shall promptly thereafter (but in any event, within three (3) Business Days after the Purchaser’s receipt of such shares) authorize and issue a number of new Purchaser Ordinary Shares equal to the Borqs Commitment Escrow Share Amount, with such shares equal and identical in all material respects (including in rights, voting, privileges, and preferences) as the Commitment Escrow Shares (the “ Borqs Commitment Issued Shares ”), to the Company Shareholders; provided, that notwithstanding the foregoing, the Purchaser shall deliver four percent (4%) of the Borqs Commitment Issued Shares (the “ Commitment Additional Indemnity Escrow Shares ”) to the Escrow Agent for deposit in the Indemnity Escrow Account, with such Commitment Additional Indemnity Escrow Shares being treated and held as Indemnity Escrow Shares in accordance with this Agreement and the Escrow Agreement. The Borqs Commitment Issued Shares shall be issued to each Company Shareholder that previously delivered the Transmittal Documents to the Surviving Company or the Purchaser in accordance with Section 1.9, with each such Company Shareholder receiving its Pro Rata Share of the Borqs Commitment Issued Shares (less the Commitment Additional Indemnity Escrow Shares).

f.              The parties acknowledge and agree that for purposes of the Agreement, any Purchaser Ordinary Shares purchased from the Purchaser by Commitment Investors pursuant to the Commitment Agreements or by the Sponsor (and/or any assignee of Sponsor under the Backstop Agreement) under the Backstop Agreement shall be part of the PIPE Investment and the shares issued thereunder shall be PIPE Shares.

3.              Effect of Amendment . The provisions of the Agreement are amended and modified by the provisions of this Amendment. If any provision of the Agreement is materially different from or inconsistent with any provision of this Amendment, the provision of this Amendment shall control, and the provision of the Agreement shall, to the extent of such difference or inconsistency, be disregarded. Except as expressly provided in this Amendment, all of the terms and provisions in the Agreement and the Ancillary Documents are and shall remain in full force and effect, on the terms and subject to the conditions set forth therein. This Amendment does not constitute, directly or by implication, an amendment or waiver of any provision of the Agreement or any Ancillary Document, or any other right, remedy, power or privilege of any party thereto, except as expressly set forth herein. For the avoidance of doubt, and notwithstanding anything in this Amendment, to the extent any of the provisions of this Amendment, or any of the matters contemplated hereby, conflict with, or require (or are subject to) disclosure by the Company, the Purchaser or Merger Sub pursuant to the Agreement, or if any such non-disclosure or any other term of this Amendment would constitute an inaccuracy or breach of any of the representations, warranties or covenants of the Company, the Purchaser or Merger Sub in the Agreement, such conflict, requirement or breach is hereby waived.

4.              Single Agreement . This Amendment and the Agreement, as amended and modified by the provisions of this Amendment, shall constitute and shall be construed as a single agreement. The provisions of the Agreement, as amended and modified by the provisions of this Amendment, are incorporated herein by this reference and are ratified and affirmed. The term “Agreement” as used in the Agreement shall be deemed to refer to the Agreement as amended hereby.

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5.              Entire Agreement . The Agreement, as amended and modified by this Amendment, and the documents or instruments referenced herein, including the Backstop Agreement to the extent incorporated herein, constitutes the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements and understandings, both oral and written, between the parties with respect to its subject matter.

6.              Miscellaneous . Sections 10.1 through 10.10 , 10.12 and 10.13 of the Agreement are hereby incorporated herein by reference and apply to this Amendment as if all references to the “Agreement” contained therein were instead references to this Amendment.

[Signature Page to Follow]

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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.

  The Purchaser:
     
  PACIFIC SPECIAL ACQUISITION CORP.
     
  By: /s/ Yaqi Feng
    Name: Yaqi Feng
    Title: COO
     
  The Purchaser Representative:
     
  ZHENGQI INTERNATIONAL HOLDING LIMITED ,
solely in its capacity as the Purchaser Representative
     
  By: /s/ Zhouhong Peng
    Name: Zhouhong Peng
    Title: Director
     
  The Company:
     
  BORQS INTERNATIONAL HOLDING CORP
     
  By: /s/ Pat Chan
    Name: Pat Chan
    Title: Chief Executive Officer
     
  The Seller Representative:
     
  /s/ Zhengdong Zou
  Zhengdong Zou , solely in its capacity as the Seller Representative

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Exhibit 3.1

 

TERRITORY OF THE BRITISH VIRGIN ISLANDS

 

THE BVI BUSINESS COMPANIES ACT 2004

 

MEMORANDUM OF ASSOCIATION

 

OF

 

Borqs Technologies, Inc.

 

a company limited by shares

 

Amended and restated on 14 October 2015, 19 April 2017 and on 18 August 2017

 

1 NAME

 

The name of the Company is Borqs Technologies, Inc.

 

2 STATUS

 

The Company shall be a company limited by shares.

 

3 REGISTERED OFFICE AND REGISTERED AGENT

 

3.1 The first registered office of the Company is at Nemours Chambers, Road Town, Tortola, British Virgin Islands, the office of the first registered agent.

 

3.2 The first registered agent of the Company is Elian Fiduciary Services (BVI) Limited of Nemours Chambers, Road Town, Tortola, British Virgin Islands.

 

3.3 The Company may change its registered office or registered agent by a Resolution of Directors or a Resolution of Members. The change shall take effect upon the Registrar registering a notice of change filed under section 92 of the Act.

 

4 CAPACITY AND POWER

 

4.1 The Company has, subject to the Act and any other British Virgin Islands legislation for the time being in force, irrespective of corporate benefit:

 

(a) full capacity to carry on or undertake any business or activity, do any act or enter into any transaction; and

 

(b) for the purposes of paragraph (a), full rights, powers and privileges.

 

4.2 There are subject to Clause 4.1, no limitations on the business that the Company may carry on.

 

  1  
 

  

5 NUMBER AND CLASSES OF SHARES

 

5.1 The Company is authorised to issue an unlimited number of shares of no par value divided into six classes of shares as follows:

 

(a) Ordinary shares of no par value ( Ordinary Shares );

 

(b) Class A preferred shares of no par value ( Class A Preferred Shares );

 

(c) Class B preferred shares of no par value ( Class B Preferred Shares );

 

(d) Class C preferred shares of no par value ( Class C Preferred Shares );

 

(e) Class D preferred shares of no par value ( Class D Preferred Shares ); and

 

(f) Class E preferred shares of no par value ( Class E Preferred Shares and together with the Class A Preferred Shares, the Class B Preferred Shares, Class C Preferred Shares and the Class D Preferred Shares being referred to as the Preferred Shares ).

 

5.2 The Company may at the discretion of the Board of Directors, but shall not otherwise be obliged to, issue fractional Shares or round up or down fractional holdings of Shares to its nearest whole number and a fractional Share (if authorised by the Board of Directors) may have the corresponding fractional rights, obligations and liabilities of a whole share of the same class or series of shares.

 

6 DESIGNATIONS POWERS PREFERENCES OF SHARES

 

6.1 Each Ordinary Share in the Company confers upon the Member (unless waived by such Member):

 

(a) the right to one vote at a meeting of the Members of the Company or on any Resolution of Members;

 

(b) the right to an equal share with each other Ordinary Share in any dividend paid by the Company; and

 

(c) the right to an equal share with each other Ordinary Share in the distribution of the surplus assets of the Company on its liquidation.

 

6.2 The rights, privileges, restrictions and conditions attaching to the Preferred Shares shall be stated in this Memorandum, which shall be amended accordingly prior to the issue of such Preferred Shares. Such rights, privileges, restrictions and conditions may include:

 

(a) the number of shares and series constituting that class and the distinctive designation of that class;

 

  2  
 

 

(b) the dividend rate of the Preferred Shares of that class, if any, whether dividends shall be cumulative, and, if so, from which date or dates, and whether they shall be payable in preference to, or in relation to, the dividends payable on any other class or classes of Preferred Shares;

 

(c) whether that class shall have voting rights, and, if so, the terms of such voting rights;

 

(d) whether that class shall have conversion or exchange privileges, and, if so, the terms and conditions of such conversion or exchange, including provision for adjustment of the conversion or exchange rate in such events as the Board of Directors shall determine;

 

(e) whether or not the Preferred Shares of that class shall be redeemable, and, if so, the terms and conditions of such redemption, including the manner of selecting Shares for redemption if less than all Preferred Shares are to be redeemed, the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount maybe less than fair value and which may vary under different conditions and at different dates;

 

(f) whether that class shall be entitled to the benefit of a sinking fund to be applied to the purchase or redemption of Preferred Shares of that class, and, if so, the terms and amounts of such sinking fund;

 

(g) the right of the Preferred Shares of that class to the benefit of conditions and restrictions upon the creation of indebtedness of the Company or any subsidiary, upon the issue of any additional Preferred Shares (including additional Preferred Shares of such class of any other class) and upon the payment of dividends or the making of other distributions on, and the purchase, redemption or other acquisition or any subsidiary of any outstanding Preferred Shares of the Company;

 

(h) the right of the Preferred Shares of that class in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and whether such rights be in preference to, or in relation to, the comparable rights or any other class or classes of Preferred Shares; and

 

(i) any other relative, participating, optional or other special rights, qualifications, limitations or restrictions of that class.

 

6.3 The Directors may at their discretion by Resolution of Directors redeem, purchase or otherwise acquire all or any of the Shares in the Company subject to Regulation 6 of the Articles.

 

6.4 The Directors have the authority and the power by Resolution of Directors:

 

(a) to authorise and create additional classes of shares; and

 

  3  
 

 

(b) (subject to the provisions of Clause 6.2) to fix the designations, powers, preferences, rights, qualifications, limitations and restrictions, if any, appertaining to any and all classes of shares that may be authorised to be issued under this Memorandum.

 

7 VARIATION OF RIGHTS

 

7.1 The rights attached to the Ordinary Shares as specified in Clause 6.1 may only, whether or not the Company is being wound up, be varied by a resolution passed at a meeting by the holders of more than fifty percent (50%) of the Ordinary Shares present at a duly convened and constituted meeting of the Members of the Company holding Ordinary Shares which were present at the meeting and voted unless otherwise provided by the terms of issue of such class.

 

7.2 The rights attached to any class of Preferred Shares in issue as specified in Clause 6.2 may only, whether or not the Company is being wound up, be varied by a resolution passed at a meeting by the holders of more than fifty percent (50%) of the Preferred Shares of that same class present at a duly convened and constituted meeting of the Members of the Company holding Preferred Shares in such class which were present at the meeting and voted unless otherwise provided by the terms of issue of such class.

 

8 RIGHTS NOT VARIED BY THE ISSUE OF SHARES PARI PASSU

 

The rights conferred upon the holders of the Shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the Shares of that class, be deemed to be varied by the creation or issue of further Shares ranking pari passu therewith.

 

9 REGISTERED SHARES

 

9.1 The Company shall issue registered shares only.

 

9.2 The Company is not authorised to issue bearer shares, convert registered shares to bearer shares or exchange registered shares for bearer shares.

 

10 TRANSFER OF SHARES

 

A Share may be transferred in accordance with Regulation 4 of the Articles.

 

11 AMENDMENT OF MEMORANDUM AND ARTICLES

 

11.1 The Company may amend its Memorandum or Articles by a Resolution of Members or by a Resolution of Directors, save that no amendment may be made by a Resolution of Directors:

 

(a) to restrict the rights or powers of the Members to amend the Memorandum or Articles;

 

(b) to change the percentage of Members required to pass a Resolution of Members to amend the Memorandum or Articles;

 

  4  
 

 

(c) in circumstances where the Memorandum or Articles cannot be amended by the Members; or

 

(d) to change Clauses 7 or 8, this Clause 11 (or any of the defined terms used in any such Clause or Regulation).

 

12 DEFINITIONS AND INTERPRETATION

 

12.1 In this Memorandum of Association and the attached Articles of Association, if not inconsistent with the subject or context:

 

(a) Act means the BVI Business Companies Act, 2004 and includes the regulations made under the Act;

 

(b) AGM means an annual general meeting of the Members;

 

(c) Articles means the attached Articles of Association of the Company;

 

(d) Board of Directors means the board of directors of the Company;

 

(e) Chairman means a person who is appointed as chairman to preside at a meeting of the Company and Chairman of the Board means a person who is appointed as chairman to preside at a meeting of the Board of Directors of the Company, in each case, in accordance with the Articles;

 

(f) Class A Preferred Shares has the meaning ascribed to it in Clause 5.1;

 

(g) Class B Preferred Shares has the meaning ascribed to it in Clause 5.1;

 

(h) Class C Preferred Shares has the meaning ascribed to it in Clause 5.1;

 

(i) Class D Preferred Shares has the meaning ascribed to it in Clause 5.1;

 

(j) Class E Preferred Shares has the meaning ascribed to it in Clause 5.1;

 

(k) Class I Directors has the meaning ascribed to it in Regulation 9.1(b);

 

(l) Class II Directors has the meaning ascribed to it in Regulation 9.1(b);

 

(m) Class III Directors has the meaning ascribed to it in Regulation 9.1(b);

 

(n) Designated Stock Exchange means the Over-the-Counter Bulletin Board, the Global Select System, Global System or the Capital Market of the Nasdaq Stock Market LLC., the NYSE MKT or the New York Stock Exchange, as applicable; provided, however, that until the Shares are listed on any such Designated Stock Exchange, the rules of such Designated Stock Exchange shall be inapplicable to the Company and this Memorandum or the Articles;

  

  5  
 

 

(o) Director means any director of the Company, from time to time;

 

(p) Distribution in relation to a distribution by the Company means the direct or indirect transfer of an asset, other than Shares, to or for the benefit of a Member in relation to Shares held by a Member, and whether by means of a purchase of an asset, the redemption or other acquisition of Shares, a distribution of indebtedness or otherwise, and includes a dividend;

 

(q) Earnout Period means the 12 month period beginning 1 July 2017 and ending on 30 June 2018;

 

(r) Earnout Period Acquisition has the meaning given in Regulation 10.8;

 

(s) Eligible Person means individuals, corporations, trusts, the estates of deceased individuals, partnerships and unincorporated associations of persons;

 

(t) Enterprise means the Company and any other corporation, constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which the Company (or any of its wholly owned subsidiaries) is a party, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise of which an Indemnitee is or was serving at the request of the Company as a Director, Officer, trustee, general partner, managing member, fiduciary, employee or agent;

 

(u) Expenses shall include all direct and indirect costs, fees and expenses of any type or nature whatsoever, including, without limitation, all legal fees and costs, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, fees of private investigators and professional advisors, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, fax transmission charges, secretarial services and all other disbursements, obligations or expenses, in each case reasonably incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, settlement or appeal of, or otherwise participating in, a Proceeding, including reasonable compensation for time spent by the Indemnitee for which he or she is not otherwise compensated by the Company or any third party. Expenses shall also include any or all of the foregoing expenses incurred in connection with all judgments, liabilities, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties and amounts paid in settlement) actually and reasonably incurred (whether by an Indemnitee, or on his behalf) in connection with such Proceeding or any claim, issue or matter therein, or any appeal resulting from any Proceeding, including without limitation the principal, premium, security for, and other costs relating to any cost bond, supersedeas bond, or other appeal bond or its equivalent, but shall not include amounts paid in settlement by an Indemnitee or the amount of judgments or fines against an Indemnitee;

 

  6  
 

 

(v) Indemnitee means any person detailed in sub regulations (a) and (b) of Regulation 15.

 

(w) Insider means any Officer, Director or pre-IPO shareholder (and their respective affiliates);

 

(x) IPO means the initial public offering of securities and warrants or other rights to receive or subscribe for securities of the Company;

 

(y) Member means an Eligible Person whose name is entered in the share register of the Company as the holder of one or more Shares or fractional Shares;

 

(z) Memorandum means this Memorandum of Association of the Company;

 

(aa) Officer means any officer of the Company, from time to time;

 

(bb) Ordinary Shares has the meaning ascribed to it in Clause 5.1;

 

(cc) Proceeding means any threatened, pending or completed action, suit, arbitration, mediation, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought in the name of the Company or otherwise and whether of a civil (including intentional or unintentional tort claims), criminal, administrative or investigative nature, in which an Indemnitee was, is, will or might be involved as a party or otherwise by reason of the fact that such Indemnitee is or was a Director or Officer of the Company, by reason of any action (or failure to act) taken by him or of any action (or failure to act) on his part while acting as a Director, Officer, employee or adviser of the Company, or by reason of the fact that he is or was serving at the request of the Company as a Director, Officer, trustee, general partner, managing member, fiduciary, employee, adviser or agent of any other Enterprise, in each case whether or not serving in such capacity at the time any liability or expense is incurred for which indemnification, reimbursement, or advancement of expenses can be provided under these Articles;

 

(dd) Preferred Shares has the meaning ascribed to it in Clause 5.1;

 

(ee) Purchaser Representative means Zhengqi International Holding Limited, a company incorporated in the British Virgin Islands;

 

(ff) relevant system means a relevant system for the holding and transfer of shares in uncertificated form;

 

(gg) Resolution of Directors means either:

 

(i) Subject to sub-paragraph (ii) below and Regulation 10.8, a resolution approved at a duly convened and constituted meeting of Directors of the Company or of a committee of Directors of the Company by the affirmative vote of a majority of the Directors present at the meeting who voted except that where a Director is given more than one vote, he shall be counted by the number of votes he casts for the purpose of establishing a majority; or

  

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(ii) a resolution consented to in writing by all Directors or by all members of a committee of Directors of the Company, as the case may be;

 

(hh) Resolution of Members means a resolution approved at a duly convened and constituted meeting of the Members of the Company by the affirmative vote of a majority of the votes of the Shares entitled to vote thereon which were present at the meeting and were voted;

 

(ii) Seal means any seal which has been duly adopted as the common seal of the Company;

 

(jj) SEC means the United States Securities and Exchange Commission;

 

(kk) Securities means Shares, other securities and debt obligations of every kind of the Company, and including without limitation options, warrants and rights to acquire shares or debt obligations;

 

(ll) Share means a share issued or to be issued by the Company and Shares shall be construed accordingly;

 

(mm) Sponsor means Zhengqi Internatioal Holding Limited, a company incorporated in the British Virgin Islands;

 

(nn) Treasury Share means a Share that was previously issued but was repurchased, redeemed or otherwise acquired by the Company and not cancelled; and

 

(oo) written or any term of like import includes information generated, sent, received or stored by electronic, electrical, digital, magnetic, optical, electromagnetic, biometric or photonic means, including electronic data interchange, electronic mail, telegram, telex or telecopy, and “in writing” shall be construed accordingly.

 

12.2 In the Memorandum and the Articles, unless the context otherwise requires a reference to:

 

(a) a Regulation is a reference to a regulation of the Articles;

 

(b) a Clause is a reference to a clause of the Memorandum;

 

(c) voting by Member is a reference to the casting of the votes attached to the Shares held by the Member voting;

 

(d) the Act, the Memorandum or the Articles is a reference to the Act or those documents as amended; and

 

(e) the singular includes the plural and vice versa.

 

12.3 Any words or expressions defined in the Act unless the context otherwise requires bear the same meaning in the Memorandum and Articles unless otherwise defined herein.

 

12.4 Headings are inserted for convenience only and shall be disregarded in interpreting the Memorandum and Articles.

  

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We, Elian Fiduciary Services (BVI) Limited of Nemours Chambers, Road Town, Tortola, British Virgin Islands, for the purpose of incorporating a BVI business company under the laws of the British Virgin Islands hereby sign this Memorandum of Association.

 

Dated the 1 st day of July, 2015

  

Incorporator

 

Signed for and on behalf of Elian Fiduciary Services (BVI) Limited of Nemours Chambers, Road Town, Tortola, British Virgin Islands

 

 
Signature of authorised signatory
   
Monique Adams
Print name

 

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TERRITORY OF THE BRITISH VIRGIN ISLANDS

 

THE BVI BUSINESS COMPANIES ACT 2004

 

ARTICLES OF ASSOCIATION

 

OF

 

Borqs Technologies, Inc.

 

a company limited by shares

 

Amended and restated on 14 October 2015, 19 April 2017 and on 18 August 2017

 

1 REGISTERED SHARES

 

1.1 Every Member is entitled to a certificate signed by a Director of the Company or under the Seal specifying the number of Shares held by him and the signature of the Director and the Seal may be facsimiles.

 

1.2 Any Member receiving a certificate shall indemnify and hold the Company and its Directors and officers harmless from any loss or liability which it or they may incur by reason of any wrongful or fraudulent use or representation made by any person by virtue of the possession thereof. If a certificate for Shares is worn out or lost it may be renewed on production of the worn out certificate or on satisfactory proof of its loss together with such indemnity as may be required by a Resolution of Directors.

 

1.3 If several Eligible Persons are registered as joint holders of any Shares, any one of such Eligible Persons may give an effectual receipt for any Distribution.

 

1.4 Nothing in these Articles shall require title to any Shares or other Securities to be evidenced by a certificate if the Act and the rules of the Designated Stock Exchange permit otherwise.

 

1.5 Subject to the Act and the rules of the Designated Stock Exchange, the Board of Directors without further consultation with the holders of any Shares or Securities may resolve that any class or series of Shares or other Securities in issue or to be issued from time to time may be issued, registered or converted to uncertificated form and the practices instituted by the operator of the relevant system. No provision of these Articles will apply to any uncertificated shares or Securities to the extent that they are inconsistent with the holding of such shares or securities in uncertificated form or the transfer of title to any such shares or securities by means of a relevant system.

 

1.6 Conversion of Shares held in certificated form into Shares held in uncertificated form, and vice versa, may be made in such manner as the Board of Directors, in its absolute discretion, may think fit (subject always to the requirements of the relevant system concerned). The Company or any duly authorised transfer agent shall enter on the register of members how many Shares are held by each member in uncertificated form and certificated form and shall maintain the register of members in each case as is required by the relevant system concerned. Notwithstanding any provision of these Articles, a class or series of Shares shall not be treated as two classes by virtue only of that class or series comprising both certificated shares and uncertificated shares or as a result of any provision of these Articles which applies only in respect of certificated shares or uncertificated shares.

 

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1.7 Nothing contained in Regulation 1.5 and 1.6 is meant to prohibit the Shares from being able to trade electronically. For the avoidance of doubt, Shares shall only be traded and transferred electronically upon consummation of the IPO.

 

2 SHARES

 

2.1 Subject to the provisions of these Articles and, where applicable, the rules of the Designated Stock Exchange, the unissued Shares of the Company shall be at the disposal of the Directors and Shares and other Securities may be issued and option to acquire Shares or other Securities may be granted at such times, to such Eligible Persons, for such consideration and on such terms as the Directors may by Resolution of Directors determine.

 

2.2 Without prejudice to any special rights previously conferred on the holders of any existing Preferred Shares or class of Preferred Shares, any class of Preferred Shares may be issued with such preferred, deferred or other special rights or such restrictions, whether in regard to dividend, voting or otherwise as the Directors may from time to time determine.

 

2.3 Section 46 of the Act does not apply to the Company.

 

2.4 A Share may be issued for consideration in any form, including money, a promissory note, real property, personal property (including goodwill and know-how) or a contract for future services.

 

2.5 No Shares may be issued for a consideration other than money, unless a Resolution of Directors has been passed stating:

 

(a) the amount to be credited for the issue of the Shares;

 

(b) their determination of the reasonable present cash value of the non-money consideration for the issue; and

 

(c) that, in their opinion, the present cash value of the non-money consideration for the issue is not less than the amount to be credited for the issue of the Shares.

 

2.6 The Company shall keep a register (the share register ) containing:

 

(a) the names and addresses of the persons who hold Shares;

 

(b) the number of each class and series of Shares held by each Member;

 

(c) the date on which the name of each Member was entered in the share register; and

 

(d) the date on which any Eligible Person ceased to be a Member.

 

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2.7 The share register may be in any such form as the Directors may approve, but if it is in magnetic, electronic or other data storage form, the Company must be able to produce legible evidence of its contents. Until the Directors otherwise determine, the magnetic, electronic or other data storage form shall be the original share register.

 

2.8 A Share is deemed to be issued when the name of the Member is entered in the share register.

 

2.9 Subject to the provisions of the Act, Shares may be issued on the terms that they are redeemable, or at the option of the Company be liable to be redeemed on such terms and in such manner as the Directors before or at the time of the issue of such Shares may determine. The Directors may issue options, warrants or convertible securities or securities or a similar nature conferring the right upon the holders thereof to subscribe for, purchase or receive any class of Shares or Securities on such terms as the Directors may from time to time determine. Notwithstanding the foregoing, the Directors may also issue options, warrants, other rights to acquire shares or convertible securities in connection with the Company’s IPO.

 

3 FORFEITURE

 

3.1 Shares that are not fully paid on issue are subject to the forfeiture provisions set forth in this Regulation and for this purpose Shares issued for a promissory note or a contract for future services are deemed to be not fully paid.

 

3.2 A written notice of call specifying the date for payment to be made shall be served on the Member who defaults in making payment in respect of the Shares.

 

3.3 The written notice of call referred to in Regulation 3.2 shall name a further date not earlier than the expiration of 14 days from the date of service of the notice on or before which the payment required by the notice is to be made and shall contain a statement that in the event of non-payment at or before the time named in the notice the Shares, or any of them, in respect of which payment is not made will be liable to be forfeited.

 

3.4 Where a written notice of call has been issued pursuant to Regulation 3.2 and the requirements of the notice have not been complied with, the Directors may, at any time before tender of payment, forfeit and cancel the Shares to which the notice relates.

 

3.5 The Company is under no obligation to refund any moneys to the Member whose Shares have been cancelled pursuant to Regulation 3.4 and that Member shall be discharged from any further obligation to the Company.

 

4 TRANSFER OF SHARES

 

4.1 Subject to the Memorandum, certificated shares may be transferred by a written instrument of transfer signed by the transferor and containing the name and address of the transferee, which shall be sent to the Company for registration. A member shall be entitled to transfer uncertificated shares by means of a relevant system and the operator of the relevant system shall act as agent of the Members for the purposes of the transfer of such uncertificated shares.

 

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4.2 The transfer of a Share is effective when the name of the transferee is entered on the share register.

 

4.3 If the Directors of the Company are satisfied that an instrument of transfer relating to Shares has been signed but that the instrument has been lost or destroyed, they may resolve by Resolution of Directors:

 

(a) to accept such evidence of the transfer of Shares as they consider appropriate; and

 

(b) that the transferee’s name should be entered in the share register notwithstanding the absence of the instrument of transfer.

 

4.4 Subject to the Memorandum, the personal representative of a deceased Member may transfer a Share even though the personal representative is not a Member at the time of the transfer.

 

5 DISTRIBUTIONS

 

5.1 The Directors of the Company may, by Resolution of Directors, authorise a distribution at a time and of an amount they think fit if they are satisfied, on reasonable grounds, that, immediately after the distribution, the value of the Company’s assets will exceed its liabilities and the Company will be able to pay its debts as and when they fall due.

 

5.2 Dividends may be paid in money, shares, or other property.

 

5.3 The Company may, by Resolution of Directors, from time to time pay to the Members such interim dividends as appear to the Directors to be justified by the profits of the Company, provided always that they are satisfied, on reasonable grounds, that, immediately after the distribution, the value of the Company’s assets will exceed its liabilities and the Company will be able to pay its debts as and when they fall due.

 

5.4 Notice in writing of any dividend that may have been declared shall be given to each Member in accordance with Regulation 21 and all dividends unclaimed for three years after such notice has been given to a Member may be forfeited by Resolution of Directors for the benefit of the Company.

 

5.5 No dividend shall bear interest as against the Company.

 

6 REDEMPTION OF SHARES AND TREASURY SHARES

 

6.1 The Company may purchase, redeem or otherwise acquire and hold its own Shares save that the Company may not purchase, redeem or otherwise acquire its own Shares without the consent of the Member whose Shares are to be purchased, redeemed or otherwise acquired unless the Company is permitted or required by the Act or any other provision in the Memorandum or Articles to purchase, redeem or otherwise acquire the Shares without such consent.

 

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6.2 The purchase, redemption or other acquisition by the Company of its own Shares is deemed not to be a distribution where:

 

(a) the Company purchases, redeems or otherwise acquires the Shares pursuant to a right of a Member to have his Shares redeemed or to have his shares exchanged for money or other property of the Company, or

 

(b) the Company purchases, redeems or otherwise acquires the Shares by virtue of the provisions of section 179 of the Act.

 

6.3 Sections 60, 61 and 62 of the Act shall not apply to the Company.

 

6.4 Shares that the Company purchases, redeems or otherwise acquires pursuant to this Regulation may be cancelled or held as Treasury Shares except to the extent that such Shares are in excess of 50 percent of the issued Shares in which case they shall be cancelled but they shall be available for reissue.

 

6.5 All rights and obligations attaching to a Treasury Share are suspended and shall not be exercised by the Company while it holds the Share as a Treasury Share.

 

6.6 Treasury Shares may be disposed of by the Company on such terms and conditions (not otherwise inconsistent with the Memorandum and Articles) as the Company may by Resolution of Directors determine.

 

6.7 Where Shares are held by another body corporate of which the Company holds, directly or indirectly, shares having more than 50 per cent of the votes in the election of Directors of the other body corporate, all rights and obligations attaching to the Shares held by the other body corporate are suspended and shall not be exercised by the other body corporate.

 

7 MORTGAGES AND CHARGES OF SHARES

 

7.1 A Member may by an instrument in writing mortgage or charge his Shares.

 

7.2 There shall be entered in the share register at the written request of the Member:

 

(a) a statement that the Shares held by him are mortgaged or charged;

 

(b) the name of the mortgagee or chargee; and

 

(c) the date on which the particulars specified in subparagraphs (a) and (b) are entered in the share register.

 

7.3 Where particulars of a mortgage or charge are entered in the share register, such particulars may be cancelled:

 

(a) with the written consent of the named mortgagee or chargee or anyone authorised to act on his behalf; or

 

(b) upon evidence satisfactory to the Directors of the discharge of the liability secured by the mortgage or charge and the issue of such indemnities as the Directors shall consider necessary or desirable.

   

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7.4 Whilst particulars of a mortgage or charge over Shares are entered in the share register pursuant to this Regulation:

 

(a) no transfer of any Share the subject of those particulars shall be effected;

 

(b) the Company may not purchase, redeem or otherwise acquire any such Share; and

 

(c) no replacement certificate shall be issued in respect of such Shares,

 

without the written consent of the named mortgagee or chargee.

 

8 MEETINGS AND CONSENTS OF MEMBERS

 

8.1 Any Director of the Company may convene meetings of the Members at such times and in such manner and places within or outside the British Virgin Islands as the Director considers necessary or desirable. An AGM shall be held annually at such date and time as may be determined by the Directors.

 

8.2 Upon the written request of the Members entitled to exercise 30 percent or more of the voting rights in respect of the matter for which the meeting is requested the Directors shall convene a meeting of Members.

 

8.3 The Director convening a meeting of Members shall give not less than 10 nor more than 60 days’ written notice of such meeting to:

 

(a) those Members whose names on the date the notice is given appear as Members in the share register of the Company and are entitled to vote at the meeting; and

 

(b) the other Directors.

 

8.4 The Director convening a meeting of Members shall fix in the notice of the meeting the record date for determining those Members that are entitled to vote at the meeting.

 

8.5 A meeting of Members held in contravention of the requirement to give notice is valid if Members holding at least 90 per cent of the total voting rights on all the matters to be considered at the meeting have waived notice of the meeting and, for this purpose, the presence of a Member at the meeting shall constitute waiver in relation to all the Shares which that Member holds.

 

8.6 The inadvertent failure of a Director who convenes a meeting to give notice of a meeting to a Member or another Director, or the fact that a Member or another Director has not received notice, does not invalidate the meeting.

 

8.7 A Member may be represented at a meeting of Members by a proxy who may speak and vote on behalf of the Member.

 

8.8 The instrument appointing a proxy shall be produced at the place designated for the meeting before the time for holding the meeting at which the person named in such instrument proposes to vote.

 

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8.9 The instrument appointing a proxy shall be in substantially the following form or such other form as the chairman of the meeting shall accept as properly evidencing the wishes of the Member appointing the proxy.

 

Borqs Technologies, Inc.

 

I/We being a Member of the above Company HEREBY APPOINT ……………………………..…… of …...……….…………..………… or failing him ……………….. of …………..…..…… to be my/our proxy to vote for me/us at the meeting of Members to be held on the …… day of …………..…………, 20…… and at any adjournment thereof.

 

(Any restrictions on voting to be inserted here.)

 

Signed this …… day of …………..…………, 20……

 

 

 

……………………………

 

Member

 

8.10 The following applies where Shares are jointly owned:

 

(a) if two or more persons hold Shares jointly each of them may be present in person or by proxy at a meeting of Members and may speak as a Member;

 

(b) if only one of the joint owners is present in person or by proxy he may vote on behalf of all joint owners; and

 

(c) if two or more of the joint owners are present in person or by proxy they must vote as one and in the event of disagreement between any of the joint owners of Shares then the vote of the joint owner whose name appears first (or earliest) in the share register in respect of the relevant Shares shall be recorded as the vote attributable to the Shares.

 

8.11 A Member shall be deemed to be present at a meeting of Members if he participates by telephone or other electronic means and all Members participating in the meeting are able to hear each other.

 

8.12 A meeting of Members is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not less than 50 per cent of the votes of the Shares entitled to vote on Resolutions of Members to be considered at the meeting. If the Company has two or more classes of shares, a meeting may be quorate for some purposes and not for others. A quorum may comprise a single Member or proxy and then such person may pass a Resolution of Members and a certificate signed by such person accompanied where such person holds a proxy by a copy of the proxy instrument shall constitute a valid Resolution of Members.

 

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8.13 If within two hours from the time appointed for the meeting of Members, a quorum is not present, the meeting, at the discretion of the Chairman of the Board of Directors shall either be dissolved or stand adjourned to a business day in the jurisdiction in which the meeting was to have been held at the same time and place, and if at the adjourned meeting there are present within one hour from the time appointed for the meeting in person or by proxy not less than one third of the votes of the Shares entitled to vote or each class or series of Shares entitled to vote, as applicable, on the matters to be considered by the meeting, those present shall constitute a quorum but otherwise the meeting shall either be dissolved or stand further adjourned at the discretion of the Chairman of the Board of Directors.

 

8.14 At every meeting of Members, the Chairman of the Board shall preside as chairman of the meeting. If there is no Chairman of the Board or if the Chairman of the Board is not present at the meeting, the Members present shall choose one of their number to be the chairman. If the Members are unable to choose a chairman for any reason, then the person representing the greatest number of voting Shares present in person or by proxy at the meeting shall preside as chairman failing which the oldest individual Member or representative of a Member present shall take the chair.

 

8.15 The person appointed as chairman of the meeting pursuant to Regulation 8.14 may adjourn any meeting from time to time, and from place to place. For the avoidance of doubt, a meeting can be adjourned for as many times as may be determined to be necessary by the chairman and a meeting may remain open indefinitely for as long a period as may be determined by the chairman.

 

8.16 At any meeting of the Members the chairman of the meeting is responsible for deciding in such manner as he considers appropriate whether any resolution proposed has been carried or not and the result of his decision shall be announced to the meeting and recorded in the minutes of the meeting. If the chairman has any doubt as to the outcome of the vote on a proposed resolution, he shall cause a poll to be taken of all votes cast upon such resolution. If the chairman fails to take a poll then any Member present in person or by proxy who disputes the announcement by the chairman of the result of any vote may immediately following such announcement demand that a poll be taken and the chairman shall cause a poll to be taken. If a poll is taken at any meeting, the result shall be announced to the meeting and recorded in the minutes of the meeting.

 

8.17 Subject to the specific provisions contained in this Regulation for the appointment of representatives of Members other than individuals the right of any individual to speak for or represent a Member shall be determined by the law of the jurisdiction where, and by the documents by which, the Member is constituted or derives its existence. In case of doubt, the Directors may in good faith seek legal advice and unless and until a court of competent jurisdiction shall otherwise rule, the Directors may rely and act upon such advice without incurring any liability to any Member or the Company.

 

8.18 Any Member other than an individual may by resolution of its Directors or other governing body authorise such individual as it thinks fit to act as its representative at any meeting of Members or of any class of Members, and the individual so authorised shall be entitled to exercise the same rights on behalf of the Member which he represents as that Member could exercise if it were an individual.

 

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8.19 The chairman of any meeting at which a vote is cast by proxy or on behalf of any Member other than an individual may at the meeting but not thereafter call for a notarially certified copy of such proxy or authority which shall be produced within 7 days of being so requested or the votes cast by such proxy or on behalf of such Member shall be disregarded.

 

8.20 Directors of the Company may attend and speak at any meeting of Members and at any separate meeting of the holders of any class or series of Shares.

 

8.21 Until the consummation of the Company’s IPO, any action that may be taken by the Members at a meeting may also be taken by a Resolution of Members consented to in writing, without the need for any prior notice. If any Resolution of Members is adopted otherwise than by the unanimous written consent of all Members, a copy of such resolution shall forthwith be sent to all Members not consenting to such resolution. The consent may be in the form of counterparts, each counterpart being signed by one or more Members. If the consent is in one or more counterparts, and the counterparts bear different dates, then the resolution shall take effect on the earliest date upon which Eligible Persons holding a sufficient number of votes of Shares to constitute a Resolution of Members have consented to the resolution by signed counterparts. Following the Company’s IPO, any action required or permitted to be taken by the Members of the Company must be effected by a meeting of the Company, such meeting to be duly convened and held in accordance with these Articles.

 

9 DIRECTORS

 

9.1 The first Directors of the Company shall be appointed by the first registered agent within 30 days of the incorporation of the Company; and thereafter, the Directors shall be elected:

 

(a) subject to Regulation 9.1 (b), by Resolution of Members or by Resolution of Directors for such term as the Members or Directors determine;

 

(b) Following the adoption of this Regulation 9.1(b) in the form that follows,the Directors shall pass a Resolution of Directors dividing (or re-dividing) (the Class Resolution ) themselves into three classes, being the class I directors (the Class I Directors ), the class II directors (the Class II Directors ) and the class III directors (the Class III Directors ). The number of Directors in each class shall be as nearly equal as possible. The Class I Directors classed under this Regulation 9.1(b) shall stand elected for a term expiring at the Company’s first AGM after the Class Resolution is passed, the Class II Directors classed under this Regulation 9.1(b) shall stand elected for a term expiring at the Company’s second AGM after the Class Resolution is passed and the Class III Directors classed under this Regulation 9.1(b) shall stand elected for a term expiring at the Company’s third AGM after the Class Resolution is passed. Commencing at the Company’s first AGM after the Class Resolution is passed, and at each following AGM, Directors elected to succeed those Directors whose terms expire shall be elected for a term of office to expire at the third AGM following their election. Except as the Act or any applicable law may otherwise require, in the interim between an AGM or general meeting called for the election of Directors and/or the removal of one or more Directors any vacancy on the Board of Directors, may be filled by the majority vote of the remaining Directors. Directors who were previously designated as “Class I” or “Class II” directors under that previous two class system existing prior to the adoption of this Regulation 9.1(b) (in its present form) may be re-classed (once only), pursuant to the Class Resolution, as a Class I, II or III Director under this Regulation 9.1(b) (with the term or remaining term of that director becoming modified (whether extended or reduced) accordingly in line with such re-classification).

 

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9.2 No person shall be appointed as a Director of the Company unless he has consented in writing to act as a Director.

 

9.3 The minimum number of Directors shall be one and there shall be no maximum number of Directors.

 

9.4 Each Director holds office for the term, if any, fixed by the Resolution of Members or Resolution of Directors appointing him, or until his earlier death, resignation or removal. If no term is fixed on the appointment of a Director, the Director serves indefinitely until his earlier death, resignation or removal.

 

9.5 A Director may be removed from office with or without cause by:

 

(a) a Resolution of Members passed at a meeting of Members called for the purposes of removing the Director or for purposes including the removal of the Director; or

 

(b) subject to Regulation 9.1 (b), a Resolution of Directors passed at a meeting of Directors.

 

9.6 A Director may resign his office by giving written notice of his resignation to the Company and the resignation has effect from the date the notice is received by the Company at the office of its registered agent or from such later date as may be specified in the notice. A Director shall resign forthwith as a Director if he is, or becomes, disqualified from acting as a Director under the Act.

 

9.7 Subject to Regulations 9.1 (b), the Directors may at any time appoint any person to be a Director either to fill a vacancy or as an addition to the existing Directors. Where the Directors appoint a person as Director to fill a vacancy, the term shall not exceed the term that remained when the person who has ceased to be a Director ceased to hold office.

 

9.8 A vacancy in relation to Directors occurs if a Director dies or otherwise ceases to hold office prior to the expiration of his term of office.

 

9.9 The Company shall keep a register of Directors containing:

 

(a) the names and addresses of the persons who are Directors of the Company;

 

(b) the date on which each person whose name is entered in the register was appointed as a Director of the Company;

 

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(c) the date on which each person named as a Director ceased to be a Director of the Company; and

 

(d) such other information as may be prescribed by the Act.

 

9.10 The register of Directors may be kept in any such form as the Directors may approve, but if it is in magnetic, electronic or other data storage form, the Company must be able to produce legible evidence of its contents. Until a Resolution of Directors determining otherwise is passed, the magnetic, electronic or other data storage shall be the original register of Directors.

 

9.11 The Directors, or if the Shares (or depository receipts therefore) are listed or quoted on a Designated Stock Exchange, and if required by the Designated Stock Exchange, any committee thereof, may, by a Resolution of Directors, fix the emoluments of Directors with respect to services to be rendered in any capacity to the Company.

 

9.12 A Director is not required to hold a Share as a qualification to office.

 

9.13 Prior to the consummation of any transaction with:

 

(a) any affiliate of the Company;

 

(b) any Member owning an interest in the voting power of the Company that gives such Member a significant influence over the Company;

 

(c) any Director or executive officer of the Company and any relative of such Director or executive officer; and

 

(d) any person in which a substantial interest in the voting power of the Company is owned, directly or indirectly, by a person referred to in Regulations 9.13(b) and (c) or over which such a person is able to exercise significant influence,

 

such transaction must be approved by a majority of the members of the Board of Directors who do not have an interest in the transaction, such directors having been provided with access (at the Company’s expense) to the Company’s attorney or independent legal counsel, unless the disinterested directors determine that the terms of such transaction are no less favourable to the Company than those that would be available to the Company with respect to such a transaction from unaffiliated third parties.

 

10 POWERS OF DIRECTORS

 

10.1 The business and affairs of the Company shall be managed by, or under the direction or supervision of, the Directors of the Company. Subject to Regulation 10.8, the Directors of the Company have all the powers necessary for managing, and for directing and supervising, the business and affairs of the Company. The Directors may pay all expenses incurred preliminary to and in connection with the incorporation of the Company and may exercise all such powers of the Company as are not by the Act or by the Memorandum or the Articles required to be exercised by the Members.

   

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10.2 If the Company is the wholly owned subsidiary of a holding company, a Director of the Company may, when exercising powers or performing duties as a Director, act in a manner which he believes is in the best interests of the holding company even though it may not be in the best interests of the Company.

 

10.3 Each Director shall exercise his powers for a proper purpose and shall not act or agree to the Company acting in a manner that contravenes the Memorandum, the Articles or the Act. Each Director, in exercising his powers or performing his duties, shall act honestly and in good faith in what the Director believes to be the best interests of the Company.

 

10.4 Any Director which is a body corporate may appoint any individual as its duly authorised representative for the purpose of representing it at meetings of the Directors, with respect to the signing of consents or otherwise.

 

10.5 The continuing Directors may act notwithstanding any vacancy in their body.

 

10.6 Subject to Regulation 10.8, the Directors may by Resolution of Directors exercise all the powers of the Company to incur indebtedness, liabilities or obligations and to secure indebtedness, liabilities or obligations whether of the Company or of any third party.

 

10.7 All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments and all receipts for moneys paid to the Company shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as shall from time to time be determined by Resolution of Directors.

 

10.8 If during the Earnout Period the Company or any subsidiary of the Company proposes to consummate the acquisition of any business or entity from a third party, including by merger, consolidation, acquisition of stock or assets, or any other form of business combination, of any entity or any division thereof, or any material amount of assets outside the ordinary course of business (any of the foregoing, an Earnout Period Acquisition ) then: (i) if such Earnout Period Acquisition involves aggregate consideration payable by the Company and its subsidiaries (in whatever form) in excess of sixty million U.S. dollars ($60,000,000), such Earnout Period Acquisition must be approved by at least two-thirds of the then Directors; (ii) the Company must notify the Sponsor and the Purchaser Representative about such Earnout Period Acquisition, including the counterparties and the material terms thereof, reasonably in advance of entering into a binding commitment for or consummating such Earnout Period Acquisition, and will keep the Sponsor and Purchaser Representative reasonably informed as to the status of the potential Earnout Period Acquisition, including any material changes to the price or other material terms thereof; and (iii) prior to entering into a binding commitment for or consummating such Earnout Period Acquisition, if requested by the Sponsor or the Purchaser Representative, the Company will obtain a fairness opinion with respect to such potential Earnout Period Acquisition from an internationally or United States nationally recognized third party valuation expert reasonably acceptable to each of the Company, the Sponsor and the Purchaser Representative.

 

10.9 Section 175 of the Act shall not apply to the Company.

 

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11 PROCEEDINGS OF DIRECTORS

 

11.1 Any one Director of the Company may call a meeting of the Directors by sending a written notice to each other Director.

 

11.2 The Directors of the Company or any committee thereof may meet at such times and in such manner and places within or outside the British Virgin Islands as the notice calling the meeting provides.

 

11.3 A Director is deemed to be present at a meeting of Directors if he participates by telephone or other electronic means and all Directors participating in the meeting are able to hear each other.

 

11.4 A Director may by a written instrument appoint an alternate who need not be a Director, any such alternate shall be entitled to attend meetings in the absence of the Director who appointed him and to vote or consent in place of the Director until the appointment lapses or is terminated.

 

11.5 A Director shall be given not less than three days’ notice of meetings of Directors, but a meeting of Directors held without three days’ notice having been given to all Directors shall be valid if all the Directors entitled to vote at the meeting who do not attend waive notice of the meeting, and for this purpose the presence of a Director at a meeting shall constitute waiver by that Director. The inadvertent failure to give notice of a meeting to a Director, or the fact that a Director has not received the notice, does not invalidate the meeting.

 

11.6 A meeting of Directors is duly constituted for all purposes if at the commencement of the meeting there are present in person or by alternate not less than one-half of the total number of Directors, unless there are only two Directors in which case the quorum is two.

 

11.7 If the Company has only one Director the provisions herein contained for meetings of Directors do not apply and such sole Director has full power to represent and act for the Company in all matters as are not by the Act, the Memorandum or the Articles required to be exercised by the Members. In lieu of minutes of a meeting the sole Director shall record in writing and sign a note or memorandum of all matters requiring a Resolution of Directors. Such a note or memorandum constitutes sufficient evidence of such resolution for all purposes.

 

11.8 At meetings of Directors at which the Chairman of the Board is present, he shall preside as chairman of the meeting. If there is no Chairman of the Board or if the Chairman of the Board is not present, the Directors present shall choose one of their number to be chairman of the meeting. If the Directors are unable to choose a chairman for any reason, then the oldest individual Director present (and for this purpose an alternate Director shall be deemed to be the same age as the Director that he represents) shall take the chair.

 

11.9 An action that may be taken by the Directors or a committee of Directors at a meeting may also be taken by a Resolution of Directors or a resolution of a committee of Directors consented to in writing by all Directors or by all members of the committee, as the case may be, without the need for any notice. The consent may be in the form of counterparts each counterpart being signed by one or more Directors. If the consent is in one or more counterparts, and the counterparts bear different dates, then the resolution shall take effect on the date upon which the last Director has consented to the resolution by signed counterparts.

 

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12 COMMITTEES

 

12.1 The Directors may, by Resolution of Directors, designate one or more committees, each consisting of one or more Directors, and delegate one or more of their powers, including the power to affix the Seal, to the committee.

 

12.2 The Directors have no power to delegate to a committee of Directors any of the following powers:

 

(a) to amend the Memorandum or the Articles;

 

(b) to designate committees of Directors;

 

(c) to delegate powers to a committee of Directors;

 

(d) to appoint Directors;

 

(e) to appoint an agent;

 

(f) to approve a plan of merger, consolidation or arrangement; or

 

(g) to make a declaration of solvency or to approve a liquidation plan.

 

12.3 Regulations 12.2(b) and (c) do not prevent a committee of Directors, where authorised by the Resolution of Directors appointing such committee or by a subsequent Resolution of Directors, from appointing a sub-committee and delegating powers exercisable by the committee to the sub-committee.

 

12.4 The meetings and proceedings of each committee of Directors consisting of 2 or more Directors shall be governed mutatis mutandis by the provisions of the Articles regulating the proceedings of Directors so far as the same are not superseded by any provisions in the Resolution of Directors establishing the committee.

 

13 OFFICERS AND AGENTS

 

13.1 The Company may by Resolution of Directors appoint officers of the Company at such times as may be considered necessary or expedient. Such officers may consist of a Chairman of the Board of Directors, a Chief Executive Officer, a President, a Chief Financial Officer (in each case there may be more than one of such officers), one or more vice-presidents, secretaries and treasurers and such other officers as may from time to time be considered necessary or expedient. Any number of offices may be held by the same person.

 

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13.2 The officers shall perform such duties as are prescribed at the time of their appointment subject to any modification in such duties as may be prescribed thereafter by Resolution of Directors. In the absence of any specific prescription of duties it shall be the responsibility of the Chairman of the Board (or Co-Chairman, as the case may be) to preside at meetings of Directors and Members, the Chief Executive Officer (or Co-Chief Executive Officer, as the case may be) to manage the day to day affairs of the Company, the vice-presidents to act in order of seniority in the absence of the Chief Executive Officer (or Co-Chief Executive Officer, as the case may be) but otherwise to perform such duties as may be delegated to them by the Chief Executive Officer (or Co-Chief Executive Officer, as the case may be), the secretaries to maintain the share register, minute books and records (other than financial records) of the Company and to ensure compliance with all procedural requirements imposed on the Company by applicable law, and the treasurer to be responsible for the financial affairs of the Company.

 

13.3 The emoluments of all officers shall be fixed by Resolution of Directors.

 

13.4 The officers of the Company shall hold office until their death, resignation or removal. Any officer elected or appointed by the Directors may be removed at any time, with or without cause, by Resolution of Directors. Any vacancy occurring in any office of the Company may be filled by Resolution of Directors.

 

13.5 The Directors may, by a Resolution of Directors, appoint any person, including a person who is a Director, to be an agent of the Company. An agent of the Company shall have such powers and authority of the Directors, including the power and authority to affix the Seal, as are set forth in the Articles or in the Resolution of Directors appointing the agent, except that no agent has any power or authority with respect to the matters specified in Regulation 12.1. The Resolution of Directors appointing an agent may authorise the agent to appoint one or more substitutes or delegates to exercise some or all of the powers conferred on the agent by the Company. The Directors may remove an agent appointed by the Company and may revoke or vary a power conferred on him.

 

14 CONFLICT OF INTERESTS

 

14.1 A Director of the Company shall, forthwith after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by the Company, disclose the interest to all other Directors of the Company.

 

14.2 For the purposes of Regulation 14.1, a disclosure to all other Directors to the effect that a Director is a member, Director or officer of another named entity or has a fiduciary relationship with respect to the entity or a named individual and is to be regarded as interested in any transaction which may, after the date of the entry or disclosure, be entered into with that entity or individual, is a sufficient disclosure of interest in relation to that transaction.

 

14.3 Provided that the requirements of Regulation 9.13 have first been satisfied, a Director of the Company who is interested in a transaction entered into or to be entered into by the Company may:

 

(a) vote on a matter relating to the transaction;

 

(b) attend a meeting of Directors at which a matter relating to the transaction arises and be included among the Directors present at the meeting for the purposes of a quorum; and

 

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(c) sign a document on behalf of the Company, or do any other thing in his capacity as a Director, that relates to the transaction,

 

and, subject to compliance with the Act and these Articles shall not, by reason of his office be accountable to the Company for any benefit which he derives from such transaction and no such transaction shall be liable to be avoided on the grounds of any such interest or benefit.

 

15 INDEMNIFICATION

 

15.1 Subject to the limitations hereinafter provided the Company may indemnify, hold harmless and exonerate against all direct and indirect costs, fees and Expenses of any type or nature whatsoever, any person who:

 

(a) is or was a party or is threatened to be made a party to any Proceeding by reason of the fact that such person is or was a Director, officer, key employee, adviser of the Company or who at the request of the Company; or

 

(b) is or was, at the request of the Company, serving as a Director of, or in any other capacity is or was acting for, another Enterprise.

 

15.2 The indemnity in Regulation 15.1 only applies if the relevant Indemnitee acted honestly and in good faith with a view to the best interests of the Company and, in the case of criminal proceedings, the Indemnitee had no reasonable cause to believe that his conduct was unlawful.

 

15.3 The decision of the Directors as to whether an Indemnitee acted honestly and in good faith and with a view to the best interests of the Company and as to whether such Indemnitee had no reasonable cause to believe that his conduct was unlawful is, in the absence of fraud, sufficient for the purposes of the Articles, unless a question of law is involved.

 

15.4 The termination of any Proceedings by any judgment, order, settlement, conviction or the entering of a nolle prosequi does not, by itself, create a presumption that the relevant Indemnitee did not act honestly and in good faith and with a view to the best interests of the Company or that such Indemnitee had reasonable cause to believe that his conduct was unlawful.

 

15.5 The Company may purchase and maintain insurance, purchase or furnish similar protection or make other arrangements including, but not limited to, providing a trust fund, letter of credit, or surety bond in relation to any Indemnitee or who at the request of the Company is or was serving as a Director, officer or liquidator of, or in any other capacity is or was acting for, another Enterprise, against any liability asserted against the person and incurred by him in that capacity, whether or not the Company has or would have had the power to indemnify him against the liability as provided in these Articles.

 

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16 RECORDS

 

16.1 The Company shall keep the following documents at the office of its registered agent:

 

(a) the Memorandum and the Articles;

 

(b) the share register, or a copy of the share register;

 

(c) the register of Directors, or a copy of the register of Directors; and

 

(d) copies of all notices and other documents filed by the Company with the Registrar of Corporate Affairs in the previous 10 years.

 

16.2 If the Company maintains only a copy of the share register or a copy of the register of Directors at the office of its registered agent, it shall:

 

(a) within 15 days of any change in either register, notify the registered agent in writing of the change; and

 

(b) provide the registered agent with a written record of the physical address of the place or places at which the original share register or the original register of Directors is kept.

 

16.3 The Company shall keep the following records at the office of its registered agent or at such other place or places, within or outside the British Virgin Islands, as the Directors may determine:

 

(a) minutes of meetings and Resolutions of Members and classes of Members;

 

(b) minutes of meetings and Resolutions of Directors and committees of Directors; and

 

(c) an impression of the Seal, if any.

 

16.4 Where any original records referred to in this Regulation are maintained other than at the office of the registered agent of the Company, and the place at which the original records is changed, the Company shall provide the registered agent with the physical address of the new location of the records of the Company within 14 days of the change of location.

 

16.5 The records kept by the Company under this Regulation shall be in written form or either wholly or partly as electronic records complying with the requirements of the Electronic Transactions Act.

 

17 REGISTERS OF CHARGES

 

17.1 The Company shall maintain at the office of its registered agent a register of charges in which there shall be entered the following particulars regarding each mortgage, charge and other encumbrance created by the Company:

 

(a) the date of creation of the charge;

 

(b) a short description of the liability secured by the charge;

 

(c) a short description of the property charged;

 

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(d) the name and address of the trustee for the security or, if there is no such trustee, the name and address of the chargee;

 

(e) unless the charge is a security to bearer, the name and address of the holder of the charge; and

 

(f) details of any prohibition or restriction contained in the instrument creating the charge on the power of the Company to create any future charge ranking in priority to or equally with the charge.

 

18 CONTINUATION

 

The Company may by Resolution of Members or by a Resolution of Directors continue as a company incorporated under the laws of a jurisdiction outside the British Virgin Islands in the manner provided under those laws.

 

19 SEAL

 

The Company may have more than one Seal and references herein to the Seal shall be references to every Seal which shall have been duly adopted by Resolution of Directors. The Directors shall provide for the safe custody of the Seal and for an imprint thereof to be kept at the registered office. Except as otherwise expressly provided herein the Seal when affixed to any written instrument shall be witnessed and attested to by the signature of any one Director or other person so authorised from time to time by Resolution of Directors. Such authorisation may be before or after the Seal is affixed, may be general or specific and may refer to any number of sealings. The Directors may provide for a facsimile of the Seal and of the signature of any Director or authorised person which may be reproduced by printing or other means on any instrument and it shall have the same force and validity as if the Seal had been affixed to such instrument and the same had been attested to as hereinbefore described.

 

20 ACCOUNTS AND AUDIT

 

20.1 The Company shall keep records that are sufficient to show and explain the Company’s transactions and that will, at any time, enable the financial position of the Company to be determined with reasonable accuracy.

 

20.2 The Company may by Resolution of Members call for the Directors to prepare periodically and make available a profit and loss account and a balance sheet. The profit and loss account and balance sheet shall be drawn up so as to give respectively a true and fair view of the profit and loss of the Company for a financial period and a true and fair view of the assets and liabilities of the Company as at the end of a financial period.

 

20.3 The Company may by Resolution of Members call for the accounts to be examined by auditors.

 

20.4 If the Shares are listed or quoted on the Designated Stock Exchange, and if required by the Designated Stock Exchange, the Directors shall establish and maintain an audit committee as a committee of the Board of Directors, the composition and responsibilities of which shall comply with the rules and regulations of the SEC and the Designated Stock Exchange subject to any available exemptions therefrom and the operation of the Act. The audit committee shall meet at least once every financial quarter, or more frequently as circumstances dictate.

 

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20.5 If the Shares are listed or quoted on a Designated Stock Exchange that requires the Company to have an audit committee, the Directors shall adopt a formal written audit committee charter and review and assess the adequacy of the formal written charter on an annual basis.

 

20.6 If the Shares are listed or quoted on the Designated Stock Exchange, the Company shall conduct an appropriate review of all related party transactions on an ongoing basis and, if required, shall utilise the audit committee for the review and approval of potential conflicts of interest.

 

20.7 If applicable, and subject to applicable law and the rules of the SEC and the Designated Stock Exchange:

 

(a) at the AGM or at a subsequent extraordinary general meeting in each year, the Members shall appoint an auditor who shall hold office until the Members appoint another auditor. Such auditor may be a Member but no Director or officer or employee of the Company shall during, his continuance in office, be eligible to act as auditor;

 

(b) a person, other than a retiring auditor, shall not be capable of being appointed auditor at an AGM unless notice in writing of an intention to nominate that person to the office of auditor has been given not less than ten days before the AGM and furthermore the Company shall send a copy of such notice to the retiring auditor; and

 

(c) the Members may, at any meeting convened and held in accordance with these Articles, by resolution remove the auditor at any time before the expiration of his term of office and shall by resolution at that meeting appoint another auditor in his stead for the remainder of his term.

 

20.8 The remuneration of the auditors shall be fixed by Resolution of Directors in such manner as the Directors may determine or in a manner required by the rules and regulations of the Designated Stock Exchange and the SEC.

 

20.9 The auditors shall examine each profit and loss account and balance sheet required to be laid before a meeting of the Members or otherwise given to Members and shall state in a written report whether or not:

 

(a) in their opinion the profit and loss account and balance sheet give a true and fair view respectively of the profit and loss for the period covered by the accounts, and of the assets and liabilities of the Company at the end of that period; and

 

(b) all the information and explanations required by the auditors have been obtained.

 

20.10 The report of the auditors shall be annexed to the accounts and shall be read at the meeting of Members at which the accounts are laid before the Company or shall be otherwise given to the Members.

 

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20.11 Every auditor of the Company shall have a right of access at all times to the books of account and vouchers of the Company, and shall be entitled to require from the Directors and officers of the Company such information and explanations as he thinks necessary for the performance of the duties of the auditors.

 

20.12 The auditors of the Company shall be entitled to receive notice of, and to attend any meetings of Members at which the Company’s profit and loss account and balance sheet are to be presented.

 

21 NOTICES

 

21.1 Any notice, information or written statement to be given by the Company to Members may be given by personal service by mail, facsimile or other similar means of electronic communication, addressed to each Member at the address shown in the share register.

 

21.2 Any summons, notice, order, document, process, information or written statement to be served on the Company may be served by leaving it, or by sending it by registered mail addressed to the Company, at its registered office, or by leaving it with, or by sending it by registered mail to, the registered agent of the Company.

 

21.3 Service of any summons, notice, order, document, process, information or written statement to be served on the Company may be proved by showing that the summons, notice, order, document, process, information or written statement was delivered to the registered office or the registered agent of the Company or that it was mailed in such time as to admit to its being delivered to the registered office or the registered agent of the Company in the normal course of delivery within the period prescribed for service and was correctly addressed and the postage was prepaid.

 

22 VOLUNTARY WINDING UP

 

The Company may by a Resolution of Members or by a Resolution of Directors appoint a voluntary liquidator.

 

We, Elian Fiduciary Services (BVI) Limited of Nemours Chambers, Road Town, Tortola, British Virgin Islands, for the purpose of incorporating a BVI business company under the laws of the British Virgin Islands hereby sign these Articles of Association.

 

Dated the 1 st day of July, 2015

 

Incorporator

 

Signed for and on behalf of Elian Fiduciary Services (BVI) Limited of Nemours Chambers, Road Town, Tortola, British Virgin Islands

  

/s/ Monique Adams

 
Signature of authorised signatory
   
Monique Adams
Print name

 

 

29

 

Exhibit 10.1

 

REGISTRATION RIGHTS AGREEMENT

 

THIS REGISTRATION RIGHTS AGREEMENT (this “ Agreement ”) is entered into as of August 18, 2017, by and among (i) Pacific Special Acquisition Corp., a British Virgin Islands company with limited liability, which will be known after the consummation of the transactions contemplated by the Merger Agreement (as defined below) as “Borqs Technologies, Inc.” (including any successor entity thereto, the “ Company ”), (ii) Zhengqi International Holding Limited, a business company incorporated in the British Virgin Islands with limited liability, in its capacity under the Merger Agreement as the Purchaser Representative (including any successor Purchaser Representative in accordance with the Merger Agreement, the “ Purchaser Representative ”) and (iii) the undersigned parties listed as Investors on Exhibit A hereto and under Investor on the signature page hereto (each, an “ Investor ” and collectively, the “ Investors ”).

 

WHEREAS, on December 27, 2016, the Company and the Purchaser Representative entered into that certain Merger Agreement (as amended from time to time in accordance with the terms thereof, and together with the First Amendment to Merger Agreement dated May 10, 2017 and the Second Amendment to Merger Agreement dated June 29, 2017, the “ Merger Agreement ”), by and among (i) the Company, (ii) PAAC Merger Subsidiary Limited, an exempted company formed under the laws of the Cayman Islands with limited liability and a wholly-owned subsidiary of the Company (“ Merger Sub ”), (iii) the Purchaser Representative, (iv) Borqs International Holding Corp, a company formed under the laws of the Cayman Islands with limited liability (“ Borqs ”), (v) Zengdong Zou, in the capacity as the Seller Representative thereunder, and (vi), for limited purposes thereof, Zhengqi International Holding Limited, a business company incorporated in the British Virgin Islands with limited liability, pursuant to which, subject to the terms and conditions thereof, Merger Sub will merge with and into Borqs, with Borqs continuing as the surviving entity (the “ Merger ”), and as a result of which (i) all of the issued and outstanding capital shares of Borqs, immediately prior to the consummation of the Merger (the “ Closing ”) shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, in exchange for the right to receive the Merger Consideration Shares, subject to the withholding of the Escrow Shares being deposited in the Escrow Account in accordance with the terms and conditions of the Merger Agreement and that certain Escrow Agreement (the “ Company Consideration Shares ”), (ii) Borqs’ holders immediately prior to the Effective Time shall be issued warrants of the Company exercisable into ordinary shares of the Company (the “ Company Consideration Warrants ”), (iii) the Investors may receive Earnout Shares (as defined below) (together with the Company Consideration Shares, and the Company Consideration Warrants, the “ Company Consideration Securities ”) and (iv) each outstanding Borqs option shall be assumed by the Company and automatically converted into any option exercisable into ordinary shares of the Company (as equitably adjusted), all upon the terms and subject to the conditions set forth in the Merger Agreement and in accordance with the applicable provisions of the Companies Law (2016 Revision) of the Cayman Islands;

 

WHEREAS, the Investors are holders of the issued and outstanding capital shares and warrants to purchase capital shares of Borqs;

 

WHEREAS, in connection with the Closing under the Merger Agreement, each Investor is also entering into a Lock-Up Agreement, dated as of the date hereof (each, as it may be amended, a “ Lock-Up Agreement ”), with the Company and the Purchaser Representative, pursuant to which such Investor is agreeing to certain restrictions on the transfer of the Company Consideration Securities received by such Investor;

 

WHEREAS, the Company is a party to a Registration Rights Agreement, dated as of October 14, 2015 (the “ Founder Registration Rights Agreement ”), with the holders of Company securities named therein; and

 

WHEREAS, the parties desire to enter into this Agreement to provide the Investors with certain rights relating to the registration of the Company Consideration Securities received in exchange for the applicable Borqs capital shares and warrants pursuant to the terms of the Merger Agreement.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 

 

1.             DEFINITIONS . The following capitalized terms used herein have the following meanings:

 

AAA ” is defined in Section 6.11.

 

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Agreement ” means this Agreement, as amended, restated, supplemented, or otherwise modified from time to time.

 

Borqs ” is defined in the recitals to this Agreement.

 

Closing ” is defined in the preamble to this Agreement.

 

Closing Date ” means the date of the Closing.

 

Commission ” means the Securities and Exchange Commission, or any other U.S. Federal agency then administering the Securities Act or the Exchange Act.

 

Company ” is defined in the preamble to this Agreement.

 

Company Consideration Securities ” is defined in the recitals to this Agreement.

 

Company Consideration Shares ” is defined in the recitals to this Agreement.

 

Company Consideration Warrants ” is defined in the recitals to this Agreement.

 

Demand Registration ” is defined in Section 2.1.1.

 

Demanding Holder ” is defined in Section 2.1.1.

 

Earnout Shares ” means any Earnout Shares (as defined in the Merger Agreement) that are ultimately released (or, in the case of certain Earnout Shares that may be cancelled and subject to reissuance, the shares equal and identical in all material respects to those cancelled that are then issued) to the Investors in the event certain conditions for the Earnout Period are met and in any case pursuant to the provisions (including the dispute resolution provisions) in the Merger Agreement governing such Earnout Shares, including Section 12.2 (“ Earnout Release Procedures ”).

 

Exchange Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect at the time.

 

Form S-3 ” is defined in Section 2.3.

 

Founder Registration Rights Agreement ” is defined in the recitals to this Agreement.

 

Founder Securities ” means those securities included in the definition of “Registrable Securities” specified in the Founder Registration Rights Agreement.

 

Indemnified Party ” is defined in Section 4.3.

 

Indemnifying Party ” is defined in Section 4.3.

 

Investor ” is defined in the preamble to this Agreement.

 

Investor Indemnified Party ” is defined in Section 4.1.

 

Lock-Up Agreement ” is defined in the recitals to this Agreement.

 

Lock-Up Release Date ” means the date on which the Lock-Up Period (as defined in the applicable Lock-Up Agreement) under the applicable Lock-Up Agreement has ended for all Registrable Securities to which it applies.

 

Maximum Number of Shares ” is defined in Section 2.1.4.

 

Merger ” is defined in the recitals to this Agreement.

 

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Merger Agreement ” is defined in the recitals to this Agreement.

 

Merger Sub ” is defined in the recitals to this Agreement.

 

Notices ” is defined in Section 6.3.

 

Ordinary Shares ” means the Ordinary Shares of the Company, no par value.

 

Piggy-Back Registration ” is defined in Section 2.2.1.

 

Pro Rata ” is defined in Section 2.1.4.

 

Proceeding ” is defined in Section 6.10.

 

Purchaser Representative ” is defined in the preamble to this Agreement.

 

Register ,” “ Registered ” and “ Registration ” mean a registration effected by preparing and filing a registration statement or similar document in compliance with the requirements of the Securities Act, and the applicable rules and regulations promulgated thereunder, and such registration statement becoming effective.

 

Registrable Securities ” means all of the Company Consideration Securities. Registrable Securities include any warrants, share capital or other securities of the Company issued as a dividend or other distribution with respect to or in exchange for or in replacement of such Company Consideration Securities. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when: (a) a Registration Statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been sold, transferred, disposed of or exchanged in accordance with such Registration Statement; (b) such securities shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent public distribution of them shall not require registration under the Securities Act; (c) such securities shall have ceased to be outstanding, or (d) the Registrable Securities are freely saleable under Rule 144 without volume limitations. Notwithstanding anything to the contrary contained herein, a person shall be deemed to be a “holder of Registrable Securities” under this Agreement only if they are an Investor or a transferee of the Registrable Securities (so long as they remain Registrable Securities) of any Investor permitted under this Agreement and the applicable Lock-Up Agreement.

 

Registration Statement ” means a registration statement filed by the Company with the Commission in compliance with the Securities Act and the rules and regulations promulgated thereunder for a public offering and sale of equity securities, or securities or other obligations exercisable or exchangeable for, or convertible into, equity securities (other than a registration statement on Form S-4 or Form S-8, or their successors, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another entity).

 

Securities Act ” means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect at the time.

 

Specified Courts ” is defined in Section 6.10.

 

Underwriter ” means a securities dealer who purchases any Registrable Securities as principal in an underwritten offering and not as part of such dealer’s market-making activities.

 

2.             REGISTRATION RIGHTS .

 

2.1.          Demand Registration .

 

2.1.1.       Request for Registration . Subject to Section 2.4, at any time and from time to time after the Closing Date, the holders of a majority-in-interest of any class of Registrable Securities held by the Investors or the transferees of the Investors may make a written demand for registration under the Securities Act of all or part of such class of Registrable Securities (a “ Demand Registration ”). Any demand for a Demand Registration shall specify the number of Registrable Securities proposed to be sold and the intended method(s) of distribution thereof. The Company will notify all other holders of Registrable Securities of the demand within fifteen (15) days following receipt of any request for a Demand Registration, and each holder of Registrable Securities who wishes to include all or a portion of such holder’s Registrable Securities in the Demand Registration (each such holder including shares of Registrable Securities in such registration, a “ Demanding Holder ”) shall so notify the Company within fifteen (15) days after the receipt by the holder of the notice from the Company. Upon any such request, the Demanding Holders shall be entitled to have their Registrable Securities included in the Demand Registration, subject to Section 2.1.4 and the provisos set forth in Section 3.1.1. The Company shall not be obligated to effect more than an aggregate of three (3) Demand Registrations under this Section 2.1.1 in respect of all Registrable Securities.

 

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2.1.2.        Effective Registration . A registration will not count as a Demand Registration until the Registration Statement filed with the Commission with respect to such Demand Registration has been declared effective and the Company has complied with all of its obligations under this Agreement with respect thereto; provided, however, that if, after such Registration Statement has been declared effective, the offering of Registrable Securities pursuant to a Demand Registration is interfered with by any stop order or injunction of the Commission or any other governmental agency or court, the Registration Statement with respect to such Demand Registration will be deemed not to have been declared effective, unless and until, (i) such stop order or injunction is removed, rescinded or otherwise terminated, and (ii) a majority-in-interest of the Demanding Holders thereafter elect to continue the offering; provided, further, that the Company shall not be obligated to file a second Registration Statement until a Registration Statement that has been filed is counted as a Demand Registration or is terminated.

 

2.1.3.        Underwritten Offering . If a majority-in-interest of the Demanding Holders so elect and such holders so advise the Company as part of their written demand for a Demand Registration, the offering of such Registrable Securities pursuant to such Demand Registration shall be in the form of an underwritten offering. In such event, the right of any holder to include its Registrable Securities in such registration shall be conditioned upon such holder’s participation in such underwriting and the inclusion of such holder’s Registrable Securities in the underwriting to the extent provided herein. All Demanding Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the Underwriter or Underwriters selected for such underwriting by a majority-in-interest of the holders initiating the Demand Registration.

 

2.1.4.        Reduction of Offering . If the managing Underwriter or Underwriters for a Demand Registration that is to be an underwritten offering advises the Company and the Demanding Holders in writing that the dollar amount or number of Registrable Securities which the Demanding Holders desire to sell, taken together with all other Ordinary Shares or other securities which the Company desires to sell and the Ordinary Shares, if any, as to which registration by the Company has been requested pursuant to written contractual piggy-back registration rights held by other security holders of the Company who desire to sell, exceeds the maximum dollar amount or maximum number of shares that can be sold in such offering without adversely affecting the proposed offering price, the timing, the distribution method, or the probability of success of such offering (such maximum dollar amount or maximum number of shares, as applicable, the “ Maximum Number of Shares ”), then the Company shall include in such registration: (i) first, the Registrable Securities as to which Demand Registration has been requested by the Demanding Holders and the Founder Securities for the account of any persons who have exercised demand registration rights pursuant to the Founder Registration Rights Agreement during the period under which the Demand Registration hereunder is on-going (all pro rata in accordance with the number of securities that each such person has requested be included in such registration, regardless of the number of securities held by each such person (such proportion is referred to herein as “ Pro Rata ”) that can be sold without exceeding the Maximum Number of Shares; (ii) second, to the extent that the Maximum Number of Shares has not been reached under the foregoing clause (i), the Ordinary Shares or other securities that the Company desires to sell that can be sold without exceeding the Maximum Number of Shares; (iii) third, to the extent that the Maximum Number of Shares have not been reached under the foregoing clauses (i) and (ii), the Ordinary Shares or other securities for the account of other persons that the Company is obligated to register pursuant to written contractual arrangements with such persons in effect as of the date of this Agreement, and that can be sold without exceeding the Maximum Number of Shares; and (iv) fourth, to the extent that the Maximum Number of Shares have not been reached under the foregoing clauses (i), (ii), and (iii), the Ordinary Shares or other securities for the account of other persons that the Company is obligated to register pursuant to written contractual arrangements with such persons with effective dates after the date of this Agreement, and that can be sold without exceeding the Maximum Number of Shares. In the event that Company securities that are convertible into Ordinary Shares are included in the offering, the calculations under this Section 2.1.4 shall include such Company securities on an as-converted to Ordinary Share basis.

 

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2.1.5.        Withdrawal . If a majority-in-interest of the Demanding Holders disapprove of the terms of any underwriting or are not entitled to include all of their Registrable Securities in any offering, such majority-in-interest of the Demanding Holders may elect to withdraw from such offering by giving written notice to the Company and the Underwriter or Underwriters of their request to withdraw prior to the effectiveness of the Registration Statement filed with the Commission with respect to such Demand Registration. If the majority-in-interest of the Demanding Holders withdraws from a proposed offering relating to a Demand Registration, then such registration shall not count as a Demand Registration provided for in Section 2.1.

 

2.2.          Piggy-Back Registration .

 

2.2.1.        Piggy-Back Rights . Subject to Section 2.4, if at any time after the Closing Date the Company proposes to file a Registration Statement under the Securities Act with respect to an offering of equity securities, or securities or other obligations exercisable or exchangeable for, or convertible into, equity securities, by the Company for its own account or for security holders of the Company for their account (or by the Company and by security holders of the Company including, without limitation, pursuant to Section 2.1), other than a Registration Statement (i) filed in connection with any employee share option or other benefit plan, (ii) for an exchange offer or offering of securities solely to the Company’s existing shareholders, (iii) for an offering of debt that is convertible into equity securities of the Company or (iv) for a dividend reinvestment plan, then the Company shall (x) give written notice of such proposed filing to the holders of Registrable Securities as soon as practicable but in no event less than ten (10) days before the anticipated filing date, which notice shall describe the amount and type of securities to be included in such offering, the intended method(s) of distribution, and the name of the proposed managing Underwriter or Underwriters, if any, of the offering, and (y) offer to the holders of Registrable Securities in such notice the opportunity to register the sale of such number of Registrable Securities as such holders may request in writing within five (5) days following receipt of such notice (a “ Piggy-Back Registration ”). The Company shall cause such Registrable Securities to be included in such registration and shall use its best efforts to cause the managing Underwriter or Underwriters of a proposed underwritten offering to permit the Registrable Securities requested to be included in a Piggy-Back Registration on the same terms and conditions as any similar securities of the Company and to permit the sale or other disposition of such Registrable Securities in accordance with the intended method(s) of distribution thereof. All holders of Registrable Securities proposing to distribute their securities through a Piggy-Back Registration that involves an Underwriter or Underwriters shall enter into an underwriting agreement in customary form with the Underwriter or Underwriters selected for such Piggy-Back Registration.

 

2.2.2.        Reduction of Offering . If the managing Underwriter or Underwriters for a Piggy-Back Registration that is to be an underwritten offering advises the Company and the holders of Registrable Securities proposing to distribute their Registrable Securities through such Piggy-Back Registration in writing that the dollar amount or number of Ordinary Shares or other Company securities which the Company desires to sell, taken together with the Ordinary Shares or other Company securities, if any, as to which registration has been demanded pursuant to written contractual arrangements with persons other than the holders of Registrable Securities hereunder, the Registrable Securities as to which registration has been requested under this Section 2.2, and the Ordinary Shares or other Company securities, if any, as to which registration has been requested pursuant to the written contractual piggy-back registration rights of other security holders of the Company, exceeds the Maximum Number of Shares, then the Company shall include in any such registration: 

 

(a)                 If the registration is undertaken for the Company’s account: (i) first, the Ordinary Shares or other securities that the Company desires to sell that can be sold without exceeding the Maximum Number of Shares; (ii) second, to the extent that the Maximum Number of Shares has not been reached under the foregoing clause (i), the Ordinary Shares or other securities, if any, comprised of Registrable Securities or Founder Securities, as to which registration has been requested pursuant to the applicable written contractual piggy-back registration rights of such security holders, Pro Rata, that can be sold without exceeding the Maximum Number of Shares; and (iii) third, to the extent that the Maximum Number of shares has not been reached under the foregoing clauses (i) and (ii), the Ordinary Shares or other securities for the account of other persons that the Company is obligated to register pursuant to written contractual piggy-back registration rights with such persons in effect as of the date of this Agreement, and that can be sold without exceeding the Maximum Number of Shares; and (iv) fourth, to the extent that the Maximum Number of Shares have not been reached under the foregoing clauses (i), (ii), and (iii), the Ordinary Shares or other securities for the account of other persons that the Company is obligated to register pursuant to written contractual arrangements with such persons with effective dates after the date of this Agreement, and that can be sold without exceeding the Maximum Number of Shares.

 

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(b)                 If the registration is a “demand” registration undertaken at the demand of persons other than the holders of Registrable Securities hereunder (including any Founder Securities under the Founder Registration Rights Agreements): (i) first, the Ordinary Shares or other securities for the account of the demanding persons that can be sold without exceeding the Maximum Number of Shares; (ii) second, to the extent that the Maximum Number of Shares has not been reached under the foregoing clause (i), the Ordinary Shares or other securities that the Company desires to sell that can be sold without exceeding the Maximum Number of Shares; (iii) third, to the extent that the Maximum Number of Shares has not been reached under the foregoing clauses (i) and (ii), the Registrable Securities as to which registration has been requested by Investors pursuant to the terms hereof and Ordinary Shares or other securities for the account of other persons that the Company is obligated to register pursuant to written contractual arrangements with such persons in effect as of the date of this Agreement, in each case Pro Rata, that can be sold without exceeding the Maximum Number of Shares; and (iv) fourth, to the extent that the Maximum Number of Shares has not been reached under the foregoing clauses (i), (ii) and (iii), the Ordinary Shares or other securities for the account of other persons that the Company is obligated to register pursuant to written contractual arrangements with such persons with effective dates after the date of this Agreement, that can be sold without exceeding the Maximum Number of Shares.

 

2.2.3.        Withdrawal . Any holder of Registrable Securities may elect to withdraw such holder’s request for inclusion of Registrable Securities in any Piggy-Back Registration by giving written notice to the Company of such request to withdraw prior to the effectiveness of the Registration Statement. The Company (whether on its own determination or as the result of a withdrawal by persons making a demand pursuant to written contractual obligations) may withdraw a Registration Statement at any time prior to the effectiveness of such Registration Statement without any liability to the applicable Investor, subject to the next sentence and the provisions of Section 4. Notwithstanding any such withdrawal, the Company shall pay all expenses incurred in connection with such Piggy-Back Registration as provided in Section 3.3 by the holders of Registrable Securities that have requested to have their Registrable Securities included in such Piggy-Back Registration.

 

2.3.          Registrations on Form S-3 . Subject to Section 2.4, after the Closing Date, holders of Registrable Securities may at any time and from time to time, request in writing that the Company register the resale of any or all of such Registrable Securities on Form S-3 or any similar short-form registration which may be available at such time (“ Form S-3 ”); provided, however, that the Company shall not be obligated to effect such request through an underwritten offering. Upon receipt of such written request, the Company will promptly give written notice of the proposed registration to all other holders of Registrable Securities, and, as soon as practicable thereafter, effect the registration of all or such portion of such holder’s or holders’ Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities or other securities of the Company, if any, of any other holder or holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration pursuant to this Section 2.3: (i) if Form S-3 is not available to the Company for such offering; or (ii) if the holders of Registrable Securities, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at any aggregate price to the public of less than $500,000. Registrations effected pursuant to this Section 2.3 shall not be counted as Demand Registrations effected pursuant to Section 2.1.

 

2.4.          Restriction of Offerings . Notwithstanding anything to the contrary contained in this Agreement, the Investors shall not be entitled to request, and the Company shall not be obligated to effect, or take any action to effect, any registration (including any Demand Registration or Piggyback Registration) pursuant to this Section 2 with respect to any Registrable Securities prior to the date that is three (3) months prior to the applicable Lock-Up Release Date, including any Escrow Shares (as defined in the Lock-Up Agreement) while they are subject to restrictions on transfer under the applicable Lock-Up Agreement, and no such registration will be effective or any transfer permitted until the applicable Lock-Up Release Date.

 

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3.             REGISTRATION PROCEDURES .

 

3.1.          Filings; Information . Whenever the Company is required to effect the registration of any Registrable Securities pursuant to Section 2, the Company shall use its best efforts to effect the registration and sale of such Registrable Securities in accordance with the intended method(s) of distribution thereof as expeditiously as practicable, and in connection with any such request: 

 

3.1.1.        Filing Registration Statement . The Company shall use its best efforts to, as expeditiously as possible after receipt of a request for a Demand Registration pursuant to Section 2.1, prepare and file with the Commission a Registration Statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the sale of all Registrable Securities to be registered thereunder in accordance with the intended method(s) of distribution thereof, and shall use its best efforts to cause such Registration Statement to become effective and use its best efforts to keep it effective for the period required by Section 3.1.3; provided, however, that the Company shall have the right to defer any Demand Registration for up to thirty (30) days, and any Piggy-Back Registration for such period as may be applicable to deferment of any demand registration to which such Piggy-Back Registration relates, in each case if the Company shall furnish to the Investors requesting to include their Registrable Securities in such registration a certificate signed by the President or Chairman of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would be materially detrimental to the Company and its shareholders for such Registration Statement to be effected at such time; provided further, however, that the Company shall not have the right to exercise the right set forth in the immediately preceding proviso more than once in any 365-day period in respect of a Demand Registration hereunder.

 

3.1.2.        Copies . The Company shall, prior to filing a Registration Statement or prospectus, or any amendment or supplement thereto, furnish without charge to the holders of Registrable Securities included in such registration, and such holders’ legal counsel, copies of such Registration Statement as proposed to be filed, each amendment and supplement to such Registration Statement (in each case including all exhibits thereto and documents incorporated by reference therein), the prospectus included in such Registration Statement (including each preliminary prospectus), and such other documents as the holders of Registrable Securities included in such registration or legal counsel for any such holders may request in order to facilitate the disposition of the Registrable Securities owned by such holders.

 

3.1.3.        Amendments and Supplements . The Company shall prepare and file with the Commission such amendments, including post-effective amendments, and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective and in compliance with the provisions of the Securities Act until all Registrable Securities and other securities covered by such Registration Statement have been disposed of in accordance with the intended method(s) of distribution set forth in such Registration Statement or such securities have been withdrawn or until such time as the Registrable Securities cease to be Registrable Securities as defined by this Agreement.

 

3.1.4.        Notification . After the filing of a Registration Statement, the Company shall promptly, and in no event more than two (2) business days after such filing, notify the holders of Registrable Securities included in such Registration Statement of such filing, and shall further notify such holders promptly and confirm such advice in writing in all events within two (2) business days of the occurrence of any of the following: (i) when such Registration Statement becomes effective; (ii) when any post-effective amendment to such Registration Statement becomes effective; (iii) the issuance or threatened issuance by the Commission of any stop order (and the Company shall take all actions required to prevent the entry of such stop order or to remove it if entered); and (iv) any request by the Commission for any amendment or supplement to such Registration Statement or any prospectus relating thereto or for additional information or of the occurrence of an event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of the securities covered by such Registration Statement, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and promptly make available to the holders of Registrable Securities included in such Registration Statement any such supplement or amendment; except that before filing with the Commission a Registration Statement or prospectus or any amendment or supplement thereto, including documents incorporated by reference, the Company shall furnish to the holders of Registrable Securities included in such Registration Statement and to the legal counsel for any such holders, copies of all such documents proposed to be filed sufficiently in advance of filing to provide such holders and legal counsel with a reasonable opportunity to review such documents and comment thereon, and the Company shall not file any Registration Statement or prospectus or amendment or supplement thereto, including documents incorporated by reference, to which such holders or their legal counsel shall object.

 

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3.1.5.        State Securities Laws Compliance . The Company shall use its best efforts to (i) register or qualify the Registrable Securities covered by the Registration Statement under such securities or “blue sky” laws of such jurisdictions in the United States as the holders of Registrable Securities included in such Registration Statement (in light of their intended plan of distribution) may request and (ii) take such action necessary to cause such Registrable Securities covered by the Registration Statement to be registered with or approved by such other governmental authorities as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be necessary or advisable to enable the holders of Registrable Securities included in such Registration Statement to consummate the disposition of such Registrable Securities in such jurisdictions; provided, however, that the Company shall not be required to qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph or subject itself to taxation in any such jurisdiction.

 

3.1.6.        Agreements for Disposition . The Company shall enter into customary agreements (including, if applicable, an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities. The representations, warranties and covenants of the Company in any underwriting agreement which are made to or for the benefit of any Underwriters, to the extent applicable, shall also be made to and for the benefit of the holders of Registrable Securities included in such Registration Statement. No holder of Registrable Securities included in such Registration Statement shall be required to make any representations or warranties in the underwriting agreement except, if applicable, with respect to such holder’s organization, good standing, authority, title to Registrable Securities, lack of conflict of such sale with such holder’s material agreements and organizational documents, and with respect to written information relating to such holder that such holder has furnished in writing expressly for inclusion in such Registration Statement.

 

3.1.7.        Cooperation . The principal executive officer of the Company, the principal financial officer of the Company, the principal accounting officer of the Company and all other officers and members of the management of the Company shall cooperate fully in any offering of Registrable Securities hereunder, which cooperation shall include, without limitation, the preparation of the Registration Statement with respect to such offering and all other offering materials and related documents, and participation in meetings with Underwriters, attorneys, accountants and potential investors.

 

3.1.8.        Records . The Company shall make available for inspection by the holders of Registrable Securities included in such Registration Statement, any Underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other professional retained by any holder of Registrable Securities included in such Registration Statement or any Underwriter, all financial and other records, pertinent corporate documents and properties of the Company, as shall be necessary to enable them to exercise their due diligence responsibility, and cause the Company’s officers, directors and employees to supply all information requested by any of them in connection with such Registration Statement.

 

3.1.9.        Opinions and Comfort Letters . The Company shall furnish to each holder of Registrable Securities included in such Registration Statement a signed counterpart, addressed to such holder, of (i) any opinion of counsel to the Company delivered to any Underwriter and (ii) any comfort letter from the Company’s independent public accountants delivered to any Underwriter. In the event no legal opinion is delivered to any Underwriter, the Company shall furnish to each holder of Registrable Securities included in such Registration Statement, at any time that such holder elects to use a prospectus, an opinion of counsel to the Company to the effect that the Registration Statement containing such prospectus has been declared effective and that no stop order is in effect.

 

3.1.10.      Earnings Statement . The Company shall comply with all applicable rules and regulations of the Commission and the Securities Act, and make available to its shareholders, as soon as practicable, an earnings statement covering a period of twelve (12) months, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder.

 

3.1.11.      Listing . The Company shall use its best efforts to cause all Registrable Securities included in any registration to be listed on such exchanges or otherwise designated for trading in the same manner as similar securities issued by the Company are then listed or designated or, if no such similar securities are then listed or designated, in a manner satisfactory to the holders of a majority-in-interest of the Registrable Securities included in such registration.

 

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3.1.12.      Road Show . If the registration involves the registration of Registrable Securities involving gross proceeds in excess of $25,000,000, the Company shall use its reasonable efforts to make available senior executives of the Company to participate in customary “road show” presentations that may be reasonably requested by the Underwriter in any underwritten offering.

 

3.2.          Obligation to Suspend Distribution . Upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3.1.4(iv), or, in the case of a resale registration on Form S-3 pursuant to Section 2.3 hereof, upon any suspension by the Company, pursuant to a written insider trading compliance program adopted by the Company’s Board of Directors, of the ability of all “insiders” covered by such program to transact in the Company’s securities because of the existence of material non-public information, each holder of Registrable Securities included in any registration shall immediately discontinue disposition of such Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such holder receives the supplemented or amended prospectus contemplated by Section 3.1.4(iv) or the restriction on the ability of “insiders” to transact in the Company’s securities is removed, as applicable, and, if so directed by the Company, each such holder will deliver to the Company all copies, other than permanent file copies then in such holder’s possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice.

 

3.3.          Registration Expenses . The Company shall bear all costs and expenses incurred in connection with any Demand Registration pursuant to Section 2.1, any Piggy-Back Registration pursuant to Section 2.2, and any registration on Form S-3 effected pursuant to Section 2.3, and all expenses incurred in performing or complying with its other obligations under this Agreement, whether or not the Registration Statement becomes effective, including, without limitation: (i) all registration and filing fees; (ii) fees and expenses of compliance with securities or “blue sky” laws (including fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities); (iii) printing expenses; (iv) the Company’s internal expenses (including, without limitation, all salaries and expenses of its officers and employees); (v) the fees and expenses incurred in connection with the listing of the Registrable Securities as required by Section 3.1.11; (vi) Financial Industry Regulatory Authority fees; (vii) fees and disbursements of counsel for the Company and fees and expenses for independent certified public accountants retained by the Company (including the expenses or costs associated with the delivery of any opinions or comfort letters requested pursuant to Section 3.1.9); (viii) the fees and expenses of any special experts retained by the Company in connection with such registration and (ix) the fees and expenses of one legal counsel selected by the holders of a majority-in-interest of the Registrable Securities included in such registration. The Company shall have no obligation to pay any underwriting discounts or selling commissions attributable to the Registrable Securities being sold by the holders thereof, which underwriting discounts or selling commissions shall be borne by such holders. Additionally, in an underwritten offering, all selling security holders and the Company shall bear the expenses of the Underwriter pro rata in proportion to the respective amount of shares each is selling in such offering.

 

3.4.          Information . The holders of Registrable Securities included in any Registration Statement shall provide such information as may reasonably be requested by the Company, or the managing Underwriter, if any, in connection with the preparation of such Registration Statement, including amendments and supplements thereto, in order to effect the registration of any Registrable Securities under the Securities Act pursuant to Section 2 and in connection with the Company’s obligation to comply with Federal and applicable state securities laws.

 

4.             INDEMNIFICATION AND CONTRIBUTION .

 

4.1.          Indemnification by the Company . The Company agrees to indemnify and hold harmless each Investor and each other holder of Registrable Securities, and each of their respective officers, employees, affiliates, directors, partners, members, attorneys and agents, and each person, if any, who controls an Investor and each other holder of Registrable Securities (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) (each, an “ Investor Indemnified Party ”), from and against any expenses, losses, judgments, claims, damages or liabilities, whether joint or several, arising out of or based upon any untrue statement (or allegedly untrue statement) of a material fact contained in any Registration Statement under which the sale of such Registrable Securities was registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained in the Registration Statement, or any amendment or supplement to such Registration Statement, or arising out of or based upon any omission (or alleged omission) to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation promulgated thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration; and the Company shall promptly reimburse the Investor Indemnified Party for any legal and any other expenses reasonably incurred by such Investor Indemnified Party in connection with investigating and defending any such expense, loss, judgment, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such expense, loss, claim, damage or liability arises out of or is based upon any untrue statement or allegedly untrue statement or omission or alleged omission made in such Registration Statement, preliminary prospectus, final prospectus, or summary prospectus, or any such amendment or supplement, in reliance upon and in conformity with information furnished to the Company, in writing, by such selling holder expressly for use therein. The Company also shall indemnify any Underwriter of the Registrable Securities, their officers, affiliates, directors, partners, members and agents and each person who controls such Underwriter on substantially the same basis as that of the indemnification provided above in this Section 4.1.

 

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4.2.          Indemnification by Holders of Registrable Securities . Each selling holder of Registrable Securities will, in the event that any registration is being effected under the Securities Act pursuant to this Agreement of any Registrable Securities held by such selling holder, indemnify and hold harmless the Company, each of its directors and officers and each Underwriter (if any), and each other selling holder and each other person, if any, who controls another selling holder or such Underwriter within the meaning of the Securities Act, against any losses, claims, judgments, damages or liabilities, whether joint or several, insofar as such losses, claims, judgments, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or allegedly untrue statement of a material fact contained in any Registration Statement under which the sale of such Registrable Securities was registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained in the Registration Statement, or any amendment or supplement to the Registration Statement, or arise out of or are based upon any omission or the alleged omission to state a material fact required to be stated therein or necessary to make the statement therein not misleading, if the statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by such selling holder expressly for use therein (provided, however, that the indemnity agreement contained in this Section 4.2 shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the indemnifying selling holder, such consent not to be unreasonably withheld, delayed or conditioned), and shall reimburse the Company, its directors and officers, each Underwriter (if any) and each other selling holder or controlling person for any legal or other expenses reasonably incurred by any of them in connection with investigation or defending any such loss, claim, damage, liability or action. Each selling holder’s indemnification obligations hereunder shall be several and not joint and shall be limited to the amount of any net proceeds actually received by such selling holder.

 

4.3.          Conduct of Indemnification Proceedings . Promptly after receipt by any person of any notice of any loss, claim, damage or liability or any action in respect of which indemnity may be sought pursuant to Section 4.1 or 4.2, such person (the “ Indemnified Party ”) shall, if a claim in respect thereof is to be made against any other person for indemnification hereunder, notify such other person (the “ Indemnifying Party ”) in writing of the loss, claim, judgment, damage, liability or action; provided, however, that the failure by the Indemnified Party to notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability which the Indemnifying Party may have to such Indemnified Party hereunder, except and solely to the extent the Indemnifying Party is actually prejudiced by such failure. If the Indemnified Party is seeking indemnification with respect to any claim or action brought against the Indemnified Party, then the Indemnifying Party shall be entitled to participate in such claim or action, and, to the extent that it wishes, jointly with all other Indemnifying Parties, to assume control of the defense thereof with counsel satisfactory to the Indemnified Party. After notice from the Indemnifying Party to the Indemnified Party of its election to assume control of the defense of such claim or action, the Indemnifying Party shall not be liable to the Indemnified Party for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that in any action in which both the Indemnified Party and the Indemnifying Party are named as defendants, the Indemnified Party shall have the right to employ separate counsel (but no more than one such separate counsel) to represent the Indemnified Party and its controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Indemnified Party against the Indemnifying Party, with the fees and expenses of such counsel to be paid by such Indemnifying Party if, based upon the written opinion of counsel of such Indemnified Party, representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, consent to entry of judgment or effect any settlement of any claim or pending or threatened proceeding in respect of which the Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such judgment or settlement includes an unconditional release of such Indemnified Party from all liability arising out of such claim or proceeding.

 

  10  
 

 

4.4.          Contribution.

 

4.4.1.       If the indemnification provided for in the foregoing Sections 4.1, 4.2 and 4.3 is unavailable to any Indemnified Party in respect of any loss, claim, damage, liability or action referred to herein, then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the Indemnified Parties and the Indemnifying Parties in connection with the actions or omissions which resulted in such loss, claim, damage, liability or action, as well as any other relevant equitable considerations. The relative fault of any Indemnified Party and any Indemnifying Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such Indemnified Party or such Indemnifying Party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

 

4.4.2.       The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 4.4 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding Section 4.4.1.

 

4.4.3.       The amount paid or payable by an Indemnified Party as a result of any loss, claim, damage, liability or action referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 4.4, no holder of Registrable Securities shall be required to contribute any amount in excess of the dollar amount of the net proceeds (after payment of any underwriting fees, discounts, commissions or taxes) actually received by such holder from the sale of Registrable Securities which gave rise to such contribution obligation. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

 

5.             UNDERWRITING AND DISTRIBUTION .

 

5.1.          Rule 144 . The Company covenants that it shall file any reports required to be filed by it under the Securities Act and the Exchange Act and shall take such further action as the holders of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holders to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 under the Securities Act, as such Rules may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission.

 

6.             MISCELLANEOUS .

 

6.1.          Other Registration Rights . The Company represents and warrants that as of the date of this Agreement, no person other than the holders of the Registrable Securities under this Agreement and the holders of Founder Securities under the Founder Registration Rights Agreement has any right to require the Company to register any of the Company’s share capital for sale or to include the Company’s share capital in any registration filed by the Company for the sale of share capital for its own account or for the account of any other person.

 

6.2.          Assignment; No Third Party Beneficiaries . This Agreement and the rights, duties and obligations of the Company hereunder may not be assigned or delegated by the Company in whole or in part. This Agreement and the rights, duties and obligations of the holders of Registrable Securities hereunder may be freely assigned or delegated by such holder of Registrable Securities in conjunction with and to the extent of any transfer of Registrable Securities by any such holder. This Agreement and the provisions hereof shall be binding upon and shall inure to the benefit of each of the parties, to the permitted assigns of the Investors or holder of Registrable Securities or of any assignee of the Investors or holder of Registrable Securities. This Agreement is not intended to confer any rights or benefits on any persons that are not party hereto other than as expressly set forth in Article 4 and this Section 6.2. If the Purchaser Representative is replaced in accordance with the terms of the Merger Agreement, the replacement Purchaser Representative shall automatically become a party to this Agreement as if it were the original Purchaser Representative hereunder

 

  11  
 

 

6.3.          Notices . All notices, demands, requests, consents, approvals or other communications (collectively, “ Notices ”) required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and shall be personally served, delivered by reputable air courier service with charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile, addressed as set forth below, or to such other address as such party shall have specified most recently by written notice. Notice shall be deemed given on the date of service or transmission if personally served or transmitted by telegram, telex or facsimile; provided, that if such service or transmission is not on a business day or is after normal business hours, then such notice shall be deemed given on the next business day. Notice otherwise sent as provided herein shall be deemed given on the next business day following timely delivery of such notice to a reputable air courier service with an order for next-day delivery.

 

If to the Company, to:

 

Borqs Technologies, Inc.
Tower A, Building B23
Universal Business Park
No. 10 Jiuxiangqiao Road
Chaoyang District, Beijing 100015, China
Attn: Pat Chan, CEO
Facsimile No.: 86-10-5975-6363
Telephone No: 86-10-5975-6336
Email: pat.chan@borqs.com

With copies to (which shall not constitute notice):

 

the Purchaser Representative (and its copy for notices hereunder)

 

and

 

Fenwick & West LLP
801 California Street
Mountain View, CA 94041
Attention: Eva Wang
Facsimile No.: (650) 938-5200
Telephone No.: (650) 335-7878
Email: ewang@fenwick.com

   
   

If to the Purchaser Representative, to:

 

Zhengqi International Holding Limited
855 Pudong South Road
The World Plaza, 27th Floor
Pudong, Shanghai 200120, China
Attn: Yaqi (Sophie) Feng, COO
Facsimile No.: 86-21-80129878
Telephone No: 86-21-80129882
Email: fengyq@tpyzq.com

 

With a copy to (which shall not constitute notice):

 

Ellenoff Grossman & Schole LLP
1345 Avenue of the Americas, 11th Floor
New York, New York 10105
Attention: Stuart Neuhauser
Facsimile No.: (212) 370-7889
Telephone No.: (212) 370-1300
Email: sneuhauser@egsllp.com

   

If to an Investor, to :  the address set forth next to such Investor’s name on Exhibit A hereto.

 

 

6.4.          Severability . This Agreement shall be deemed severable, and the invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of this Agreement or of any other term or provision hereof. Furthermore, in lieu of any such invalid or unenforceable term or provision, the parties hereto intend that there shall be added as a part of this Agreement a provision as similar in terms to such invalid or unenforceable provision as may be possible that is valid and enforceable. Notwithstanding anything to the contrary contained in this Agreement, in the event that an Investor identified on Exhibit A hereto or any other person receiving Company Consideration Securities in connection with the Closing does not sign and provide to the Company a duly executed copy of this Agreement and the applicable Lock-Up Agreement, such Investor or other person failing to provide such signature shall not be a party to this Agreement or have any rights or obligations hereunder, but such failure shall not affect the rights and obligations of the other parties to this Agreement as amongst such other parties.

 

  12  
 

 

6.5.          Counterparts . This Agreement may be executed in multiple counterparts (including by facsimile or pdf or other electronic document transmission), each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument.

 

6.6.          Entire Agreement . This Agreement (together with Merger Agreement and the Lock-Up Agreements to the extent incorporated herein, and including all agreements entered into pursuant hereto and all certificates and instruments delivered pursuant hereto and thereto) constitute the entire agreement of the parties with respect to the subject matter hereof and supersede all prior and contemporaneous agreements, representations, understandings, negotiations and discussions between the parties, whether oral or written, relating to the subject matter hereof. For the avoidance of doubt, the foregoing shall not affect the rights and obligations of the parties under the Merger Agreement or any other Ancillary Document (as defined in the Merger Agreement), including the Lock-Up Agreements.

 

6.7.          Interpretation . Titles and headings of sections of this Agreement are for convenience only and shall not affect the construction of any provision of this Agreement. In this Agreement, unless the context otherwise requires: (i) any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa; (ii) “including” (and with correlative meaning “include”) means including without limiting the generality of any description preceding or succeeding such term and shall be deemed in each case to be followed by the words “without limitation”; (iii) the words “herein,” “hereto,” and “hereby” and other words of similar import in this Agreement shall be deemed in each case to refer to this Agreement as a whole and not to any particular section or other subdivision of this Agreement; and (iv) the term “or” means “and/or”. For purposes of this Agreement, the term (x) “person” means an individual, corporation, partnership (including a general partnership, limited partnership or limited liability partnership), limited liability company, association, trust or other entity or organization, including a government, domestic or foreign, or political subdivision thereof, or an agency or instrumentality thereof and (y) “business day” means a day other than a Saturday, Sunday or a legal holiday on which commercial banking institutions in New York, New York are authorized to close for business. The parties have participated jointly in the negotiation and drafting of this Agreement. Consequently, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement.

 

6.8.          Amendments; Waivers . Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance, and either retroactively or prospectively) only with the written agreement or consent of the Company, the Purchaser Representative and Investors holding a majority-in-interest of the Registrable Securities; provided, that any amendment of this Agreement which imposes additional liability on an Investor will also require the consent of such Investor. No failure or delay by a party in exercising any right hereunder shall operate as a waiver thereof. No waivers of or exceptions to any term, condition, or provision of this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, condition, or provision

 

6.9.          Remedies Cumulative . In the event that the Company fails to observe or perform any covenant or agreement to be observed or performed under this Agreement, the Investor or any other holder of Registrable Securities may proceed to protect and enforce its rights by suit in equity or action at law, whether for specific performance of any term contained in this Agreement or for an injunction against the breach of any such term or in aid of the exercise of any power granted in this Agreement or to enforce any other legal or equitable right, or to take any one or more of such actions, without being required to post a bond. None of the rights, powers or remedies conferred under this Agreement shall be mutually exclusive, and each such right, power or remedy shall be cumulative and in addition to any other right, power or remedy, whether conferred by this Agreement or now or hereafter available at law, in equity, by statute or otherwise.

 

6.10.        Governing Law; Jurisdiction . In connection with Section 5-1401 of the General Obligations Law of the State of New York, this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without regard to principles of conflicts of law that would result in the application of the substantive law of another jurisdiction. Subject to Section 6.11 , any action, proceeding or claim arising out of or relating to this Agreement (a “ Proceeding ”) shall be heard and determined exclusively in any state or federal court located in New York, New York (or in any court in which appeal from such courts may be taken) (the “ Specified Courts ”). Subject to Section 6.11 , each party hereto hereby (i) submits to the exclusive jurisdiction of any Specified Court for the purpose of any Proceeding brought by any party hereto and (ii) irrevocably waives, and agrees not to assert by way of motion, defense or otherwise, in any such Proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the Proceeding is brought in an inconvenient forum, that the venue of the Proceeding is improper, or that this Agreement or the transactions contemplated hereby may not be enforced in or by any Specified Court. Each party agrees that a final judgment in any Proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by applicable law. Each party irrevocably consents to the service of the summons and complaint and any other process in any other action or proceeding relating to the transactions contemplated by this Agreement, on behalf of itself, or its property, by personal delivery of copies of such process to such party at the applicable address set forth in Section 6.3 . Nothing in this Section 6.10 shall affect the right of any party to serve legal process in any other manner permitted by applicable law.

 

  13  
 

 

6.11.        Arbitration . The parties hereto agree that any Proceeding (other than applications for temporary restraining order, preliminary injunction, permanent injunction or other equitable relief or application for enforcement of aa resolution under this Section 6.11 ) shall be resolved through final and binding arbitration in accordance with the International Arbitration Rules of the American Arbitration Association (“ AAA ”). The arbitration shall be brought before the AAA International Center for Dispute Resolution’s offices in New York City, New York, will be conducted in English and will be decided by a panel of three arbitrators selected from the AAA Commercial Disputes Panel and that the arbitrator panel’s decision shall be final and enforceable by any court having jurisdiction over the party from whom enforcement is sought. The cost of such arbitrators and arbitration services, together with the prevailing party’s legal fees and expenses, shall be borne by the non-prevailing party or as otherwise directed by the arbitrators.

 

6.12.        Waiver of Trial by Jury . Each party hereby irrevocably and unconditionally waives the right to a trial by jury in any action, suit, counterclaim or other proceeding (whether based on contract, tort or otherwise) arising out of, connected with or relating to this Agreement, the transactions contemplated hereby, or the actions of the Investor in the negotiation, administration, performance or enforcement hereof.

 

6.13.        Termination of Merger Agreement . This Agreement shall be binding upon each party upon such party’s execution and delivery of this Agreement, but this Agreement shall only become effective upon the Closing. In the event that the Merger Agreement is validly terminated in accordance with its terms prior to the Closing, this Agreement shall automatically terminate and become null and void and be of no further force or effect, and the parties shall have no obligations hereunder.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES FOLLOW]

 

  14  
 

 

IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be executed and delivered as of the date first written above.

 

  THE COMPANY:
     
  PACIFIC SPECIAL ACQUISITION CORP .
     
  By: /s/ Zhouhong Peng                      
    Name: Zhouhong Peng
    Tittle: CEO
     
  THE PURCHASER REPRESENTATIVE:
     
  ZHENGQI INTERNTIONAL HOLDING LIMITED , in its capacity under the Merger Agreement as the Purchaser Representative
     
  By: /s/ Zhouhong Peng         
    Name: Zhouhong Peng
    Tittle: CEO

 

  15  
 

 

  INVESTORS :
   
  By: /s/ Wenbiao Li
    Name: Wenbiao Li
    Title:   

 

  16  
 

 

  INVESTORS :
     
  Zhifei Zhang
     
  By: /s/ Zhifei Zhang
    Name: Zhifei Zhang
    Title:

 

  17  
 

 

  INVESTORS :
     
  By: /s/ Steven Sun
    Name: Steven Sun
    Title:   Investor

  

  18  
 

 

  INVESTORS :
     
  By: /s/ Kai Chen
    Name: Kai Chen
  Title: Director of Neutron Holdings Ltd.
as the General Partner for and on behalf of SK Telecom China Fund I, L.P.

 

  19  
 

 

  INVESTORS :
     
  Norwest Venture Partners X, LP
  By: Genesis VC Partners X, LLC, General Partner
     
  By: NVP Associates, LLC,
    Managing Member
     
  By: /s/ Matthew De Dominicis
    Name: Matthew De Dominicis

 

  20  
 

 

  INVESTORS :
     
  By: /s/ Cai Jufang
    Name: Cai Jufang
    Title:   Director

 

  21  
 

 

  INVESTORS :
     
  Keytone Ventures II, L.P.,
  a Cayman Islands exempted limited partnership
   
  By: Keytone Capital Partners II, L.P.,
  a Cayman Islands exempted limited partnership
  Its: General Partner

 

    By: Keytone Investment Group II, Ltd.,
      a Cayman Islands exempted company

 

    By: /s/ illegible
    Its: Director

 

  Signing Location:

  

  22  
 

 

  INVESTORS :
     
  By: /s/ Hareesh Ramanna
    Name: Hareesh Ramanna
    Title:   EVP & GM

 

  23  
 

 

  INVESTORS :
   
  Tzyh-Jain Gene Wuu
   
  By: /s/ Tzyh-Jain Gene Wuu
    Name: Tzyh-Jain Gene Wuu
    Title:

 

  24  
 

 

  INVESTORS :
   
  David Gerald Oliver
     
  By: /s/ David Gerald Oliver
    Name: David Gerald Oliver
    Title:

 

  25  
 

 

  INVESTORS :
   
  Xiao Bo Li
     
  By: /s/ Xiao Bo Li
    Name: Xiao Bo Li
    Title:

 

  26  
 

 

  INVESTORS :
     
  By: /s/ Rose Lee
    Name: Rose Lee
    Title:

 

  27  
 

 

  INVESTORS :
     
  By: /s/ Charles Geh Chi Lee
    Name: Charles Geh Chi Lee/Betty Pikki Gang
    Title:

 

  28  
 

 

  INVESTORS :
     
  By: /s/ Thomas Toy
    Name: Thomas Toy
    Title:

 

  29  
 

 

  INVESTORS :
   
  SVB Financial Group
     
  By: /s/ Michael Kruse
    Name: Michael Kruse
    Title:   Treasurer

 

  30  
 

 

  INVESTORS :
   
  PFG Equity Investors, LLC
     
  By: /s/ Andrew Kahn
    Name: Andrew Kahn
    Title:   Manager

 

  31  
 

  

  INVESTORS:
     
  Partners for Growth IV, L.P.
       
  By: /s/ Andrew Kahn
    Name: Andrew Kahn
    Title: Managing Member,
Partners for Growth IV, LLC,
the General Partner of Partners for Growth IV, L.P.

 

  32  
 

 

  INVESTORS :
     
  Intel Capital Corporation
     
  By: /s/ Abhay Gadkari
    Name: Abhay Gadkari
    Title:   Authorized Signatory

 

 

 

 

[Signature Page for Borqs Technologies, Inc. Registration Rights Agreement]

 

  33  
 

 

  INVESTORS :
     
  By: /s/ Wanyu Chow
    Name: Wanyu Chow
    Title:   

 

  34  
 

 

  INVESTORS :
     
  China Equities HK Limited
     
  By: /s/ Andrew Kahn
    Name: Andrew Kahn
    Title:   Director

  

  35  
 

 

  INVESTORS :
     
  PAT SEK YUEN CHAN
     
  By: /s/ Pat Sek Yuen Chan
    Name: Pat Sek Yuen Chan
    Title:  

  

  36  
 

 

  INVESTORS :
     
  Asset Horizon International Limited
     
  By: /s/ Fung Bik Wah
    Name: Fung Bik Wah
    Title:  Director

  

  37  
 

 

  INVESTORS :
     
  Anthony K. Chan
     
  By: /s/ Anthony K. Chan
    Name: Anthony K. Chan
    Title:  SELF

 

  38  
 

 

EXHIBIT A

INVESTORS

 

Name of Investor Address of Investor
1.     Accel India IV (Mauritius) Limited

Fifth Floor, Ebene Esplanade

24 Cybercity

Ebene, Mauritius

2.     Anthony K. Chan

32429 Seaside Drive

Union City, CA 94587

USA

3.     Asset Horizon International Limited

Unit C, 8 th Floor, Jonsim Place

228 Queen’s Road East

Hong Kong

4.     Banean Holdings Ltd  
5.     Xiao Bo Li

Tower A, Building B23, Universal Park

No. 10 Jiuxianquiao Road, Chaoyang District

Beijing 100015, PRC

6.     Charles Lieh Chi Lee and Betty Pik Ki Liang

3421 West 36 th Avenue

Vancouver, BC V6N 2R8

Canada

7.     David Gerald Oliver (spouse of Mingyu "Jessica" Xue)

959 Pleasant Point Highway

Timaru 7974

New Zealand

8.     Freshfields Corporation  
9.     Tzyh-Jain Gene Wuu

19 Percheron Road

Manalapan, NJ 07726

USA

10.    GSR Associates II, L.P.  
11.    GSR Ventures II, L.P.  
12.    Hareesh Ramanna

G02, 38/1, Prestige Serenity, Kanakapura Road

Basavangudi, Bangalore 560004

India

13.    Intel Capital Corporation

c/o Intel Semiconductor (US) LLC

69/F, Central Plaza, 18 Harbour Road

Wanchai, Hong Kong

14.    Keytone Ventures, L.P.

Suite 1908, China Resource Building

No. 8 Jianquomen North Ave.

Beijing 100005, PRC

15.    LinkSure America Holding Limited  
16.    Merchant World Limited

Unit 2101 on Level 21, No. 2 Office Buildings

China Centre Place, No. 79 Jianguo Road

Chaoyang District, Beijing 100025, PRC

 

 

 

 

Name of Investor Address of Investor
17.    Norwest Venture Partners X, L.P.

525 University Ave, Suite 800

Palo Alto, CA 94301

USA

18.    Pat Sek Yuen Chan

Tower A, Building B23, Universal Business Park

No. 10 Jiuxianquiao Road, Chaoyang District

Beijing 100015, PRC

19.    Qualcomm Global Trading Pte. Ltd.  
20.    Rose Lee (Administrator of Greg Zhang estate)

20329 Pinntage Parkway

Cupertino, CA 95014

USA

21.    SK Telecom China Fund I, L.P.

2302A, SK Tower

No. 6 Jia, Jiangoumenwai Ave

Beijing 100022, PRC

22.    Steven Sun

2524 Grappa Pl.

Pleasanton, CA 94566

USA

23.    Thomas Toy

58 Rittenhouse Avenue

Atherton, CA 94027

USA

24.    Tsinghua Education Foundation (N.A.), Inc.  
25.    Wanyu Chow

12/A Ngan Tao Bldg.

Causeway, Hong Kong

26.    Wenbiao Li

2066 Leman Lake, Houshayu Area

Shunyi District

Beijing 101300, PRC

27.    Zhifei Zhang (spouse of Tun “Tracy” Wang)

Tower A, Building B23, Universal Business Park

No. 10, Jiuxianquiao Road, Chaoyang District

Beijing 100015, PRC

28.    China Equities HK Limited

c/o Partners for Growth, Attn: Tracy Pappas

1660 Tiburon Blvd., Suite D

Tiburon, CA 94920, USA

29.    Partners for Growth IV, LP

1660 Tiburon Blvd., Suite D

Tiburon, CA 94920

USA

30.    Silicon Valley Bank

SVB Financial Group

3003 Tasman Drive

Santa Clara, CA 95054

31.    PFG Equity Investors, LLC

1660 Tiburon Blvd., Suite D

Tiburon, CA 94920

USA

 

 

 

 

Exhibit 10.2

 

LOCK-UP AGREEMENT

 

THIS LOCK-UP AGREEMENT (this “ Agreement ”) is made as of August [__], 2017 by and among (i) Pacific Special Acquisition Corp. , a British Virgin Islands business company with limited liability, which will be known after the consummation of the transactions contemplated by the Merger Agreement (as defined below) as “Borqs Technologies, Inc.” (including any successor entity thereto, “ Purchaser ”), (ii) Zhengqi International Holding Limited , a business company incorporated in the British Virgin Islands with limited liability, in its capacity under the Merger Agreement as the Purchaser Representative (including any successor Purchaser Representative in accordance with the Merger Agreement, the “ Purchaser Representative ”), and (iii) the undersigned (“ Holder ”). Any capitalized term used but not defined in this Agreement will have the meaning ascribed to such term in the Merger Agreement.

 

WHEREAS , on December 27, 2016, (i) Purchaser, (ii) PAAC Merger Subsidiary Limited, an exempted company incorporated under the laws of the Cayman Islands with limited liability and a wholly-owned subsidiary of the Purchaser (“ Merger Sub ”), (iii) the Purchaser Representative, (iv) Borqs International Holding Corp, an exempted company incorporated under the laws of the Cayman Islands with limited liability (the “ Company ”), (v) Zhengdong Zou, in the capacity as the Seller Representative thereunder, and (vi) for limited purposes thereof, Zhengqi International Holding Limited, a business company incorporated in the British Virgin Islands with limited liability, entered into that certain Merger Agreement (as amended from time to time in accordance with the terms thereof, including by that First Amendment to Merger Agreement, dated May 10, 2017, and that Second Amendment to Merger Agreement, dated June 29, 2017, the “ Merger Agreement ”), pursuant to which Merger Sub will merge with and into the Company, with the Company continuing as the surviving entity (the “ Merger ”), and as a result of which, (i) all of the issued and outstanding capital shares of the Company, immediately prior to the consummation of the Merger (the “ Closing ”), shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, in exchange for the Merger Consideration Shares, subject to the withholding of the Escrow Shares and the Earnout Shares, in each case being deposited in the Escrow Accounts in accordance with the terms and conditions of the Merger Agreement and the Escrow Agreement(s), (ii) the Company’s warrant holders immediately prior to the Closing shall be issued replacement warrants of Purchaser exercisable into Purchaser Ordinary Shares (the “ Replacement Purchaser Warrants ”) and (iii) each outstanding Company option shall be assumed by Purchaser and automatically converted into an option exercisable into Purchaser Ordinary Shares (as equitably adjusted), all upon the terms and subject to the conditions set forth in the Merger Agreement and in accordance with the applicable provisions of the Companies Law (2016 Revision) of the Cayman Islands;

 

WHEREAS , immediately prior to the Closing, Holder is a holder of Company Shares and/or Company Warrants in such amounts as set forth underneath Holder’s name on the signature page hereto; and

 

WHEREAS , pursuant to the Merger Agreement, and in view of the valuable consideration to be received by Holder thereunder, including the rights under the Registration Rights Agreement by and among Purchaser, the Purchaser Representative, Holder and the other holders of the Company’s securities immediately prior to the Closing that are named therein, that is to be entered into on or about the date hereof in connection with the Merger Agreement (the “ Registration Rights Agreement ”), Purchaser, the Purchaser Representative, and Holder desire to enter into this Agreement, pursuant to which the Merger Consideration Shares, the Replacement Purchaser Warrants and all Purchaser Ordinary Shares underlying the Replacement Purchaser Warrants received by Holder in the Merger (all such securities, together with any securities paid as dividends or distributions with respect to such securities or into which such securities are exchanged or converted, the Restricted Securities ) shall become subject to limitations on disposition as set forth herein.

 

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NOW, THEREFORE , in consideration of the premises set forth above, which are incorporated in this Agreement as if fully set forth below, and intending to be legally bound hereby, the parties hereby agree as follows:

 

1.        Lock-Up Provisions .

 

(a)       Holder hereby agrees not to, during the period commencing from the Closing and (A), with respect to fifty percent (50%) of each type of the Restricted Securities, ending on the earliest of (x) the one (1) year anniversary of the date of the Closing, (y) the date after the Closing on which Purchaser consummates a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of Purchaser’s shareholders having the right to exchange their equity holdings in Purchaser for cash, securities or other property (a “ Subsequent Transaction ”), and (z) the date on which the closing sale price of the Purchaser Ordinary Shares equals or exceeds $12.50 per share (as adjusted for share splits, share dividends, reorganizations and recapitalizations) for any twenty (20) trading days within any thirty (30) trading day period commencing after the Closing, and (B), with respect to the remaining fifty percent (50%) of the Restricted Securities, ending on the earlier of (x) the one (1) year anniversary of the date of the Closing and (y) the date after the Closing on which Purchaser consummates a Subsequent Transaction, (the “ Lock-Up Period ”): (i) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any Restricted Securities, (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Restricted Securities, or (iii) publicly disclose the intention to do any of the foregoing, whether any such transaction described in clauses (i), (ii), or (iii) above is to be settled by delivery of Restricted Securities or other securities, in cash or otherwise (any of the foregoing described in clauses (i), (ii), or (iii), a “ Prohibited Transfer ”); provided, however, that the foregoing shall not preclude Holder from engaging in any transaction in the securities of another company in the same sector or in a similar sector as that of the Company. The foregoing sentence shall not apply to the transfer of any or all of the Restricted Securities owned by Holder (other than Escrow Shares and the Earnout Shares until such Escrow Shares and Earnout Shares are disbursed to such Holder from the Escrow Accounts in accordance with the terms and conditions of the Merger Agreement and the Escrow Agreement(s)), (A) by gift, will or intestate succession upon the death of Holder, (B) to any Permitted Transferee or (C) pursuant to a court order or settlement agreement related to the distribution of assets in connection with the dissolution of marriage or civil union; provided, however, that in any of cases (A), (B) or (C) it shall be a condition to such transfer that the transferee executes and delivers to Purchaser and the Purchaser Representative an agreement stating that the transferee is receiving and holding the Restricted Securities subject to the provisions of this Agreement applicable to Holder, and there shall be no further transfer of such Restricted Securities except in accordance with this Agreement. As used in this Agreement, the term “ Permitted Transferee ” shall mean: (1) the members of Holder’s immediate family (for purposes of this Agreement, “immediate family” shall mean any relationship by blood, marriage or adoption, not more remote than first cousin), (2) any trust for the direct or indirect benefit of Holder or the immediate family of Holder, (3) if Holder is a trust, to the trustor or beneficiary of such trust or to the estate of a beneficiary of such trust, (4) as a distribution to limited partners, shareholders, members of, or owners of similar equity interests in Holder upon the liquidation and dissolution of Holder or (5) to any affiliate of Holder or to any investment fund or other entity controlled by Holder.

 

(b)       Without limiting Section 1(a) above, Holder further acknowledges and agrees that it shall not be permitted to engage in any Prohibited Transfer with respect to any Escrow Shares until such Escrow Shares are disbursed to such Holder from the Escrow Account in accordance with the terms and conditions of the Merger Agreement and the Escrow Agreement.

 

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(c)       Notwithstanding the foregoing, Holder may during the Lock-Up Period pledge its Restricted Securities (other than its Escrow Shares) to an unaffiliated third party as a guarantee to secure borrowings made by such third party to the Purchaser or any of its Subsidiaries.

 

(d)       If any Prohibited Transfer is made or attempted contrary to the provisions of this Agreement, such purported Prohibited Transfer shall be null and void ab initio, and Purchaser shall refuse to recognize any such purported transferee of the Restricted Securities as one of its equity holders for any purpose. In order to enforce this  Section 1 , Purchaser may impose stop-transfer instructions with respect to the Restricted Securities of Holder (and permitted transferees and assigns thereof) until the end of the Lock-Up Period.

 

(e)       During the Lock-Up Period (and with respect to any Escrow Shares, if longer, during the period when such Escrow Shares are held in the Escrow Account), each certificate evidencing any Restricted Securities shall be stamped or otherwise imprinted with a legend in substantially the following form, in addition to any other applicable legends:

 

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER SET FORTH IN A LOCK-UP AGREEMENT, DATED AS OF AUGUST [__], 2017, BY AND AMONG THE ISSUER OF SUCH SECURITIES (THE “COMPANY”) AND THE COMPANY’S SHAREHOLDER NAMED THEREIN, AS AMENDED. A COPY OF SUCH LOCK-UP AGREEMENT WILL BE FURNISHED WITHOUT CHARGE BY THE COMPANY TO THE HOLDER HEREOF UPON WRITTEN REQUEST.”

 

(f)       For the avoidance of any doubt, Holder shall retain all of its rights as a shareholder of Purchaser during the Lock-Up Period, including the right to vote any Restricted Securities.

 

(g)       To the extent that any of the Merger Consideration Shares or Replacement Purchaser Warrants held by any other Company Shareholder subject to a Lock-Up Agreement entered into in connection with the Closing are released from, or not subject to, lockup restrictions substantially similar to those in this Agreement (a “ Lockup Change ”), Purchaser shall promptly give Holder written notice of such Lockup Change and the Restricted Securities subject to the terms of this Agreement shall be immediately released from, or not subject to, the lockup restrictions in this Agreement with an effectiveness concurrent with, and to substantially the same extent and effect as, the Lockup Change.

 

2.        Miscellaneous .

 

(a)        Termination of Merger Agreement . Notwithstanding anything to the contrary contained herein, in the event that the Merger Agreement is terminated in accordance with its terms prior to the Closing, this Agreement and all rights and obligations of the parties hereunder shall automatically terminate and be of no further force or effect.

 

(b)        Binding Effect; Assignment . This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. This Agreement and all obligations of Holder are personal to Holder and may not be transferred or delegated by Holder at any time. Purchaser may freely assign any or all of its rights under this Agreement, in whole or in part, to any successor entity (whether by merger, consolidation, equity sale, asset sale or otherwise) without obtaining the consent or approval of Holder. If the Purchaser Representative is replaced in accordance with the terms of the Merger Agreement, the replacement Purchaser Representative shall automatically become a party to this Agreement as if it were the original Purchaser Representative hereunder.

 

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(c)        Third Parties . Nothing contained in this Agreement or in any instrument or document executed by any party in connection with the transactions contemplated hereby shall create any rights in, or be deemed to have been executed for the benefit of, any person or entity that is not a party hereto or thereto or a successor or permitted assign of such a party.

 

(d)        Governing Law; Jurisdiction . This Agreement and any dispute or controversy arising out of or relating to this Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflict of law principles thereof. All Actions arising out of or relating to this Agreement shall be heard and determined exclusively in any state or federal court located in New York, New York (or in any court in which appeal from such courts may be taken) (the “ Specified Courts ”). Each party hereto hereby (i) submits to the exclusive jurisdiction of any Specified Court for the purpose of any Action arising out of or relating to this Agreement brought by any party hereto and (ii) irrevocably waives, and agrees not to assert by way of motion, defense or otherwise, in any such Action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the Action is brought in an inconvenient forum, that the venue of the Action is improper, or that this Agreement or the transactions contemplated hereby may not be enforced in or by any Specified Court. Each party agrees that a final judgment in any Action shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Each party irrevocably consents to the service of the summons and complaint and any other process in any other action or proceeding relating to the transactions contemplated by this Agreement, on behalf of itself, or its property, by personal delivery of copies of such process to such party at the applicable address set forth in  Section 2(g) . Nothing in this  Section 2(d)  shall affect the right of any party to serve legal process in any other manner permitted by applicable law.

 

(e)        WAIVER OF JURY TRIAL . EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY ACTION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO (i) CERTIFIES THAT NO REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF ANY ACTION, SEEK TO ENFORCE THAT FOREGOING WAIVER AND (ii) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS  SECTION 2(e) .

 

(f)        Interpretation . The titles and subtitles used in this Agreement are for convenience only and are not to be considered in construing or interpreting this Agreement. In this Agreement, unless the context otherwise requires: (i) any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa; (ii) “including” (and with correlative meaning “include”) means including without limiting the generality of any description preceding or succeeding such term and shall be deemed in each case to be followed by the words “without limitation”; (iii) the words “herein,” “hereto,” and “hereby” and other words of similar import in this Agreement shall be deemed in each case to refer to this Agreement as a whole and not to any particular section or other subdivision of this Agreement; and (iv) the term “or” means “and/or”. The parties have participated jointly in the negotiation and drafting of this Agreement. Consequently, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement.

 

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(g)        Notices . All notices, consents, waivers and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered (i) in person, (ii) by facsimile or other electronic means, with affirmative confirmation of receipt, (iii) one Business Day after being sent, if sent by reputable, nationally recognized overnight courier service or (iv) three (3) Business Days after being mailed, if sent by registered or certified mail, pre-paid and return receipt requested, in each case to the applicable party at the following addresses (or at such other address for a party as shall be specified by like notice):

 

 

If to Purchaser after the Closing, to:

 

Borqs Technologies, Inc.
Tower A, Building B23
Universal Business Park
No. 10 Jiuxiangqiao Road
Chaoyang District, Beijing 100015, China
Attn: Pat Chan, CEO
Facsimile No.: 86-10-5975-6363
Telephone No: 86-10-5975-6336
Email: pat.chan@borqs.com

 

With copies to (which shall not constitute notice):

 

the Purchaser Representative (and its copy for notices hereunder)

 

and

 

Fenwick & West LLP
801 California Street
Mountain View, CA 94041
Attention: Eva Wang
Facsimile No.: (650) 938-5200
Telephone No.: (650) 335-7878
Email: ewang@fenwick.com

 

 

If to the Purchaser Representative, to:

 

Zhengqi International Holding Limited
855 Pudong South Road
The World Plaza, 27th Floor
Pudong, Shanghai 200120, China
Attn: Yaqi (Sophie) Feng, COO
Facsimile No.: 86-21-8012-9882
Telephone No: 86-21-8012-9878
Email: fengyq@tpyzq.com

 

With a copy to (which shall not constitute notice):

 

Ellenoff Grossman & Schole LLP
1345 Avenue of the Americas, 11th Floor
New York, New York 10105
Attention: Douglas Ellenoff
                 Stuart Neuhauser
Facsimile No.: (212) 370-7889
Telephone No.: (212) 370-1300
Email: ellenoff@egsllp.com
            sneuhauser@egsllp.com

 

If to Holder, to :  the address set forth under Holder’s name on the signature page hereto.

 

 

(h)        Amendments and Waivers . Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance, and either retroactively or prospectively) only with the written consent of Purchaser, the Purchaser Representative and Holder. No failure or delay by a party in exercising any right hereunder shall operate as a waiver thereof. No waivers of or exceptions to any term, condition, or provision of this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, condition, or provision.

 

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(i)        Severability . In case any provision in this Agreement shall be held invalid, illegal or unenforceable in a jurisdiction, such provision shall be modified or deleted, as to the jurisdiction involved, only to the extent necessary to render the same valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby nor shall the validity, legality or enforceability of such provision be affected thereby in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties will substitute for any invalid, illegal or unenforceable provision a suitable and equitable provision that carries out, so far as may be valid, legal and enforceable, the intent and purpose of such invalid, illegal or unenforceable provision.

 

(j)        Specific Performance . Holder acknowledges that its obligations under this Agreement are unique, recognizes and affirms that in the event of a breach of this Agreement by Holder, money damages may be inadequate and Purchaser (and the Purchaser Representative on behalf of Purchaser) may have not adequate remedy at law, and agrees that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed by Holder in accordance with their specific terms or were otherwise breached. Accordingly, each of Purchaser and the Purchaser Representative shall be entitled to seek an injunction or restraining order to prevent breaches of this Agreement by Holder and to seek to enforce specifically the terms and provisions hereof, without the requirement to post any bond or other security or to prove that money damages would be inadequate, this being in addition to any other right or remedy to which such party may be entitled under this Agreement, at law or in equity.

 

(k)        Entire Agreement . This Agreement constitutes the full and entire understanding and agreement among the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties is expressly canceled;  provided , that, for the avoidance of doubt, the foregoing shall not affect the rights and obligations of the parties under the Merger Agreement or any Ancillary Document, including the Registration Rights Agreement. Notwithstanding the foregoing, nothing in this Agreement shall limit any of the rights or remedies of Purchaser and the Purchaser Representative or any of the obligations of Holder under any other agreement between Holder and Purchaser or the Purchaser Representative or any certificate or instrument executed by Holder in favor of Purchaser or the Purchaser Representative, and nothing in any other agreement, certificate or instrument shall limit any of the rights or remedies of Purchaser or the Purchaser Representative or any of the obligations of Holder under this Agreement.

 

(l)        Further Assurances . From time to time, at another party’s request and without further consideration (but at the requesting party’s reasonable cost and expense), each party shall execute and deliver such additional documents and take all such further action as may be reasonably necessary to consummate the transactions contemplated by this Agreement.

 

(m)        Counterparts; Facsimile.   This Agreement may also be executed and delivered by facsimile signature or by email in portable document format in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

[Remainder of Page Intentionally Left Blank; Signature Pages Follow]

 

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IN WITNESS WHEREOF , the parties have executed this Lock-Up Agreement as of the date first written above.

 

Purchaser:  
     
Pacific Special Acquisition Corp.  
     
By:                        
Name:    
Title:    
     
The Purchaser Representative :  
     
Zhengqi International Holding Limited ,  
in its capacity as the Purchaser Representative  
     
By:    
Name:    
Title:    

 

{Additional Signature on the Following Page}

 

 

{Signature Page to Lock-Up Agreement}

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IN WITNESS WHEREOF , the parties have executed this Lock-Up Agreement as of the date first written above. 

 

Holder :
 
Name of Holder:  _______________________________

 

By:    
Name:    
Title:    

 

Number and Type of Company Shares and/or Company Warrants:

 

Company Shares:_________________________________________________

 

_______________________________________________________________

 

Company Warrants:_______________________________________________

 

_______________________________________________________________

 

Address for Notice:

 

Address: _____________________________________

____________________________________________

____________________________________________

 

Facsimile No.: ______________________________
Telephone No.: _____________________________
Email: ____________________________________

 

 

{Signature Page to Lock-Up Agreement}

 

 

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Exhibit 10.3

 

NON-COMPETITION AND NON-SOLICITATION AGREEMENT

 

THIS NON-COMPETITION AND NON-SOLICITATION AGREEMENT (this “ Agreement ”) is being executed and delivered as of August 18, 2017 by [_______________________], an individual residing in [____________] (the “ Subject Party ”), in favor of and for the benefit of Pacific Special Acquisition Corp. , a business company incorporated in the British Virgin Islands with limited liability, which will be known after the consummation of the transactions contemplated by the Merger Agreement (as defined below) as “Borqs Technologies, Inc.” (including any successor entity thereto, “ Purchaser ”), Borqs International Holding Corp. , a company formed under the laws of the Cayman Islands with limited liability (together with its successors, including the Surviving Company (as defined in the Merger Agreement), the “ Company ”), and each of Purchaser’s and/or the Company’s respective present and future successors and direct and indirect Subsidiaries (collectively with Purchaser and the Company, the “ Covered Parties ”). Any capitalized term used, but not defined in this Agreement will have the meaning ascribed to such term in the Merger Agreement.

 

WHEREAS, on December 27, 2016, Purchaser and the Company entered into that certain Merger Agreement (as amended from time to time in accordance with the terms thereof, the “ Merger Agreement ”), by and among (i) Purchaser, (ii) PAAC Merger Subsidiary Limited, a company formed under the laws of the Cayman Islands with limited liability and a wholly-owned subsidiary of Purchaser ( Merger Sub ), (iii) Zhengqi International Holding Limited, in the capacity as the Purchaser Representative thereunder (including any successor Purchaser Representative appointed in accordance therewith, the “ Purchaser Representative ”), (iv) Zhengdong Zou, in the capacity as the Seller Representative thereunder, (v) the Company and (vi) for certain limited purposes thereunder, Zhengqi International Holding Limited, a company incorporated in the British Virgin Islands, pursuant to which, subject to the terms and conditions thereof, Merger Sub merged with an into the Company, with the Company continuing as the surviving company, and with the Company’s shareholders receiving equity shares of Purchaser;

 

WHEREAS, the Company, directly and indirectly through its Subsidiaries (including the WFOE, the VIE Entities and their respective Subsidiaries), provides software and solutions for connected devices in the Internet of Things industry, and mobile communication service as a Mobile Virtual Network Operator (the “ Business ”);

 

WHEREAS, in connection with, and as a condition to the consummation of the transactions contemplated by the Merger Agreement (the “ Transactions ”), and to enable Purchaser and the Company to secure more fully the benefits of the Transactions, including the protection and maintenance of the goodwill and confidential information of the Company and its Subsidiaries, Purchaser has required that the Subject Party enter into this Agreement;

 

WHEREAS, the Subject Party is entering into this Agreement in order to induce Purchaser and Merger Sub to consummate the Transactions, pursuant to which the Subject Party will directly or indirectly receive a material benefit; and

 

WHEREAS, the Subject Party, as a former and/or current shareholder, director, officer and/or employee of the Company or its Subsidiaries, has contributed to the value of the Company and has obtained extensive and valuable knowledge and confidential information concerning the business of the Company and its Subsidiaries.

 

NOW, THEREFORE, in order to induce Purchaser to consummate the Transactions, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Subject Party hereby agrees as follows:

 

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1.       Restriction on Competition.

 

(a)        Restriction . The Subject Party hereby agrees that during the period from the Closing until the later of (i) the four (4) year anniversary of the Closing Date and (ii) the date on which the Subject Party is no longer a director, officer, manager, employee or independent contractor of any Covered Party (the “ Termination Date ”, and such period from the Closing until the later of clauses (i) and (ii), the “ Restricted Period ”), the Subject Party will not, and will cause its Controlled Affiliates not to, without the prior written consent of Purchaser (which may be withheld in its sole discretion), anywhere in the People’s Republic of China or in any other markets in which the Covered Parties are engaged, or are actively contemplating to become engaged, in the Business as of the Closing Date or during the Restricted Period (the “ Territory ”), directly or indirectly engage in the Business (other than through a Covered Party) or own, manage, finance or control, or participate in the ownership, management, financing or control of, or become engaged or serve as an officer, director, member, partner, employee, agent, consultant, advisor or representative of, a business or entity (other than a Covered Party) that engages in the Business (a “ Competitor ”). Notwithstanding the foregoing, the Subject Party and his or her Affiliates may own passive investments of no more than two percent (2%) of any class of outstanding equity interests in a Competitor that is publicly traded, so long as the Subject Party and his or her Affiliates and immediate family members are not involved in the management or control of such Competitor (“ Permitted Ownership ”).

 

(b)        Acknowledgment . The Subject Party acknowledges and agrees, based upon the advice of legal counsel and/or the Subject Party’s own education, experience and training, that (i) the Subject Party possesses knowledge of confidential information of the Company and its Subsidiaries and the Business, (ii) the Subject Party’s execution of this Agreement is a material inducement to Purchaser to consummate the Transactions and to realize the goodwill of the Company and its Subsidiaries, for which the Subject Party and/or his or her Affiliates will receive a substantial direct or indirect financial benefit, and that Purchaser would not have entered into the Merger Agreement or consummated the Transactions but for the Subject Party’s agreements set forth in this Agreement; (iii) it would impair the goodwill of the Company and its Subsidiaries and reduce the value of the assets of the Company and its Subsidiaries and cause serious and irreparable injury if the Subject Party were to use his or her ability and knowledge by engaging in the Business in competition with a Covered Party, and/or to otherwise breach the obligations contained herein and that the Covered Parties would not have an adequate remedy at law because of the unique nature of the Business, (iv) the Subject Party and his or her Controlled Affiliates have no intention of engaging in the Business during the Restricted Period other than through Permitted Ownership, (v) the relevant public policy aspects of restrictive covenants, covenants not to compete and non-solicitation provisions have been discussed, and every effort has been made to limit the restrictions placed upon the Subject Party to those that are reasonable and necessary to protect the Covered Parties’ legitimate interests, (vi) the Covered Parties conduct and intend to conduct the Business everywhere in the Territory and compete with other businesses that are or could be located in any part of the Territory, (vii) the foregoing restrictions on competition are fair and reasonable in type of prohibited activity, geographic area covered, scope and duration, (viii) the consideration provided to the Subject Party under this Agreement and the Merger Agreement is not illusory, and (ix) such provisions do not impose a greater restraint than is necessary to protect the goodwill or other business interests of the Covered Parties.

 

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2.       No Solicitation; No Disparagement.

 

(a)        No Solicitation of Employees and Consultants . The Subject Party agrees that, during the Restricted Period, the Subject Party and his or her Controlled Affiliates will not, without the prior written consent of Purchaser (which may be withheld in its sole discretion), either on its own behalf or on behalf of any other Person (other than, if applicable, a Covered Party in the performance of the Subject Party’s duties on behalf of the Covered Parties), directly or indirectly: (i) hire or engage as an employee, independent contractor, consultant or otherwise any Covered Personnel (as defined below); (ii) solicit, induce, encourage or otherwise knowingly cause (or attempt to do any of the foregoing) any Covered Personnel to leave the service (whether as an employee, consultant or independent contractor) of any Covered Party; or (iii) in any way interfere with or attempt to interfere with the relationship between any Covered Personnel and any Covered Party; provided , however , the Subject Party will not be deemed to have violated this Section 2(a) if any Covered Personnel voluntarily and independently solicits an offer of employment from the Subject Party or his or her Controlled Affiliate (or other Person whom any of them is acting on behalf of) by responding to a general advertisement or solicitation program conducted by or on behalf of the Subject Party or his or her Controlled Affiliate (or such other Person whom any of them is acting on behalf of) that is not specifically targeted at such Covered Personnel or Covered Personnel generally, so long as such Covered Personnel is not hired. For purposes of this Agreement, “ Covered Personnel ” shall mean any Person who is or was an employee, consultant or independent contractor of the Covered Parties, (A) if the relevant time of determination is before the Termination Date, as of such date of determination or during the one (1) year period preceding such date and, (B) if the relevant time of determination is after the Termination Date, as of the Termination Date or during the one (1) year period preceding the Termination Date.

 

(b)        Non-Solicitation of Customers and Suppliers . The Subject Party agrees that, during the Restricted Period, the Subject Party and his or her Controlled Affiliates will not, without the prior written consent of Purchaser (which may be withheld in its sole discretion), individually or on behalf of any other Person (other than, if applicable, a Covered Party in the performance of the Subject Party’s duties on behalf of the Covered Parties), directly or indirectly: (i) solicit, induce, encourage or otherwise knowingly cause (or attempt to do any of the foregoing) any Covered Customer (as defined below) to (A) cease being, or not become, a client or customer of any Covered Party with respect to the Business or (B) reduce the amount of business of such Covered Customer with any Covered Party, or otherwise alter such business relationship in a manner adverse to any Covered Party, in either case, with respect to or relating to the Business; (ii) interfere with or disrupt (or attempt to interfere with or disrupt) the contractual relationship between any Covered Party and any Covered Customer; (iii) divert any business with any Covered Customer relating to the Business from a Covered Party; (iv) solicit for business, provide services to, engage in or do business with, any Covered Customer for products or services that are part of the Business; or (v) interfere with or disrupt (or attempt to interfere with or disrupt), any Person that was a vendor, supplier, distributor, agent or other service provider of a Covered Party at the time of such interference or disruption, for a purpose competitive with a Covered Party as it relates to the Business. For purposes of this Agreement, a “ Covered Customer ” shall mean any Person who is or was an actual customer or client (or prospective customer or client with whom a Covered Party actively marketed or made or taken specific action to make a proposal) of a Covered Party, (A) if the relevant time of determination is before the Termination Date, as of such date of determination or during the one (1) year period preceding such date and, (B) if the relevant time of determination is after the Termination Date, as of the Termination Date or during the one (1) year period preceding the Termination Date.

 

(c)        Non-Disparagement . The Subject Party agrees that from and after the Closing Date until the second (2 nd ) anniversary of the end of the Restricted Period, the Subject Party and its Controlled Affiliates will not, directly or indirectly engage in any conduct that involves the making or publishing (including through electronic mail distribution or online social media) of any written or oral statements or remarks (including the repetition or distribution of derogatory rumors, allegations, negative reports or comments) that are disparaging, deleterious or damaging to the integrity, reputation or good will of one or more Covered Parties or their respective management, officers, employees, independent contractors or consultants. Notwithstanding the foregoing, subject to Section 3 below, the provisions of this Section 2(c) shall not restrict the Subject Party from providing truthful testimony or information in response to a subpoena or investigation by a Governmental Authority or in connection with any legal action by the Subject Party against any Covered Party under this Agreement, the Merger Agreement or any other Ancillary Document that is asserted by the Subject Party in good faith.

 

  3  

 

 

3.       Confidentiality. From and after the Closing Date, the Subject Party will, and will cause its Representatives to, keep confidential and not (except, if applicable, in the performance of the Subject Party’s duties on behalf of the Covered Parties) directly or indirectly use, disclose, reveal, publish, transfer or provide access to, any and all Covered Party Information without the prior written consent of Purchaser (which may be withheld in its sole discretion). As used in this Agreement, “ Covered Party Information ” means all material and information relating to the business, affairs and assets of any Covered Party, including material and information that concerns or relates to such Covered Party’s bidding and proposal, technical, computer hardware or software, administrative, management, operational, data processing, financial, marketing, sales, human resources, business development, planning and/or other business activities, regardless of whether such material and information is maintained in physical, electronic, or other form, that is: (A) gathered, compiled, generated, produced or maintained by such Covered Party through its Representatives, or provided to such Covered Party by its suppliers, service providers or customers; and (B) intended and maintained by such Covered Party or its Representatives, suppliers, service providers or customers to be kept in confidence. The obligations set forth in this Section 3 will not apply to any Covered Party Information where the Subject Party can prove that such material or information: (i) is known or available through other lawful sources not bound by a confidentiality agreement with, or other confidentiality obligation to, any Covered Party; (ii) is or becomes publicly known through no violation of this Agreement or other non-disclosure obligation of the Subject Party or any of its Representatives; (iii) is already in the possession of the Subject Party at the time of disclosure through lawful sources not bound by a confidentiality agreement or other confidentiality obligation as evidenced by the Subject Party’s documents and records; or (iv) is required to be disclosed pursuant to an order of any administrative body or court of competent jurisdiction (provided that (A) the applicable Covered Party is given reasonable prior written notice, (B) the Subject Party cooperates (and causes its Representatives to cooperate) with any reasonable request of any Covered Party to seek to prevent or narrow such disclosure and (C) if after compliance with clauses (A) and (B) such disclosure is still required, the Subject Party and its Representatives only disclose such portion of the Covered Party Information that is expressly required by such order, as it may be subsequently narrowed).

 

4.       Representations and Warranties. The Subject Party hereby represents and warrants, to and for the benefit of the Covered Parties as of the date of this Agreement and as of the Closing Date, that: (a) the Subject Party has full power and capacity to execute and deliver, and to perform all of the Subject Party’s obligations under, this Agreement; and (b) neither the execution and delivery of this Agreement nor the performance of the Subject Party’s obligations hereunder will result directly or indirectly in a violation or breach of any agreement or obligation by which the Subject Party is a party or otherwise bound. By entering into this Agreement, the Subject Party certifies and acknowledges that the Subject Party has carefully read all of the provisions of this Agreement, and that the Subject Party voluntarily and knowingly enters into this Agreement.

 

5.       Remedies. The covenants and undertakings of the Subject Party contained in this Agreement relate to matters which are of a special, unique and extraordinary character and a violation of any of the terms of this Agreement may cause irreparable injury to the Covered Parties, the amount of which may be impossible to estimate or determine and which cannot be adequately compensated. The Subject Party agrees that, in the event of any breach or threatened breach by the Subject Party of any covenant or obligation contained in this Agreement, each applicable Covered Party will be entitled to obtain the following remedies (in addition to, and not in lieu of, any other remedy at law or in equity or pursuant to the Merger Agreement or the other Ancillary Documents that may be available to the Covered Parties, including monetary damages), and a court of competent jurisdiction may award: (i) an injunction, restraining order or other equitable relief restraining or preventing such breach or threatened breach, without the necessity of proving actual damages or posting bond or security, which the Subject Party expressly waives; and (ii) recovery of the Covered Party’s attorneys’ fees and costs incurred in enforcing the Covered Party’s rights under this Agreement. The Subject Party hereby consents to the award of any of the above remedies to the applicable Covered Party in connection with any such breach or threatened breach. The Subject Party hereby acknowledges and agrees that in the event of any breach of this Agreement, any value attributed or allocated to this Agreement (or any other non-competition agreement with the Subject Party) under or in connection with the Merger Agreement shall not be considered a measure of, or a limit on, the damages of the Covered Parties.

 

  4  

 

 

6.       Survival of Obligations. The expiration of the Restricted Period will not relieve the Subject Party of any obligation or liability arising from any breach by the Subject Party of this Agreement during the Restricted Period. Each Subject Party further agrees that the time period during which the covenants contained in Section 1 and Section 2 of this Agreement will be effective will be computed by excluding from such computation any time during which the Subject Party is in violation of any provision of such Sections.

 

7.       Miscellaneous.

 

(a)        Notices . All notices, consents, waivers and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered (i) in person, (ii) by facsimile or other electronic means, with affirmative confirmation of receipt, (iii) one Business Day after being sent, if sent by reputable, nationally recognized overnight courier service or (iv) three (3) Business Days after being mailed, if sent by registered or certified mail, pre-paid and return receipt requested, in each case to the applicable party at the following addresses (or at such other address for a party as shall be specified by like notice):

 

 

If to Purchaser (or any other Covered Party), to:

 

Borqs Technologies, Inc.

Tower A, Building B23

Universal Business Park

No. 10 Jiuxiangqiao Road

Chaoyang District, Beijing 100015, China

Attn: Pat Chan, CEO

Facsimile No.: 86-10-5975-6363

Telephone No: 86-10-5975-6336

Email: pat.chan@borqs.com

 

and

 

Zhengqi International Holding Limited

855 Pudong South Road

The World Plaza, 27 th Floor

Pudong, Shanghai 200120, China

Attn: Yaqi (Sophie) Feng, COO

Facsimile No.: 86-21-8012-9882

Telephone No: 86-21-8012-9878

Email: fengyq@tpyzq.com

 

 

 

with copies (that will not constitute notice) to:

 

Fenwick & West LLP

801 California Street

Mountain View, CA 94041

Attention: Eva Wang

Facsimile No.: (650) 938-5200

Telephone No.: (650) 335-7878

Email: ewang@fenwick.com

 

and

 

Ellenoff Grossman & Schole LLP

1345 Avenue of the Americas, 11th Floor

New York, New York 10105

Attn: Douglas Ellenoff, Esq.

Stuart Neuhauser, Esq.

Facsimile No.: (212) 370-7889

Telephone No.: (212) 370-1300

Email: ellenoff@egsllp.com

sneuhauser@egsllp.com

     

If to the Subject Party, to:

the address below the Subject Party’s name on the signature page to this Agreement.

 

 

  5  

 

 

(b)        Integration and Non-Exclusivity . This Agreement, the Merger Agreement and the other Ancillary Documents contain the entire agreement between the Subject Party and the Covered Parties concerning the subject matter hereof. Notwithstanding the foregoing, the rights and remedies of the Covered Parties under this Agreement are not exclusive of or limited by any other rights or remedies which they may have, whether at law, in equity, by contract or otherwise, all of which will be cumulative (and not alternative). Without limiting the generality of the foregoing, the rights and remedies of the Covered Parties, and the obligations and liabilities of the Subject Party, under this Agreement, are in addition to their respective rights, remedies, obligations and liabilities (i) under the laws of unfair competition, misappropriation of trade secrets, or other requirements of statutory or common law, or any applicable rules and regulations and (ii) otherwise conferred by contract, including the Merger Agreement and any other written agreement between the Subject Party and any of the Covered Parties. Nothing in the Merger Agreement will limit any of the obligations, liabilities, rights or remedies of the Subject Party or the Covered Parties under this Agreement, nor will any breach of the Merger Agreement or any other agreement between the Subject Party and any of the Covered Parties limit or otherwise affect any right or remedy of the Covered Parties under this Agreement. If any term or condition of any other agreement between the Subject Party and any of the Covered Parties conflicts or is inconsistent with the terms and conditions of this Agreement, the more restrictive terms will control as to the Subject Party.

 

(c)        Severability; Reformation . Each provision of this Agreement is separable from every other provision of this Agreement. If any provision of this Agreement is found or held to be invalid, illegal or unenforceable, in whole or in part, by a court of competent jurisdiction, then (i) such provision will be deemed amended to conform to applicable laws so as to be valid, legal and enforceable to the fullest possible extent, (ii) the invalidity, illegality or unenforceability of such provision will not affect the validity, legality or enforceability of such provision under any other circumstances or in any other jurisdiction, and (iii) the invalidity, illegality or unenforceability of such provision will not affect the validity, legality or enforceability of the remainder of such provision or the validity, legality or enforceability of any other provision of this Agreement. The Subject Party and the Covered Parties will substitute for any invalid, illegal or unenforceable provision a suitable and equitable provision that carries out, so far as may be valid, legal and enforceable, the intent and purpose of such invalid, illegal or unenforceable provision. Without limiting the foregoing, if any court of competent jurisdiction determines that any part hereof is unenforceable because of the duration, geographic area covered, scope of such provision, or otherwise, such court will have the power to reduce the duration, geographic area covered or scope of such provision, as the case may be, and, in its reduced form, such provision will then be enforceable. The Subject Party will, at a Covered Party’s request, join such Covered Party in requesting that such court take such action.

 

(d)        Amendment; Waiver . This Agreement may not be amended or modified in any respect, except by a written agreement executed by the Subject Party, Purchaser and the Purchaser Representative (or their respective permitted successors or assigns). No waiver will be effective unless it is expressly set forth in a written instrument executed by the waiving party (and if such waiving party is a Covered Party, the Purchaser Representative) and any such waiver will have no effect except in the specific instance in which it is given. Any delay or omission by a party in exercising its rights under this Agreement, or failure to insist upon strict compliance with any term, covenant, or condition of this Agreement will not be deemed a waiver of such term, covenant, condition or right, nor will any waiver or relinquishment of any right or power under this Agreement at any time or times be deemed a waiver or relinquishment of such right or power at any other time or times.

 

  6  

 

 

(e)        Dispute Resolution . Any dispute, difference, controversy or claim arising in connection with or related or incidental to, or question occurring under, this Agreement or the subject matter hereof (other than applications for a temporary restraining order, preliminary injunction, permanent injunction or other equitable relief or application for enforcement of a resolution under this Section 7(e) ) (a “ Dispute ”) shall be governed by this Section 7(e) . A party must, in the first instance, provide written notice of any Disputes to the other parties subject to such Dispute, which notice must provide a reasonably detailed description of the matters subject to the Dispute. Any Dispute that is not resolved may at any time after the delivery of such notice immediately be referred to and finally resolved by arbitration pursuant to the then-existing Expedited Procedures of the Commercial Arbitration Rules (the “ AAA Procedures ”) of the American Arbitration Association (the “ AAA ”). Any party involved in such Dispute may submit the Dispute to the AAA to commence the proceedings after the Resolution Period. To the extent that the AAA Procedures and this Agreement are in conflict, the terms of this Agreement shall control. The arbitration shall be conducted by one arbitrator nominated by the AAA promptly (but in any event within five (5) Business Days) after the submission of the Dispute to the AAA and reasonably acceptable to each party subject to the Dispute, which arbitrator shall be a commercial lawyer with substantial experience arbitrating disputes under acquisition agreements. The arbitrator shall accept his or her appointment and begin the arbitration process promptly (but in any event within five (5) Business Days) after his or her nomination and acceptance by the parties subject to the Dispute. The proceedings shall be streamlined and efficient. The arbitrator shall decide the Dispute in accordance with the substantive law of the State of New York. Time is of the essence. Each party shall submit a proposal for resolution of the Dispute to the arbitrator within twenty (20) days after confirmation of the appointment of the arbitrator. The arbitrator shall have the power to order any party to do, or to refrain from doing, anything consistent with this Agreement, the Ancillary Documents and applicable Law, including to perform its contractual obligation(s); provided , that the arbitrator shall be limited to ordering pursuant to the foregoing power (and, for the avoidance of doubt, shall order) the relevant party (or parties, as applicable) to comply with only one or the other of the proposals. The arbitrator's award shall be in writing and shall include a reasonable explanation of the arbitrator's reason(s) for selecting one or the other proposal. The seat of arbitration shall be in New York County, State of New York. The language of the arbitration shall be English.

 

(f)        Governing Law; Jurisdiction . This Agreement shall be governed by, construed and enforced in accordance with the Laws of the State of New York without regard to the conflict of laws principles thereof. Subject to Section 7(e) , all Actions arising out of or relating to this Agreement shall be heard and determined exclusively in any state or federal court located in New York, New York (or in any court in which appeal from such courts may be taken) (the “ Specified Courts ”). Subject to Section 7(e) , each party hereto hereby (a) submits to the exclusive jurisdiction of any Specified Court for the purpose of any Action arising out of or relating to this Agreement brought by any party hereto, (b) irrevocably waives, and agrees not to assert by way of motion, defense or otherwise, in any such Action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the Action is brought in an inconvenient forum, that the venue of the Action is improper, or that this Agreement or the transactions contemplated hereby may not be enforced in or by any Specified Court and (c) waives any bond, surety or other security that might be required of any other party with respect thereto. Each party agrees that a final judgment in any Action shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law or in equity. Each party irrevocably consents to the service of the summons and complaint and any other process in any other action or proceeding relating to the transactions contemplated by this Agreement, on behalf of itself, or its property, by personal delivery of copies of such process to such party at the applicable address set forth in Section 7(a) . Nothing in this Section 7(f) shall affect the right of any party to serve legal process in any other manner permitted by Law.

 

  7  

 

 

(g)        WAIVER OF JURY TRIAL . EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY ACTION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF ANY ACTION, SEEK TO ENFORCE THAT FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 7(g) . ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 7(g) WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF EACH SUCH PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.

 

(h)        Successors and Assigns; Third Party Beneficiaries . This Agreement will be binding upon the Subject Party and the Subject Party’s estate, successors and assigns, and will inure to the benefit of the Covered Parties, and their respective successors and assigns. Each Covered Party may freely assign any or all of its rights under this Agreement, at any time, in whole or in part, to any Person which acquires, in one or more transactions, at least a majority of the equity securities (whether by equity sale, merger or otherwise) of such Covered Party or all or substantially all of the assets of such Covered Party and its Subsidiaries, taken as a whole, without obtaining the consent or approval of the Subject Party. The Subject Party agrees that the obligations of the Subject Party under this Agreement are personal and will not be assigned by the Subject Party. Each of the Covered Parties are express third party beneficiaries of this Agreement and will be considered parties under and for purposes of this Agreement.

 

(i)        Purchaser Representative Authorized to Act on Behalf of Covered Parties . The parties acknowledge and agree that the Purchaser Representative is authorized and shall have the sole right to act on behalf of Purchaser and the other Covered Parties under this Agreement, including the right to enforce Purchaser’s rights and remedies under this Agreement. Without limiting the foregoing, in the event that the Subject Party serves as a director, officer, employee or other authorized agent of a Covered Party, the Subject Party shall have no authority, express or implied, to act or make any determination on behalf of a Covered Party in connection with this Agreement or any dispute or Action with respect hereto.

 

(j)        Construction . The Subject Party acknowledges that the Subject Party has been represented by counsel, or had the opportunity to be represented by counsel of the Subject Party’s choice. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party will not be applied in the construction or interpretation of this Agreement. Neither the drafting history nor the negotiating history of this Agreement will be used or referred to in connection with the construction or interpretation of this Agreement. The headings and subheadings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. In this Agreement: (i) the words “include,” “includes” and “including” when used herein shall be deemed in each case to be followed by the words “without limitation”; (ii) the definitions contained herein are applicable to the singular as well as the plural forms of such terms; (iii) whenever required by the context, any pronoun shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa; (iv) the words “herein,” “hereto,” and “hereby” and other words of similar import shall be deemed in each case to refer to this Agreement as a whole and not to any particular Section or other subdivision of this Agreement; (v) the word “if” and other words of similar import when used herein shall be deemed in each case to be followed by the phrase “and only if”; (vi) the term “or” means “and/or”; and (vii) any agreement or instrument defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement or instrument as from time to time amended, modified or supplemented, including by waiver or consent and references to all attachments thereto and instruments incorporated therein.

 

(k)        Counterparts . This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. A photocopy, faxed, scanned and/or emailed copy of this Agreement or any signature page to this Agreement, shall have the same validity and enforceability as an originally signed copy.

 

(l)        Effectiveness . This Agreement shall be binding upon the Subject Party upon the Subject Party’s execution and delivery of this Agreement, but this Agreement shall only become effective upon the consummation of the Transactions. In the event that the Merger Agreement is validly terminated in accordance with its terms prior to the consummation of the Transactions, this Agreement shall automatically terminate and become null and void, and the parties shall have no obligations hereunder.

 

[Remainder of Page Intentionally Left Blank; Signature Page Follows ]

 

  8  

 

 

IN WITNESS WHEREOF, the undersigned has duly executed and delivered this Non-Competition and Non-Solicitation Agreement as of the date first written above.

 

  Subject Party:
     
  Signature:  
  Print Name:  

 

  Address for Notice:
     
  Address:  
   
   

 

  Facsimile No.:  
  Telephone No.:  
  Email:  

 

{Signature Page to Non-Competition Agreement}

 

   

 

 

Acknowledged and accepted as of the date first written above:

 

Purchaser:  
     
PACIFIC SPECIAL ACQUISITION CORP.  
                             
By:    
Name:    
Title:    
     
Company:  
     
BORQS INTERNATIONAL HOLDING CORP.  
     
By:    
Name:    
Title:    

 

The Purchaser Representative:  
     
ZHENGQI INTERNATIONAL HOLDING
LIMITED
, solely in its capacity as the Purchaser
Representative hereunder
 
     
By:        
Name:    
Title:    
     

 

{Signature Page to Non-Competition Agreement}

 

 

 

 

Exhibit 10.4

 

ESCROW AGREEMENT

 

This ESCROW AGREEMENT (this “ Agreement ”) is made and entered into as of August 18, 2017, by and among: (i) Pacific Special Acquisition Corp. , a business company incorporated in the British Virgin Islands with limited liability (“ Purchaser ”); (ii) Zhengqi International Holding Limited, a company incorporated in the British Virgin Islands, in the capacity under the Merger Agreement (as defined below) as the Purchaser Representative (the “ Purchaser Representative ”); (iii) Zhengdong Zou , in the capacity under the Merger Agreement as the Seller Representative (the “ Seller Representative ”); and (iv) Continental Stock Transfer & Trust Company , as escrow agent (the “ Escrow Agent ”). Capitalized terms used herein but not otherwise defined herein shall have the meaning given to such terms in the Merger Agreement.

 

Whereas , Purchaser, Borqs International Holding Corp, an exempted company incorporated under the laws of the Cayman Islands with limited liability (the “ Company ”), the Seller Representative, the Purchaser Representative, PAAC Merger Subsidiary Limited, an exempted company incorporated under the laws of the Cayman Islands with limited liability and a wholly-owned subsidiary of Purchaser (“ Merger Sub ”), and, for certain limited purpose thereof, Zhengqi International Holding Limited (“ Sponsor ”), are parties to that certain Merger Agreement, dated as of December 27, 2016 (as amended, including by the First Amendment to Merger Agreement dated May 10, 2017 and the Second Amendment to Merger Agreement dated June 29, 2017, the “ Merger Agreement ”), pursuant to which Merger Sub will merge with and into the Company, with the Company continuing as the surviving entity (the “ Merger ”), and as a result of which, among other matters, all of the issued and outstanding share capital of the Company immediately prior to the consummation of the Merger (the “ Closing ”) shall no longer be outstanding, and shall automatically be cancelled and shall cease to exist, in exchange for a certain number of newly issued ordinary shares of no par value of Purchaser (“ Purchaser Ordinary Shares ”) as specified in the Merger Agreement (the “ Merger Consideration Shares ”), subject to the withholding of the Escrow Shares (as defined below) being deposited in the Escrow Accounts (as defined below) in accordance with the terms and conditions of the Merger Agreement and this Agreement;

 

WHEREAS, pursuant to the Merger Agreement, Purchaser, Purchaser Representative, their respective Affiliates and their respective officers, directors, managers, employees, successors and permitted assigns (the “ Indemnified Parties ”) are entitled to be indemnified in certain respects by the Company and the Company Shareholders;

 

WHEREAS, in accordance with the Merger Agreement and this Agreement, at the Closing, Purchaser shall issue to the Escrow Agent: (i) 942,467 Purchaser Ordinary Shares (together with any equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or converted, and any additional shares deposited in the Indemnity Escrow Account in accordance with Section 5(c) below, the “ Indemnity Escrow Shares ”) to be held, along with any other Indemnity Escrow Property (as defined below), by the Escrow Agent in a segregated escrow account (the “ Indemnity Escrow Account ”) and disbursed therefrom in accordance with the terms of Article VI of the Merger Agreement and this Agreement; and (ii) 2,352,285 Purchaser Ordinary Shares (together with any equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or converted, the “ Guarantee Escrow Shares ”, and collectively with the Indemnity Escrow Shares, the “ Escrow Shares ”) to be held by the Escrow Agent in a segregated escrow account (the “ Earnout Escrow Account ”, and together with the Indemnity Escrow Account, the “ Escrow Accounts ”) and disbursed therefrom in accordance with the terms of Article XII of the Merger Agreement and this Agreement;

 

  1  
 

 

WHEREAS, it has been determined in accordance with the terms of the Merger Agreement that there are no Commitment Escrow Shares and no Net Income Escrow Shares;

 

WHEREAS, (i) pursuant to the Merger Agreement and the Letters of Transmittal executed by the Company Shareholders the Seller Representative has been designated as the Company’s and each Company Shareholder’s representative and agent to represent each of them, and to act on their behalf for purposes of this Agreement, and (ii) pursuant to the Merger Agreement, the Purchaser Representative has been designated as the Purchaser’s sole representative and agent to act on its behalf for purposes of this Agreement, which appointment has been acknowledged and confirmed by the Backstop Investors (as defined below) in the Backstop Agreement, as amended; and

 

WHEREAS, the Escrow Agent is willing to administer the escrow under the terms and conditions of this Agreement.

 

NOW, THEREFORE, in consideration of the foregoing premises and of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows:

 

Section 1.                Appointment . Purchaser and the Seller Representative hereby appoint the Escrow Agent as their escrow agent for the purposes set forth herein, and the Escrow Agent hereby agrees to perform the duties of their escrow agent under this Agreement. The escrow services to be rendered by the Escrow Agent under this Agreement will not begin until the Escrow Agent has received the documentation necessary to establish the Escrow Accounts on its books and has received the Escrow Shares in accordance with this Agreement.

 

Section 2.                Transfer of Share Certificates Representing Escrow Shares .

 

(a)            In accordance with the Merger Agreement, at the Closing, Purchaser shall deposit with the Escrow Agent (i) share certificate(s) for the Indemnity Escrow Shares, with each such certificate being in the name of the Escrow Agent, to be held for the benefit of each Company Shareholder based on each Company Shareholders’ Pro Rata Share of the total Indemnity Escrow Shares as determined in accordance with the Merger Agreement, all of which shall be deposited by the Escrow Agent in the Indemnity Escrow Account; and (ii) share certificates for the Guarantee Escrow Shares, with each such certificate being in the name of the Sponsor and/or any assignee of Sponsor under the Backstop Agreement (collectively, the “ Backstop Investors ”), all of which shall be held by the Escrow Agent in the Earnout Escrow Account. Notwithstanding the foregoing, Purchaser may alternatively have the Escrow Agent, Purchaser and Purchaser’s transfer agent account for any of the Escrow Shares in book entry form. Upon its receipt of the certificates for the Escrow Shares, the Escrow Agent shall send a written acknowledgement of its receipt to the Purchaser Representative and the Seller Representative

 

(b)            In addition, as promptly as practicable following the date of this Agreement, Purchaser shall deliver to the Escrow Agent five (5) duly executed instruments of transfer in customary form, executed in blank by the applicable Backstop Investors, with respect to the Guarantee Escrow Shares. Upon its receipt of such duly executed instruments of transfer, the Escrow Agent shall send a written acknowledgement of its receipt to the Purchaser Representative.

 

Section 3.                Maintenance of the Escrow Shares and other Escrow Property .

 

(a)            So long as any: (i) Indemnity Escrow Shares are being held in the Indemnity Escrow Account, any dividends, distributions or other income paid on or otherwise accruing to such Indemnity Escrow Shares (the foregoing, together with the Indemnity Escrow Shares, and as reduced by any disbursements of such Indemnity Escrow Shares or dividends, distributions or other income from the Indemnity Escrow Account by the Escrow Agent in accordance with the terms of this Agreement and the Merger Agreement, the “ Indemnity Escrow Property ”) shall be held by the Escrow Agent in the Indemnity Escrow Account; and (ii) Guarantee Escrow Shares are being held in the Earnout Escrow Account, the Backstop Investors shall be entitled to (x) exercise voting rights with respect to such shares, and (y) receive dividends or other distributions (if declared and paid) with respect to the Guarantee Escrow Shares (other than those paid in equity securities, which shall be included as part of the Guarantee Escrow Shares and held in the Earnout Escrow Account). If the Escrow Agent receives any dividends or other distributions with respect to the Guarantee Escrow Shares (other than equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or converted) while they are held in the Earnout Escrow Account, it will promptly pay such dividends or distributions to the Backstop Investor. The Indemnity Escrow Property and the Guarantee Escrow Shares, while held in the applicable Escrow Account, are collectively referred to as the “ Escrow Property ”.

 

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(b)            During the term of this Agreement, the Escrow Agent shall hold the Escrow Property in the applicable Escrow Account and shall not sell, transfer, dispose of, lend or otherwise subject to a Lien any of the Escrow Property except until and to the extent that they are disbursed in accordance with Section 4 or Section 5 . Except as the Purchaser Representative (on behalf of Purchaser) and the Seller Representative may otherwise agree in joint written instructions executed and delivered to the Escrow Agent by the Seller Representative and the Purchaser Representative (on behalf of Purchaser), no part of the Escrow Property may be withdrawn except as expressly provided in this Agreement.

 

Section 4.                Transfer of the Indemnity Escrow Property . The Escrow Agent shall hold the Indemnity Escrow Property and shall transfer the Indemnity Escrow Property to either the Purchaser or the Seller Representative (for further distribution to the Company Shareholders), as applicable, in accordance with the following procedures:

 

(a)            Purchaser (with the Purchaser Representative acting on its behalf) may assert a claim for indemnification on behalf of an Indemnified Party pursuant to the Merger Agreement (an “ Indemnification Claim ”) by providing written notice (a “ Claim Notice ”) of such claim to the Seller Representative and the Escrow Agent, which Claim Notice shall include (i) a reasonable description of the facts and circumstances which relate to the subject matter of such Indemnification Claim to the extent then known and (ii) the amount of Losses suffered by the Indemnified Party in connection with the claim to the extent known or reasonably estimable (provided, that the Purchaser Representative (on behalf of Purchaser) may thereafter in good faith adjust the amount of Losses with respect to the claim by providing a revised Claim Notice to the Seller Representative and the Escrow Agent (such updated Claim Notice, a “ Revised Claim Notice ”, and such amount, as it may be adjusted, the “ Claim Amount ”); provided , that the copy of any Claim Notice provided to the Escrow Agent shall be redacted for any confidential or proprietary information of the Indemnifying Party or the Indemnified Party described in clause (i).

 

(b)            With respect to any (i) direct indemnification claim that is not a Third Party Claim, the Seller Representative will have a period of thirty (30) days after receipt of the Claim Notice (or of any Revised Claim Notice) to respond thereto, or (ii) Third Party Claim that has become a Resolved Third Party Claim, the Seller Representative will have a period of thirty (30) days after such Third Party Claims has become a Resolved Third Party Claim and notice of such Resolved Third Party Claim has been given to the Purchaser Representative and the Seller Representative in accordance with Section 6.5 of the Merger Agreement to respond to the Claim Notice (or any Revised Claim Notice, as it may have been updated) sent for such Third Party Claim. If the Seller Representative does not provide to the Purchaser Representative and the Escrow Agent a written notice objecting to such Indemnification Claim (an “ Objection Notice ”) (with any Objection Notice provided to the Purchaser Representative, but not the Escrow Agent, including an attachment with a description, in reasonable detail, of the facts upon which such objection is based) by 5:00 p.m. New York City time on the end of such applicable thirtieth (30 th ) day (such applicable thirty (30) day period, the “ Objection Period ”), the Seller Representative on will be deemed to have accepted responsibility for the Losses set forth in such Claim Notice or Revised Claim Notice subject to the limitations on indemnification set forth in Article VI of the Merger Agreement and will have no further right to contest the validity of such Claim Notice or Revised Claim Notice, and the Escrow Agent shall promptly (in any event within five (5) Business Days) after the expiration of the Objection Period (or, if during the Objection Period, the Seller Representative provides affirmative written instructions to the Escrow Agent to release such Indemnity Escrow Property from the Indemnity Escrow Account, promptly (in any event within five (5) Business Days) after the Escrow Agent’s receipt of such instructions from the Seller Representative) disburse from the Indemnity Escrow Account to the Purchaser Representative, Indemnity Escrow Property in an amount equal to the Claim Amount. If the Seller Representative provides an Objection Notice during the Objection Period that disputes only a portion of the Claim Amount, the Escrow Agent shall promptly (in any event within five (5) Business Days) the expiration of the Objection Period (or, if during the Objection Period, the Seller Representative provides affirmative written instructions to the Escrow Agent to release such Indemnity Escrow Property from the Indemnity Escrow Account, promptly (in any event within five (5) Business Days) after the Escrow Agent’s receipt of such instructions from the Seller Representative), distribute from the Indemnity Escrow Account to Purchaser, Indemnity Escrow Property in an amount equal to the undisputed portion of the Claim Amount.

 

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(c)            If the Seller Representative timely disputes an Indemnification Claim by providing an Objection Notice to the Purchaser Representative and the Escrow Agent during the Objection Period, the Purchaser Representative and the Seller Representative shall resolve the dispute in accordance with the terms of the Merger Agreement. If an Indemnification Claim is disputed by the Seller Representative, the Escrow Agent shall not distribute to the Seller Representative (or directly to any Company Shareholder) any portion of the Indemnity Escrow Property with respect to the disputed portion of the Claim Amount, until receipt of (i) joint written instructions executed and delivered by the Seller Representative and Purchaser Representative(on behalf of Purchaser) stating that the dispute has been resolved and that the Purchaser Representative has the right to the Claim Amount (or some portion thereof) (“ Joint Instructions ”) or (ii) a copy of a final, non-appealable arbitration award issued pursuant to Section 10.4 of the Merger Agreement or a final, non-appealable Order from a court of competent jurisdiction establishing the Indemnified Party’s right to the Claim Amount (or some portion thereof) pursuant to the Merger Agreement (a “ Binding Award ”). Upon receipt of such Joint Instructions or Binding Award, the Escrow Agent shall, without further action on the part of the Seller Representative or the Purchaser Representative, promptly (in any event within five (5) Business Days) disburse to Purchaser the amount of the Indemnity Escrow Property set forth in the Joint Instructions or the Binding Award, less any undisputed amounts already disbursed (as applicable).

 

(d)            Payments from the Indemnity Escrow Account with respect to any Indemnification Claims shall first be paid with any Indemnity Escrow Shares then held in the Indemnity Escrow Account, and then with any remaining property in the Indemnity Escrow Account. For any Indemnity Escrow Shares to be disbursed with respect to Indemnification Claims pursuant to this Section 4, the Indemnity Escrow Shares shall be valued at the Purchaser Share Price as of the date that an Indemnification Claim is finally determined in accordance with the Merger Agreement and this Agreement (the “ Resolution Date ”). For the avoidance of doubt, the Resolution Date shall be (i) if no Objection Notice is delivered by the Seller Representative during the Objection Period, the first (1 st ) Business Day immediately following the Objection Period; (ii) if prior to the date described in clause (i) above, the date that the Escrow Agent receives written instructions from the Seller Representative to release the Indemnity Escrow Property for the amount set forth in the Claim Notice or Revised Claim Notice; (iii) if the Seller Representative provides an Objection Notice that disputes only a portion of the Claim Amount, with respect to the undisputed portion of such Claim Amount, the date that the Escrow Agent receives such Objection Notice; and (iv) with respect to any disputed Claim Amount, either the date that the Escrow Agent receives Joint Instructions or a Binding Award.

 

(e)            With respect to any indemnification claims made in accordance with Article VI of the Merger Agreement and this Agreement on or prior to the eighteen (18) month anniversary of the Closing (the “ Expiration Date ”) (including those at are revised or adjusted in accordance with Article VI of the Merger Agreement after the Expiration Date) that remain unresolved at the time of the Expiration Date (“ Pending Claims ”), all or a portion of the Indemnity Escrow Property reasonably necessary to satisfy such Pending Claims (as determined based on the amount of the indemnification claim included in the Claim Notice or Revised Claim Notice provided by the Purchaser Representative and the Purchaser Share Price as of the Expiration Date) shall remain in the Indemnity Escrow Account until such time as such Pending Claim shall have been finally resolved pursuant to the provisions of Article VI of the Merger Agreement and this Agreement. After the Expiration Date, any Indemnity Escrow Property remaining in the Indemnity Escrow Account that is not subject to Pending Claims, if any, and not subject to resolved but unpaid claims in favor of an Indemnified Party, shall be transferred by the Escrow Agent to the Seller Representative (for distribution to the Company Shareholders that have previously delivered the Transmittal Documents to the Surviving Company or Purchaser in accordance with Section 1.9 of the Merger Agreement, with each such Company Shareholder receiving its Pro Rata Share of such Indemnity Escrow Property). Promptly after the final resolution of all Pending Claims and payment of all indemnification obligations in connection therewith, the Escrow Agent shall transfer any Indemnity Escrow Property remaining in the Indemnity Escrow Account to the Seller Representative (for distribution by the Seller Representative to the Company Shareholders that have previously delivered the Transmittal Documents to the Surviving Company or Purchaser in accordance with Section 1.9 of the Merger Agreement, with each such Company Shareholder receiving its Pro Rata Share of such Indemnity Escrow Property).

 

Section 5.                Transfer of the Guarantee Escrow Shares . The Escrow Agent shall hold the Guarantee Escrow Shares and shall transfer the Guarantee Escrow Shares to the applicable recipient in accordance with the following procedures (and the register of members of Purchaser shall be updated accordingly):

 

(a)            Promptly, but in any event within five (5) Business Days, after the Escrow Agent’s receipt of joint written instructions (“ Earnout Payment Instructions ”) from the Purchaser Representative (on behalf of Purchaser) and the Seller Representative that there has been a final determination in accordance with Section 12.1 of the Merger Agreement with respect to the number of Guarantee Escrow Shares (the date that the Escrow Agent receives Earnout Payment Instructions the “ Earnout Release Date ”), the Escrow Agent shall transfer the applicable Guarantee Escrow Shares from the Earnout Escrow Account in accordance with such Earnout Payment Instructions.

 

(b)           Any amount of Guarantee Escrow Shares required to be transferred to any Person pursuant to this Section 5 shall be transferred by the Escrow Agent pursuant to such delivery instructions as set forth in the Earnout Payment Instructions. The Escrow Agent shall rely exclusively on instructions provided by the Seller Representative and the Purchaser Representative (on behalf of Purchaser) as to the amount and recipient of any distribution of Escrow Property pursuant to this Section 5 , or the relevant order of any court of competent jurisdiction or other award granted pursuant to other binding legal process (including any binding arbitration). The Escrow Agent has no duty or responsibility to calculate any distribution or to confirm the accuracy of any distribution amount so instructed.

 

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(c)            In the event that any Guarantee Escrow Shares are released to Purchaser so that Purchaser can issue replacement shares to the Company Shareholders as the Borqs Guarantee Issued Shares under Section 12(b) of the Merger Agreement, then Purchaser shall transfer to the Escrow Agent four percent (4%) of such replacement shares as the Guarantee Additional Indemnity Escrow Shares under Section 12(b) of the Merger Agreement for deposit by the Escrow Agent into the Indemnity Escrow Account as Indemnity Escrow Shares, and the Escrow Agent will deposit such shares into the Indemnity Escrow Account as Indemnity Escrow Shares to be held and disbursed in accordance with Section 4 .

  

Section 6.                 Tax Matters .

 

(a)            Purchaser, the Purchaser Representative and the Seller Representative agree and acknowledge that, for all U.S. and foreign tax purposes, except as required by applicable Law: (i) Purchaser shall be the owner of the Indemnity Escrow Property while held in the Indemnity Escrow Account and until released to the Company Shareholders or the Seller Representative for distribution to Company Shareholders, and all interest, earnings or income, if any, earned with respect to the Indemnity Escrow Property while held by the Escrow Agent shall be treated as earned by Purchaser; and (ii) the Backstop Investors shall be the owner of the Guarantee Escrow Shares while held in the Earnout Escrow Account, and until released all distributions from the Earnout Escrow Account to the Backstop Investors shall be treated by the parties for tax purposes as adjustment to the basis of the Backstop Investors’ investment in Purchaser Ordinary Shares, and in the event that the Guarantee Escrow Shares are released by the Escrow Agent to Purchaser, such release shall be treated by the parties as a shareholder contribution to capital by the Backstop Investors.

 

(b)            The Escrow Agent shall have the right to deduct and withhold taxes from any payments to be made hereunder if such withholding is required by law and to request and receive any necessary tax forms, including Form W-9 or the appropriate series of Form W-8, as applicable, or any similar information, from the applicable recipient of the Escrow Shares.

 

Section 7.               Duties . The Escrow Agent’s duties are entirely ministerial and not discretionary, and the Escrow Agent will be under no duty or obligation to do or to omit the doing of any action with respect to the Escrow Property, except to give notice, provide monthly reports, make disbursements, keep an accurate record of all transactions with respect to the Escrow Property, hold the Escrow Property in accordance with the terms of this Agreement and to comply with any other duties expressly set forth in this Agreement. The Escrow Agent shall not have any interest in the Escrow Property but shall serve as escrow holder only and have only possession thereof. Nothing contained herein shall be construed to create any obligation or liability whatsoever on the part of the Escrow Agent to anyone other than the parties to this Agreement. There are no third party beneficiaries to this Agreement.

 

Section 8.                Determination of Purchaser Share Price . In the event that the Escrow Agent has any question as to the applicable Purchaser Share Price, the Seller Representative and Purchaser Representative shall cooperate to promptly provide the Escrow Agent with their good faith determination of the applicable Purchaser Share Price pursuant to Joint Instructions or a Binding Award (and in the event of any dispute as to the Purchaser Share Price, the Escrow Agent shall not disburse the applicable Escrow Property until such dispute has been resolved).

 

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Section 9.               Monthly Reports . The Escrow Agent shall provide monthly account statements to Purchaser Representative on behalf of Purchaser and the Seller Representative with respect to the Escrow Accounts. The Purchaser Representative and the Seller Representative have one hundred twenty (120) days to object in writing to such reports. If no written notice detailing a party's objections has been received by the Escrow Agent within this period, an acceptance of such reports shall be deemed to have occurred.

 

Section 10.             Authorized Parties; Reliance . The parties hereby acknowledge that the Purchaser Representative has the sole and exclusive authorization to act on behalf of Purchaser under this Agreement. The Purchaser Representative on behalf of Purchaser and the Seller Representative agree to provide, on Exhibit A (as it may be amended from time to time) to this Agreement, the names and specimen signatures of those persons who are authorized to issue notices and instructions to the Escrow Agent and execute required documents under this Agreement. The Escrow Agent may rely and shall be protected in acting or refraining from acting upon any written notice, instruction or request furnished to it hereunder and believed by it to be genuine and to have been signed or presented by the proper party or parties. The Escrow Agent is entitled to rely on, and shall be fully protected in relying on, the instructions and notices from any one of the authorized signers, as identified on the attached Exhibit A (as it may be amended from time to time) to this Agreement, from each of Purchaser Representative (on behalf of Purchaser) and the Seller Representative, either acting alone, until such time as their authority is revoked in writing, or until successors have been appointed and identified by notice in the manner described in Section 16 below.

 

Section 11.             Good Faith . The Escrow Agent shall not be liable for any action taken by it in good faith and reasonably believed by it to be authorized or within the rights or powers conferred upon it by this Agreement and may consult with counsel of its own choice and shall have full and complete authorization and protection for any action taken or suffered by it hereunder in good faith and in accordance with the opinion of such counsel.

 

Section 12.             Right to Resign . The Escrow Agent may resign and be discharged from its duties or obligations hereunder by giving such notice in writing of such resignation specifying a date when such resignation shall take effect, which shall be a date not less than sixty (60) days after the date of the notice of such resignation. Similarly, the Escrow Agent may be removed and replaced following the giving of thirty (30) days’ notice to the Escrow Agent by all of the other parties hereto. In either event, the Purchaser Representative and the Seller Representative shall agree upon a successor Escrow Agent. If the Seller Representative and the Purchaser Representative are unable to agree upon a successor or shall have failed to appoint a successor prior to the expiration of sixty (60) days following the date of resignation or thirty (30) days following the date of removal, the then-acting Escrow Agent may petition any court of competent jurisdiction for the appointment of a successor escrow agent or otherwise appropriate relief, and any such resulting appointment shall be binding upon all of the parties hereto. Any successor Escrow Agent shall execute and deliver to the predecessor Escrow Agent, the Purchaser Representative and the Seller Representative an instrument accepting such appointment and the transfer of the Escrow Property and agreeing to the terms of this Agreement.

 

Section 13.             Compensation . The Escrow Agent shall be entitled to receive the fees as set forth on Exhibit B for the services to be rendered hereunder, and to be paid or reimbursed for all reasonable documented out-of-pocket expenses, disbursements and advances, including reasonable documented out-of-pocket attorneys’ fees, incurred or paid in connection with carrying out its duties hereunder, such amounts to be paid by Purchaser.

 

Section 14.             Indemnification . Purchaser hereby agrees to indemnify the Escrow Agent for, and to hold it harmless against any loss, liability or expense incurred without gross negligence, willful misconduct or bad faith on the part of the Escrow Agent, arising out of or in connection with its entering into this Agreement and carrying out its duties hereunder.

 

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Section 15.             Disputes . If a controversy arises between the parties hereto as to whether or not or to whom the Escrow Agent shall transfer all or any portion of the Escrow Property or as to any other matter arising out of or relating to this Agreement or the Escrow Property, the Escrow Agent shall not be required to determine the same, shall not make any transfer of and shall retain the Escrow Property in dispute without liability to anyone until the rights of the parties to the dispute shall have finally been determined by mutual written agreement of the Purchaser Representative on behalf of Purchaser and the Seller Representative, or by a final non-appealable judgment or order of any state or federal court located in New York County, New York (or in any court in which appeal from such courts may be taken) but the Escrow Agent shall be under no duty whatsoever to institute or defend any such proceedings. The Escrow Agent shall be entitled to assume that no such controversy has arisen unless it has received notice of such controversy or conflicting written notices from the parties to this Agreement. Any disputes arising out of, related to, or in connection with, this Agreement between Purchaser, the Purchaser Representative and/or the Seller Representative, including a dispute arising from a party’s failure or refusal to sign a joint written notice hereunder, shall be determined by arbitration conducted in accordance with the provisions of Section 10.4 of the Merger Agreement (other than (i) disputes subject to the Dispute Resolution Procedure under Section 12.1 of the Merger Agreement, which will be determined in accordance with such section, or (ii) applications for a temporary restraining order, preliminary injunction, permanent injunction or other equitable relief or application for enforcement of any arbitration award pursuant to this Section 15 or Section 10.4 of the Merger Agreement).

 

Section 16.             Notices . Except to the extent expressly set forth herein, all notices and communications hereunder shall be in writing and shall be deemed to be given if (a) delivered personally, (b) sent by facsimile or email (with affirmative confirmation of receipt), (c) sent by recognized overnight courier that issues a receipt or other confirmation of delivery or (d) sent by registered or certified mail, return receipt requested, postage prepaid to the parties as follows:

 

 

If to Purchaser or the Purchaser Representative, to:

 

Zhengqi International Holding Limited
855 Pudong South Road
The World Plaza, 27 th Floor
Pudong, Shanghai 200120, China
Attn: Yaqi (Sophie) Feng, COO
Facsimile No.: 86-21-8012-9882
Telephone No: 86-21-8012-9878
Email: fengyq@tpyzq.com

 

 

with a copy (which will not constitute notice) to:

 

Ellenoff Grossman & Schole LLP
1345 Avenue of the Americas, 11th Floor
New York, New York 10105
Attention: Stuart Neuhauser
Facsimile No.: (212) 370-7889
Telephone No.: (212) 370-1300
Email: sneuhauser@egsllp.com

 

If to the Seller Representative, to:

 

Zhengdong Zou
28/F, Jing Guang Centre, Hu Jia Lou
No. 1 East Third Ring Road
Chaoyang District, Beijing 100020, China
Facsimile No.: 86-10-6554-4123
Telephone No: 86-10-6597-0811
Email: zouzhendong@sinowinglaw.com

 

 

with a copy (which will not constitute notice) to:

 

Fenwick & West LLP
801 California Street
Mountain View, CA 94041
Attn: Eva Wang
Facsimile No.: (650) 938-5200
Telephone No.: (650) 335-7878
Email: ewang@fenwick.com

 

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If to the Escrow Agent, to:

 

Continental Stock Transfer & Trust Company
17 Battery Place 8 th Floor
New York, NY 10004
Attention: Compliance Department
Facsimile No: (212) 509-5150
Telephone No: (212) 845-4000

 

 

 

or at such other address as any of the above may have furnished to the other parties in a notice duly given as provided herein. Any such notice or communication given in the manner specified in this Section 16 shall be deemed to have been given (i) on the date personally delivered or transmitted by facsimile or email (with affirmative confirmation of receipt), (ii) one (1) Business Day after the date sent by recognized overnight courier that issues a receipt or other confirmation of delivery or (iii) three (3) Business Days after being sent by registered or certified mail, return receipt requested, postage prepaid.

 

Section 17.             Term . This Agreement shall terminate upon the final, proper and complete distribution of the Escrow Property in accordance with the terms hereof; provided , that Purchaser’s obligations under Section 14 hereof shall survive any termination of this Agreement.

 

Section 18.             Entire Agreement . The terms and provisions of this Agreement (including the Exhibits hereto, which are hereby incorporated by reference herein) constitute the entire agreement between the Escrow Agent and the other parties hereto with respect to the subject matter hereof. Notwithstanding the foregoing, as between Purchaser, the Purchaser Representative and the Seller Representative, the terms of the Merger Agreement shall control and govern over the terms of this Agreement in the event of any conflict or inconsistency between this Agreement and the Merger Agreement. The actions of the Escrow Agent shall be governed solely by this Agreement.

 

Section 19.             Amendment; Waiver . This Agreement may be amended or modified only by a written instrument duly signed by the parties hereto, and any provision hereof may be waived only by a written instrument duly signed by the party against whom enforcement of such waiver is sought.

 

Section 20.             Severability . In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other Persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision.

 

Section 21.             Further Assurances . From time to time on and after the date hereof, Purchaser Representative and the Seller Representative shall deliver or cause to be delivered to the Escrow Agent such further documents and instruments and shall do and cause to be done such further acts as the Escrow Agent shall reasonably request (it being understood that the Escrow Agent shall have no obligation to make any such request) to carry out more effectively the provisions and purposes of this Agreement, to evidence compliance herewith or to assure itself that it is protected in acting hereunder.

 

Section 22.             Accounting . In the event of the resignation or removal of the Escrow Agent, upon the termination of this Agreement or upon demand at any time of either the Purchaser Representative or the Seller Representative under reasonable circumstances, the Escrow Agent shall render to the Purchaser Representative, the Seller Representative and the successor escrow agent (if any) an accounting (free of charge) in writing of the property constituting the Escrow Property.

 

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Section 23.             Interpretation . The parties acknowledge and agree that: (a) this Agreement is the result of negotiations between the parties and will not be deemed or construed as having been drafted by any one party, (b) each party and its counsel have reviewed and negotiated the terms and provisions of this Agreement (including any Exhibits attached hereto) and have contributed to its revision and (c) the rule of construction to the effect that any ambiguities are resolved against the drafting party will not be employed in the interpretation of this Agreement. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. In this Agreement, unless the context otherwise requires: (i) words of the masculine, feminine or neuter gender will include the masculine, neuter or feminine gender, and words in the singular number or in the plural number will each include, as applicable, the singular number or the plural number; (ii) reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity; (iii) reference to any law means such law as amended, modified codified or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder; (iv) any agreement or instrument defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement or instrument as from time to time amended, modified or supplemented, including by waiver or consent and references to all attachments thereto and instruments incorporated therein; (v) the term “or” means “and/or”; (vi) the words “herein, “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision; (vii) the words “include,” “includes” and “including” when used herein shall be deemed in each case to be followed by the words “without limitation”; (viii) any reference herein to “dollars” or “$” shall mean United States dollars; and (ix) reference to any Section or Exhibit means such Section hereof or Exhibit hereto.

 

Section 24.             Successors and Assigns . This Agreement and the rights and obligations hereunder may not be assigned without the prior written consent of each of the parties hereto; provided , however , that (a) if the Seller Representative is replaced in accordance with the terms of the Merger Agreement, the replacement Seller Representative shall automatically become a party to this Agreement as if it were the original Seller Representative hereunder upon providing (i) written notice to the Escrow Agent and Purchaser of such replacement and accepting its rights and obligations under this Agreement and (ii) the Escrow Agent with the documentation referenced in Section 29 hereof from such replacement Seller Representative and any replacement authorized individuals to act on behalf of the Seller Representative for purposes of Exhibit A and (b) if the Purchaser Representative is replaced in accordance with the terms of the Merger Agreement, the replacement Purchaser Representative shall automatically become a party to this Agreement as if it were the original Purchaser Representative hereunder upon providing (i) written notice to the Escrow Agent and the Seller Representative of such replacement and accepting its rights and obligations under this Agreement and (ii) the Escrow Agent with the documentation referenced in Section 29 hereof from such replacement Purchaser Representative and any replacement authorized individuals to act on behalf of Purchaser for purposes of Exhibit A . This Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and permitted assigns.

 

Section 25.             Failure or Indulgence Not Waiver; Remedies Cumulative . No failure or delay on the part of any party hereto in the exercise of any right hereunder will impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty, covenant or agreement herein, nor will any single or partial exercise of any such right preclude any other (or further) exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive to or exclusive of, any rights or remedies otherwise available to a party hereunder.

 

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Section 26.             Governing Law; Venue . The terms and provisions of this Agreement shall be construed and enforced in accordance with the laws of the State of New York without reference to its conflict of law provisions. Subject to Section 15 , each of the parties hereto irrevocably consents to the exclusive jurisdiction and venue of any state or federal court located in New York County, New York (or in any court in which appeal from such courts may be taken) in connection with any matter based upon or arising out of this Agreement or the matters contemplated herein, agrees that process may be served upon them in any manner authorized by the laws of the State of New York for such Persons and waives and covenants not to assert or plead any objection which they might otherwise have to such jurisdiction, venue and such process.

 

Section 27.             Waiver of Jury Trial . EACH PARTY HEREBY WAIVES THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY LITIGATION, CLAIM, CAUSE OF ACTION OR OTHER LEGAL PROCEEDING BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES HERETO AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE PARTIES HERETO EACH AGREE THAT ANY SUCH LITIGATION, CLAIM, CAUSE OF ACTION OR OTHER LEGAL PROCEEDING SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES HERETO FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR ANY PROVISION HEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT.

 

Section 28.             Counterparts . This Agreement may be executed simultaneously in two or more counterparts (including by facsimile or other electronic transmission), each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

Section 29.             U.S. Patriot Act . Purchaser and the Seller Representative agree to provide the Escrow Agent with the information reasonably requested by the Escrow Agent to verify and record Purchaser’s and the Seller Representative’s respective identities pursuant to the Escrow Agent’s procedures for compliance with the U.S. Patriot Act and any other applicable laws.

 

Section 30.             Representations of the Parties . Each of the parties hereto hereby represents and warrants that as of the date hereof: (a) it has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder, and all such actions have been duly and validly authorized by all necessary proceedings; and (b) this Agreement has been duly authorized, executed and delivered by it, and constitutes a legal, valid and binding agreement of it.

 

{REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS}

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first written above.

 

 

Purchaser:

 

Pacific Special Acquisition Corp .

  

  By: /s/ Zhouhong Peng                         
  Name: Zhouhong Peng
    Title: CEO
     
 

The Seller Representative:

 

/s/ Zhengdong Zou 

 

Zhengdong Zou , in the capacity under the Merger Agreement as the Seller Representative

  

 

The Escrow Agent:

 

CONTINENTAL STOCK TRANSFER & TRUST COMPANY , as escrow agent

   
  By: /s/ Kevin Jennings 
    Name: Kevin Jennings
    Title: Vice-President

   

[Signature Page to Escrow Agreement]

 

 

 

 

 

The Purchaser Representative:

 

ZHENGQI INTERNATIONAL HOLDING LIMITED, solely in its capacity as the Purchaser Representative

 

  By: /s/ Zhouhong Peng 
    Name: Zhouhong Peng
    Title: Director

 

[Signature Page to Escrow Agreement]

 

 

 

 

EXHIBIT A
AUTHORIZED SIGNERS

 

Purchaser:

 

Individuals authorized by the Purchaser Representative:

 

Name   Telephone Number   Specimen Signature
           
1. Yaqi (Sophie) Feng, COO   86-21-8012-9878   /s/ Yaqi (Sophie) Feng
           
2. Zhouhong Peng, CEO   86-21-6137-6584   /s/ Zhouhong Peng
           
3.    

 

Seller Representative:

 

Name   Telephone Number   Specimen Signature
           
1. Zhengdong Zou   86-10-6597-0811   /s/ Zhengdong Zou
           
2.    
           
3.    

 

 

 

 

EXHIBIT B
FEE INFORMATION

 

[To be provided]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 10.5

 

INSTRUCTIONS FOR LETTER OF TRANSMITTAL

FOR SHAREHOLDERS AND WARRANT HOLDERS (“ HOLDERS ”)

OF BORQS INTERNATIONAL HOLDING CORP (THE “ COMPANY ”)

 

1. Delivery of Letter of Transmittal, Exhibits and Certificates. The Letter of Transmittal, together with the exhibits attached thereto, properly completed and duly executed, together with the certificate(s) for the securities described, should be delivered to the Company at the address below in the envelope enclosed for your convenience. If the space provided on the Letter of Transmittal is inadequate, the applicable information should be listed on a separate schedule to be attached thereto.

 

THE METHOD OF DELIVERY OF ALL REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER, BUT IF SENT BY MAIL, IT IS RECOMMENDED THAT THEY BE SENT BY REGISTERED MAIL WITH RETURN RECEIPT REQUESTED. DELIVERY OF THE DOCUMENTS WILL BE EFFECTIVE, AND RISK OF LOSS AND TITLE WITH RESPECT THERETO SHALL PASS, ONLY WHEN THE MATERIALS ARE ACTUALLY RECEIVED BY THE COMPANY AT THE ADDRESS BELOW.

 

2. Signatures.

 

a. If the Letter of Transmittal is signed by the registered owner(s) of the share certificate(s) listed and surrendered thereby, no endorsements of certificates or separate stock powers are required. If the Letter of Transmittal is signed by the original recipient of the warrants to be surrendered, no evidence of transfer is required. If the certificate(s) or warrants surrendered is (are) owned of record by two or more joint owners, all such owners must sign the Letter of Transmittal.

 

b. If, with respect to any surrendered certificate(s), the Letter of Transmittal is signed by a person other than the registered owner of the certificate(s) listed or its duly authorized representative (as confirmed by proper evidence satisfactory to the Company and to Pacific Special Acquisition Corp. (the “ Purchaser ”)), such certificate(s) must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name or names of the registered owner or owners appear on the certificate(s). Signatures on such Letters of Transmittal and such certificates or stock powers must be guaranteed by a financial institution that is a member of a Securities Transfer Association approved medallion program such as STAMP, SEMP or MSP (an “ Eligible Institution ”).

 

c. If, with respect to any warrant(s), the Letter of Transmittal is signed by a person other than the person to whom such warrants were issued or its duly authorized representative (as confirmed by proper evidence satisfactory to the Company and the Purchaser), such warrants must be accompanied by appropriate evidence of transfer, signed exactly as the name or names of the person indicated in such warrants. Signatures on such Letters of Transmittal and evidence of transfer must be guaranteed by an Eligible Institution.

 

d. If the Letter of Transmittal or any certificate, warrant, stock power or other exhibit to the Letter of Transmittal is signed by trustees, executors, administrators, guardians, attorney-in-fact, officers of corporations or other entities or others, acting in a fiduciary or representative capacity, such persons should so indicate when signing and proper evidence, satisfactory to the Company and the Purchaser, of their authority to do so must be submitted.

 

3. Special Payment and Delivery Instructions. Indicate on the Letter of Transmittal all names and addresses to which consideration for the securities is to be issued and the amounts thereto, if different from the name and address of the person(s) signing the Letter of Transmittal. Signatures on such Letters of Transmittal must be guaranteed by an Eligible Institution.

 

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4. Form W-8/W-9. If you are a U.S. person, please enter your social security or employer identification number, and complete, sign and date the attached Form W-9. If you are a non-U.S. person, you must provide a properly completed and executed Internal Revenue Service Form W-8BEN or other Form W-8, which you can obtain from the Company by contacting the designated person below.

 

5. Additional Copies. Additional copies of the Letter of Transmittal may be obtained from the Company at the address listed below.

 

6. Lost, Stolen or Destroyed Certificates and Warrant. If any share certificates or warrants have been lost, stolen or destroyed, please so indicate on the front of the Letter of Transmittal, and additional paperwork will be sent to you to replace the lost, stolen or destroyed certificates or warrants, as applicable.

 

All questions as to the validity, form and eligibility of any surrender of certificates or warrants will be determined by the Company and the Purchaser, and such determination shall be final and binding on each Holder. The Company and the Purchaser reserve the right to together waive any irregularities or defects in the surrender of any certificates or warrants. A surrender will not be deemed to have been made until all irregularities have been cured or waived. Neither the Company nor the Purchaser is under any obligation to waive or to provide any notification of any irregularities or defects in the surrender of any certificates or warrants, nor shall the Company or the Purchaser be liable for any failure to give such notification.

 

All documentation and requests should be sent to the Company at the following address :

 

Borqs International Holding Corp.

Tower A, Building B23

Universal Business Park

No. 10 Jiuxiangqiao Road

Chaoyang District, Beijing 100015, China

Attention: Daphne Mao

Facsimile No.: 86-10-5975-6363

Telephone No: 86-10-5975-6336

Email: daphne.mao@borqs.com

 

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Method of delivery of the certificate(s) is at the option and risk of the Holder. See Instruction 1.

 

All Holders, please mail or deliver each of the following:

 

An original of this Letter of Transmittal, duly executed by Holder

 

An original of the Lock-Up Agreement, duly executed by Holder, the form of which is attached as Exhibit A

 

An original of the Registration Rights Agreement, duly executed by Holder, the form of which is attached as Exhibit B

 

A completed and executed IRS Form W-9 or Form W-8BEN (or Other Form W-8), as applicable, the form of which is attached as Exhibit C .

 

If you are a holder of Company shares, please also mail the following:

 

The certificate(s) representing your Company shares

 

If required, as described in the instructions, an original stock power, duly executed by Holder, the form of which is attached as Exhibit D

 

If you are a holder of Company warrants, please also mail the following:

 

All agreements for your Company warrants

 

Please return all documents to the Company using the address set forth in the instructions.

 

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LETTER OF TRANSMITTAL

 

To Exchange Securities of Borqs International Holding Corp Pursuant to the Merger of Borqs International

Holding Corp and PAAC Merger Subsidiary Limited.

 

This letter of transmittal (this “ Letter of Transmittal ”) is being furnished in connection with the merger of PAAC Merger Subsidiary Limited, a Cayman Islands company (“ Merger Sub ”) and a wholly-owned subsidiary of Pacific Special Acquisition Corp., a British Virgin Islands company (the “ Purchaser ”), with and into Borqs International Holding Corp, a Cayman Islands company (the “ Company ”), pursuant to the Merger Agreement, dated as of December 27, 2016 (as amended, including by that First Amendment to Merger Agreement, dated May 10, 2017, and that Second Amendment to Merger Agreement, dated June 29, 2017, the “ Merger Agreement ”), by and among (i) the Purchaser, (ii) Merger Sub, (iii) Zhengqi International Holding Limited, a British Virgin Islands company, in the capacity thereunder as the Purchaser Representative (the “ Purchaser Representative ”), (iv) Zhengdong Zou, in the capacity thereunder as the Seller Representative (the “ Seller Representative ”), (v) the Company and (vi) solely for limited purposes thereof, Zhengqi International Holding Limited, a British Virgin Islands company. Pursuant to the Merger Agreement, and subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company with the Company surviving the Merger as a wholly-owned subsidiary of the Purchaser (the “ Merger ”). At the effective time of the Merger (the “ Effective Time ”), each issued and outstanding (a) share in the capital of the Company (other than shares in respect of which dissenters or appraisal rights have been properly exercised and perfected under Cayman law and shares held in treasury) (each, a “ Company Share ”) will be cancelled and cease to exist in exchange for the right to receive ordinary shares of the Purchaser (the “ Merger Consideration Shares ”), (b) warrant to acquire shares in the capital of the Company (each, a “ Company Warrant ”) shall be cancelled, retired and terminated in exchange for the right to receive from the Purchaser a new warrant for ordinary shares of the Purchaser with its price and number of shares equitably adjusted based on the conversion of the Company Shares into the Merger Consideration shares (the “ Replacement Purchaser Warrants ”), and (c) option to acquire shares in the capital of the Company (each, a “ Company Option ”) (whether vested or unvested) shall be assumed by Purchaser and automatically converted into an option to acquire ordinary shares of the Purchaser, with its price and number of shares equitably adjusted based on the conversion of the Company Shares into the Merger Consideration Shares. Any capitalized term used but not defined in this Letter of Transmittal will have the meaning ascribed to such term in the Merger Agreement.

 

The undersigned holder (“ Holder ”) of Company Shares and/or Company Warrants understands that this Letter of Transmittal is being provided to both the Company and the Purchaser in connection with, and as a condition to the consummation of the Merger, and that the Company and the Purchaser are consummating the Merger and the other transactions contemplated by the Merger Agreement in reliance upon the representations, warranties, covenants and agreements of Holder set forth in this Letter of Transmittal.

 

IN ADDITION, HOLDER HAS READ, UNDERSTANDS AND AGREES TO ALL OF THE TERMS AND CONDITIONS SET FORTH IN THE MERGER AGREEMENT, THE ANCILLARY DOCUMENTS TO WHICH THE HOLDER IS BOUND, THE MATERIALS ACCOMPANYING THIS LETTER OF TRANSMITTAL AND THE ACCOMPANYING INSTRUCTIONS BEFORE COMPLETING ANY OF THE INFORMATION BELOW.

 

Please read carefully this entire Letter of Transmittal and the accompanying instructions before completing any of the boxes below.

 

1.        Representations and Warranties of Holder . Holder hereby represents, warrants and covenants to the Company and the Purchaser as follows as of the date of this Letter of Transmittal and as of the Effective Time:

 

(a)        Ownership of Securities . All of the Company Shares and Company Warrants owned by Holder, including without limitation the number, type, class and series thereof, are set forth and accurately described in Schedule 1 below (the “ Holder Company Securities ”). Holder has beneficial ownership over, is the lawful owner of, and has good and valid title to, the Holder Company Securities, free and clear of any and all pledges, mortgages, encumbrances, charges, proxies, voting agreements, liens, adverse claims, options, security interests and demands of any nature or kind whatsoever (other than those imposed by applicable securities laws or the Company’s organizational documents, as in effect on the date hereof, or any applicable Voting Agreement entered into by Holder with the Company and the Purchaser in connection with the Merger Agreement). There are no claims for finder’s fees or brokerage commission or other like payments in connection with the Merger Agreement or the transactions contemplated thereby payable by Holder pursuant to arrangements made by such Holder. Except for the Holder Company Securities set forth on Schedule 1 and any Company Options, Holder is not a beneficial owner or record holder of any: (i) equity securities of the Company, (ii) securities of the Company having the right to vote on any matters on which the holders of equity securities of the Company may vote, or (iii) options, warrants or other rights to acquire from the Company any equity securities or securities convertible into or exchangeable for equity securities of the Company.

 

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(b)        Binding Agreement . Holder (i) if a natural person, is of legal age to execute this Letter of Transmittal and each of the Exhibits hereto, including the Lock-Up Agreement and the Registration Rights Agreement, and any other document required by this Letter of Transmittal (collectively with the Letter of Transmittal, the “ Transmittal Documents ”), and is legally competent to do so and (ii) if not a natural person, is (A) a corporation or other entity duly organized and validly existing under the laws of the jurisdiction of its organization and (B) has all necessary power and authority to execute and deliver the Transmittal Documents, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. If Holder is not a natural person, the execution and delivery of the Transmittal Documents, the performance of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby by Holder has been duly authorized by all necessary corporate or similar action on the part of Holder. This Letter of Transmittal and each other Transmittal Document, assuming due authorization, execution and delivery hereof by the other parties hereto and thereto, constitutes a legal, valid and binding obligation of Holder, enforceable against Holder in accordance with its terms (except as such enforceability may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other similar laws of general applicability relating to or affecting creditor’s rights, and to general equitable principles).

 

(c)        No Conflicts . No filing with, or notification to, any governmental authority, and no consent, approval, authorization or permit of any other person or entity is necessary for the execution of this Letter of Transmittal or any other Transmittal Document by Holder, the performance of its obligations hereunder or thereunder or the consummation by it of the transactions contemplated hereby or thereby. None of the execution and delivery of this Letter of Transmittal or any other Transmittal Document by Holder, the performance of its obligations hereunder or thereunder or the consummation by it of the transactions contemplated hereby or thereby will (i) conflict with or result in any breach of the organizational documents of Holder, if applicable, (ii) result in, or give rise to, a violation or breach of or a default under any of the terms of any contract or obligation to which Holder is a party or by which Holder or any of the Company Shares or Company Warrants or its other assets may be bound, or (iii) violate any applicable law or order, except for any of the foregoing in clauses (i) through (iii) as would not reasonably be expected to impair in any material respect Holder’s ability to perform its obligations under this Letter of Transmittal or the other Transmittal Documents. Holder has not entered into any agreement or knowingly taken any action (nor will enter into any agreement or knowingly take any action) that would make any representation or warranty of Holder contained in this Letter of Transmittal untrue or incorrect in any material respect or have the effect of preventing Holder from performing any of its material obligations under this Letter of Transmittal or any Transmittal Document.

 

(d)        Investment Representations . Holder: (i) is an “accredited investor” as such term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (the “ Securities Act ”); (ii) is acquiring its portion of the Merger Consideration Shares and/or Replacement Purchaser Warrants, and/or the Purchaser Ordinary Shares underlying each such Replacement Purchaser Warrant (collectively, the “ Purchaser Securities ”) for itself for investment purposes only, and not with a view towards any resale or distribution of such Purchaser Securities; (iii) has been advised and understands that the Purchaser Securities (A) are being issued in reliance upon one or more exemptions from the registration requirements of the Securities Act and any applicable state securities laws, (B) have not been and shall not be registered under the Securities Act or any applicable state securities laws and, therefore, must be held indefinitely and cannot be resold unless such Purchaser Securities are registered under the Securities Act and all applicable state securities laws, unless exemptions from registration are available and (C) will be subject to additional restrictions on transfer pursuant to the Lock-Up Agreement; (iv) is aware that an investment in the Purchaser is a speculative investment and is subject to the risk of complete loss; and (v) acknowledges that the Purchaser is under no obligation hereunder to register the Purchaser Securities under the Securities Act (except as may be set forth in the Registration Rights Agreement). Holder does not have any contract with any person or entity to sell, transfer, or grant participations to such person or entity, or to any third person or entity, with respect to the Purchaser Securities. By reason of Holder’s business or financial experience, or by reason of the business or financial experience of Holder’s “purchaser representatives” (as that term is defined in Rule 501(h) under the Securities Act), Holder is capable of evaluating the risks and merits of an investment in Purchaser and of protecting its interests in connection with this investment. Holder has carefully read and understands all materials provided by or on behalf of Purchaser or its affiliates or the managers, directors, officers, employees, agents or advisors of Purchaser or its affiliates (collectively, “ Purchaser’s Representatives ”) to Holder or its affiliates or the managers, directors, officers, employees, agents or advisors of Holder or its affiliates (collectively, “ Holder’s Representatives ”) pertaining to an investment in the Purchaser and has consulted, as Holder has deemed advisable, with its own attorneys, accountants or investment advisors with respect to the investment contemplated hereby and its suitability for Holder. Holder acknowledges that the Purchaser Securities are subject to dilution for events not under the control of Holder. Holder has completed its independent inquiry and has relied fully upon the advice of its own legal counsel, accountant, financial and other Holder’s Representatives in determining the legal, tax, financial and other consequences of the Merger Agreement and the Transmittal Documents and the transactions contemplated hereby and thereby and the suitability of the foregoing for Holder and its particular circumstances, and has not relied upon any representations or advice by Purchaser or Purchaser’s Representatives. Holder acknowledges and agrees that no representations or warranties have been made by Purchaser or any Purchaser’s Representatives to Holder, and that Holder has not been guaranteed or represented to by any person or entity, (i) any specific amount or the event of the distribution of any cash, property or other interest in Purchaser or (ii) the profitability or value of the Purchaser Securities in any manner whatsoever. Holder: (A) has been represented by independent counsel (or has had the opportunity to consult with independent counsel and has declined to do so); (B) has had the full right and opportunity to consult with Holder’s attorneys and other advisors and has availed itself of this right and opportunity; (C) has carefully read and fully understands the Merger Agreement and this Letter of Transmittal and the other Transmittal Documents in their entirety and has had them fully explained to it by such counsel; (D) is fully aware of the contents hereof and the meaning, intent and legal effect thereof; and (E) is competent to execute this Letter of Transmittal and the other Transmittal Documents and has executed this Letter of Transmittal and the other Transmittal Documents free from coercion, duress or undue influence.

 

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2.        Escrow, Earnout, and Indemnification . Holder acknowledges, covenants and agrees that: (a) Pursuant to the Merger Agreement, between 2,352,285 and 3,846,154 Merger Consideration Shares otherwise due to the Company Shareholders (the “ Earnout Shares ”) shall be placed in escrow and subject to release (or, in the case of certain Earnout Shares, cancellation and reissuance of an equivalent number of shares equal and identical in all material respects) to the Company Shareholders only in the event that certain specified net income earnout conditions for the period of July 1, 2017 to June 30, 2018 are met and in any case pursuant to the provisions (including the dispute resolution provisions) in the Merger Agreement governing such Earnout Shares; (b) Pursuant to Section 1.14 of the Merger Agreement, four percent (4%) of the Merger Consideration Shares less the Earnout Shares (as set forth in the Merger Agreement, the “ Indemnity Escrow Shares ”, and, such Indemnity Escrow Shares, together with the Earnout Shares, the “ Escrow Shares ”), together with any dividends, distributions or other income thereon (the Indemnity Escrow Shares together with any such dividends, distributions or other income, as set forth in the Merger Agreement, the “ Indemnity Escrow Property ”), will be held in escrow for a period of eighteen (18) months after the Closing Date (the “ Indemnity Escrow Period ”) (subject to amounts retained in escrow thereafter for then pending claims) and shall serve as security for, and a source of payment of, the indemnification rights of the Purchaser, the Purchaser Representative, their respective affiliates and their respective officers, directors, managers, employees, successors and permitted assigns (collectively, the “ Indemnified Parties ”) pursuant to Article VI of the Merger Agreement; and (c) four percent (4%) of any Earnout Shares earned by the Company Shareholders shall be delivered to the Escrow Agent for deposit in the Indemnity Escrow Account and held as Indemnity Escrow Shares (including for the purposes of satisfying indemnification obligations, if applicable). Consequently, Holder’s Pro Rata Share (as defined in the Merger Agreement) of the Escrow Shares and any other Indemnity Escrow Property will be held in escrow in accordance with the Merger Agreement and the Escrow Agreement(s) to be entered into in connection with the Merger Agreement; and Holder, if a holder of Company Shares, will be required to provide several indemnification to the Indemnified Parties for claims made during the Indemnity Escrow Period to the extent of the Indemnity Escrow Property then remaining in the escrow account

 

3.        Disposition of Company Shares and Company Warrants . Pursuant to the Merger Agreement, Holder hereby: (a) surrenders, cancels and terminates Holder’s Company Shares, if any, in exchange for Holder’s Pro Rata Share of the Merger Consideration Shares (net of any Escrow Shares), subject to the Merger Agreement and the Escrow Agreement(s); and (b) agrees that Holder’s Company Warrants, if any, will be surrendered, cancelled and terminated in accordance with the Merger Agreement and replaced with Replacement Purchaser Warrants. Holder hereby authorizes and instructs the Purchaser to (i) make entries in its register of members to record and give effect to the issue and allotment of the portion of Merger Consideration Shares (less the Escrow Shares) due to Holder as a result of the Merger, if any, in the name of and deliver to the address indicated below (unless otherwise instructed in Schedule 2 hereto), and (ii) replace Holder’s Company Warrants, if any, with Replacement Purchaser Warrants pursuant to the Merger Agreement.

 

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4.        Appointment of Seller Representative to Act on Holder’s Behalf . By the execution and delivery of this Letter of Transmittal, Holder on behalf of itself and its successors and assigns, hereby agrees to the provisions of Section 10.15 of the Merger Agreement and irrevocably constitutes and appoints Zhengdong Zou in the capacity as the Seller Representative as set forth in the Merger Agreement, as the true and lawful agent and attorney-in-fact of Holder with full powers of substitution to act in the name, place and stead of thereof with respect to the performance on behalf of Holder to the extent set forth in Section 10.15 of the Merger Agreement; provided, that the Seller Representative shall have no authority to incur expenses or liabilities for or on behalf of the Holder exceeding the value of the Holder’s Pro Rata Share of (i) the Indemnity Escrow Property plus (ii) the Earnout Shares.

 

5.        Release of Claims . In consideration of the receipt of its Pro Rata Share of the Merger Consideration Shares and/or the Replacement Warrant, Holder, intending to be legally bound, effective as of the Effective Time hereby releases and discharges the Company and its affiliates and their respective directors, officers, employees, agents, representatives, successors and assigns (collectively, “ Releasees ”) fully, finally and forever, from all and any manner of claims, actions, rights, causes of actions, suits, obligations, liabilities debts, due sums of money, agreements, promises, damages, judgments, executions, accounts, expenses, costs, attorneys’ fees and demands whatsoever, whether in law, contract or equity, whether known or unknown, matured or unmatured, foreseen or unforeseen, arising out of events existing or occurring contemporaneously with or prior to the Effective Time, in each case, in Holder’s capacity as a shareholder, warrant holder or option holder of the Company (or its precedessors) or otherwise relating to Holder’s acquisition, ownership, control or sale of Company Shares, Company Warrants or Company Options; provided, that nothing contained herein shall operate to release (i) any liabilities of a Releasee based upon, arising out of or relating to, without duplication, this Letter of Transmittal or any of the other Transmittal Documents, the Merger Agreement, or any of the Ancillary Documents or (ii) the Company for Fraud Claims made by the Purchaser against the Company under the Merger Agreement for which Holder has any responsibility beyond the Escrow Property. Holder hereby irrevocably covenants to refrain from, directly or indirectly asserting, commencing or instituting any cause of action, suit or claim of any kind against any Releasee based upon any matter intended or purported to be released hereby. This release may not be altered except in a writing signed by the person or entity against whose interest such change shall operate. This release shall be governed by and construed under the laws of the State of New York, without regard to principals of conflicts of law.

 

6.        Confidentiality . Holder hereby agrees for a period of two (2) years from and after the date hereof to, and to cause Holder’s Representatives to: (i) treat and hold in strict confidence any Company Confidential Information (as defined in the Merger Agreement), and not use for any purpose (except in connection with the consummation of the transactions contemplated by this Letter of Transmittal, the Merger Agreement or the Ancillary Documents, performing its obligations hereunder or thereunder or enforcing its rights hereunder or thereunder), nor directly or indirectly disclose, distribute, publish, disseminate or otherwise make available to any third party any of the Company Confidential Information without the Company’s and the Purchaser’s prior written consent; and (ii) in the event that Holder or any of Holder’s Representatives becomes legally compelled to disclose any Company Confidential Information, (A) provide the Company and the Purchaser with prompt written notice of such requirement so that the Company and the Purchaser may seek a protective order or other remedy or waive compliance with this Section 6 and (B) in the event that such protective order or other remedy is not obtained, or the Company and the Purchaser waive compliance with this this Section 6 , furnish only that portion of such Company Confidential Information which is legally required to be provided as advised in writing by outside counsel and to exercise its commercially reasonable efforts to obtain assurances that confidential treatment will be accorded such Company Confidential Information. Notwithstanding the foregoing, in this event that Holder is already subject to confidentiality obligations to the Company which are in effect as of the Closing Date which provide that such confidentiality obligations are the sole confidentiality provisions with respect to the Company applicable to Holder, then those confidentiality obligations will apply to Holder in lieu of the provisions of this Section 6 .

 

{remainder of page intentionally left blank; signature page follows}

 

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IMPORTANT — HOLDERS SIGN HERE

 

(Must be signed by registered Holder(s) exactly as name(s) appear(s) on share certificate(s), warrants and/or on a security position listing or by person(s) authorized to become registered holder(s) as evidenced by certificates and documents transmitted herewith. If signature is by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, please set forth full title and see Instruction 2.)

 

Method of delivery of the certificate(s) is at the option and risk of the Holder. See Instruction 1.

 

Signature(s):  

 

Print Name:  

 

Title (if signing on behalf of an entity Holder):  

 

Mailing Address:  
   
   
   
   
   
   

 

Area Code and Telephone Number:  

 

Email Address:  

 

Dated:   , 2017  

 

GUARANTEE OF SIGNATURE(S)

(See Instruction 2)

Complete ONLY if required by Instruction 2.

 

FOR USE BY ELIGIBLE INSTITUTION ONLY.

PLACE MEDALLION GUARANTEE IN SPACE BELOW.

 

Firm:    
     
By:    
     
Title:    
     
Date:    
     
Address    
     
     
     
     

 

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Schedule 1

Holder Company Securities

 

Names(s) and Address(es) of Registered Owner(s)

(Please fill in, if blank, exactly as name(s) appear(s) on the records of the Company)

Company Shares

(Attach additional list if necessary)

 

 

Company Certificate

Number(s)

 

_________________

 

_________________

 

_________________

 

Number and Class of Company Shares

 

_______________________________

 

_______________________________

 

_______________________________

 

Names(s) and Address(es) of Warrant Holder(s)

(Please fill in, if blank, exactly as name(s) appear(s) on warrant documentation)

Company Warrants

(Attach additional list if necessary)

 

 

Company Warrant

Number(s)

 

 

_________________

 

_________________

 

_________________

 

Number and Class of Shares Purchasable under Company Warrants

 

_______________________________

 

_______________________________

 

_______________________________

 

 

If any certificate(s) representing Company Shares that you own or Company Warrants representing your right to purchase Company Shares have been lost or destroyed, check this box and see Instruction 6. Please fill out the remainder of this Letter of Transmittal and:

 

1. Indicate here the number and class of Company Shares represented by the lost or destroyed certificates:
     
     
    (number and class of Company Shares);

 

2. Indicate here the number and class of Company Shares purchasable pursuant to the lost or destroyed Company Warrants
     
     
    (number and class of Company Shares underlying Company Warrants)

 

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Schedule 2

 

Special Issuance and Delivery Instructions

 

SPECIAL ISSUANCE INSTRUCTIONS

(See Instructions 2 and 3)

 

To be completed ONLY if the Pro Rata Share of Merger Consideration Shares or Replacement Purchaser Warrants are to be issued in the name of someone other than the undersigned Holder.

 

Holder Company Securities to which the Special Issuance Instruction applies (must match at least one of the Holder Company Securities listed on Schedule 1):

 

______________________________________________

 

______________________________________________

 

______________________________________________

 

 

Issue to:

 

Name: ________________________________________

(Please Print)

 

Address: ______________________________________

 

______________________________________________ 

(Include Zip Code)

 

______________________________________________ 

(Tax Identification or Social Security No.)

 

If the above space is inadequate, please note that fact above and continue on a separate attachment

 

SPECIAL DELIVERY INSTRUCTIONS

(See Instructions 2 and 3)

 

To be completed ONLY if the physical copies of the new certificates for the Pro Rata Share of Merger Consideration Shares or the Replacement Purchaser Warrants are to be delivered to someone other than the undersigned or to the undersigned at an address other than that shown above.

 

Holder Company Securities to which the Special Delivery Instruction applies (must match at least one of the Holder Company Securities listed on Schedule 1):

 

______________________________________________

 

______________________________________________

 

______________________________________________

 

 

 

Deliver to:

 

 

Name: ________________________________________

(Please Print)

 

Address: _____________________________________

 

____________________________________________  

(Include Zip Code)

 

If the above space is inadequate, please note that fact above and continue on a separate attachment

 

 

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Exhibit A

Form of Lock-Up Agreement

 

 

TO BE COMPLETED BY ALL HOLDERS

 

 

[Complete attached Form Lock-Up Agreement]

 

 

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Exhibit B

Form of Registration Rights Agreement

 

 

TO BE COMPLETED BY ALL HOLDERS

 

 

[Complete attached Form Registration Rights Agreement]

 

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Exhibit C-1

IRS Form W-9

 

 

TO BE COMPLETED BY ALL U.S. HOLDERS

 

(See Instruction 4)

 

 

[Complete attached Form W-9]

 

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Exhibit C-2

Form W-8BEN

 

 

TO BE COMPLETED BY ALL NON-U.S. HOLDERS

 

(See Instruction 4)

 

 

[Complete attached Form W-8BEN]

 

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Exhibit D

Form of Stock Power

 

 

TO BE COMPLETED BY HOLDERS OF COMPANY SHARES

WHERE THE LETTER OF TRANSMITTAL IS NOT SIGNED BY THE

REGISTERED OWNER OF THE STOCK CERTIFICATE(S)

 

(See Instruction 2)

 

[Complete attached Form Stock Power]

 

 

15

Exhibit 10.6

 

BACKSTOP AND SUBSCRIPTION AGREEMENT

 

This Backstop and Subscription Agreement (this “ Agreement ”), made as of May 11, 2017 by and among Pacific Special Acquisition Corp., a British Virgin Islands business company with limited liability (the “ Company ”), and Zhengqi International Holding Limited, a company incorporated in the British Virgin Islands (the “ Subscriber ”), is intended to set forth certain representations, covenants and agreements among the Company and the Subscriber, with respect to the acquisition by Subscriber of the Company’s ordinary shares of no par value (the “ Ordinary Shares ”), for aggregate consideration of up to Twenty-Four Million U.S. Dollars ($24,000,000), through such acquisitions as are described in Sections 1(a)(iii) and (iv) hereof, which representations, covenants and agreements are made in connection with the Company’s acquisition of Borqs International Holding Corp, an exempted company incorporated under the laws of the Cayman Islands with limited liability (“ Borqs ”), in accordance with that certain Merger Agreement, dated as of December 27, 2016 (as amended, including by Amendment No.1 thereto on or about the date hereof, the “ Merger Agreement ”), by and among the Company, PAAC Merger Subsidiary Limited, Zhengqi International Holding Limited in its capacity thereunder as the Purchaser Representative, Zhengdong Zou in its capacity thereunder as the Seller Representative and, for certain limited purposes thereunder, the Subscriber. Any capitalized term used but not defined in this Agreement will have the meaning ascribed to such term in the Merger Agreement.

 

1.              Transfer and Voting of Shares .

 

(a)        Subscriber covenants and agrees that until the earlier of (i) the closing under the Merger Agreement (the “ Merger Closing ”) or (ii) the date on which the Merger Agreement is terminated in accordance with its terms (the “ Termination Date ”), it shall not, and shall ensure that each of its Affiliates do not, Transfer any Ordinary Shares (other than Ordinary Shares held by the Subscriber as of the date hereof, the proceeds of which were not deposited by the Company into the Trust Account in connection with the IPO). For purposes hereof, “ Affiliate ” shall mean affiliate as such term is defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and “ Transfer ” shall mean any direct or indirect transfer, redemption, disposition or monetization in any manner whatsoever, including through redemption election or any derivative transactions.

 

(b)        Subscriber covenants and agrees that it shall, and shall cause each of its Affiliates to, (i) vote all of the Ordinary Shares that it owns as of the record date (the “ Record Date ”) for the Shareholder Meeting in favor of the Merger and the other Shareholder Approval Matters at the Shareholder Meeting and (ii) not exercise its redemption or conversion rights with respect to any Ordinary Shares that it owns as of the Record Date in connection with the Shareholder Meeting.

 

2.              Backstop .

 

(a)        Commencing on the date hereof and through 5:00 p.m. Eastern Time on the last date on which it may purchase Ordinary Shares such that the settlement of such purchase shall occur on or before the Record Date (the “ Market Deadline ”), Subscriber shall (provided it is lawful to do so) have the right to purchase up to Twenty-Four Million U.S. Dollars ($24,000,000) of Ordinary Shares in the open market or in other privately negotiated transactions with third parties. On the date immediately following the Market Deadline and promptly at other times requested by the Company from time to time, Subscriber shall notify the Company in writing of the number of Ordinary Shares so purchased (the “ Open Market Shares ”) and the aggregate purchase price paid therefor by the Subscriber.

 

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(b)        Between the Market Deadline and the close of business on the third Trading Day prior to the Shareholder Meeting (the “ Private Purchase Deadline ”), if the Company reasonably believes in good faith that it will have less than Twenty-Four Million U.S. Dollars ($24,000,000) in Closing Proceeds (as defined below) after giving effect to any Open Market Shares previously purchased by the Subscriber pursuant to Section 2(a) hereof, it will promptly notify the Subscriber of the anticipated shortfall of Closing Proceeds below $24,000,000 (the “ Expected Shortfall ”), and Subscriber shall (provided it is lawful to do so) use its commercially reasonable efforts to purchase an amount of Ordinary Shares up to the Expected Shortfall in privately negotiated transactions with third parties, including forward contracts (such shares, the “ Private Purchase Shares ” and, together with the Open Market Shares, the “ Market Shares ”), provided that: (i) such transactions settle no later than, and are conditioned upon, the Merger Closing and (ii) Subscriber shall not be required to purchase any Ordinary Shares at a price above $10.40 per share. Notwithstanding the foregoing, Subscriber shall be permitted (provided it is lawful to do so) prior to the Private Purchase Deadline to buy additional Ordinary Shares in such private transactions in excess of the Expected Shortfall, up to a total of $24,000,000 in total Market Shares. On the date immediately following the Private Purchase Deadline, and at such other times as may be requested by the Company from time to time, Subscriber shall (x) notify the Company in writing of the number of Private Purchase Shares so purchased and the aggregate purchase price paid therefor by Subscriber and (y) provide the Company, for all Private Purchase Shares acquired, all documentary evidence reasonably requested by the Company and its advisors (including its legal counsel) and its transfer agent and proxy solicitor to confirm that: (i) the Subscriber purchased, or has contracted to purchase, such shares, and (ii) the seller of such shares has provided to the Subscriber a representation that (A) the seller voted such shares in favor of the Merger and the other Shareholder Approval Matters and (B) the seller of such shares did not exercise its redemption or conversion rights for such shares in connection with the Shareholder Meeting or the Merger Closing. Notwithstanding the foregoing, and for the avoidance of doubt, if the Merger Agreement is terminated in accordance with its terms prior to the Merger Closing, then the Subscriber’s obligations to purchase Ordinary Shares under this Section 2(b) will immediately terminate and be extinguished. For purposes of this Agreement, (i) “ Closing Proceeds ” means the sum of (A) the funds left in the Trust Account as of the Merger Closing, after giving effect to any redemptions or conversions by Public Stockholders, but before giving effect to the payment of any Transaction Expenses, plus (B) the amount of funds from any private placements of the Company’s capital stock (or binding commitments therefor, other than the Subscriber’s obligations in the Backstop Offering) occurring or to occur at or prior to the Merger Closing, and (ii) “ Trading Day ” shall mean a day during which trading in the Ordinary Shares generally occurs on the Nasdaq or, if the Ordinary Shares are not listed on the Nasdaq, on the principal other national or regional securities exchange on which the Ordinary Shares are then listed or, if the Ordinary Shares are not listed on a national or regional securities exchange, on the principal other market on which the Ordinary Shares are then listed or admitted for trading.

 

(c)        Immediately after the deadline for the Public Stockholders to elect to redeem or convert their Ordinary Shares from funds in the Trust Account in connection with the Merger Closing, the Company shall notify the Subscriber of the updated Expected Shortfall anticipated at such time and after giving effect to any Market Shares previously purchased (or committed to be purchased) by the Subscriber pursuant to Sections 2(a) and 2(b) hereof (the “ Final Shortfall ”). The Subscriber hereby irrevocably subscribes for and agrees, subject to the substantially concurrent Merger Closing and the other terms and conditions set forth herein, to purchase from the Company that number of Ordinary Shares equivalent to the Final Shortfall at a purchase price of $10.40 per share (such shares, the “ Backstop Shares ”), and the Company agrees to sell such Backstop Shares to the Subscriber at such price per share (such offering, the “ Backstop Offering ”); provided, that, if requested by the Subscriber, the Company shall (provided it is lawful to do so) issue and sell to the Subscriber an additional number of Backstop Shares in the Backstop Offering, up to a total of Twenty-Four Million U.S. Dollars ($24,000,000) when aggregated with all amounts for Market Shares and Backstop Shares (the “ Backstop Cap ”). For the avoidance of doubt, if the Merger Agreement is terminated in accordance with its terms prior to the Merger Closing, then the Subscriber’s obligations to purchase Backstop Shares under this Section 2(c) will immediately terminate and be extinguished. Any such purchase under this Section 2(c) shall be consummated substantially concurrent with the Merger Closing. For the avoidance of doubt, in the event that no Market Shares are acquired by the Subscriber pursuant to Sections 2(a) and 2(b) hereof, the Subscriber’s obligations under this Section 2(c) shall nevertheless continue to apply.

 

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3.              Right to Guarantee Escrow Shares . In consideration for the Subscriber’s obligations described in this Agreement, including Sections 1 and 2 hereof, in accordance with the Merger Agreement, at the Merger Closing, the Guarantee Escrow Shares will be issued in the name of the Subscriber and deposited in the Guarantee Escrow Account, to be held by the Escrow Agent in accordance with the terms of the Merger Agreement and the Escrow Agreement for the Guarantee Escrow Account, and the Subscriber shall be entitled to receive the Backstop Guarantee Escrow Share Amount from the Guarantee Escrow Account subject to, and in accordance with, the terms and conditions of the Merger Agreement. The Company will, and will use its reasonable efforts to cause the Seller Representative to, promptly provide any required notices to the Escrow Agent to cause the timely release of the Backstop Guarantee Escrow Share Amount in accordance with the Merger Agreement to the extent that the Subscriber is entitled to such amounts in accordance with the Merger Agreement.

 

4.              Delivery of Subscription Amount; Acceptance of Subscriptions; Delivery . The Subscriber understands and agrees that its subscription is made subject to the following terms and conditions:

 

(a)        Contemporaneously with the execution and delivery of this Agreement, the Subscriber shall execute and deliver to the Company the Investor Questionnaire attached hereto as Exhibit A (the “ Investor Questionnaire ”) and, in respect of the Backstop Offering pursuant to Section 2(c) hereof, upon notice from the Company setting forth the reasonably anticipated date of the Merger Closing, the Subscriber shall, no fewer than two (2) Business Days prior to such anticipated date (the “ Funding Date ”), cause a wire transfer to be made for payment for the Backstop Shares in immediately available funds in the aggregate amount equal to $10.40 multiplied by the number of Backstop Shares to be purchased by the Subscriber (the “ Subscription Amount ”) to the account(s) designated in writing by the Company to the Subscriber prior to the Merger Closing. In the event that the Subscriber enters into privately negotiated transactions with third parties in accordance with Section 2(b) hereof subsequent to the Funding Date but prior to the Merger Closing, unless otherwise requested in writing by the Subscriber (but subject to the Backstop Cap), the Subscription Amount shall be reduced by the dollar amount of such purchases and such excess funds (not to exceed the Subscription Amount) shall be returned to the Subscriber. The payments provided for in this Section 2(a) shall be deposited in escrow with Continental Stock Transfer & Trust Company (or other nationally recognized escrow agent with whom in all cases, whether with Continental Stock Transfer & Trust Company or otherwise, the Company shall have an escrow agreement in place for purposes hereof, which such agreement shall be on reasonable and customary terms) pending the Company’s acceptance of the subscription.

 

(b)        The subscription of the Subscriber for the Backstop Shares shall be deemed to be accepted only (and shall not otherwise be accepted by the Company except) when (i) the Company has confirmed in writing to the Subscriber that the Company’s representations and warranties contained herein are, or shall be, true and correct as of the date of the Company’s acceptance of such subscription and (ii) the Merger Closing occurs substantially concurrent with the Company’s acceptance of such subscription. If such acceptance does not occur on or prior to the earlier of (x) the Merger Closing or (y) the Termination Date, the Subscriber’s subscription shall automatically be deemed rejected (the “ Subscription Rejection ”). The payment of the Subscription Amount will be returned promptly, without interest, to the Subscriber if the subscription is rejected in whole or in part or if the Backstop Offering is withdrawn or canceled.

 

(c)        The representations and warranties of the Company and the Subscriber set forth herein shall be true and correct as of the date that the Company accepts the subscriptions set forth herein.

 

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5.              Expenses . Each party hereto shall pay all of its own expenses in connection with this Agreement and the transactions contemplated hereby.

 

6.              Registration Rights .

 

(a)        At the Merger Closing, the Company and the Subscriber shall enter into a Registration Rights Agreement (the “ Registration Rights Agreement ”), pursuant to which the Company will agree to (i) register the resale of the Backstop Shares, any Guarantee Escrow Shares received by the Subscriber from the applicable Escrow Account and not forfeited in accordance with the Merger Agreement (the “ Subscriber Earnout Shares ”), and any Market Shares requested by the Subscriber under the Securities Act of 1933, as amended (the “ Securities Act ”), and the rules and regulations promulgated thereunder, and applicable state securities laws, (ii) use reasonable best efforts to cause such registration with respect to such Backstop Shares and such Market Shares to be declared effective no later than one-hundred and twenty (120) days following the Merger Closing (provided, that the Company shall have no obligation to register the resale of any Subscriber Earnout Shares until they are actually received by the Subscriber from the Escrow Account) and (iii) provide the Subscriber with customary demand and piggyback registration rights. The Registration Rights Agreement shall include such additional terms and conditions as are customary and reasonably satisfactory to the Company and the Subscriber.

 

(b)        None of the Backstop Shares or Subscriber Earnout Shares may be Transferred except pursuant to an effective registration statement or in a transaction that is exempt from the registration requirements of the Securities Act and applicable state securities laws.

 

(c)        Without limitation to the generality of the foregoing, the Subscriber shall not execute any short sales or engage in other hedging transactions of any kind with respect to any Ordinary Shares during the period from the date of the Merger Closing through the date that is forty-five (45) consecutive days thereafter. For the avoidance of doubt, the prohibition set forth in this Section 6(c) shall not be applicable on or after the Termination Date.

 

7.              Representations, Warranties, Understandings, Risk Acknowledgments, and Covenants of The Subscriber . The Subscriber hereby represents, warrants and covenants to the Company as follows:  

 

(a)        The Subscriber is purchasing the Backstop Shares and acquiring the Subscriber Earnout Shares, if any, for its own account, not as a nominee or agent, for investment purposes and not with a view towards distribution or resale within the meaning of the Securities Act (absent the registration of the Backstop Shares and Subscriber Earnout Shares for resale under the Securities Act or a valid exemption from registration). The Subscriber will not Transfer such shares at any time in violation of the Securities Act or applicable state securities laws. The Subscriber acknowledges that the Backstop Shares and Subscriber Earnout Shares cannot be sold unless subsequently registered under the Securities Act and applicable state securities laws or an exemption from such registration is available.

 

(b)        The Subscriber understands that (i) the Backstop Shares and the Subscriber Earnout Shares (A) have not been registered under the Securities Act or any applicable state securities laws, (B) have been offered and will be sold in reliance upon an exemption from the registration and prospectus delivery requirements of the Securities Act, (C) will be issued in reliance upon exemptions from the registration and prospectus delivery requirements of applicable state securities laws which relate to private offerings and (D) may be required to be held indefinitely because of the fact that the Backstop Shares and Subscriber Earnout Shares have not been registered under the Securities Act or applicable state securities laws, and (ii) the Subscriber must therefore be capable of bearing the economic risk of its investment hereunder indefinitely unless a subsequent disposition thereof is registered under the Securities Act and applicable state securities laws or is exempt therefrom. The Subscriber further understands that such exemptions depend upon, among other things, the bona fide nature of the investment intent of the Subscriber expressed herein. Pursuant to the foregoing, the Subscriber acknowledges that until such time as the resale of the Backstop Shares and Subscriber Earnout Shares has been registered under the Securities Act as contemplated by the Registration Rights Agreement or otherwise may be sold pursuant to an exemption from registration, the certificates representing any Backstop Shares and Subscriber Earnout Shares acquired by the Subscriber shall bear a restrictive legend substantially as follows (and a stop-transfer order may be placed against transfer of such Backstop Shares and Subscriber Earnout Shares):

 

“THESE ORDINARY SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS. NEITHER THESE ORDINARY SHARES NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING:

 

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BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER:

 

1. REPRESENTS THAT IT AND ANY ACCOUNT FOR WHICH IT IS ACTING IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) OR IS AN “ACCREDITED INVESTOR” AS DEFINED IN REGULATION D UNDER THE SECURITIES ACT AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, AND

 

2. AGREES FOR THE BENEFIT OF PACIFIC SPECIAL ACQUISITION CORP. (THE “COMPANY”) THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN PRIOR TO THE DATE THAT IS THE LATER OF (X) ONE YEAR OR SUCH OTHER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THERETO AFTER THE LAST DATE OF THE ACQUISITION FROM THE COMPANY OR AN AFFILIATE OF THE COMPANY, AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW, EXCEPT:

 

(A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, OR

 

(B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, OR

 

(C) OUTSIDE THE UNITED STATES IN A TRANSACTION COMPLYING WITH THE REQUIREMENTS OF REGULATION S UNDER THE SECURITIES ACT, OR

 

(D) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT OR AN “ACCREDITED INVESTOR” AS DEFINED IN REGULATION D UNDER THE SECURITIES ACT, OR

 

(E) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

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PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH CLAUSE (2)(E) ABOVE, THE COMPANY AND THE TRANSFER AGENT RESERVE THE RIGHT TO REQUIRE THE DELIVERY OF SUCH CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.”

 

(c)        The Subscriber has knowledge, skill and experience in financial, business and investment matters relating to an investment of this type and is capable of evaluating the merits and risks of such investment and protecting the Subscriber’s interest in connection with the acquisition of the Backstop Shares, Subscriber Earnout Shares and the Market Shares (collectively, the “ Shares ”). The Subscriber understands that the acquisition of the Shares is a speculative investment and involves substantial risks and that the Subscriber could lose the Subscriber’s entire investment. Further, the Subscriber has (i) carefully read and considered the risks identified in the Disclosure Documents (as defined below) and (ii) carefully considered the risks related to the Merger, the Company, and Borqs and has taken full cognizance of and understands all of the risks related to the Company, Borqs, the Merger, the Shares and the transactions contemplated hereby, including the purchase of the Shares. Acknowledging the very significant tax impact analysis and other analyses that is warranted in determining the consequences to it of purchasing and owning the Shares, to the extent deemed necessary by the Subscriber, the Subscriber has had the opportunity to retain, at its own expense, and relied upon, appropriate professional advice regarding the investment, tax and legal merits and consequences of the foregoing, including purchasing and owning the Shares. The Subscriber has the ability to bear the economic risks of the Subscriber’s investment in the Company, including a complete loss of the investment, and the Subscriber has no need for liquidity in such investment.

 

(d)        The Subscriber has been furnished by the Company all information (or provided access to all information it reasonably requested) regarding the business and financial condition of the Company and Borqs, the Company’s expected plans for future business activities, and the merits and risks of an investment in the Shares which the Subscriber has reasonably requested or otherwise needs to evaluate the investment in the Shares.

 

(e)        The Subscriber acknowledges receipt of and has carefully reviewed and understands the following items (collectively, the “ Disclosure Documents ”): (i) the IPO Prospectus; (ii) each filing made by the Company with the SEC under the Exchange Act following the filing of the IPO Prospectus through the date of this Agreement, including the preliminary Proxy Statement; (iii) the Merger Agreement, a copy of which has been made available to the Subscriber, as in effect on the date of this Agreement, including Amendment No. 1 thereto; and (iv) the proposed draft amendments to the preliminary Proxy Statement based on the SECs comments, Amendment No. 1 to the Merger Agreement and this Agreement and other recent events. The Subscriber understands the significant extent to which certain of the disclosures contained in items (i) and (ii) above shall no longer apply following the Merger Closing.

 

(f)        The Subscriber acknowledges that neither the Company nor any of its Affiliates has made or makes any representation or warranty to the Subscriber in respect of the Company or Borqs, the Merger or the other transactions contemplated by the Merger Agreement, other than in the case of the Company, the representations and warranties contained in this Agreement.

 

(g)        In making its investment decision to purchase the Shares, the Subscriber is relying solely on investigations made by the Subscriber and the Subscriber’s representatives. The offer to sell the Backstop Shares and issue the Subscriber Earnout Shares was communicated to the Subscriber in such a manner that the Subscriber was able to ask questions of and receive answers from the management of the Company concerning the terms and conditions of the proposed transaction and that at no time was the Subscriber presented with or solicited by or through any advertisement, article, leaflet, public promotional meeting, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or meeting or any other form of general or public advertising or solicitation.

 

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(h)        The Subscriber acknowledges that it has been advised that:

 

(i)        The Backstop Shares and Subscriber Earnout Shares offered or issued or issuable hereby have not been approved or disapproved by the SEC or any applicable state securities commission nor has the SEC or any applicable state securities commission passed upon the accuracy or adequacy of any representations by the Company. Any representation to the contrary is a criminal offense.

 

(ii)        In making an investment decision, the Subscriber must rely on its own examination of the Company, the Merger, Borqs and the Backstop Offering, including the merits and risks involved. The Shares have not been recommended by any applicable federal or state securities commission or regulatory authority. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of any representation by the Company. Any representation to the contrary is a criminal offense.

 

(iii)        The Backstop Shares and the Subscriber Earnout Shares will be “restricted securities” within the meaning of Rule 144 under the Securities Act, are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the Securities Act and applicable state securities laws, pursuant to the applicable registration requirements or exemption therefrom. The Subscriber is aware that the provisions of Rule 144 are not currently available and, in the future, may not become available for resale of any of the Backstop Shares and Subscriber Earnout Shares and that the Company is an issuer subject to Rule 144(i) under the Securities Act. The Subscriber is aware that it may be required to bear the financial risks of this investment for an indefinite period of time.

 

(i)        The Subscriber agrees to furnish the Company with such other information as the Company may reasonably request in order to verify the accuracy of the information contained herein and agrees to notify the Company immediately of any material change in the information provided herein that occurs prior to the acceptance of this Agreement by the Company.

 

(j)        The Subscriber further represents and warrants that the Subscriber is a “qualified institutional buyer” within the meaning of Rule 144A under the Securities Act or an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act, and Subscriber has executed the Investor Questionnaire and shall provide to the Company an updated Investor Questionnaire promptly following any change in circumstances at any time on or prior to the Merger Closing.

 

(k)        As of the date of this Agreement, the Subscriber and its Affiliates do not have, and during the thirty (30) day period prior to the date of this Agreement the Subscriber and its Affiliates did not enter into, any “put equivalent position” as such term is defined in Rule 16a-1 of under the Exchange Act or short sale positions with respect to the securities of the Company. In addition, the Subscriber shall comply with all applicable provisions of Regulation M promulgated under the Securities Act.

 

(l)        If the Subscriber is a natural person, the Subscriber has reached the age of majority in the state in which the Subscriber resides, has adequate means of providing for the Subscriber’s current financial needs and contingencies, is able to bear the substantial economic risks of an investment in the Shares for an indefinite period of time, has no need for liquidity in such investment and, at the present time, can afford a complete loss of such investment.

 

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(m)        If the Subscriber is a partnership, corporation, trust, estate or other entity (an “ Entity ”): (i) the Entity has the full legal right and power and all authority and approval required (a) to execute and deliver, or authorize execution and delivery of, this Agreement and all other instruments executed and delivered by or on behalf of the Entity in connection with the acquisition of the Shares, (b) to delegate authority pursuant to power of attorney and (c) to acquire and hold such Shares; (ii) the signature of the party signing on behalf of the Entity is binding upon the Entity; and (iii) the Entity has not been formed for the specific purpose of acquiring the Shares, unless each beneficial owner of such entity is a “qualified institutional buyer” within the meaning of Rule 144A under the Securities Act or is qualified as an accredited investor within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act and has submitted information substantiating such individual qualification.

 

(n)        If the Subscriber is a retirement plan or is investing on behalf of a retirement plan, the Subscriber acknowledges that investment in the Shares poses additional risks including the inability to use losses generated by an investment in the Shares to offset taxable income.

 

(o)        This Agreement has been duly authorized, executed and delivered by the Subscriber and constitutes a legal, valid and binding obligation of the Subscriber enforceable against the Subscriber in accordance with its terms, except as such enforceability may be limited by: (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws in effect that limit creditors’ rights generally; (ii) equitable limitations on the availability of specific remedies; (iii) principles of equity (regardless of whether such enforcement is considered in a proceeding in law or in equity); and (iv) to the extent rights to indemnification and contribution may be limited by federal securities laws or the public policy underlying such laws.

 

(p)        The Subscriber understands and confirms that the Company will rely on the representations and covenants of the Subscriber contained herein in effecting the transactions contemplated by this Agreement and the other Transaction Documents (as defined herein). All representations and warranties provided to the Company by or on behalf of the Subscriber, taken as a whole, are true and correct and do not contain any untrue statement of material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading.

 

(q)        Neither the purchase of the Backstop Shares nor the acquisition of the Subscriber Earnout Shares by the Subscriber will subject the Company to any of the “Bad Actor” disqualifications described in Rule 506(d) under the Securities Act.

 

(r)        Unless otherwise specified in the Investor Questionnaire, the Subscriber is not a U.S. person (as defined in the Securities Act) and is acquiring the Backstop Shares and Subscriber Earnout Shares in an offshore transaction in accordance with the requirements of Regulation S under the Securities Act.

 

  8  
 

 

8.              Representations and Warranties of the Company . The Company represents and warrants to the Subscriber as follows:

 

(a)        Subject to obtaining all required approvals necessary in connection with the performance of the Merger Agreement (including the approval of the Company’s stockholders for the Merger Agreement and any approvals required for the Extension, if applicable) and any required approvals pursuant to the applicable rules of Nasdaq (together, the “ Required Approvals ”), the Company has all requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement and the Merger Agreement (collectively, the “ Transaction Documents ”), and to perform its obligations under this Agreement and the other Transaction Document. Subject to obtaining the Required Approvals, the execution, delivery and performance of this Agreement and the other Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly and validly authorized by all requisite corporate action, and no other proceedings on the Company’s part are necessary to authorize the execution, delivery or performance of this Agreement and the other Transaction Documents. This Agreement and each of the other Transaction Documents have been duly executed and delivered by the Company, and, assuming that this Agreement and the Registration Rights Agreement constitute a valid and binding obligation of the Subscriber, this Agreement and each of the other Transaction Documents will constitute upon execution and delivery by the Company, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by: (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws in effect that limit creditors’ rights generally; (ii) equitable limitations on the availability of specific remedies; (iii) principles of equity (regardless of whether such enforcement is considered in a proceeding in Law or in equity); and (iv) to the extent rights to indemnification and contribution may be limited by federal securities laws or the public policy underlying such laws.

 

(b)        Subject to obtaining the Required Approvals, the execution, delivery and performance of this Agreement and the other Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby will not (i) conflict with or result in a violation of any provision of the Company’s Organizational Documents, (ii) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both could become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, to which the Company is a party, or (iii) result in a violation of any Law applicable to the Company or by which any property or asset of the Company is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations in clauses (ii) or (iii) of this Section 8(b) as have not had or would not reasonably be expect to have, individually or in the aggregate, a material adverse effect on the business, properties, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole (“ Material Adverse Effect ”)). The Company is not in violation of its Organizational Documents in any material respect.

 

(c)        Except for (i) the applicable requirements of any applicable Antitrust Laws, the federal securities Laws or any applicable state securities or “blue sky” Laws and (ii) the filing of the Plan of Merger with the Registrar of Companies of the Cayman Islands (and subject to obtaining the Required Approvals), the Company is not required to submit any notice, report or other filing with any Governmental Authority in connection with the execution, delivery or performance by it of the Transaction Documents or the consummation of the transactions contemplated by the Transaction Documents and no consent, approval or authorization of any Governmental Authority or any other Person is required to be obtained by the Company in connection with its execution, delivery and performance of this Agreement and each of the other Transaction Documents or the consummation of the transactions contemplated hereby and thereby, (other than such consents, approvals or authorizations, the failure of which to obtain, have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect).

 

(d)        The Company has timely filed all forms, reports and other documents required to be filed by it with the SEC (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents (other than exhibits to such documents) incorporated by reference therein, being hereinafter referred to herein as the “ SEC Documents ”) since the date of its IPO (the “ IPO Date ”), or has timely filed for a valid extension of such time of filing and has filed any such SEC Document prior to the expiration of any such extension. As of their respective dates, the SEC Documents complied in all material respects in accordance with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations thereunder, and none of the SEC Documents, at the time they were filed with the SEC (except to the extent that information contained in any SEC Document has been superseded by a later timely filed SEC Document), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.

 

  9  
 

 

(e)        Each of the financial statements (including, in each case, any notes thereto) contained in the SEC Documents was prepared in accordance with U.S. generally accepted accounting principles (“ GAAP ”) applied on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by Form 10-Q of the SEC) and each fairly presents, in all material respects, the financial position, results of operations and cash flows of the Company as at the respective dates thereof and for the respective periods indicated therein.

 

(f)        The Company has established and maintains disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act). Such disclosure controls and procedures: (i) are designed to ensure that material information relating to the Company and its Subsidiaries is made known to the Company’s chief executive officer and its chief financial officer by others within those entities, particularly during the periods in which the Company’s reports and filings under the Exchange Act are being prepared, (ii) have been evaluated for effectiveness as of the end of the most recent quarterly period reported to the SEC, and (iii) are effective to perform the functions for which they were established. The Company is in compliance in all material respects with the provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder that are applicable to it.

 

(g)        As of the date hereof, there are no, and since the Company’s formation, there have not been any Actions pending or, to the knowledge of the Company, threatened in writing against the Company, including any such Actions that (i) challenges the validity or enforceability of the Company’s obligations under this Agreement or the other Transaction Documents or (ii) seeks to prevent, delay or otherwise would reasonably be expected to adversely affect the consummation by the Company of the transactions contemplated herein or therein.

 

(h)        Except as and to the extent set forth on the balance sheet of the Company as of December 31, 2016, including the notes thereto, the Company has no liability or obligation of a type required to be reflected in a balance sheet prepared in accordance with GAAP or in the footnotes thereto, except for (i) liabilities and obligations incurred since December 31, 2016 in the ordinary course of business that are not, individually or in the aggregate, material to the Company and none of which results from or arises out of any material breach of or material default under any contract, material breach of warranty, tort, material infringement or material violation of Law; (ii) liabilities and obligations incurred in connection with the transactions contemplated by this Agreement and other Transaction Documents; and (iii) liabilities and obligations which have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

(i)        The Company will file with the SEC a Current Report on Form 8-K or other periodic report under the Exchange Act disclosing the form of this Agreement within four (4) Business Days after the date of this Agreement.

 

  10  
 

 

(j)        The Company understands and confirms that the Subscriber will rely on the representations and covenants contained herein in effecting the transactions contemplated by this Agreement.

 

9.              Understandings . The Subscriber understands, acknowledges and agrees with the Company as follows:

 

(a)        The Subscriber hereby acknowledges and agrees that, subject to the terms and conditions of this Agreement, the subscription hereunder is irrevocable by the Subscriber, that, except as required by applicable Law, the Subscriber is not entitled to cancel, terminate or revoke this Agreement or any agreements of the Subscriber hereunder, and that this Agreement and such other agreements shall survive the death or disability of the Subscriber and shall be binding upon and inure to the benefit of the parties and their respective heirs, executors, administrators, successors, legal representatives and permitted assigns.

 

(b)        No federal or state agency has made any finding or determination as to the accuracy or adequacy of the Disclosure Documents or as to the suitability of this offering for investment nor any recommendation or endorsement of the Shares.

 

(c)        The Backstop Offering is intended to be exempt from registration, which is dependent upon the truth, completeness and accuracy of the statements made by the Subscriber herein.

 

(d)        There is only a limited public market for the Ordinary Shares. There can be no assurance that a Subscriber will be able to sell or dispose of the Shares.

 

(e)        The representations and warranties of the Subscriber contained in this Agreement and in any other writing delivered in connection with the transactions contemplated hereby shall be true and correct in all respects on and as of the date hereof and the date of the consummation of each offering of the Backstop Shares and issuance of the Subscriber Earnout Shares as if made on and as of such date and such representation and warranties and all agreements of the Subscriber contained herein and in any other writing delivered in connection with the transactions contemplated hereby.

 

10.            Survival . All representations, warranties and covenants contained in this Agreement shall survive (i) the acceptance of this Agreement by the Company and (ii) changes in the transactions, documents and instruments described herein which are not material or which are to the benefit of the Subscriber, in each case until the earlier of the (A) Merger Closing or (B) Termination Date. The Subscriber acknowledges the meaning and legal consequences of the representations, warranties and covenants contained herein and that the Company has relied upon such representations, warranties and covenants in determining the Subscriber’s qualification and suitability to purchase the Shares.

 

  11  
 

 

11.            Waiver Against Trust . Reference is made to the IPO Prospectus. The Subscriber represents and warrants that it has read the IPO Prospectus and understands that Company has established the Trust Account containing the proceeds of the IPO (including interest accrued from time to time thereon) for the benefit of the Public Stockholders and that, except as otherwise described in the IPO Prospectus, the Company may disburse monies from the Trust Account only: (a) to the Public Shareholders in the event they elect to redeem their Ordinary Shares in connection with the consummation of its Business Combination, (b) to the Public Shareholders if the Company fails to consummate a Business Combination by August 21, 2017 or such earlier date as determined by the Company’s directors (as extended from April 20, 2017), (c) to pay any taxes and for working capital purposes from the interest accrued in the Trust Account, and (d) to the Company after or concurrently with the consummation of its Business Combination. For and in consideration of the Company entering into this Agreement and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Subscriber hereby agrees on behalf of itself and its Affiliates that, notwithstanding anything to the contrary in this Agreement, neither the Subscriber nor its Affiliates does now or shall at any time hereafter have any right, title, interest or claim of any kind in or to any monies in the Trust Account or distributions therefrom, or make any claim against the Trust Account (including any distributions therefrom), regardless of whether such claim arises as a result of, in connection with or relating in any way to, any proposed or actual business relationship between the Company or its Representatives, on the one hand, and the Subscriber or its Representatives, on the other hand, this Agreement or any other matter, and regardless of whether such claim arises based on contract, tort, equity or any other theory of legal liability (any and all such claims are collectively referred to hereafter as the “ Released Claims ”). The Subscriber on behalf of itself and its Affiliates hereby irrevocably waives any Released Claims that the Subscriber or its Affiliates may have against the Trust Account (including any distributions therefrom) now or in the future as a result of, or arising out of, any negotiations, contracts or agreements with the Company or its Representatives and will not seek recourse against the Trust Account (including any distributions therefrom) for any reason whatsoever (including for an alleged breach of this Agreement or any other agreement with the Company or its Affiliates). The Subscriber agrees and acknowledges that such irrevocable waiver is material to this Agreement and specifically relied upon by the Company and its Affiliates to induce the Company to enter in this Agreement, and the Subscriber further intends and understands such waiver to be valid, binding and enforceable under applicable Law. To the extent the Subscriber or any of its Affiliates commences any action or proceeding based upon, in connection with, relating to or arising out of any matter relating to the Company or its Representatives, which proceeding seeks, in whole or in part, monetary relief against the Company or its Representatives, the Subscriber hereby acknowledges and agrees its sole remedy shall be against funds held outside of the Trust Account and that such claim shall not permit any the Subscriber or its Affiliates (or any Person claiming on any of their behalves or in lieu of them) to have any claim against the Trust Account (including any distributions therefrom) or any amounts contained therein. In the event that the Subscriber or any of its Affiliates commences Action based upon, in connection with, relating to or arising out of any matter relating to the Company or its Representatives which proceeding seeks, in whole or in part, relief against the Trust Account (including any distributions therefrom) or the Public Shareholders, whether in the form of money damages or injunctive relief, the Company and its Representatives shall be entitled to recover from the Subscriber, its Affiliates, and the Subscriber Shareholders, the associated legal fees and costs in connection with any such Action, in the event the Company or its Representatives, as applicable, prevails in such Action. Notwithstanding anything to the contrary in this Section 11, the Released Claims shall not include, and this Section 11 shall not otherwise affect, any rights of the Subscriber or its Affiliates as a Public Stockholder of the Company to receive distributions from the Trust Account in its capacity as a Public Stockholder. This Section 11 shall survive termination of this Agreement for any reason.

 

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12.        Notices . All notices, consents, waivers and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered (i) in person, (ii) by facsimile or other electronic means, with affirmative confirmation of receipt, (iii) one Business Day after being sent, if sent by reputable, nationally recognized overnight courier service or (iv) three (3) Business Days after being mailed, if sent by registered or certified mail, pre-paid and return receipt requested, in each case to the applicable party at the following addresses (or at such other address for a party as shall be specified by like notice):

 

 

If to the Company prior to the Merger Closing or to the Subscriber, to:

 

c/o Zhengqi International Holding Limited
855 Pudong South Road
The World Plaza, 27th Floor
Pudong, Shanghai 200120, China
Attn: Yaqi (Sophie) Feng, COO
Facsimile No.:    86-21-8012-9882
Telephone No:  86-21-8012-9878
Email:    fengyq@tpyzq.com

 

with a copy (which will not constitute notice) to:

 

Ellenoff Grossman & Schole LLP
1345 Avenue of the Americas, 11th Floor
New York, New York 10105
Attn:   Douglas Ellenoff, Esq.
            Stuart Neuhauser, Esq.
Facsimile No.:      (212) 370-7889
Telephone No.:    (212) 370-1300
Email:   ellenoff@egsllp.com
              sneuhauser@egsllp.com

 

and

 

Borqs International Holding Corp.
Tower A, Building B23
Universal Business Park
No. 10 Jiuxiangqiao Road
Chaoyang District, Beijing 100015, China
Attn: Pat Chan, CEO
Facsimile No.:     86-10-5975-6363
Telephone No:   86-10-5975-6336
Email:    pat.chan@borqs.com

 

and

 

Fenwick & West LLP
801 California Street
Mountain View, CA 94041
Attn: Eva Wang
Facsimile No.:      (650) 938-5200
Telephone No.:   (650) 335-7878
Email: ewang@fenwick.com

 

 

If to the Company after the Merger Closing, to:

 

Borqs Technologies, Inc.
Tower A, Building B23
Universal Business Park
No. 10 Jiuxiangqiao Road
Chaoyang District, Beijing 100015
China
Attn: Pat Chan, CEO
Facsimile No.:    86-10-5975-6363
Telephone No:  86-10-5975-6336
Email: pat.chan@borqs.com

 

with a copy (which will not constitute notice) to:

 

Fenwick & West LLP
801 California Street
Mountain View, CA 94041
Attn:   Eva Wang
Facsimile No.:      (650) 938-5200
Telephone No.:   (650) 335-7878
Email:   ewang@fenwick.com

 

and

 

Ellenoff Grossman & Schole LLP
1345 Avenue of the Americas, 11th Floor
New York, New York 10105
Attn: Douglas Ellenoff, Esq.
Stuart Neuhauser, Esq.
Facsimile No.:      (212) 370-7889
Telephone No.:   (212) 370-1300
Email:    ellenoff@egsllp.com
              sneuhauser@egsllp.com

 

 

  13  
 

 

13.            Notification of Changes . The Subscriber agrees and covenants to notify the Company and Borqs immediately upon the occurrence of any event prior to the Merger Closing that would cause any representation, warranty, covenant or other statement contained in this Agreement to be false or incorrect in any material respect or of any material change in any statement made herein occurring prior to the Merger Closing. The Company agrees and covenants to notify the Subscriber immediately upon the occurrence of any event prior to the Merger Closing that would cause any representation, warranty, covenant or other statement contained in this Agreement to be false or incorrect in any material respect or of any material change in any statement made herein occurring prior to the Merger Closing.

 

14.            Obligations Irrevocable . Subject to the terms and conditions contained herein, the obligations of the Subscriber to make its subscription provided for hereunder shall be irrevocable, except with the consent of the Company and Borqs, until the Subscription Rejection.

 

15.            Amendments; Waiver . This Agreement may be amended, supplemented or modified only by execution of a written instrument signed by the Company, the Subscriber and Borqs. This Agreement may not be waived except by an instrument in writing signed by the party against whom enforcement of waiver is sought (and, with respect to any waiver by the Company, Borqs).

 

16.            Assignment . This Agreement shall not be assigned without the prior written consent of the Company, the Subscriber and Borqs, and any assignment without such consent shall be null and void ab initio. Notwithstanding the foregoing, the Company and Borqs will not unreasonably withhold, delay or condition their consent to transfer and assign all or a proportion of the Subscriber’s obligations under this Agreement to an investor that is a “qualified institutional buyer” within the meaning of Rule 144A under the Securities Act or an institutional “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act and who otherwise is reasonably expected to be capable of satisfying the Subscriber’s obligations transferred to such assignee. Such assignee shall be entitled to receive a proportionate share of the Guarantee Escrow Shares based on the portion of the Subscriber’s obligations transferred to such assignee, as well as entitled to receive the rights and obligations of the Subscriber under the Registration Rights Agreement with respect to its Shares. Upon any such approved assignment by the Subscriber, such assignee shall be deemed to be the “Subscriber” under this Agreement (and the Registration Rights Agreement) with respect to the rights and obligations under this Agreement (and the Registration Rights Agreement) transferred to such assignee; provided, that each Subscriber shall be severally, and not jointly, liable for any breach of this Agreement or the Registration Rights Agreement. Notwithstanding the foregoing, in the event that an assignee does not fulfill its purchase obligations hereunder, the original Subscriber shall be secondarily responsible for fulfilling such purchase obligations, and the original Subscriber shall (i) be permitted to enforce this Agreement against such assignee on behalf of the Company, (ii) receive such defaulting assignee’s rights under this Agreement (including its share of the Guarantee Escrow Shares), and (iii) be entitled to seek any remedies against the defaulting assignee for such default to which it or the Company may be entitled under this Agreement, such assignment, at law or in equity.

 

17.            Binding Effect; Third Party Beneficiaries . Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties and their heirs, successors and assigns, and the agreements, representations, warranties and acknowledgments contained herein shall be deemed to be made by and be binding upon such heirs, executors, administrators, successors, legal representatives and assigns. This Agreement does not confer any rights or remedies upon any person or entity other than the parties hereto and their heirs, successors and permitted assigns, provided , however , that Borqs is an intended third-party beneficiary of this Agreement, and the Company and the Subscriber hereby acknowledge and agree that Borqs has the right to cause the Company to enforce its rights and perform its obligations under this Agreement including the right to cause the Company to make or not make any election or otherwise exercise or not exercise a right hereunder.

 

  14  
 

 

18.            Governing Law; Jurisdiction; WAIVER OF JURY TRIAL . This Agreement shall be governed by, construed and enforced in accordance with the Laws of the State of Delaware without regard to the conflict of laws principles thereof. All Actions arising out of or relating to this Agreement shall be heard and determined exclusively in any state or federal court located in New York, New York (or in any court in which appeal from such courts may be taken) (the " Specified Courts "). Each party hereto (and Borqs to the extent of its third party beneficiary rights) hereby (a) submits to the exclusive jurisdiction of any Specified Court for the purpose of any Action arising out of or relating to this Agreement and (b) irrevocably waives, and agrees not to assert by way of motion, defense or otherwise, in any such Action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the Action is brought in an inconvenient forum, that the venue of the Action is improper, or that this Agreement or the transactions contemplated hereby may not be enforced in or by any Specified Court. Each party (and Borqs to the extent of its third party beneficiary rights) agrees that a final judgment in any Action shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Each party irrevocably consents to the service of the summons and complaint and any other process in any other Action relating to the transactions contemplated by this Agreement, on behalf of itself, or its property, by personal delivery of copies of such process to such party at the applicable address set forth in Section 12. Nothing in this Section 18 shall affect the right of any party to serve legal process in any other manner permitted by Law. EACH PARTY HERETO (AND BORQS TO THE EXTENT OF ITS THIRD PARTY BENEFICIARY RIGHTS) HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY ACTION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

 

19.            Specific Performance . Each party acknowledges that the rights of each party to consummate the transactions contemplated by this Agreement are unique, recognizes and affirms that in the event of a breach of this Agreement by any party, money damages may be inadequate and the non-breaching party (or Borqs) may have not adequate remedy at law, and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed by an applicable party in accordance with their specific terms or were otherwise breached. Accordingly, each party (and Borqs as a third party beneficiary) shall be entitled to seek an injunction or restraining order to prevent breaches of this Agreement and to seek to enforce specifically the terms and provisions hereof, without the requirement to post any bond or other security or to prove that money damages would be inadequate, this being in addition to any other right or remedy to which such party may be entitled under this Agreement, at law or in equity.

 

20.            Severability . In case any provision in this Agreement shall be held invalid, illegal or unenforceable in a jurisdiction, such provision shall be modified or deleted, as to the jurisdiction involved, only to the extent necessary to render the same valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby nor shall the validity, legality or enforceability of such provision be affected thereby in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties will substitute for any invalid, illegal or unenforceable provision a suitable and equitable provision that carries out, so far as may be valid, legal and enforceable, the intent and purpose of such invalid, illegal or unenforceable provision.

 

21.            Entire Agreement . This Agreement and the Registration Rights Agreement, and to the extent incorporated herein, the Merger Agreement, constitutes the entire agreement of the Subscriber and the Company relating to the matters contained herein and therein, superseding all prior contracts or agreements relating to such matters, whether oral or written. Notwithstanding the foregoing, this Section 21 shall not affect any confidentiality obligations of the Subscriber to the Company or Borqs pursuant to any confidentiality agreements entered into by the Subscriber prior to the date hereof.

 

  15  
 

 

22.            Interpretation . The headings, titles and subtitles used in this Agreement are for convenience only and are not to be considered in construing or interpreting this Agreement. In this Agreement, unless the context otherwise requires: (i) any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa; (ii) “including” (and with correlative meaning “include”) means including without limiting the generality of any description preceding or succeeding such term and shall be deemed in each case to be followed by the words “without limitation”; (iii) the words “herein,” “hereto,” and “hereby” and other words of similar import in this Agreement shall be deemed in each case to refer to this Agreement as a whole and not to any particular section or other subdivision of this Agreement; and (iv) the term “Dollars” or “$” means United States dollars. The parties have participated jointly in the negotiation and drafting of this Agreement. Consequently, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement.

 

23.            Counsel . The Subscriber hereby acknowledges that the Company and its counsel represent the interests of the Company and not those of the Subscriber in any agreement (including this Agreement) to which the Company is a party.

 

24.            Further Assurances . From time to time, at another party's request and without further consideration (but at the requesting party's reasonable cost and expense), each party shall execute and deliver such additional documents and take all such further action as may be reasonably necessary to consummate the transactions contemplated by this Agreement.

 

25.            Counterparts; Facsimile . This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which together shall be deemed to be one and the same agreement. A facsimile or other electronic transmission of this signed Agreement shall be legal and binding on all parties hereto.

 

{Remainder of Page Intentionally Left Blank; Signature Page Follows}

 

  16  
 

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the date first written above.

 

 

The Company:
     
  PACIFIC SPECIAL ACQUISITION CORP.
     
  By: /s/ Yaqi Feng                            
  Name: Yaqi Feng
  Title: COO
     
  The Subscriber:
     
  ZHENGQI INTERNATIONAL HOLDING LIMITED
     
  By: /s/ Zhouhong Peng
  Name: Zhouhong Peng
  Title: Director

 

 

{Signature Page to Backstop and Subscription Agreement}

   

 

 

Exhibit A

Investor Questionnaire

 

THIS QUESTIONNAIRE MUST BE ANSWERED FULLY AND RETURNED ALONG WITH YOUR COMPLETED SUBSCRIPTION AGREEMENT IN CONNECTION WITH YOUR PROSPECTIVE PURCHASE OF SHARES FROM PACIFIC SPECIAL ACQUISITION CORP (THE “ COMPANY ”).

 

THE INFORMATION SUPPLIED IN THIS QUESTIONNAIRE WILL BE HELD IN STRICT CONFIDENCE. NO INFORMATION WILL BE DISCLOSED EXCEPT TO THE EXTENT THAT SUCH DISCLOSURE IS REQUIRED BY LAW OR REGULATION, OTHERWISE DEMANDED BY PROPER LEGAL PROCESS OR IN LITIGATION INVOLVING THE COMPANY AND ITS CONTROLLING PERSONS.

 

Capitalized terms used herein without definition shall have the respective meanings given such terms as set forth in the Backstop and Subscription Agreement by and between Company and Zhengqi International Holding Limited, a company incorporated in the British Virgin Islands (the “ Agreement ”).

 

(1)       The undersigned represents and warrants that he, she or it comes within at least one category marked below, and that for any category marked, he, she or it has truthfully set forth, where applicable, the factual basis or reason the undersigned comes within that category. The undersigned agrees to furnish any additional information which the Company reasonably deems necessary in order to verify the answers set forth below.

 

Category A ___

The undersigned is an individual (not a partnership, corporation, etc.) whose individual net worth, or joint net worth with his or her spouse, presently exceeds $1,000,000.

 

Explanation . In calculating net worth, you include all of your assets (other than your primary residence), whether liquid or illiquid, such as cash, stock, securities, personal property and real estate based on the fair market value of such property MINUS all debts and liabilities (except that a mortgage or other debt secured by your primary residence, up to the estimated fair market value of the primary residence at the time of the purchase of the Shares, shall not be included as a liability, provided that if the amount of such indebtedness outstanding at the time of the purchase of the Shares exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of your primary residence, the amount of such excess shall be included as a liability. Further, the amount of any mortgage or other indebtedness secured by your primary residence that exceeds the fair market value of the residence at the time of the purchase of the Shares shall be included as a liability.

   
Category B ___ The undersigned is an individual (not a partnership, corporation, etc.) who had an income in excess of $200,000 in each of the two most recent years, or joint income with his or her spouse in excess of $300,000 in each of those years (in each case including foreign income, tax exempt income and full amount of capital gains and losses but excluding any income of other family members and any unrealized capital appreciation) and has a reasonable expectation of reaching the same income level in the current year.
   
Category C ___ The undersigned is a director or executive officer of the Company which is issuing and selling the Shares.

 

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Category D ___

The undersigned is a bank, as defined in Section 3(a)(2) of the Securities Act of 1933, as amended (the “ Act ”); a savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Act, whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934; any insurance company as defined in Section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors (describe entity).

___________________________________________________________________ ___________________________________________________________________

 

Category E ___

The undersigned is a private business development company as defined in Section 202(a) (22) of the Investment Advisors Act of 1940 (describe entity) 

___________________________________________________________________ ___________________________________________________________________  

 

Category F ___

The undersigned is either a corporation, partnership, Massachusetts or similar business trust, or any organization described in Section 501(c)(3) of the Internal Revenue Code, in each case not formed for the specific purpose of acquiring the Shares and with total assets in excess of $5,000,000. (describe entity)

___________________________________________________________________ ___________________________________________________________________

 

Category G ___

The undersigned is a trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Shares, where the purchase is directed by a “sophisticated investor” as defined in Regulation 506(b)(2)(ii) under the Act.

__________________________________________________________________
__________________________________________________________________ 

 

Category H ___

The undersigned is an entity (other than a trust) in which all of the equity owners are “accredited investors” within one or more of the above categories. If relying upon this Category alone, each equity owner must complete a separate copy of this Investor Questionnaire. (describe entity)

___________________________________________________________________ ___________________________________________________________________

 

  The undersigned agrees that the undersigned will notify the Company at any time on or prior to the applicable closing in the event that the representations and warranties in this Investor Questionnaire shall cease to be true, accurate and complete.

 

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(2)           Suitability (please answer each question) 

 

  (a) Are you familiar with the risk aspects and the non-liquidity of investments such as the Shares for which you seek to acquire?

 

YES _____     NO _____

 

  (b) Do you understand that there is no guarantee of financial return on this investment and that you run the risk of losing your entire investment?

 

YES _____     NO _____

 

(3)           Manner in which title is to be held: (circle one)

 

  (a) Individual Ownership
  (b) Community Property
  (c) Joint Tenant with Right of Survivorship (both parties must sign)
  (d) Partnership
  (e) Tenants in Common
  (f) Company
  (g) Trust
  (h) Other

(4)           Are you a U.S. person (as defined in the Securities Act)?

 

YES _____     NO _____

 

 (5)           FINRA Affiliation.

 

Are you affiliated or associated with a member of FINRA (please check one):

 

YES _____     NO _____

 

If Yes, please describe: 

 

   
   
   

 

*If subscriber is a Registered Representative with a member of FINRA, have the following acknowledgment signed by the appropriate party:

 

The undersigned FINRA firm acknowledges receipt of the notice required by the Conduct Rules of FINRA.

  

     
  Name of NASD Member Firm  
     
  By:    
    Authorized Officer  
       
  Date:    

 

{Remainder of page intentionally left blank}

 

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The undersigned is informed of the significance to the Company of the foregoing representations and answers contained in this Investor Questionnaire and such answers have been provided under the assumption that the Company will rely on them. The undersigned represents and warrants to the Company, as or on behalf of the Subscriber, that the information in this Investor Questionnaire is true, complete and accurate and may be relied upon by the Company. The Subscriber understands that a false representation may constitute a violation of law, and that any person or entity who suffers damage as a result of a false representation may have a claim against the Subscriber for damages

  

Individual Signature:   Entity Signature:
         
     
Signature   Entity Name
         
    By:  
Name (Print)   Signature
         
       
Date:     Signatory Name (Print)
       
         
       
    Title  
         
    Date:  

 

 

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Exhibit 10.7

 

Borqs Wireless Ltd.

 

Employment Contract

 

Party of the First Part: Borqs Wireless Ltd. Party of the Second Part: Xiyuan CHEN
   

Legal Representative: Xiyuan CHEN

Or Commissioned Agent:

Address of the Party of the First Part: No. 10

Jiuxianqiao Road, Chaoyang District, Beijing

Tower A, Building B23, Universal Business Park

Postal Code: 100102

Identification Card No.:

Residence Location:

 

Home Address:

Postal Code:

Telephone No.:

 

This employment contract (hereinafter, “this Contract”) is being concluded and signed by and between Borqs Wireless Ltd., a limited liability company incorporated in accordance with the laws of the People’s Republic of China (hereinafter, the “Company”) and Mr./Ms. Xiyuan CHEN (hereinafter, the “Employee”) on July 1, 2013.

 

Each party to this Contract, by means of amicable negotiations, voluntarily and on the basis of mutual benefit, hereby agrees and signs this Contract as follows:

 

Article 1     Employment

 

1. 1         Content of the work and the work place .

 

1.1.1 In accordance with the relevant Chinese laws, statutes, and regulations, the Company agrees to employ the employee in the Company in the Office of the Chief Executive Officer in order to conduct work as President and Chief Executive Officer in accordance with the articles and provisions stipulated in this Contract, and the workplace shall be the premises of the Company, and the Employee agrees to accept this employment.

 

1.1.2 The Employee shall, at all times in accordance with the instructions directly issued by the Company, be responsible for conducting sad work, and shall accept all the guidance and supervision of the top leadership and the relevant departments of the Company.

 

1.1.3 Both Parties hereby acknowledge that, at any time during the term of this Contract, the Company shall be entitled, in accordance with the operating requirements and the employee’s work performance, make suitable changes as the Company deems to be necessary with regard to the department, work responsibilities, and position held by the Employee, the content of the work, or the workplace within the scope of the Company and its subsidiaries.

 

1.2          Employment Term .

 

1.2.1 This Contract shall become effective on July 1, 2013 (the “Effective Date”). The Parties agree that this Contract shall be a Fixed Term Contract, beginning on its effective date and ending on October 7, 2015 (hereinafter, the “Term of the Contract”), unless in accordance with the provisions and clauses stipulated in this Contract it is extended or terminated early. Prior to the expiration date of the Term of the Contract or in accordance with any extension of this Article, if either Party wishes to renew the Contract, said Party shall, one (1) month before the expiration date notify the other Party thereof in writing, After both Parties reach agreement in writing, the Term of this Contract may be extended accordingly.

 

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1.2.2 Each Party to this Contract agrees that the first three (3) months of the Term of the Contract shall be a probationary period. If at any time during this probationary period, the Company recognizes that the Employee is not in compliance with the terms and conditions of employment, the Company shall be entitled, after explaining the reasons to the Employee, to rescind this Contract immediately without any need to provide advance notice to the Employee. The Employee may terminate this Contract during the probationary period by providing written notice to the Company three days in advance. Once this Contract has been terminated in accordance with the provisions stipulated in this clause, except the obligations regarding confidentiality stipulated clearly elsewhere in this Contract, neither Party shall be liable to the other Party for performing any obligations under the terms of this Contract.

 

1.3          Obligations of the Employee . The Employee agrees that, besides the obligations stipulated in this Contract, during the Term of this Contract, the Employee shall be required to:

 

1.3.1 During his regular working hours according to this Contract, use all his time, energy, and skills in performing the obligations stipulated in this Contract, and perform his duties effectively, exert his greatest efforts, and ensure the satisfactory completion of the responsibilities assigned by the Company.

 

1.3.2 According to the provisions of this Contract, the Company’s regulations and policies and applicable laws, regulations, and faithful and scrupulous performance of his duties, perform his obligations for the Company as stipulated under the provisions of this Contract, not engage in any activities that violate the Company’s regulations or that might harm the interests of the Company, and not to use the work duties or position in the Company directly or indirectly to obtain his own personal interests.

 

1.3.3 The Employee shall conscientiously comply with the system of rules stipulated by the Company, take care of the Company’s assets, respect professional ethics, be industrious and meticulous, and proactively participate in the training and education organized by the Company. If the Employee violates the system of rules stipulated by the Company or other work discipline, the Company may, in accordance with said individual system of rules, apply disciplinary measures, up to terminating this Contract.

 

1.3.4 Prior to the Company signing the Employment Contract, the Employee has agreed that he is signing this Contract with the Company only after he has officially terminated the employment relationship with his previous employer. If the Employee violates this commitment and causes this Contract to be null and void, the Employee shall accept all liability. If it causes losses to the Company, the Employee shall be liable to pay compensation. The Company shall not assume liability for any economic disputes or legal liability of the Employee prior to the signing of the Contract.

 

1.4          Obligations of the Company . The Company hereby agrees that, besides for other obligations stipulated in this Contract, the Company shall also, during the Term of this Contract be required to:

 

1.4.1 In accordance with the relevant laws and regulations with regard to labor protection, provide a safe, healthy environment and working conditions for the Employee;

 

1.4.2 Formulate for the employee and provide to the employee an employee handbook, and said handbook shall stipulate all work regulations in compliance with Chinese laws and regulations and include the bonus system and disciplinary rules, working hours, vacation time, the employee corporate benefits plan, and the work safety plan. Once said handbook has become effective, it shall become an inseparable part of this Contract, and both the Employee and the Company shall be required to comply strictly with it in accordance with this Contract. However, if any provision in the employee handbook is inconsistent with or conflicts with any clause stipulated in this Contract, the clause in this Contract shall take precedence.

 

1.5         Training . If the Company decides to provide training events for the Employee in any location, the Employee shall participate in said training, in accordance with said training plan and in the designated location. Unless this Contract is terminated in accordance with Clauses 5.1, 5.2, and 5.3 or Clauses 5.6.2 or 5.6.3 in this Contract, after the Employee has participated in said training, he shall provide services the Company for at least three (3) years in accordance with the provisions stipulated in this Contract; and if the Employee conducts such service to the Company less than three (3) years, the Employee shall compensate the Company for all the training expenses that the Company has expended for the training conducted and provided to the Employee in accordance with this clause and pay a penalty for breach of contract. The sum of money for the aforementioned training may be reduced year after year by thirty percent (30%) per year, in accordance with the number of years of actual service for the Company after the Employee received the training. However, any compensation that the Employee pays to the Company in accordance with the provisions stipulated in this clause may not affect or reduce any other of liability he has for breach of the contract or of any of the obligations and liability assumed by him pursuant to Article 6 of this Contract.

 

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Article 2     Employment Compensation

 

2.1          Salary .

 

2. 1.1 During the period the Employee is employed in accordance with this Contract, unless there is agreement reached between the parties elsewhere in this Contract, the Company shall, during the Term of this Contract stipulated in Article 1.2.1 of this Contract, pay the Employee, in Chinese Yuan (CNY) a salary for compensation per month equivalent the amount in the offer letter (the amount in CNY in the offer letter), and the salary for the probationary period shall be 100% of the official salary.

 

2.1.2 The annual salary mentioned in this Contract or in other Company policies shall, in accordance with the Company’s salary policy, be paid to the Employee by the Company with the annual amount of compensation divided into 12 equal monthly installments. For the composition of the salary see the pay stub.

 

2.1.3 The Company shall be entitled, in accordance with the Employee’s wishes and changes in the Employee’s work duties or position in the company, or in accordance with the Company’s new salary policy, adjust or change the Employee’s salary level.

 

2.1.4 The Company may decrease or deduct the following expenses and sums from the Salary it pays to the Employee in accordance with this Contract:

 

2.1.4.1 Income tax on the Employee’s salary withheld in accordance with Article 9 of this Contract;

 

2.1.4.2 The social insurance expenses to be assumed by the Employee individually to be withheld by the Company on his behalf in accordance with this Contract or in accordance with the relevant Chinese laws and regulations;

 

2.1.4.3 The expenses specified by a court judgment or by an arbitral award that the Company is required to deduct from the Employee’s salary;

 

2.1.4.4 All sums of compensation for losses to be paid by the Employee to the Company as stipulated in this Contract or by means of another legal decision, and all other expenses and expenditures deducted from the salary paid to the Employee in accordance with applicable Chinese laws and regulations.

 

2.2         Bonuses . During the Term of this Contract, the Company may pay the Employee bonuses at any time pay the, in accordance with the standards, clauses, terms and conditions, and amounts that it determines itself.

 

Article 3    Social Welfare Insurance, Benefits, and Vacations

 

3.1         Social welfare insurance and benefits . During the Term of this Contract, the Company shall provide the Employee social welfare insurance and benefit payments stipulated by the relevant Chinese laws and regulations, including, but not limited to those with regard to retirement, health care, and housing.

 

3.2         Vacations . The Employee shall, in accordance with the relevant laws and regulations of China, have the right to paid leave and vacation as stipulated in the Company’s policy, however, the Company shall have the right, in accordance with work requirements, to arrange for the Employee to use the relevant vacation time early or defer the use of said time.

 

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Article 4     Arrangement of Working Hours

 

The Company shall implement a standard full-time work system, adopting flexible working hours. The Employee shall, work eight (8) hours per day (break times are not calculated in the working hours), forty (40) hours per week; however, because of work requirements or depending on the intensity and the environment of the work, the Company shall have the right to arrange for increasing or decreasing the number of hours of work per day or per week or adjust his beginning and ending times, and the Employee waives the right to claim from the company any sum of additional compensation or an allowance on the basis of the aforementioned adjustments.

 

Article 5     Termination

 

5.1          Immediate Termination . This Contract shall, terminate automatically without advance notice on the date on which any of the following circumstances arises:

 

5.1.1 The Term of the Contract stipulated in Article 1.2.1 of this Contract expires;

 

5.1.2 This Contract is terminated within the probationary period in accordance with the provision stipulated by Article 1.2.2 of this Contract;

 

5.1.3 Both Parties to this Contract agree to terminate this Contract early;

 

5.1.4 The Employee is legally investigated for criminal liability or re-education through labor.

 

5.2          Immediate termination of the Contract by the Company . Any of the following kinds of conduct on the part of the Employee shall constitute a serious breach of contract on the part of the Employee and shall cause the Company to have the right to terminate this Contract the same day it issues a written notice of termination:

 

5.2.1 The Employee conducts any deceit of the Company or engages in any other dishonest conduct, regardless of whether said conduct causes the Company to incur an actual loss;

 

5.2.2 The Employee has committed gross negligence, engaged in corrupt practices, and caused interests of the management unit to suffer serious losses;

 

5.2.3 The Employee, at the same time that he was an employee, established an employment relationship with another employer, has used his position for it, and has refused to correct it;

 

5.24 The Employee’s conduct constitutes a serious violation of Chinese laws and regulations, and has been legally investigated for criminal liability;

 

5.2.5 The Employee has deliberately or seriously breached the employment regulations or work rules stipulated by the Company;

 

5.2.6 The Employee’s conduct has breached the obligations stipulated in Article 1.3 of this Agreement or Article 6 or Article 7 of this Agreement;

 

5.2.7 Other circumstances stipulated by Chinese laws and regulations that might terminate this Agreement.

 

5.3        Termination with thirty days’ notice in writing.

 

5.3.1 Under the circumstances in the provisions stipulated in Clauses 5.1 and 5.2 and in Clause 5.3.2 and under any of the following kinds of circumstances, the Company shall be entitled to terminate this Contract, however, it must give thirty days’ notice in writing to the Employee:

 

5.3.1.1 If the Employee becomes ill or is injured for reasons other than work, and after the expiration of the legally stipulated period of illness he cannot perform his original job, or cannot perform work that the Company otherwise arranges for him in accordance with the actual circumstances and requirements of the Company at the time:

 

5.3.1.2 The Employee, after he has had the Company’s on the job training or other formal training is still unable to perform the tasks in accordance with this Contract or the requirements of the Company;

 

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5.3.1.3 The Employee has, other than the provisions stipulated in Article 5.2 of this Contract, engaged in conduct that is in breach of this Contract and caused the Company to suffer significant losses; or

 

5.3.1.4 Objective circumstances at the time this Contract is concluded in accordance with the significant changes indicated in Article 5.4 of this Contract occur and render this Contract impossible to perform, even though both Parties have consulted each other and have still not been able to reach agreement with regard to amending this Contract.

 

5.3.2 If the following circumstances arise, the Company, under said circumstances, before terminating this Contract in accordance with the provisions stipulated in Article 5.3.1 above, shall, at the same time, handle the matter in accordance with the relevant applicable Chinese laws and regulations:

 

5.3.2.1 The Employee, according to a determination of the relevant Chinese labor department, is suffering from an occupational illness or has sustained an injury while serving the Company causing the Employee to lose or partially lose his ability to work; or

 

5.3.2.2 The Employee, because of other causes, is ill or has sustained an injury and, has been diagnosed by a reputable health care institution as stipulated by the relevant regulations of the Chinese Government and it is within the period of medical treatment determined by a doctor’s certificate.

 

5.3.2.3 The Employee submits a valid evidence proving that, according to provisions stipulated the applicable Chinese laws, it is within a time period that the Company cannot dismiss a female employee.[The provision stipulated in this clause shall be applicable only to female employees.]

 

5.4        Significant changes in circumstances . The significant changes in circumstances stipulated in Article 5.3.1.4 of this Contract shall include but not be limited to the following:

 

5.4.1 The Company conducts a merger with another company and puts the corporate assets for sale on the market or transfers them to any other company or to any third party;

 

5.4.2 For three (3) consecutive years, the Company’s production operations and marketing sales have not reached the scheduled goals or the Company has been operating at a financial loss for three (3) consecutive years;

 

5.4.3 The Company has legally declared bankruptcy, dissolution, or liquidation;

 

5.4.4 New laws or regulations promulgated by the Chinese Government render one or both Parties to the Contract legally unable to perform this Contract.

 

5.5       Compensation .

 

When a significant change stipulated in Article 5.4 of this Contract causes the Company to terminate this Contract in accordance with the provisions stipulated above, the Company shall, in accordance with the provisions stipulated in the applicable Chinese laws and regulations, provide to the Employee an appropriate subsidy and compensation. However, both Parties hereby explicitly acknowledge that when calculating said subsidy and compensation, any employment relationship prior to the one that hereby exists other than between the Employee and the Company shall not be counted as Employment of the Employee by the Company, and the Employee’s employment by the Company shall begin on the Effective Date of this Contract.

 

5.6        Termination of the Contract by the Employee .

 

5.6.1 During the Term of this Contract and under the circumstances stipulated by Article 1.5 of this Contract, the Employee may submit his resignation and terminate this Contract; however, he must submit written notice to the company thirty (30) days in advance;

 

5.6.2 If the Company seriously breaches the provisions of Clause 1.4 or Article 2, Article 3, or Article 4 of this Contract, and receives the written notice from the Employee, thirty days after said breaches of contact such breaches of contract continue, the Employee shall be entitled to terminate this Contract; or

 

5.6.3 If the Company uses violence or makes threats or uses illegal methods to limit the personal freedom of the Employee, in order to compel the Employee to conduct work that is prohibited by Chinese law, the Employee shall be entitled to issue written notice of termination of this Contract to the Company.

 

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5.6.4 Other than the circumstances stipulated in Article 5.6.3, at the same time the Employee terminates this Contract, the Employee shall compensate the Company for the advanced study and training, training expenses that the Company funded during the Term of the Contract and for the expenses paid directly by the Company to hire the Employee (including but not limited to the expenses of employment agencies or executive recruitment (headhunting) companies).

 

5.7        Compensation by the Company .

 

When the following events occur, the Company shall, in accordance with the provisions stipulated by the relevant Chinese laws and regulations, compensate the Employee for the harm suffered as a result thereof:

 

5.7.1 The Company has committed a serious breach of provisions stipulated in Clause 1.4.1 or Article 2, Article 3, or Article 4 of this Contract and has not been able to stop the conduct in breach of contract after receiving written notification from the Employee indicating such breach of contract;

 

5.7.2 If the Company uses violence or makes threats or uses illegal methods to limit the personal freedom of the Employee.

 

5.8        Effective date of termination .

 

5.8.1 When this Contract expires in accordance with its provisions, or when terminated or rescinded, Clause 5.8 and Article 6, Article 7, and Article 8 of this Contract shall remain in effect.

 

5.8.2 Within seven (7) days after the expiration, termination, or rescission of this Contract, the Employee shall deliver or return to the Company all the property that belongs to the Company that he has used or kept in his possession, including but not limited to the following:

 

5.8.2.1 All the equipment, devices, and tools related to the employment that the Company provided for the Employee in accordance with this Contract;

 

5.8.2.2 All relevant Company management, operations, production, or product documents, files and records, and any copies of files that the Employee had in his care, use, or under his control for which he was responsible;

 

5.8.2.3 Lists of and/or materials regarding the Company’s vendors, customers, and other entities and individuals with which it has relationships;

 

5.8.2.4 The computer equipment, hardware, disks, hard disks, compact disks or DVDs, and other office supplies provided by the Company. If the Company suffers from any loss or harm as a result of a breach of the provision stipulated above by the Employee, the Employee shall assume liability for compensating the Company for the production and operating losses thereby caused.

 

Article 6     Trade Secrets

 

6.1        Trade secrets . The Employee hereby acknowledges that the Company possesses commercial and technical information that can bring economic benefits to the Company that are not known to people or are not specially designated, and the Company has adopted appropriate measures to protect said trade secrets and classified commercial information (hereinafter, “Trade Secrets”).The Employee may obtain and come to know said Trade Secrets because of his employment position at the Company. Said Trade Secrets shall include but are not limited to the following information and materials:

 

6.1.1 Technical data and software materials (including design plans and flow charts);

 

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6.1.2 Lists of customers, vendors, sales representatives, and dealers;

 

6.1.3 Production formulas, workflows, blueprints, and designs;

 

6.1.4 Proprietary technology and patented technology and related materials, whether said proprietary technology and patented technology has already obtained patent registration;

 

6.1.5 Information and plans regarding supplies, marketing, and research and development;

 

6.1.6 Financial information;

 

6.1.7 Records of the Company’s meetings, decisions, and internal affairs.

 

6.2 The Employee hereby agrees and guarantees that during the term of his employment in accordance with this Contract and for three years thereafter the Employee may not use the Company’s Trade Secrets for his individual purposes and interests, and under circumstances in which he has not receive separate written authorization from the Company, may not disclose said Trade Secrets to any company or individual, organization, or entity in any form for any purpose. The Employee acknowledges that the Company possesses absolute property rights to said Trade Secrets, and the Employee shall not raise any objections or claim any rights with regard to the property rights to said Trade Secrets and unless it is in the name of the Company or with written approval from the Company shall not himself or in the name of any other individual or company anywhere in the world seek the registration or recording of any property rights to said Trade Secrets.

 

6.3        Non-Compete Clause . In order to protect the Company’s Trade Secrets, the Employee agrees that during the term of this Contract and during one year thereafter, unless he is performing services for the Company on the basis of this contract, he may hold any appointment for any company, body, organization, or entity that has a competitive relationship with the Company, and he also may not himself conduct or conduct jointly with any other company, body, organization, or individual any activities involving inventions, research, management, production, or sales in any form that is in competition with the Company.

 

6.4        Compensation for breach of contract . The Employee acknowledges that the Employee’s guarantee above to guarantee the Company’s Trade Secrets and non-compete commitment in this Article is an express precondition for the Company’s agreement to hire the Employee in accordance with this Contract, and if the Employee breaches any of said obligations it could cause the inestimable losses to the company. The Employee therefore agrees that any action that breaches or violates the obligations stipulated in this Article shall entitle the Company to file a lawsuit or request enforcement or a prohibition directly in the courts without going through a labor arbitration and the Company shall not be required to prove the actual losses that it has sustained, and may ask the court for a decision or judgment to grant compensation for the prohibitive and indemnifiable losses. The Employee agrees that under circumstances in which the Company is able to prove that the Employee has breached the obligations stipulated in this Article, the Employee waives the any right to demand that the Company prove the actual losses that it has sustained as a result.

 

Article 7     Intellectual Property

 

The Employee agrees that during the period of his employment by the Company in accordance with this Contract, he himself or jointly with others designs or upgrades any software products with regard to the Company’s products, production, management, sales, or any other matters related to the Company’s operations, or various kinds of graphical products that he or they create, design, or improve with regard to the company’s products, plans, work flows designs, or products produced or improved with regard to the Company’s production facilities and research and development technology related thereto, along with concepts and programs produced with regard to the Company’s operations management, raw materials supplies, product sales, and market development, as well as any software products designed or upgraded related to the Company’s production, management, sales, products, or any other items related to the Company’s operations shall all be regarded as his employment products, inventions, discoveries, and results and shall be the exclusive property of the Company, The Employee agrees that he shall take all necessary steps (including signing various types of documents) so that such kinds of works, inventions, discoveries, and results are under the name of the Company and authorizes the Company to use them and conduct registrations and recordings in the name of the Company, so that the Company can obtain the corresponding intellectual property rights, and shall not on this basis seek any expenses or compensation from the Company besides his rightful reward.

 

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Article 8     Resolution of Employment Disputes

 

If any disputes arise between the Company and the Employee with regard to this Contract, they shall first endeavor to resolve it through amicable consultation. The consultation shall begin within five (5) days after written notice indicating the existence of the dispute and requesting resolution of the dispute has been given by one Party to the other Party. If within ten (10) days after the beginning of the consultation it has not been possible to resolve the dispute, either party may ask the Company’s union organization to mediate and resolve the dispute. If within sixty (60) days after the aforementioned notice was issued, neither the aforementioned consultation nor mediation has been able to resolve the dispute, either Party may request arbitration by the Labor Dispute Arbitration Committee with jurisdiction in the city of Beijing. If either Party refuses to comply with the arbitral award issued by the Labor Dispute Arbitration Committee, it may file a lawsuit in the People’s Court with jurisdiction within fifteen days after the issuance of the arbitral award.

 

Article 9     Taxation

 

The Employee shall be liable for the individual income taxes that must be paid on the salary, bonuses, and various kinds of income received as compensation paid by the Company to the Employee as stipulated in this Contract, The Company shall withhold in advance the individual income tax and other tax expenses at the time the salary, bonuses, and other kinds of income for compensation are paid to the Employee.

 

Article 10     Other Provisions

 

10.1        Language and text. This Contract has been drafted in Chinese, in two original counterparts, and shall become effective on the aforementioned Effective Date when signed by the Company and the Employee. The Parties shall each have one counterpart, and both texts shall be the same original text.

 

10.2        Ability to sign the Contract . The Employee hereby represents and guarantees that the Employee can legally sign this Contract and be bound by this Contract. The duties for which the Employee is signing this Contract and the work stipulated in this Contract has not and shall not breach any other employment contract or agreement that is binding upon the Employee, and shall not breach the provisions of any other company, organization, or body that are binding upon him.

 

10.3        Validity . If any clause of this Contract is not in accordance with Chinese laws or regulations, Chinese laws and regulations shall prevail within the scope of said inconsistency.

 

10.4        Severability . When any clause stipulated in this Contract conflicts with or becomes invalid or inconsistent on the basis of Chinese law, said clause or clauses may not influence the effectiveness and the validity of the other clauses of this Contract.

 

10.5        Amendments in the Contract . Revisions of, amendments to, or supplements to of any article in this Contract must be approved in writing by both the Company and the Employee and be signed to be valid.

 

10.6        Transfer . The Employee may not transfer this Contract.

 

10.7        Entire Agreement . This Contract stipulates the entire agreement reached between the parties with regard to the content of this Contract, and replaces all previous contracts and understandings with regard thereto. The Company and the Employee may at any time, with regard to Trade Secrets, the non-compete clause, and/or intellectual property rights, draft contractual provisions that are more detailed and more strict. Once said contractual provisions become effective, they shall automatically become an appendix and an integral part of this Contract.

 

10.8       The interpretation and performance of this Contract shall be conducted on the basis of Chinese law.

 

  8  

 

 

Both Parties hereby sign with the date as indicated at the beginning of this Contract.

 

“The Company”   “The /Employee” (signature and seal)
     
Borqs Wireless Ltd. (corporate seal)   [illegible seal]
Legal Representative or Commissioned Agent (signature or seal)   (signature)
     
    /s/ Pat Sek Yuen Chan
[signature]    
{stamp:] Borqs Wireless Ltd.    

1101050464617 “The Employee” (signature and seal]

   

 

  9  

 

 

Employment Contract Renewal Form

 

This renewal of the Employment Contract Term shall be a (fixed /indefinite) term Contract, with the renewal being effective beginning on October 8, 2015 until ________. During the term that this Contract continues to be in effect, the terms and conditions of employment shall be maintained unchanged.

 

Legal Representative or Commissioned Agent (signature or seal)   The Employee (signature and seal)
     
     
[signature]   /s/ Pat Sek Yuen Chan
{stamp:] Borqs Wireless Ltd.    

1101050464617 The Employee (signature and seal]

   
    [illegible seal]
       

  

Employment Contract Renewal Form

 

This renewal of the Employment Contract Term shall be ___ (fixed /indefinite) term Contract, with the renewal being effective beginning on July 1, 2015 until ________. During the term that this Contract continues to be in effect, the terms and conditions of employment shall be maintained unchanged.

 

Legal Representative or Commissioned Agent (signature or seal)   The Employee (signature and seal)
     
     

 

 

 

10

 

Exhibit 10.8

 

Borqs Wireless Ltd.

 

Employment Contract

 

Party of the First Part: Borqs Wireless Ltd. Party of the Second Part: Xiaobo LI

Legal Representative: Xiyuan CHEN

Or Commissioned Agent:

Address of the Party of the First Part: No. 10

Jiuxianqiao Road, Chaoyang District, Beijing

Tower A, Building B23, Universal Business Park

Postal Code: 100102

Identification Card No.:

Residence Location: 

Home Address:

 

Postal Code:

Telephone No.:

 

This employment contract (hereinafter, “this Contract”) is being concluded and signed by and between Borqs Wireless Ltd., a limited liability company incorporated in accordance with the laws of the People’s Republic of China (hereinafter, the “Company”) and Mr./Ms. Xiaobo LI (hereinafter, the “Employee”) on July 1, 2013.

 

Each party to this Contract, by means of amicable negotiations, voluntarily and on the basis of mutual benefit, hereby agrees and signs this Contract as follows:

 

Article 1     Employment

 

1. 1         Content of the work and the work place .

 

1.1.1 In accordance with the relevant Chinese laws, statutes, and regulations, the Company agrees to employ the employee in the Company in the Office of the Chief Executive Officer in order to conduct work as Senior Vice President for Commercial Affairs in accordance with the articles and provisions stipulated in this Contract, and the workplace shall be the premises of the Company; and the Employee agrees to accept this employment.

 

1.1.2 The Employee shall, at all times in accordance with the instructions directly issued by the Company, be responsible for conducting sad work, and shall accept all the guidance and supervision of the top leadership and the relevant departments of the Company.

 

1.1.3 Both Parties hereby acknowledge that, at any time during the term of this Contract, the Company shall be entitled, in accordance with the operating requirements and the employee’s work performance, make suitable changes as the Company deems to be necessary with regard to the department, work responsibilities, and position held by the Employee, the content of the work, or the workplace within the scope of the Company and its subsidiaries.

 

1.2          Employment Term .

 

1.2.1 This Contract shall become effective on July 1, 2013 (the “Effective Date”). The Parties agree that this Contract shall be a Fixed Term Contract, beginning on its effective date and ending on June 30, 2015 (hereinafter, the “Term of the Contract”), unless in accordance with the provisions and clauses stipulated in this Contract it is extended or terminated early. Prior to the expiration date of the Term of the Contract or in accordance with any extension of this Article, if either Party wishes to renew the Contract, said Party shall, one (1) month before the expiration date notify the other Party thereof in writing, After both Parties reach agreement in writing, the Term of this Contract may be extended accordingly.

 

  1  

 

 

1.2.2 Each Party to this Contract agrees that the first three (3) months of the Term of the Contract shall be a probationary period. If at any time during this probationary period, the Company recognizes that the Employee is not in compliance with the terms and conditions of employment, the Company shall be entitled, after explaining the reasons to the Employee, to rescind this Contract immediately without any need to provide advance notice to the Employee. The Employee may terminate this Contract during the probationary period by providing written notice to the Company three days in advance. Once this Contract has been terminated in accordance with the provisions stipulated in this clause, except the obligations regarding confidentiality stipulated clearly elsewhere in this Contract, neither Party shall be liable to the other Party for performing any obligations under the terms of this Contract.

 

1.3          Obligations of the Employee . The Employee agrees that, besides the obligations stipulated in this Contract, during the Term of this Contract, the Employee shall be required to:

 

1.3.1 During his regular working hours according to this Contract, use all his time, energy, and skills in performing the obligations stipulated in this Contract, and perform his duties effectively, exert his greatest efforts, and ensure the satisfactory completion of the responsibilities assigned by the Company.

 

1.3.2 According to the provisions of this Contract, the Company’s regulations and policies and applicable laws, regulations, and faithful and scrupulous performance of his duties, perform his obligations for the Company as stipulated under the provisions of this Contract, not engage in any activities that violate the Company’s regulations or that might harm the interests of the Company, and not to use the work duties or position in the Company directly or indirectly to obtain his own personal interests.

 

1.3.3 The Employee shall conscientiously comply with the system of rules stipulated by the Company, take care of the Company’s assets, respect professional ethics, be industrious and meticulous, and proactively participate in the training and education organized by the Company. If the Employee violates the system of rules stipulated by the Company or other work discipline, the Company may, in accordance with said individual system of rules, apply disciplinary measures, up to terminating this Contract.

 

1.3.4 Prior to the Company signing the Employment Contract, the Employee has agreed that he is signing this Contract with the Company only after he has officially terminated the employment relationship with his previous employer. If the Employee violates this commitment and causes this Contract to be null and void, the Employee shall accept all liability. If it causes losses to the Company, the Employee shall be liable to pay compensation. The Company shall not assume liability for any economic disputes or legal liability of the Employee prior to the signing of the Contract.

 

1.4          Obligations of the Company . The Company hereby agrees that, besides for other obligations stipulated in this Contract, the Company shall also, during the Term of this Contract be required to:

 

1.4.1 In accordance with the relevant laws and regulations with regard to labor protection, provide a safe, healthy environment and working conditions for the Employee;

 

1.4.2 Formulate for the employee and provide to the employee an employee handbook, and said handbook shall stipulate all work regulations in compliance with Chinese laws and regulations and include the bonus system and disciplinary rules, working hours, vacation time, the employee corporate benefits plan, and the work safety plan. Once said handbook has become effective, it shall become an inseparable part of this Contract, and both the Employee and the Company shall be required to comply strictly with it in accordance with this Contract. However, if any provision in the employee handbook is inconsistent with or conflicts with any clause stipulated in this Contract, the clause in this Contract shall take precedence.

 

1.5         Training . If the Company decides to provide training events for the Employee in any location, the Employee shall participate in said training, in accordance with said training plan and in the designated location. Unless this Contract is terminated in accordance with Clauses 5.1, 5.2, and 5.3 or Clauses 5.6.2 or 5.6.3 in this Contract, after the Employee has participated in said training, he shall provide services the Company for at least three (3) years in accordance with the provisions stipulated in this Contract; and if the Employee conducts such service to the Company less than three (3) years, the Employee shall compensate the Company for all the training expenses that the Company has expended for the training conducted and provided to the Employee in accordance with this clause and pay a penalty for breach of contract. The sum of money for the aforementioned training may be reduced year after year by thirty percent (30%) per year, in accordance with the number of years of actual service for the Company after the Employee received the training. However, any compensation that the Employee pays to the Company in accordance with the provisions stipulated in this clause may not affect or reduce any other of liability he has for breach of the contract or of any of the obligations and liability assumed by him pursuant to Article 6 of this Contract.

 

  2  

 

 

Article 2     Employment Compensation

 

2.1          Salary .

 

2. 1.1 During the period the Employee is employed in accordance with this Contract, unless there is agreement reached between the parties elsewhere in this Contract, the Company shall, during the Term of this Contract stipulated in Article 1.2.1 of this Contract, pay the Employee, in Chinese Yuan (CNY) a salary for compensation per month equivalent to the amount in the offer letter (the amount in CNY in the offer letter), and the salary for the probationary period shall be 100% of the official salary.

 

2.1.2 The annual salary mentioned in this Contract or in other Company policies shall, in accordance with the Company’s salary policy, be paid to the Employee by the Company with the annual amount of compensation divided into 12 equal monthly installments. For the composition of the salary see the pay stub.

 

2.1.3 The Company shall be entitled, in accordance with the Employee’s wishes and changes in the Employee’s work duties or position in the company, or in accordance with the Company’s new salary policy, adjust or change the Employee’s salary level.

 

2.1.4 The Company may decrease or deduct the following expenses and sums from the Salary it pays to the Employee in accordance with this Contract:

 

2.1.4.1 Income tax on the Employee’s salary withheld in accordance with Article 9 of this Contract;

 

2.1.4.2 The social insurance expenses to be assumed by the Employee individually to be withheld by the Company on his behalf in accordance with this Contract or in accordance with the relevant Chinese laws and regulations;

 

2.1.4.3 The expenses specified by a court judgment or by an arbitral award that the Company is required to deduct from the Employee’s salary;

 

2.1.4.4 All sums of compensation for losses to be paid by the Employee to the Company as stipulated in this Contract or by means of another legal decision, and all other expenses and expenditures deducted from the salary paid to the Employee in accordance with applicable Chinese laws and regulations.

 

2.2         Bonuses. During the Term of this Contract, the Company may pay the Employee bonuses at any time pay the, in accordance with the standards, clauses, terms and conditions, and amounts that it determines itself.

 

Article 3    Social Welfare Insurance, Benefits, and Vacations

 

3.1         Social welfare insurance and benefits . During the Term of this Contract, the Company shall provide the Employee social welfare insurance and benefit payments stipulated by the relevant Chinese laws and regulations, including, but not limited to those with regard to retirement, health care, and housing.

 

3.2         Vacations . The Employee shall, in accordance with the relevant laws and regulations of China, have the right to paid leave and vacation as stipulated in the Company’s policy, however, the Company shall have the right, in accordance with work requirements, to arrange for the Employee to use the relevant vacation time early or defer the use of said time.

 

  3  

 

 

Article 4     Arrangement of Working Hours

 

The Company shall implement a standard full-time work system, adopting flexible working hours. The Employee shall, work eight (8) hours per day (break times are not calculated in the working hours), forty (40) hours per week; however, because of work requirements or depending on the intensity and the environment of the work, the Company shall have the right to arrange for increasing or decreasing the number of hours of work per day or per week or adjust his beginning and ending times, and the Employee waives the right to claim from the company any sum of additional compensation or an allowance on the basis of the aforementioned adjustments.

 

Article 5     Termination

 

5.1          Immediate Termination . This Contract shall, terminate automatically without advance notice on the date on which any of the following circumstances arises:

 

5.1.1 The Term of the Contract stipulated in Article 1.2.1 of this Contract expires;

 

5.1.2 This Contract is terminated within the probationary period in accordance with the provision stipulated by Article 1.2.2 of this Contract;

 

5.1.3 Both Parties to this Contract agree to terminate this Contract early;

 

5.1.4 The Employee is legally investigated for criminal liability or re-education through labor.

 

5.2          Immediate termination of the Contract by the Company . Any of the following kinds of conduct on the part of the Employee shall constitute a serious breach of contract on the part of the Employee and shall cause the Company to have the right to terminate this Contract the same day it issues a written notice of termination:

 

5.2.1 The Employee conducts any deceit of the Company or engages in any other dishonest conduct, regardless of whether said conduct causes the Company to incur an actual loss;

 

5.2.2 The Employee has committed gross negligence, engaged in corrupt practices, and caused interests of the management unit to suffer serious losses;

 

5.2.3 The Employee, at the same time that he was an employee, established an employment relationship with another employer, has used his position for it, and has refused to correct it;

 

5.24 The Employee’s conduct constitutes a serious violation of Chinese laws and regulations, and has been legally investigated for criminal liability;

 

5.2.5 The Employee has deliberately or seriously breached the employment regulations or work rules stipulated by the Company;

 

5.2.6 The Employee’s conduct has breached the obligations stipulated in Article 1.3 of this Agreement or Article 6 or Article 7 of this Agreement;

 

5.2.7 Other circumstances stipulated by Chinese laws and regulations that might terminate this Agreement.

 

5.3          Termination with thirty days’ notice in writing.

 

5.3.1 Under the circumstances in the provisions stipulated in Clauses 5.1 and 5.2 and in Clause 5.3.2 and under any of the following kinds of circumstances, the Company shall be entitled to terminate this Contract, however, it must give thirty days’ notice in writing to the Employee:

 

5.3.1.1 If the Employee becomes ill or is injured for reasons other than work, and after the expiration of the legally stipulated period of illness he cannot perform his original job, or cannot perform work that the Company otherwise arranges for him in accordance with the actual circumstances and requirements of the Company at the time:

 

5.3.1.2 The Employee, after he has had the Company’s on the job training or other formal training is still unable to perform the tasks in accordance with this Contract or the requirements of the Company;

 

  4  

 

 

5.3.1.3 The Employee has, other than the provisions stipulated in Article 5.2 of this Contract, engaged in conduct that is in breach of this Contract and caused the Company to suffer significant losses; or

 

5.3.1.4 Objective circumstances at the time this Contract is concluded in accordance with the significant changes indicated in Article 5.4 of this Contract occur and render this Contract impossible to perform, even though both Parties have consulted each other and have still not been able to reach agreement with regard to amending this Contract.

 

5.3.2 If the following circumstances arise, the Company, under said circumstances, before terminating this Contract in accordance with the provisions stipulated in Article 5.3.1 above, shall, at the same time, handle the matter in accordance with the relevant applicable Chinese laws and regulations:

 

5.3.2.1 The Employee, according to a determination of the relevant Chinese labor department, is suffering from an occupational illness or has sustained an injury while serving the Company causing the Employee to lose or partially lose his ability to work; or

 

5.3.2.2 The Employee, because of other causes, is ill or has sustained an injury and, has been diagnosed by a reputable health care institution as stipulated by the relevant regulations of the Chinese Government and it is within the period of medical treatment determined by a doctor’s certificate.

 

5.3.2.3 The Employee submits a valid evidence proving that, according to provisions stipulated the applicable Chinese laws, it is within a time period that the Company cannot dismiss a female employee. [The provision stipulated in this clause shall be applicable only to female employees.]

 

5.4          Significant changes in circumstances . The significant changes in circumstances stipulated in Article 5.3.1.4 of this Contract shall include but not be limited to the following:

 

5.4.1 The Company conducts a merger with another company and puts the corporate assets for sale on the market or transfers them to any other company or to any third party;

 

5.4.2 For three (3) consecutive years, the Company’s production operations and marketing sales have not reached the scheduled goals or the Company has been operating at a financial loss for three (3) consecutive years;

 

5.4.3 The Company has legally declared bankruptcy, dissolution, or liquidation;

 

5.4.4 New laws or regulations promulgated by the Chinese Government render one or both Parties to the Contract legally unable to perform this Contract.

 

5.5          Compensation .

 

When a significant change stipulated in Article 5.4 of this Contract causes the Company to terminate this Contract in accordance with the provisions stipulated above, the Company shall, in accordance with the provisions stipulated in the applicable Chinese laws and regulations, provide to the Employee an appropriate subsidy and compensation. However, both Parties hereby explicitly acknowledge that when calculating said subsidy and compensation, any employment relationship prior to the one that hereby exists other than between the Employee and the Company shall not be counted as Employment of the Employee by the Company, and the Employee’s employment by the Company shall begin on the Effective Date of this Contract.

 

5.6          Termination of the Contract by the Employee .

 

5.6.1 During the Term of this Contract and under the circumstances stipulated by Article 1.5 of this Contract, the Employee may submit his resignation and terminate this Contract; however, he must submit written notice to the company thirty (30) days in advance;

 

5.6.2 If the Company seriously breaches the provisions of Clause 1.4 or Article 2, Article 3, or Article 4 of this Contract, and receives the written notice from the Employee, thirty days after said breaches of contact such breaches of contract continue, the Employee shall be entitled to terminate this Contract; or

 

5.6.3 If the Company uses violence or makes threats or uses illegal methods to limit the personal freedom of the Employee, in order to compel the Employee to conduct work that is prohibited by Chinese law, the Employee shall be entitled to issue written notice of termination of this Contract to the Company.

 

  5  

 

 

5.6.4 Other than the circumstances stipulated in Article 5.6.3, at the same time the Employee terminates this Contract, the Employee shall compensate the Company for the advanced study and training, training expenses that the Company funded during the Term of the Contract and for the expenses paid directly by the Company to hire the Employee (including but not limited to the expenses of employment agencies or executive recruitment (headhunting) companies).

 

5.7          Compensation by the Company .

 

When the following events occur, the Company shall, in accordance with the provisions stipulated by the relevant Chinese laws and regulations, compensate the Employee for the harm suffered as a result thereof:

 

5.7.1 The Company has committed a serious breach of provisions stipulated in Clause 1.4.1 or Article 2, Article 3, or Article 4 of this Contract and has not been able to stop the conduct in breach of contract after receiving written notification from the Employee indicating such breach of contract;

 

5.7.2 If the Company uses violence or makes threats or uses illegal methods to limit the personal freedom of the Employee.

 

5.8          Effective date of termination .

 

5.8.1 When this Contract expires in accordance with its provisions, or when terminated or rescinded, Clause 5.8 and Article 6, Article 7, and Article 8 of this Contract shall remain in effect.

 

5.8.2 Within seven (7) days after the expiration, termination, or rescission of this Contract, the Employee shall deliver or return to the Company all the property that belongs to the Company that he has used or kept in his possession, including but not limited to the following:

 

5.8.2.1 All the equipment, devices, and tools related to the employment that the Company provided for the Employee in accordance with this Contract;

 

5.8.2.2 All relevant Company management, operations, production, or product documents, files and records, and any copies of files that the Employee had in his care, use, or under his control for which he was responsible;

 

5.8.2.3 Lists of and/or materials regarding the Company’s vendors, customers, and other entities and individuals with which it has relationships;

 

5.8.2.4 The computer equipment, hardware, disks, hard disks, compact disks or DVDs, and other office supplies provided by the Company. If the Company suffers from any loss or harm as a result of a breach of the provision stipulated above by the Employee, the Employee shall assume liability for compensating the Company for the production and operating losses thereby caused.

 

Article 6     Trade Secrets and Non-Compete Clause

 

6.1          Trade secrets . The Employee hereby acknowledges that the Company possesses commercial and technical information that can bring economic benefits to the Company that are not known to people or are not specially designated, and the Company has adopted appropriate measures to protect said trade secrets and classified commercial information (hereinafter, “Trade Secrets”).The Employee may obtain and come to know said Trade Secrets because of his employment position at the Company. Said Trade Secrets shall include but are not limited to the following information and materials:

 

6.1.1 Technical data and software materials (including design plans and flow charts);

 

  6  

 

 

6.1.2 Lists of customers, vendors, sales representatives, and dealers;

 

6.1.3 Production formulas, workflows, blueprints, and designs;

 

6.1.4 Proprietary technology and patented technology and related materials, whether said proprietary technology and patented technology has already obtained patent registration;

 

6.1.5 Information and plans regarding supplies, marketing, and research and development;

 

6.1.6 Financial information;

 

6.1.7 Records of the Company’s meetings, decisions, and internal affairs.

 

6.2        The Employee hereby agrees and guarantees that during the term of his employment in accordance with this Contract and for three years thereafter the Employee may not use the Company’s Trade Secrets for his individual purposes and interests, and under circumstances in which he has not receive separate written authorization from the Company, may not disclose said Trade Secrets to any company or individual, organization, or entity in any form for any purpose. The Employee acknowledges that the Company possesses absolute property rights to said Trade Secrets, and the Employee shall not raise any objections or claim any rights with regard to the property rights to said Trade Secrets and unless it is in the name of the Company or with written approval from the Company shall not himself or in the name of any other individual or company anywhere in the world seek the registration or recording of any property rights to said Trade Secrets.

 

6.3          Compensation for breach of contract . The Employee acknowledges that the Employee’s guarantee above to guarantee the Company’s Trade Secrets and non-compete commitment in this Article is an express precondition for the Company’s agreement to hire the Employee in accordance with this Contract, and if the Employee breaches any of said obligations it could cause the inestimable losses to the company. The Employee therefore agrees that any action that breaches or violates the obligations stipulated in this Article shall entitle the Company to file a lawsuit or request enforcement or a prohibition directly in the courts without going through a labor arbitration and the Company shall not be required to prove the actual losses that it has sustained, and may ask the court for a decision or judgment to grant compensation for the prohibitive and indemnifiable losses. The Employee agrees that under circumstances in which the Company is able to prove that the Employee has breached the obligations stipulated in this Article, the Employee waives the any right to demand that the Company prove the actual losses that it has sustained as a result.

 

Article 7     Intellectual Property

 

The Employee agrees that during the period of his employment by the Company in accordance with this Contract, he himself or jointly with others designs or upgrades any software products with regard to the Company’s products, production, management, sales, or any other matters related to the Company’s operations, or various kinds of graphical products that he or they create, design, or improve with regard to the company’s products, plans, work flows designs, or products produced or improved with regard to the Company’s production facilities and research and development technology related thereto, along with concepts and programs produced with regard to the Company’s operations management, raw materials supplies, product sales, and market development, as well as any software products designed or upgraded related to the Company’s production, management, sales, products, or any other items related to the Company’s operations shall all be regarded as his employment products, inventions, discoveries, and results and shall be the exclusive property of the Company, The Employee agrees that he shall take all necessary steps (including signing various types of documents) so that such kinds of works, inventions, discoveries, and results are under the name of the Company and authorizes the Company to use them and conduct registrations and recordings in the name of the Company, so that the Company can obtain the corresponding intellectual property rights, and shall not on this basis seek any expenses or compensation from the Company besides his rightful reward.

 

  7  

 


Article 8     Resolution of Employment Disputes

 

If any disputes arise between the Company and the Employee with regard to this Contract, they shall first endeavor to resolve it through amicable consultation. The consultation shall begin within five (5) days after written notice indicating the existence of the dispute and requesting resolution of the dispute has been given by one Party to the other Party. If within ten (10) days after the beginning of the consultation it has not been possible to resolve the dispute, either party may ask the Company’s union organization to mediate and resolve the dispute. If within sixty (60) days after the aforementioned notice was issued, neither the aforementioned consultation nor mediation has been able to resolve the dispute, either Party may request arbitration by the Labor Dispute Arbitration Committee with jurisdiction in the city of Beijing. If either Party refuses to comply with the arbitral award issued by the Labor Dispute Arbitration Committee, it may file a lawsuit in the People’s Court with jurisdiction within fifteen days after the issuance of the arbitral award.

 

Article 9     Taxation

 

The Employee shall be liable for the individual income taxes that must be paid on the salary, bonuses, and various kinds of income received as compensation paid by the Company to the Employee as stipulated in this Contract, The Company shall withhold in advance the individual income tax and other tax expenses at the time the salary, bonuses, and other kinds of income for compensation are paid to the Employee.

 

Article 10     Other Provisions

 

10.1        Language and text. This Contract has been drafted in Chinese, in two original counterparts, and shall become effective on the aforementioned Effective Date when signed by the Company and the Employee. The Parties shall each have one counterpart, and both texts shall be the same original text.

 

10.2        Ability to sign the Contract . The Employee hereby represents and guarantees that the Employee can legally sign this Contract and be bound by this Contract. The duties for which the Employee is signing this Contract and the work stipulated in this Contract has not and shall not breach any other employment contract or agreement that is binding upon the Employee, and shall not breach the provisions of any other company, organization, or body that are binding upon him.

 

10.3        Validity . If any clause of this Contract is not in accordance with Chinese laws or regulations, Chinese laws and regulations shall prevail within the scope of said inconsistency.

 

10.4        Severability . When any clause stipulated in this Contract conflicts with or becomes invalid or inconsistent on the basis of Chinese law, said clause or clauses may not influence the effectiveness and the validity of the other clauses of this Contract.

 

10.5        Amendments in the Contract . Revisions of, amendments to, or supplements to of any article in this Contract must be approved in writing by both the Company and the Employee and be signed to be valid.

 

10.6        Transfer . The Employee may not transfer this Contract.

 

10.7        Entire Agreement . This Contract stipulates the entire agreement reached between the parties with regard to the content of this Contract, and replaces all previous contracts and understandings with regard thereto. The Company and the Employee may at any time, with regard to Trade Secrets, the non-compete clause, and/or intellectual property rights, draft contractual provisions that are more detailed and more strict. Once said contractual provisions become effective, they shall automatically become an appendix and an integral part of this Contract.

 

10.8       The interpretation and performance of this Contract shall be conducted on the basis of Chinese law.

 

  8  

 

 

Both Parties hereby sign with the date as indicated at the beginning of this Contract.

 

     
“The Company”   “The /Employee” (signature and seal)
     
Borqs Wireless Ltd. (corporate seal)  
Legal Representative or Commissioned Agent (signature or seal)  
   
[signature]   [illegible seal]
[ stamp:] Borqs Wireless Ltd.   /s/ Bob Xiao Bo Li

1101050464617 “The Employee” (signature and seal)

   
     

[illegible seal]

   

[signature]

 

  9  

 

 

Employment Contract Renewal Form

 

This renewal of the Employment Contract Term shall be nine (fixed /open-ended) term Contract, with the renewal being effective beginning on July 1, 2015 until ________. During the term that this Contract continues to be in effect, the terms and conditions of employment shall be maintained unchanged.

 

Legal Representative or Commissioned Agent   The Employee (signature and seal)
(signature or seal)    
   
{stamp:] Borqs Wireless Ltd.   /s/ Bob Xiao Bo Li

1101050464617 The Employee (signature and seal]

  [illegible seal]

  

Employment Contract Renewal Form

 

This renewal of the Employment Contract Term shall be ___ (fixed /indefinite) term Contract, with the renewal being effective beginning on July 1, 2015 until ________. During the term that this Contract continues to be in effect, the terms and conditions of employment shall be maintained unchanged.

 

Legal Representative or Commissioned Agent
(signature or seal)
  The Employee (signature and seal)
     
     

 

 

10

 

Exhibit 10.9

 

CONSULTING AGREEMENT

 

This Consulting Agreement (“ Agreement ”) is made and entered into as of April 1, 2015 by and between BORQS Hong Kong Ltd., with an address of Rm 512,5/F, Tower 1, Silvercord, 30 Canton Road, TST, Kowloon, Hong Kong (the “ Company ”), and United Dash Holdings Limited, a BVI company (“ UDH ” or the “ Consultant ”) with an address of 25D, Tower 6, The Palazzo, 28 Lok King Street, Shatin N.T., Hong Kong. Company desires to retain Consultant as an independent contractor to perform consulting services for Company and Consultant is willing to perform such services, on terms set forth more fully below. In consideration of the mutual promises contained herein, the parties agree as follows:

 

1.        SERVICES AND COMPENSATION

 

1.1        Statement of Work . Consultant shall perform the services in the statement(s) of work attached as exhibit(s) hereto (each a “ Statement of Work ”) which Consultant and Company may enter into from time to time, and which are incorporated by reference herein.

 

1.2        Services . Consultant shall perform for Company the services (“ Services ”) described in the applicable Statement of Work.

 

1.3        Fees . Company shall pay Consultant the compensation set forth in the Statement of Work for the performance of the Services. Such fees shall be on a time and materials basis, except as may be otherwise set forth in the Statement of Work.

 

2.        CONFIDENTIALITY

 

2.1        Definition . “ Confidential Information ” means any Company proprietary information, technical data, trade secrets or know-how, including, but not limited to, research, product plans, products, services, customers, customer lists, markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, hardware configuration information, marketing, finances or other business information disclosed by Company either directly or indirectly in writing, orally or by drawings or inspection of parts or equipment.

 

2.2        Non-Use and Non-Disclosure . Consultant shall not, during or subsequent to the term of this Agreement, use Company’s Confidential Information for any purpose whatsoever other than the performance of the Services on behalf of Company or disclose Company’s Confidential Information to any third party. It is understood that said Confidential Information will remain the sole property of Company. Consultant further shall take all reasonable precautions to prevent any unauthorized disclosure of such Confidential Information including, but not limited to, having each employee of Consultant, if any, with access to any Confidential Information, execute a nondisclosure agreement containing provisions in Company’s favor identical to this Section 2. Confidential Information does not include information which (i) is known to Consultant at the time of disclosure to Consultant by Company as evidenced by written records of Consultant, (ii) has become publicly known and made generally available through no wrongful act of Consultant, or (iii) has been rightfully received by Consultant from a third party who is authorized to make such disclosure. Without Company’s prior written approval, Consultant shall not directly or indirectly disclose to anyone the existence of this Agreement or the fact that Consultant has this arrangement with Company.

 

 

 

 

2.3        Former Employer’s Confidential Information . Consultant agrees that Consultant shall not, during the term of this Agreement, improperly use or disclose any proprietary information or trade secrets of any former or current employer or other person or entity with which Consultant has an agreement or duty to keep in confidence information acquired by Consultant, if any, and that Consultant shall not bring onto the premises of Company any unpublished document or proprietary information belonging to such employer, person or entity unless consented to in writing by such employer, person or entity. Consultant shall indemnify Company and hold it harmless from and against all claims, liabilities, damages and expenses, including reasonable attorneys fees and costs of suit, arising out of or in connection with any violation or claimed violation of a third party’s rights resulting in whole or in part from Company’s use of the work product of Consultant under this Agreement.

 

2.4        Third Party Confidential Information . Consultant recognizes that Company has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on Company’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. Consultant agrees that Consultant owes Company and such third parties, during the term of this Agreement and thereafter, a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation or to use it except as necessary in carrying out the Services for Company consistent with Company’s agreement with such third party.

 

2.5        Return of Materials . Upon the termination of this Agreement, or upon Company’s earlier request, Consultant shall deliver to Company all of Company’s property or Confidential Information that Consultant may have in Consultant’s possession or control.

 

3.        OWNERSHIP

 

3.1        Assignment . Consultant acknowledges that all copyrightable material, notes, records, drawings, designs, inventions, improvements, developments, discoveries and trade secrets (collectively, “Work Product”) conceived, made or discovered by Consultant, solely or in collaboration with others, during the period of this Agreement which relate in any manner to the business of Company that Consultant may be directed to undertake, investigate or experiment with, or which Consultant may become associated with in work, investigation or experimentation in the line of business of Company in performing the Services hereunder, are the sole property of Company. Consultant further shall assign (or cause to be assigned) and does hereby assign fully to Company all Work Product and any copyrights, patents, mask work rights or other intellectual property rights relating thereto.

 

3.2        Further Assurances . Consultant shall assist Company, or its designee, at Company’s expense, in every proper way to secure Company’s rights in the Work Product and any copyrights, patents, mask work rights or other intellectual property rights relating thereto in any and all countries, including the disclosure to Company of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments and all other instruments that Company deems necessary in order to apply for and obtain such rights and in order to assign and convey to Company, its successors, assigns and nominees the sole and exclusive right, title and interest in and to such Work Product, and any copyrights, patents, mask work rights or other intellectual property rights relating thereto. Consultant further agrees that Consultant’s obligation to execute or cause to be executed, when it is in Consultant’s power to do so, any such instrument or papers will continue after the termination of this Agreement.

 

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3.3        Pre-Existing Materials . Consultant agrees that if in the course of performing the Services, Consultant incorporates into any Work Product developed hereunder any invention, improvement, development, concept, discovery or other proprietary information owned by Consultant or in which Consultant has an interest, (i) Consultant shall inform Company, in writing before incorporating such invention, improvement, development, concept, discovery or other proprietary information into any Work Product; and (ii) Consultant hereby grants Company a nonexclusive, royalty-free, perpetual, irrevocable, worldwide license to use, reproduce, distribute, perform, display, prepare derivative works of, make, have made, sell and export such item as part of or in connection with such Work Product. Consultant shall not incorporate any invention, improvement, development, concept, discovery or other proprietary information owned by any third party into any Work Product without Company’s prior written permission.

 

3.4        Attorney in Fact . Where Company is unable because of Consultant’s unavailability, dissolution, mental or physical incapacity, or for any other reason, to secure Consultant’s signature to apply for or to pursue any application for any United States or foreign patents or mask work or copyright registrations covering the Work Product assigned to Company above, then Consultant hereby irrevocably designates and appoints Company and its duly authorized officers and agents as Consultant’s agent and attorney in fact, to act for and in Consultant’s behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyright and mask work registrations thereon with the same legal force and effect as if executed by Consultant.

 

3.5        Warranty . Consultant hereby represents and warrants that (i) all Work Product shall be performed and provided in a workmanlike manner and perform according to the agreed upon specifications and Company requirements, (ii) will be the original work of Consultant; (iii) the Work Product will not infringe the copyright, patent, trade secret, or any other intellectual property right of any third party; (iv) the Work Product will not be obscene, libelous, or violate the right of privacy or publicity of any third party; (v) the Work Product will not contain any virus, trap door, worm, or any other device that is injurious or damaging to software or hardware used in conjunction with the Work Product; and (vi) any software or data portions of the Work Product will operate correctly and consistently upon dates occurring on or after January 1, 2000.

 

4.         CONFLICTING OBLIGATIONS . Consultant hereby represents and warrants that consultant will not conduct the activities that is in conflict with any of the provisions of this Agreement, or that would preclude Consultant from complying with the provisions hereof, and further certifies that Consultant will not enter into any such conflicting Agreement during the term of this Agreement.

 

Consultant hereby represents and warrants that consultant will not conduct the activities that would be in conflict with any of the provision of this agreement.

 

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5.        TERM AND TERMINATION

 

5.1        Term . This Agreement will commence on the date first written above and will continue until the earlier of (i) final completion of the Services or (ii) termination as provided below.

 

5.2        Termination . Company may terminate this Agreement or any Statement of Work without cause upon giving one (1) months prior written notice thereof to Consultant. If Company terminates this Agreement under the prior sentence, Company shall pay to Consultant the fees for any Services performed before the effective date of termination on a time and materials basis. Company may terminate this Agreement immediately and without prior notice if Consultant refuses to or is unable to perform the Services or is in breach of any material provision of this Agreement.

 

5.3        Survival . Upon such termination all rights and duties of the parties toward each other will cease except: (a) Company shall pay, within 30 days after the effective date of termination, all amounts owing to Consultant for Services completed and accepted by Company prior to the termination date and related expenses, if any, in accordance with the provisions of Section 1 (Services and Fees); and (b) Sections 2 (Confidentiality), 3 (Ownership), 6 (Miscellaneous), and 7 (Arbitration and Equitable Relief) will survive termination of this Agreement.

 

6.        Miscellaneous

 

6.1        Nonassignment / Binding Agreement . The parties acknowledge that the unique nature of Consultant’s services is substantial consideration for the parties’ entering into this Agreement. Neither this Agreement nor any rights under this Agreement may be assigned or otherwise transferred by Consultant, in whole or in part, whether voluntarily or by operation of law, without the prior written consent of Company, which consent will not be unreasonably withheld. Subject to the foregoing, this Agreement will be binding upon and will inure to the benefit of the parties and their respective successors and assigns. Any assignment in violation of the foregoing will be null and void.

 

6.2        Notices . Any notice required or permitted under the terms of this Agreement or required by law must be in writing and must be (a) delivered in person, (b) sent by first class registered mail, or air mail, as appropriate, or (c) sent by overnight air courier, in each case properly posted and fully prepaid to the appropriate address set forth in the preamble to this Agreement. Either party may change its address for notice by notice to the other party given in accordance with this Section. Notices will be considered to have been given at the time of actual delivery in person, three (3) business days after deposit in the mail as set forth above, or one (1) day after delivery to an overnight air courier service.

 

6.3        Waiver . Any waiver of the provisions of this Agreement or of a party’s rights or remedies under this Agreement must be in writing to be effective. Failure, neglect, or delay by a party to enforce the provisions of this Agreement or its rights or remedies at any time, will not be construed as a waiver of such party’s rights under this Agreement and will not in any way affect the validity of the whole or any part of this Agreement or prejudice such party’s right to take subsequent action. No exercise or enforcement by either party of any right or remedy under this Agreement will preclude the enforcement by such party of any other right or remedy under this Agreement or that such party is entitled by law to enforce.

 

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6.4        Severability . If any term, condition, or provision in this Agreement is found to be invalid, unlawful or unenforceable to any extent, the parties shall endeavor in good faith to agree to such amendments that will preserve, as far as possible, the intentions expressed in this Agreement. If the parties fail to agree on such an amendment, such invalid term, condition or provision will be severed from the remaining terms, conditions and provisions, which will continue to be valid and enforceable to the fullest extent permitted by law.

 

6.5        Integration . This Agreement (and all Statements of Works) contains the entire agreement of the parties with respect to the subject matter of this Agreement and supersedes all previous communications, representations, understandings and agreements, either oral or written, between the parties with respect to said subject matter. No terms, provisions or conditions of any purchase order, acknowledgement or other business form that either party may use in connection with the transactions contemplated by this Agreement will have any effect on the rights, duties or obligations of the parties under, or otherwise modify, this Agreement, regardless of any failure of a receiving party to object to such terms, provisions or conditions. This Agreement may not be amended, except by a writing signed by both parties.

 

6.6        Confidentiality of Agreement . Consultant shall not disclose any terms or the existence of this Agreement to any third party without the consent of Company, except as required by securities or other applicable laws.

 

6.7        Counterparts . This Agreement may be executed in counterparts, each of which so executed will be deemed to be an original and such counterparts together will constitute one and the same agreement.

 

6.8        Independent Contractors . It is the express intention of the parties that Consultant is an independent contractor. Nothing in this Agreement will in any way be construed to constitute Consultant as an agent, employee or representative of Company, but Consultant shall perform the Services hereunder as an independent contractor. Consultant shall furnish (or reimburse Company for) all tools and materials necessary to accomplish this contract, and will incur all expenses associated with performance, except as expressly provided on the applicable Statement of Work. Consultant acknowledges and agrees that Consultant is obligated to report as income all compensation received by Consultant pursuant to this Agreement, and Consultant acknowledges its obligation to pay all self-employment and other taxes thereon. Consultant further shall indemnify and hold harmless Company and its directors, officers, and employees from and against all taxes, losses, damages, liabilities, costs and expenses, including attorney’s fees and other legal expenses, arising directly or indirectly from (i) any negligent, reckless or intentionally wrongful act of Consultant or Consultant’s assistants, employees or agents, (ii) a determination by a court or agency that the Consultant is not an independent contractor, or (iii) any breach by the Consultant or Consultant’s assistants, employee or agents of any of the covenants contained in this Agreement.

 

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6.9        Benefits . Consultant acknowledges that Consultant will receive no Company- sponsored benefits from Company either as a Consultant or employee, where benefits include without limitation paid vacation, sick leave, medical insurance, MPF or other any social insurance required by law.

 

7.        ARBITRATION AND EQUITABLE RELIEF

 

7.1        Disputes . Except as provided in Section 7.4, Company and Consultant agree that any dispute or controversy arising out of, relating to or in connection with the interpretation, validity, construction, performance, breach or termination of this Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce (“Rules”) by one or more arbitrators appointed in accordance with the said Rules. The place of arbitration shall be in Hong Kong at Hong Kong International Arbitration Center. The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator(s) will be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator’s decision in any court of competent jurisdiction.

 

7.2        Governing Law . The arbitrator(s) must apply Hong Kong law to the merits of any dispute or claim, without reference to conflicts of law rules. Consultant hereby consents to the personal jurisdiction of the courts located in Hong Kong for any action or proceeding arising from or relating to this Agreement or relating to any arbitration in which the parties are participants.

 

7.3        Costs . Company and Consultant shall each pay one-half of the costs and expenses of such arbitration, and each shall separately pay its counsel fees and expenses unless otherwise required by law.

 

7.4        Equitable Relief . The parties may apply to any court of competent jurisdiction for a temporary restraining order, preliminary injunction, or other interim or conservatory relief, as necessary, without breach of this arbitration agreement and without abridgment of the powers of the arbitrator.

 

7.5        Acknowledgment . CONSULTANT HAS READ AND UNDERSTANDS THIS SECTION 7. CONSULTANT UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, CONSULTANT WILL BE OBLIGATED TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF, TO BINDING ARBITRATION, EXCEPT AS PROVIDED IN SECTION 7.4, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF CONSULTANT’S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE RELATIONSHIP BETWEEN THE PARTIES.

 

7.6        Indemnity . Consultant shall indemnify and hold harmless Company from any losses, liabilities, damages, claims, payments, liens, judgments, demands, costs and expenses (including reasonable attorney’s fees) arising out of any act or omission of Consultant, or Consultant’s performance or breach of this Agreement.

 

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The parties have executed this Agreement below to indicate their acceptance of its terms.

 

“CONSULTANT”   “COMPANY”
         
United Dash Holdings Limited   BORQS Hong Kong Ltd
         
By: /s/ Anthony Chan   By: /s/ Pat Chan
Print Name: Anthony Chan   Print Name: Pat Chan
Title: President   Title: CEO

 

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EXHIBIT A

 

STATEMENT OF WORK

 

Terms and Conditions

 

A. Engagement . BORQS hereby retains UDH for the purpose of providing corporate finance and related consulting services to BORQS including but not limited to: financial accounting and reporting, financial planning and budgeting, working with the Company’s independent auditors, negotiating with investors and bankers, fundraising from private and/or public sources, compliance with governmental rules and regulations, listing of the Company’s shares on an exchange either in the U.S., Hong Kong or China, negotiating M&A transactions, and representing the Company on financial matters (the “Services”).

 

B. Performance of Consulting Services . During the term hereof, UDH shall provide the above said Services by appointing Mr. Anthony K. Chan (the “Executive”) to personally handle all tasks related to such Services.

 

C. Position : Senior Vice President Corporate Finance 高级副总裁 企业融资, this position will be based in the location that designated by company and report to CEO directly.

 

D. Consulting fee : The consultant shall receive a monthly compensation in the amount of Twelve thousand and five hundred US Dollars (US$12,500) per month. The amount of the consulting fee shall be reviewed periodically by the company upon the consultant’s actual performance and contribution. Payment shall be wired by company before the 5th working day of the month for the prior month services.

 

E. Compensation in Stock . In addition, Consultant shall be paid in common shares of the Company under the following circumstance that the Executive successfully transacts by and before December 31, 2015:

 

i) A listing of the Company’s stock on an exchange in the U.S.: 0.4% of the Company’s outstanding common stock at the completion of the listing; or

 

ii) A round of private financing for the Company of not less than US$20 million: 500,000 stock options; or

 

iii) A sale of the Company to a buyer who has its A shares listed on the Shanghai Stock Exchange: 500,000 stock options.

 

iv) The final amounts and details of the Compensation in Stock shall be subject to approval of the Board of Directors of the Company.

 

F. The term of the agreement shall be Nine (9) months, effective as of April 1st, 2015. Unless both parties mutually agree to extend the term of this agreement, the term of this agreement shall expire automatically on the expiration date. The agreement can be renewed for an additional time period as agreed by both parties. The agreement can be terminated earlier by either party by giving one month’s prior written notice.

 

 

 

 

G. Expense authorized for reimbursement by the Company: Business related expenses of the Executive, including travel, meals and living accommodations incurred in the course of performing the Services, shall be promptly paid or reimbursed by the Company within 10 business days after submission by the Executive. Consultant will be expected to provide expense report for such out of pocket costs the Company has authorized to be reimbursed, except that meals and living accommodations shall be the Executive’s own responsibility while the Executive is working in the city of Beijing and in the San Francisco Bay Area.

 

The parties have executed this Statement of Work below to indicate their acceptance of its terms.

 

“CONSULTANT”   “COMPANY”
         
United Dash Holdings Limited   BORQS Hong Kong Ltd
         
By: /s/ Anthony Chan   By: /s/ Pat Chan
Print Name: Anthony Chan   Print Name: Pat Chan
Title: President   Title: CEO

 

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EXHIBIT B

 

Wire Transfer

 

Bank Account information of consultant : UNITED DASH HOLDINGS LIMITED

 

Bank Name : Hong Kong and Shanghai Banking Corporation (HSBC)

 

Bank Address : No.1 Queen’s Road Central, Hong Kong

 

Account Name : UNITED DASH HOLDINGS LIMITED

 

Account No : 500 709738 838

 

Bank Swift : HSBCHKHHHKH

 

 

  

 

 

 

 

 

 

 

I confirm the above bank information that I have provided is correct.

 

/s/ Anthony Chan  
Consultant ANTHONY CHAN  

 

 

 

 

Exhibit 10.10

 

BORQS TECHNOLOGIES, INC.

 

2017 EQUITY INCENTIVE PLAN

 

1.  PURPOSE . The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, and any Parents, Subsidiaries and Affiliates that exist now or in the future, by offering them an opportunity to participate in the Company’s future performance through the grant of Awards. Capitalized terms not defined elsewhere in the Plan are defined in Section 28.

 

2.  SHARES SUBJECT TO THE PLAN .

 

2.1  Number of Shares Available . Subject to Sections 2.6 and 21 and any other applicable provisions hereof, the maximum aggregate number of Shares reserved and available for grant and issuance pursuant to this Plan as of the date of adoption of the Plan by the Board, is 2,500,000 Shares.

 

2.2  Lapsed, Returned Awards . Shares subject to Awards, and Shares issued under the Plan under any Award, will again be available for grant and issuance in connection with subsequent Awards under this Plan to the extent such Shares: (a) are subject to issuance upon exercise of an Option or SAR granted under this Plan but which cease to be subject to the Option or SAR for any reason other than exercise of the Option or SAR; (b) are subject to Awards granted under this Plan that are forfeited or are repurchased by the Company; (c) are subject to Awards granted under this Plan that otherwise terminate without such Shares being issued; or (d) are surrendered pursuant to an Exchange Program. To the extent an Award under the Plan is paid out in cash or other property rather than Shares, such cash payment will not result in reducing the number of Shares available for issuance under the Plan. Unissued Shares used to pay the exercise price of an Award or withheld to satisfy the tax withholding obligations related to an Award will become available for future grant or sale under the Plan. For the avoidance of doubt, Shares that otherwise become available for grant and issuance because of the provisions of this Section 2.2 shall not include Shares subject to Awards that initially became available because of the substitution clause in Section 21.2 hereof.

 

2.3  Minimum Share Reserve . At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Awards granted under this Plan.

 

2.4  Automatic Share Reserve Increase . The number of Shares available for grant and issuance under the Plan shall be increased on January 1, of each of the calendar years 2018 through 2027, by the lesser of (a) five percent (5%) of the number of Shares issued and outstanding on each December 31 immediately prior to the date of increase or (b) such number of Shares determined by the Board.

 

2.5  Limitations . No more than 5,000,000 Shares shall be issued pursuant to the exercise of ISOs. No Participant will be eligible to receive an Award or Awards for more than 2,000,000 Shares in any calendar year under this Plan except that new Employees (including new Employees who are also officers and directors) are eligible to be granted up to a maximum of an Award or Awards for 4,000,000 Shares in the calendar year in which they commence their employment.

 

 

 

 

2.6  Adjustment of Shares . If the number of outstanding Shares is changed by a share dividend, recapitalization, share split, reverse share split, subdivision, combination, reclassification or similar change in the capital structure of the Company, without consideration, then (a) the number of Shares reserved for issuance and future grant under the Plan set forth in Section 2.1, (b) the Exercise Prices of and number of Shares subject to outstanding Options and SARs, (c) the number of Shares subject to other outstanding Awards, (d) the maximum number of Shares that may be issued pursuant to the exercise of ISOs set forth in Section 2.5 and (e) the maximum number of Shares that may be issued to an individual or to a new Employee in any one calendar year set forth in Section 2.5 shall be proportionately adjusted, subject to any required action by the Board or the shareholders of the Company and in compliance with applicable securities laws; provided that fractions of a Share will not be issued.

 

3.  ELIGIBILITY . ISOs may be granted only to Employees. All other Awards may be granted to Employees, Consultants and Directors; provided that such Consultants and Directors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction.

 

4.  ADMINISTRATION .

 

4.1  Committee Composition; Authority . This Plan will be administered by the Committee or by the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. The Committee will have the authority to:

 

(a)  construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan;

 

(b)  prescribe, amend and rescind rules and regulations relating to this Plan or any Award;

 

(c)  select persons to receive Awards;

 

(d)  determine the form and terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Awards may vest and be exercised (which may be based on performance criteria) or settled, any vesting acceleration or waiver of forfeiture restrictions, the method to satisfy tax withholding obligations or any other tax liability legally due and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Committee will determine;

 

(e)  determine the number of Shares or other consideration subject to Awards;

 

(f)  determine the Fair Market Value in good faith and interpret the applicable provisions of this Plan and the definition of Fair Market Value in connection with circumstances that impact the Fair Market Value, if necessary;

 

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(g)  determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent, Subsidiary, Related Entity or Affiliate;

 

(h)  grant waivers of Plan or Award conditions;

 

(i)  determine the vesting, exercisability and payment of Awards;

 

(j)  correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement;

 

(k)  determine whether an Award has been earned;

 

(l)  determine the terms and conditions of any, and to institute any Exchange Program;

 

(m)  reduce or waive any criteria with respect to Performance Factors;

 

(n)  adjust Performance Factors to take into account changes in law and accounting or tax rules as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships;

 

(o)  adopt rules and/or procedures (including the adoption of any subplan under this Plan) relating to the operation and administration of the Plan to accommodate requirements of local law and procedures outside of the United States;

 

(p)  make all other determinations necessary or advisable for the administration of this Plan;

 

(q)  delegate any of the foregoing to a subcommittee consisting of one or more executive officers pursuant to a specific delegation as permitted by Applicable Law; and

 

(r)  exercise negative discretion on Performance Awards, reducing or eliminating the amount to be paid to Participants.

 

4.2  Committee Interpretation and Discretion . Any determination made by the Committee with respect to any Award shall be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of the Plan or Award, at any later time, and such determination shall be final and binding on the Company and all persons having an interest in any Award under the Plan. Any dispute regarding the interpretation of the Plan or any Award Agreement shall be submitted by the Participant or Company to the Committee for review. The resolution of such a dispute by the Committee shall be final and binding on the Company and the Participant. The Committee may delegate to one or more executive officers the authority to review and resolve disputes with respect to Awards held by Participants who are not Insiders, and such resolution shall be final and binding on the Company and the Participant.

 

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4.3  Section 162(m) of the Code and Section 16 of the Exchange Act . When necessary or desirable for an Award to qualify as “performance-based compensation” under Section 162(m) of the Code, the Committee administering the Plan in accordance with the requirements of Rule 16b-3 and Section 162(m) of the Code shall consist of at least two individuals, each of whom qualifies as (a) a Non-Employee Director under Rule 16b-3, and (b) an “outside director” pursuant to Code Section 162(m) and the regulations issued thereunder. At least two (or a majority if more than two then serve on the Committee) such “outside directors” shall approve the grant of such Award and timely determine (as applicable) the Performance Period and any Performance Factors upon which vesting or settlement of any portion of such Award is to be subject. When required by Section 162(m) of the Code, prior to settlement of any such Award at least two (or a majority if more than two then serve on the Committee) such “outside directors” then serving on the Committee shall determine and certify in writing the extent to which such Performance Factors have been timely achieved and the extent to which the Shares subject to such Award have thereby been earned. Awards granted to Participants who are subject to Section 16 of the Exchange Act (to the extent applicable to the Company) must be approved by two or more “non-employee directors” (as defined in the regulations promulgated under Section 16 of the Exchange Act). With respect to Participants whose compensation is subject to Section 162(m) of the Code and for whom the Company intends to seek a tax deduction with respect thereto, and provided that such adjustments are consistent with the regulations promulgated under Section 162(m) of the Code, the Committee may adjust the performance goals to account for changes in law and accounting and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships, including without limitation (a) restructurings, discontinued operations, extraordinary items, and other unusual or non-recurring charges, (b) an event either not directly related to the operations of the Company or not within the reasonable control of the Company’s management, or (c) a change in accounting standards required by generally accepted accounting principles.

 

4.4  Documentation . The Award Agreement for a given Award, the Plan and any other documents may be delivered to, and accepted by, a Participant or any other person in any manner (including electronic distribution or posting) that meets applicable legal requirements.

 

4.5  Jurisdictions . Notwithstanding any provision of the Plan to the contrary, in order to comply with the laws in countries in which the Company and its Subsidiaries, Related Entities and Affiliates operate or have employees or other individuals eligible for Awards, the Committee, in its sole discretion, shall have the power and authority to: (a) determine which Subsidiaries, Related Entities and Affiliates shall be covered by the Plan; (b) determine which individuals are eligible to participate in the Plan; (c) modify the terms and conditions of any Award granted to individuals to comply with Applicable Laws; (d) establish subplans and modify exercise procedures and other terms and procedures, to the extent the Committee determines such actions to be necessary or advisable (and such subplans and/or modifications shall be attached to this Plan as appendices); provided, however, that no such subplans and/or modifications shall increase the share limitations contained in Section 2 hereof; and (e) take any action, before or after an Award is made, that the Committee determines to be necessary or advisable to obtain approval or comply with any local governmental regulatory exemptions or approvals. Notwithstanding the foregoing, the Committee may not take any actions hereunder, and no Awards shall be granted, that would violate the Exchange Act or any other applicable securities law, the Code, or any other applicable governing statute or law.

 

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5.  OPTIONS . An Option is the right but not the obligation to purchase a Share, subject to certain conditions, if applicable. The Committee may grant Options to eligible Employees, Consultants and Directors and will determine whether such Options will be incentive stock options within the meaning of the Code (“ ISOs ”) or Nonqualified Share options (“ NSOs ”), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may vest and be exercised, and all other terms and conditions of the Option, subject to the following terms of this section.

 

5.1  Option Grant . Each Option granted under this Plan will identify the Option as an ISO or an NSO. An Option may be, but need not be, awarded upon satisfaction of such Performance Factors during any Performance Period as are set out in advance in the Participant’s individual Award Agreement. If the Option is being earned upon the satisfaction of Performance Factors, then the Committee will: (a) determine the nature, length and starting date of any Performance Period for each Option; and (b) select from among the Performance Factors to be used to measure the performance, if any. Performance Periods may overlap and Participants may participate simultaneously with respect to Options that are subject to different performance goals and other criteria.

 

5.2  Date of Grant . The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, or a specified future date.

 

5.3  Exercise Period . Options may be vested and exercisable within the times or upon the conditions as set forth in the Award Agreement governing such Option; provided , however , that no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; provided , further , that no ISO granted to a person who, at the time the ISO is granted, directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of shares of the Company or of any Parent or Subsidiary (“ Ten Percent Shareholder ”) will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines.

 

5.4  Exercise Price . The Exercise Price per Share subject to an Option will be determined by the Committee when the Option is granted and set forth in the Award Agreement and may be a fixed or variable price related to the Fair Market Value of the Shares; provided that the Exercise Price of any ISO granted to a Ten Percent Shareholder will not be less than one hundred ten percent (110%) of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 11 and the Award Agreement and in accordance with any procedures established by the Company. The exercise price per Share subject to an Option may be amended or adjusted in the absolute discretion of the Committee, the determination of which shall be final, binding and conclusive. For the avoidance of doubt, to the extent not prohibited by Applicable Laws, a downward adjustment of the exercise prices of Options mentioned in the preceding sentence shall be effective without the approval of the Company’s shareholders or the approval of the affected Participants.

 

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5.5  Method of Exercise . Any Option granted hereunder will be vested and exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Committee and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share. An Option will be deemed exercised when the Company receives: (a) notice of exercise (in such form as the Committee may specify from time to time) from the person entitled to exercise the Option, and (b) full payment for the Shares with respect to which the Option is exercised (together with applicable withholding taxes). Full payment may consist of any consideration and method of payment authorized by the Committee and permitted by the Award Agreement and the Plan. Shares issued upon exercise of an Option will be issued in the name of the Participant. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder will exist with respect to the Shares, notwithstanding the exercise of the Option. The Company will issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 2.6 of the Plan. Exercising an Option in any manner will decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

 

5.6  Termination of Service . If the Participant’s Service terminates for any reason except for Cause or the Participant’s death or Disability, then the Participant may exercise such Participant’s Options only to the extent that such Options would have been exercisable by the Participant on the date Participant’s Service terminates no later than three (3) months after the date Participant’s Service terminates (or such shorter or longer time period as may be determined by the Committee, with any exercise beyond three (3) months after the date Participant’s Service terminates deemed to be the exercise of an NSO), but in any event no later than the expiration date of the Options.

 

(a)  Death . If the Participant’s Service terminates because of the Participant’s death (or the Participant dies within three (3) months after the Participant’s Service terminates other than for Cause or because of the Participant’s Disability), then the Participant’s Options may be exercised only to the extent that such Options would have been exercisable by the Participant on the date Participant’s Service terminates, and must be exercised by the Participant’s legal representative or authorized assignee, no later than twelve (12) months after the date the Participant’s Service terminates (or such shorter time period not less than six (6) months or longer time period as may be determined by the Committee), but in any event no later than the expiration date of the Options.

 

(b)  Disability . If the Participant’s Service terminates because of the Participant’s Disability, then the Participant’s Options may be exercised only to the extent that such Options would have been exercisable by the Participant on the date Participant’s Service terminates and must be exercised by the Participant (or the Participant’s legal representative or authorized assignee) no later than twelve (12) months after the date the Participant’s Service terminates, but in any event no later than the expiration date of the Options.

 

(c)  Cause . If the Participant is terminated for Cause, then the Participant’s Options shall expire on such Participant’s date of termination of Service, or at such later time and on such conditions as are determined by the Committee, but in no event later than the expiration date of the Options. Unless otherwise provided in the Award Agreement, Cause shall have the meaning set forth in the Plan.

 

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5.7  Limitations on Exercise . The Committee may specify a minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent any Participant from exercising the Option for the full number of Shares for which it is then exercisable.

 

5.8  Limitations on ISOs . ISOs may only be granted to employees of the Company or to employees of a “parent corporation” or a “subsidiary corporation” of the Company as those terms are defined in Section 424 of the Code. With respect to Awards granted as ISOs, to the extent that the aggregate Fair Market Value of the Shares with respect to which such ISOs are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds one hundred thousand dollars (US$100,000), such Options will be treated as NSOs. For purposes of this Section 5.8, ISOs will be taken into account in the order in which they were granted. The Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is granted. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment.

 

5.9  Modification, Extension or Renewal . The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant’s rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. Subject to Section 18 of this Plan, by written notice to affected Participants, the Committee may reduce the Exercise Price of outstanding Options without the consent of such Participants; provided , however , that the Exercise Price may not be reduced below the Fair Market Value of the Shares on the date the action is taken to reduce the Exercise Price.

 

5.10  No Disqualification . Notwithstanding any other provision in this Plan, no term of this Plan relating to ISOs will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code.

 

6.  RESTRICTED SHARE AWARDS . A Restricted Share Award is an offer by the Company to sell to an eligible Employee, Consultant or Director Shares that are subject to restrictions (“ Restricted Share ”). The Committee will determine to whom an offer will be made, the number of Shares the Participant may purchase, the Purchase Price, the restrictions under which the Shares will be subject and all other terms and conditions of the Restricted Share Award, subject to the Plan.

 

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6.1  Restricted Share Purchase Agreement . All purchases under a Restricted Share Award will be evidenced by an Award Agreement. Except as may otherwise be provided in an Award Agreement, a Participant accepts a Restricted Share Award by signing and delivering to the Company an Award Agreement with full payment of the Purchase Price, within thirty (30) days from the date the Award Agreement was delivered to the Participant. If the Participant does not accept such Award within thirty (30) days, then the offer of such Restricted Share Award will terminate, unless the Committee determines otherwise.

 

6.2  Purchase Price . The Purchase Price for a Restricted Share Award will be determined by the Committee and may be less than Fair Market Value of a Share on the date the Restricted Share Award is granted. Payment of the Purchase Price must be made in accordance with Section 11 of the Plan, and the Award Agreement and in accordance with any procedures established by the Company.

 

6.3  Terms of Restricted Share Awards . Restricted Share Awards will be subject to such restrictions as the Committee may impose or are required by law. These restrictions may be based on completion of a specified number of years of service with the Company or upon completion of Performance Factors, if any, during any Performance Period as set out in advance in the Participant’s Award Agreement. Prior to the grant of a Restricted Share Award, the Committee shall: (a) determine the nature, length and starting date of any Performance Period for the Restricted Share Award; (b) select from among the Performance Factors to be used to measure performance goals, if any; and (c) determine the number of Shares that may be awarded to the Participant. Performance Periods may overlap and a Participant may participate simultaneously with respect to Restricted Share Awards that are subject to different Performance Periods and having different performance goals and other criteria.

 

6.4  Termination of Service . Except as may be set forth in the Participant’s Award Agreement, vesting ceases on such date Participant’s Service terminates (unless determined otherwise by the Committee).

 

7.  SHARE BONUS AWARDS . A Share Bonus Award is an Award to an eligible Employee, Consultant or Director of Shares for Services to be rendered or for past Services already rendered to the Company or any Parent, Subsidiary, Related Entity or Affiliate. All Share Bonus Awards shall be made pursuant to an Award Agreement. No payment from the Participant will be required for Shares awarded pursuant to a Share Bonus Award.

 

7.1  Terms of Share Bonus Awards . The Committee will determine the number of Shares to be awarded to the Participant under a Share Bonus Award and any restrictions thereon. These restrictions may be based upon completion of a specified number of years of service with the Company or upon satisfaction of performance goals based on Performance Factors during any Performance Period as set out in advance in the Participant’s Share Bonus Agreement. Prior to the grant of any Share Bonus Award, the Committee shall: (a) determine the nature, length and starting date of any Performance Period for the Share Bonus Award; (b) select from among the Performance Factors to be used to measure performance goals; and (c) determine the number of Shares that may be awarded to the Participant. Performance Periods may overlap and a Participant may participate simultaneously with respect to Share Bonus Awards that are subject to different Performance Periods and different performance goals and other criteria.

 

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7.2  Form of Payment to Participant . Payment may be made in the form of cash, whole Shares, or a combination thereof, based on the Fair Market Value of the Shares earned under a Share Bonus Award on the date of payment, as determined in the sole discretion of the Committee.

 

7.3  Termination of Service . Except as may be set forth in the Participant’s Award Agreement, vesting ceases on such date Participant’s Service terminates (unless determined otherwise by the Committee).

 

8.  SHARE APPRECIATION RIGHTS . A Share Appreciation Right (“ SAR ”) is an Award to an eligible Employee, Consultant or Director that may be settled in cash or Shares (which may consist of Restricted Share), having a value equal to (a) the difference between the Fair Market Value of a Share on the date of exercise over the Exercise Price multiplied by (b) the number of Shares with respect to which the SAR is being settled (subject to any maximum number of Shares that may be issuable as specified in an Award Agreement). All SARs shall be made pursuant to an Award Agreement.

 

8.1  Terms of SARs . The Committee will determine the terms of each SAR including, without limitation: (a) the number of Shares subject to the SAR; (b) the Exercise Price and the time or times during which the SAR may be settled; (c) the consideration to be distributed on settlement of the SAR; and (d) the effect of the Participant’s termination of Service on each SAR. The Exercise Price of the SAR will be determined by the Committee when the SAR is granted, and may not be less than Fair Market Value of a Share. A SAR may be awarded upon satisfaction of Performance Factors, if any, during any Performance Period as are set out in advance in the Participant’s individual Award Agreement. If the SAR is being earned upon the satisfaction of Performance Factors, then the Committee will: (x) determine the nature, length and starting date of any Performance Period for each SAR; and (y) select from among the Performance Factors to be used to measure the performance, if any. Performance Periods may overlap and Participants may participate simultaneously with respect to SARs that are subject to different Performance Factors and other criteria.

 

8.2  Exercise Period and Expiration Date . A SAR will be exercisable within the times or upon the occurrence of events determined by the Committee and set forth in the Award Agreement governing such SAR. The SAR Agreement shall set forth the expiration date; provided that no SAR will be exercisable after the expiration of ten (10) years from the date the SAR is granted. The Committee may also provide for SARs to become exercisable at one time or from time to time, periodically or otherwise (including, without limitation, upon the attainment during a Performance Period of performance goals based on Performance Factors), in such number of Shares or percentage of the Shares subject to the SAR as the Committee determines. Notwithstanding the foregoing, the rules of Section 5.6 also will apply to SARs.

 

8.3  Form of Settlement . Upon exercise of a SAR, a Participant will be entitled to receive payment from the Company in an amount determined by multiplying (a) the difference between the Fair Market Value of a Share on the date of exercise over the Exercise Price; times (b) the number of Shares with respect to which the SAR is exercised. At the discretion of the Committee, the payment from the Company for the SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof. The portion of a SAR being settled may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee determines, provided that the terms of the SAR and any deferral satisfy the requirements of Section 409A of the Code, to the extent a Participant is subject to Section 409A of the Code.

 

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8.4  Termination of Service . Except as may be set forth in the Participant’s Award Agreement, vesting ceases on such date Participant’s Service terminates (unless determined otherwise by the Committee).

 

9.  RESTRICTED SHARE UNITS . A Restricted Share Unit (“ RSU ”) is an Award to an eligible Employee, Consultant or Director covering a number of Shares that may be settled in cash, or by issuance of those Shares (which may consist of Restricted Share). All RSUs shall be made pursuant to an Award Agreement.

 

9.1  Terms of RSUs . The Committee will determine the terms of an RSU including, without limitation: (a) the number of Shares subject to the RSU; (b) the time or times during which the RSU may be settled; (c) the consideration to be distributed on settlement; and (d) the effect of the Participant’s termination of Service on each RSU; provided that no RSU shall have a term longer than ten (10) years. An RSU may be awarded upon satisfaction of such performance goals based on Performance Factors during any Performance Period as are set out in advance in the Participant’s Award Agreement. If the RSU is being earned upon satisfaction of Performance Factors, then the Committee will: (x) determine the nature, length and starting date of any Performance Period for the RSU; (y) select from among the Performance Factors to be used to measure the performance, if any; and (z) determine the number of Shares deemed subject to the RSU. Performance Periods may overlap and participants may participate simultaneously with respect to RSUs that are subject to different Performance Periods and different performance goals and other criteria.

 

9.2  Form and Timing of Settlement . Payment of earned RSUs shall be made as soon as practicable after the date(s) determined by the Committee and set forth in the Award Agreement. The Committee, in its sole discretion, may settle earned RSUs in cash, Shares, or a combination of both. The Committee may also permit a Participant to defer payment under a RSU to a date or dates after the RSU is earned, provided that, to the extent a Participant is subject to Section 409A of the Code, the terms of the RSU and any deferral shall satisfy the requirements of Section 409A of the Code.

 

9.3  Termination of Service . Except as may be set forth in the Participant’s Award Agreement, vesting ceases on such date Participant’s Service terminates (unless determined otherwise by the Committee).

 

10.  PERFORMANCE AWARDS . A Performance Award is an Award to an eligible Employee, Consultant or Director of an award of Performance Shares or Performance Units. Grants of Performance Awards shall be made pursuant to an Award Agreement.

 

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10.1  Types of Performance Awards . Performance Awards shall include Performance Shares and Performance Units as set forth in Sections 10.1(a) and 10.1(b) below.

 

(a)  Performance Shares . The Committee may grant Awards of Performance Shares, designate the Participants to whom Performance Shares are to be awarded and determine the number of Performance Shares and the terms and conditions of each such Award. .

 

(b)  Performance Units . The Committee may grant Awards of Performance Units, designate the Participants to whom Performance Units are to be awarded and determine the number of Performance Units and the terms and conditions of each such Award.

 

10.2  Terms of Performance Awards . The Committee will determine, and each Award Agreement shall set forth, the terms of each Performance Award including, without limitation: (a) the number of Shares deemed subject to an award of Performance Shares; (b) the Performance Factors and Performance Period that shall determine the time and extent to which each award of Performance Shares shall be settled; (c) the consideration to be distributed on settlement; and (d) the effect of the Participant’s termination of Service on each Performance Award. In establishing Performance Factors and the Performance Period the Committee will: (x) determine the nature, length and starting date of any Performance Period; (y) select from among the Performance Factors to be used; and (z) determine the number of Shares deemed subject to the award of Performance Shares. Prior to settlement the Committee shall determine the extent to which Performance Awards have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Performance Awards that are subject to different Performance Periods and different performance goals and other criteria.

 

10.3  Termination of Service . Except as may be set forth in the Participant’s Award Agreement, vesting ceases on the date Participant’s Service terminates (unless determined otherwise by the Committee).

 

11.  PAYMENT FOR SHARE PURCHASES . Payment from a Participant for Shares purchased pursuant to this Plan may be made in cash or by check or, where approved for the Participant by the Committee and where permitted by law (and to the extent not otherwise set forth in the applicable Award Agreement):

 

(a)  by cancellation of indebtedness of the Company to the Participant;

 

(b)  by surrender of Shares by the Participant that have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Award will be exercised or settled;

 

(c)  by waiver of compensation due or accrued to the Participant for services rendered or to be rendered to the Company or a Parent or Subsidiary;

 

(d)  by consideration received by the Company pursuant to a broker-assisted or other form of cashless exercise program implemented by the Company in connection with the Plan;

 

(e)  by any combination of the foregoing; or

 

(f)  by any other method of payment as is permitted by Applicable Law.

 

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For avoidance of doubt, cash or check payment by a Participant for Shares may include (i) cash or check denominated in U.S. Dollars, (ii) to the extent permissible under Applicable Laws, cash or check denominated in Chinese Renminbi, or (iii) cash or check denominated in any other local currency as approved by the Committee. In the event the exercise price for an Award is paid in Renminbi or other foreign currency, as permitted by the Committee, the amount payable will be determined by conversion from U.S. dollars at the official rate promulgated by the People’s Bank of China for Renminbi, or for any other foreign currency, the exchange rate as selected by the Committee on the date of exercise.

 

Notwithstanding any other provision of the Plan to the contrary, no Participant who is a member of the Board or an “executive officer” of the Company within the meaning of Section 13(k) of the Exchange Act shall be permitted to pay the exercise price in any method that would violate Section 13(k) of the Exchange Act.

 

12.  SHARES DISTRIBUTED . Any Shares distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares, treasury shares (subject to Applicable Laws) or Shares purchased on the open market.

 

13.  WITHHOLDING TAXES .

 

13.1  Withholding Generally . Whenever Shares are to be issued in satisfaction of Awards granted under this Plan or a tax event occurs, the Company may require the Participant to remit to the Company, or to the Parent, applicable Subsidiary or Related Entity or Affiliate employing the Participant, an amount sufficient to satisfy applicable U.S. federal, state, local and international withholding tax or social insurance requirements or any other tax liability legally due from the Participant prior to the delivery of Shares pursuant to exercise or settlement of any Award. Whenever payments in satisfaction of Awards granted under this Plan are to be made in cash, such payment will be net of an amount sufficient to satisfy applicable U.S. federal, state, local and international withholding tax or social insurance requirements or any other tax liability legally due from the Participant. The Fair Market Value of the Shares will be determined as of the date that the taxes are required to be withheld and such Shares shall be valued based on the value of the actual trade of Shares, or, if the foregoing does not apply, the Fair Market Value of the Shares as of the previous trading day.

 

13.2  Share Withholding . The Committee, or its delegate(s), as permitted by Applicable Law, in its sole discretion and pursuant to such procedures as it may specify from time to time and to limitations of local law, may require or permit a Participant to satisfy such tax withholding obligation or any other tax liability legally due from the Participant, in whole or in part by (without limitation) (a) paying cash, electing to have the Company withhold otherwise deliverable cash, or Shares having a Fair Market Value equal to the applicable amount required to be withheld, (c) delivering to the Company already-owned Shares or (d) withholding from the proceeds of the sale of otherwise deliverable Shares acquired pursuant to an Award either through a voluntary sale or through a mandatory sale arranged by the Company for the applicable amount required to be withheld.

 

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14.  TRANSFERABILITY .

 

14.1  Transfer Generally . Unless determined otherwise by the Committee or pursuant to Section 14.2, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution. If the Committee makes an Award transferable, including, without limitation, by instrument to an inter vivos or testamentary trust in which the Awards are to be passed to beneficiaries upon the death of the trustor (settlor) or by gift or by domestic relations order to a Permitted Transferee, such Award will contain such additional terms and conditions as the Committee deems appropriate. All Awards shall be exercisable: (a) during the Participant’s lifetime only by (i) the Participant, or (ii) the Participant’s guardian or legal representative; (b) after the Participant’s death, by the legal representative of the Participant’s heirs or legatees; and (c) in the case of all Awards except ISOs, by a Permitted Transferee.

 

14.2  Award Transfer Program . Notwithstanding any contrary provision of the Plan, the Committee shall have all discretion and authority to determine and implement the terms and conditions of any Award Transfer Program instituted pursuant to this Section 14.2 and shall have the authority to amend the terms of any Award participating in, or otherwise eligible to participate in, the Award Transfer Program, including (but not limited to) the authority to (a) amend (including to extend) the expiration date, post-termination exercise period and/or forfeiture conditions of any such Award, (b) amend or remove any provisions of the Award relating to the Award holder’s continued service to the Company or its Parent, Subsidiary, Related Entity or Affiliate, (c) amend the permissible payment methods with respect to the exercise or purchase of any such Award, (d) amend the adjustments to be implemented in the event of changes in the capitalization and other similar events with respect to such Award, and (e) make such other changes to the terms of such Award as the Committee deems necessary or appropriate in its sole discretion.

 

15.  PRIVILEGES OF SHARE OWNERSHIP; RESTRICTIONS ON SHARES .

 

15.1  Voting and Dividends . No Participant will have any of the rights of a shareholder with respect to any Shares until the Shares are issued to the Participant, except for any dividend equivalent rights permitted by an applicable Award Agreement (“ Dividend Equivalent Rights ”). After Shares are issued to the Participant, the Participant will be a shareholder and have all the rights of a shareholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided that if such Shares are Restricted Shares, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a share dividend, share split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Shares; provided , further , that the Participant will have no right to retain such share dividends or share distributions with respect to Shares that are repurchased pursuant to Section 15.2. However, the Committee, in its discretion, may provide in the Award Agreement evidencing any Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Shares underlying an Award during the period beginning on the date the Award is granted and ending, with respect to each Share subject to the Award, on the earlier of the date on which the Award is exercised or settled or the date on which it is forfeited. Such Dividend Equivalent Rights, if any, shall be credited to the Participant in the form of additional whole Shares as of the date of payment of such cash dividends on Shares.

 

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15.2  Restrictions on Shares . At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) a right to repurchase any or all Unvested Shares (other than Unvested Shares that forfeit on termination of Service) held by a Participant following such Participant’s termination of Service at any time within ninety (90) days (or such longer or shorter time determined by the Committee) after the later of the date the Participant’s Service terminates and the date the Participant purchases Shares under this Plan, for cash and/or cancellation of purchase money indebtedness, at the Participant’s Purchase Price.

 

16.  CERTIFICATES . All Shares or other securities whether or not certificated, delivered under this Plan will be subject to such share transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable U.S. federal, state or other securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted and any non-U.S. exchange controls or securities law restrictions to which the Shares are subject.

 

17.  ESCROW; PLEDGE OF SHARES . To enforce any restrictions on a Participant’s Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with share powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of the Participant’s obligation to the Company under the promissory note; provided , however , that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant’s Shares or other collateral. In connection with any pledge of the Shares, the Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid.

 

18.  REPRICING; EXCHANGE AND BUYOUT OF AWARDS . Without prior shareholder approval, the Committee may (a) reprice Options or SARs (and where such repricing is a reduction in the Exercise Price of outstanding Options or SARs, the consent of the affected Participants is not required provided written notice is provided to them, notwithstanding any adverse tax consequences to them arising from the repricing), and (b) with the consent of the respective Participants (unless not required pursuant to Section 5.9 of the Plan), pay cash or issue new Awards in exchange for the surrender and cancellation of any, or all, outstanding Awards.

 

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19.  SECURITIES LAW AND OTHER REGULATORY COMPLIANCE . An Award will not be effective unless such Award is in compliance with all applicable U.S. federal and state securities and exchange control laws, all Applicable Laws of any other country or jurisdiction, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any Applicable Law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any applicable securities laws, exchange control laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so.

 

20.  NO OBLIGATION TO EMPLOY . Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employment of, or to continue any other relationship with, the Company or any Parent, Subsidiary, Related Entity or Affiliate or limit in any way the right of the Company or any Parent, Subsidiary, Related Entity or Affiliate to terminate Participant’s employment or other relationship at any time.

 

21.  CORPORATE TRANSACTIONS .

 

21.1  Assumption or Replacement of Awards by Successor . In the event that the Company is subject to a Corporate Transaction, outstanding Awards acquired under the Plan shall be subject to the agreement evidencing the Corporate Transaction, which need not treat all outstanding Awards in an identical manner. Such agreement, without the Participant’s consent, shall provide for one or more of the following with respect to all outstanding Awards as of the effective date of such Corporate Transaction:

 

(a)  The continuation of an outstanding Award by the Company (if the Company is the successor entity).

 

(b)  The assumption of an outstanding Award by the successor or acquiring entity (if any) of such Corporate Transaction (or by its parents, if any), which assumption will be binding on all selected Participants; provided that the exercise price and the number and nature of shares issuable upon exercise of any such Option or Share Appreciation Right, or any Award that is subject to Section 409A of the Code by a Participant who is subject to Section 409A, will be adjusted appropriately pursuant to Section 424(a) of the Code.

 

(c)  The substitution by the successor or acquiring entity in such Corporate Transaction (or by its parents, if any) of equivalent awards with substantially the same terms for such outstanding Awards (except that the exercise price and the number and nature of shares issuable upon exercise of any such Option or Share Appreciation Right, or any Award that is subject to Section 409A of the Code by a Participant who is subject to Section 409A, will be adjusted appropriately pursuant to Section 424(a) of the Code).

 

(d)  The full or partial acceleration of exercisability or vesting and accelerated expiration of an outstanding Award and lapse of the Company’s right to repurchase or re-acquire shares acquired under an Award or lapse of forfeiture rights with respect to shares acquired under an Award.

 

  15  

 

 

(e)  The settlement of the full value of such outstanding Award (whether or not then vested or exercisable) in cash, cash equivalents, or securities of the successor entity (or its parent, if any) with a Fair Market Value equal to the required amount, followed by the cancellation of such Awards; provided , however , that such Award may be cancelled if such Award has no value, as determined by the Committee, in its discretion. Subject to Section 409A of the Code, to the extent applicable, such payment may be made in installments and may be deferred until the date or dates the Award would have become exercisable or vested. Such payment may be subject to vesting based on the Participant’s continued service, provided that the vesting schedule shall not be less favorable to the Participant than the schedule under which the Award would have become vested or exercisable. For purposes of this Section 21.1(e), the Fair Market Value of any security shall be determined without regard to any vesting conditions that may apply to such security.

 

(f)  The cancellation of outstanding Awards in exchange for no consideration.

 

The Board shall have full power and authority to assign the Company’s right to repurchase or re-acquire or forfeiture rights to such successor or acquiring corporation. In addition, in the event such successor or acquiring corporation refuses to assume, convert, replace or substitute Awards, as provided above, pursuant to a Corporate Transaction, the Committee will notify the Participant in writing or electronically that such Award will be exercisable for a period of time determined by the Committee in its sole discretion, and such Award will terminate upon the expiration of such period. Awards need not be treated similarly in a Corporate Transaction.

 

21.2  Assumption of Awards by the Company . The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting an Award under this Plan in substitution of such other company’s award; or (b) assuming such Award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged ( except that the Purchase Price or the Exercise Price, as the case may be, and the number and nature of Shares issuable upon exercise or settlement of any such award will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option in substitution rather than assuming an existing Option, such new Option may be granted with a similarly adjusted Exercise Price. Substitute Awards shall not be credited toward the number of Shares authorized for grant under the Plan or authorized for grant to a Participant in a calendar year.

 

22.  ADOPTION AND SHAREHOLDER APPROVAL . This Plan shall be submitted for the approval of the Company’s shareholders, consistent with Applicable Laws, within twelve (12) months before or after the date this Plan is adopted by the Board.

 

23.  TERM OF PLAN/GOVERNING LAW . Unless earlier terminated as provided herein, this Plan will become effective on the Effective Date and will terminate ten (10) years from such date. This Plan and all Awards granted hereunder shall be governed by and construed in accordance with the laws of the British Virgin Islands (excluding its conflict of law rules).

 

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24.  AMENDMENT OR TERMINATION OF PLAN . The Board may at any time terminate or amend this Plan in any respect, including, without limitation, amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided , however , that to the extent necessary to comply with Applicable Laws, the Board will not, without the approval of the shareholders of the Company, amend this Plan in any manner that requires such shareholder approval; provided , further , that a Participant’s Award shall be governed by the version of this Plan then in effect at the time such Award was granted.

 

25.  NONEXCLUSIVITY OF THE PLAN . Neither the adoption of this Plan by the Board, the submission of this Plan to the shareholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of share Awards and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases.

 

26.  INSIDER TRADING POLICY . Each Participant who receives an Award shall comply with any policy adopted by the Company from time to time covering transactions in the Company’s securities by Employees, officers and/or Directors of the Company.

 

27.  ALL AWARDS SUBJECT TO COMPANY CLAWBACK OR RECOUPMENT POLICY . All Awards, subject to applicable law, shall be subject to clawback or recoupment pursuant to any compensation clawback or recoupment policy adopted by the Board or required by law during the term of Participant’s employment or other service with the Company that is applicable to executive officers, employees, directors or other service providers of the Company, and in addition to any other remedies available under such policy and applicable law, may require the cancellation of outstanding Awards and the recoupment of any gains realized with respect to Awards.

 

28.  DEFINITIONS . As used in this Plan, and except as elsewhere defined herein, the following terms will have the following meanings:

 

28.1  Affiliate ” means any person or entity that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Company, including any general partner, managing member, officer or Director of the Company, in each case as of the date on which, or at any time during the period for which, the determination of affiliation is being made. For purposes of this definition, the term “control” (including the correlative meanings of the terms “controlled by” and “under common control with”), as used with respect to any person or entity, means the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of such person or entity, whether through the ownership of voting securities or by contract or otherwise.

 

28.2  Applicable Laws ” means the requirements relating to the administration of equity-based awards under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Shares are listed or quoted, and the applicable laws of any other country or jurisdiction where Awards are, or will be, granted under the Plan.

 

  17  

 

 

28.3  Award ” means any award under the Plan, including any Option, Restricted Share Award, Share Bonus Award, Share Appreciation Right, Restricted Share Unit or Performance Award.

 

28.4  Award Agreement ” means, with respect to each Award, the written or electronic agreement between the Company and the Participant setting forth the terms and conditions of the Award, which shall be in substantially a form (which need not be the same for each Participant) that the Committee (or Board) has from time to time approved, and will comply with and be subject to the terms and conditions of this Plan.

 

28.5  Award Transfer Program ” means any program instituted by the Committee which would permit Participants the opportunity to transfer any outstanding Awards to a financial institution or other person or entity approved by the Committee.

 

28.6  Board ” means the board of Directors of the Company.

 

28.7  Cause ” means (a) Participant’s willful failure substantially to perform his or her duties and responsibilities to the Company or deliberate violation of a Company policy; (b) Participant’s commission of any act of fraud, embezzlement, dishonesty or any other willful misconduct that has caused or is reasonably expected to result in material injury to the Company; (c) unauthorized use or disclosure by Participant of any proprietary information or trade secrets of the Company or any other party to whom the Participant owes an obligation of nondisclosure as a result of his or her relationship with the Company; or (d) Participant’s willful breach of any of his or her obligations under any written agreement or covenant with the Company. The determination as to whether a Participant is being terminated for Cause shall be made in good faith by the Company and shall be final and binding on the Participant. The foregoing definition does not in any way limit the Company’s ability to terminate a Participant’s employment or consulting relationship at any time as provided in Section 20 above, and the term “Company” will be interpreted to include any Parent, Subsidiary, Related Entity or Affiliate, as appropriate. Notwithstanding the foregoing, the foregoing definition of “Cause” may, in part or in whole, be modified or replaced in each individual employment agreement or Award Agreement with any Participant, provided that such document supersedes the definition provided in this Section 28.7.

 

28.8  Code ” means the United States Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

 

28.9  Committee ” means the Compensation Committee of the Board or those persons to whom administration of the Plan, or part of the Plan, has been delegated as permitted by law.

 

28.10  Company ” means BORQS Technologies, Inc., or any successor company.

 

28.11  Consultant ” means any person, including an advisor or independent contractor, engaged by the Company or a Parent, Subsidiary, Related Entity or Affiliate to render bona fide services to such entity, provided that such rendered services are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for the Company’s securities.

 

  18  

 

 

28.12  Corporate Transaction ” means the occurrence of any of the following events: (a) any “Person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total voting power represented by the Company’s then-outstanding voting securities; provided , however , that for purposes of this subclause (a), the acquisition of additional securities by any one Person who is considered to own more than fifty percent (50%) of the total voting power of the securities of the Company will not be considered a Corporate Transaction; provided , further , that the following acquisitions shall not constitute a Corporate Transaction: (I) any acquisition by the Company or any Affiliate, (II) any acquisition by any employee benefit plan sponsored or maintained by the Company or any Affiliate, or (III) any acquisition pursuant to a merger or consolidation that would not otherwise constitute a Corporate Transaction by reason of the exception set forth in subclause (b) below; (b) the consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets; (c) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation; (d) any other transaction which qualifies as a “corporate transaction” under Section 424(a) of the Code wherein the shareholders of the Company give up all of their equity interest in the Company (except for the acquisition, sale or transfer of all or substantially all of the outstanding shares of the Company); or (e) a change in the effective control of the Company that occurs on the date that a majority of members of the Board is replaced during any twelve (12) month period by members of the Board whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election; provided , however , that for purpose of this subclause (e), if any Person is considered to be in effective control of the Company, the acquisition of additional control of the Company by the same Person will not be considered a Corporate Transaction. For purposes of this definition, Persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of shares, or similar business transaction with the Company. Notwithstanding the foregoing, to the extent that any amount constituting deferred compensation (as defined in Section 409A of the Code) would become payable under this Plan by reason of a Corporate Transaction, such amount shall become payable only if the event constituting a Corporate Transaction would also qualify as a change in ownership or effective control of the Company or a change in the ownership of a substantial portion of the assets of the Company, each as defined within the meaning of Code Section 409A, as it has been and may be amended from time to time, and any proposed or final Treasury Regulations and IRS guidance that has been promulgated or may be promulgated thereunder from time to time.

 

28.13  Director ” means a member of the Board.

 

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28.14  Disability ” means, unless otherwise required by Applicable Law or as may be expressly set forth in an applicable employment agreement, Award Agreement or other applicable contract with the Participant, (a) in the case of incentive stock options, total and permanent disability as defined in Section 22(e)(3) of the Code, or (b) in the case of other Awards, that the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months. A Participant will not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Committee in its discretion.

 

28.15  Effective Date ” means the date this Plan is approved by the Company’s shareholders, the date of which shall be within twelve (12) months before or after the date this Plan is adopted by the Board.

 

28.16  Employee ” means any person, including officers and Directors, employed by the Company or any Parent, Subsidiary, Related Entity or Affiliate. Neither service as a Director nor payment of a Director’s fee by the Company will be sufficient to constitute “employment” by the Company.

 

28.17  Exchange Act ” means the United States Securities Exchange Act of 1934, as amended.

 

28.18  Exchange Program ” means a program pursuant to which (a) outstanding Awards are surrendered, cancelled or exchanged for cash, the same type of Award or a different Award (or combination thereof), or (b) the exercise price of an outstanding Award is increased or reduced.

 

28.19  Exercise Price ” means, with respect to an Option, the price at which a holder may purchase the Shares issuable upon exercise of an Option and with respect to a SAR, the price at which the SAR is granted to the holder thereof.

 

28.20  Fair Market Value ” means, as of any date, the value of an Ordinary Share determined as follows:

 

(a)  if such Ordinary Share is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Ordinary Share is listed or admitted to trading as reported in The Wall Street Journal or such other source as the Committee deems reliable;

 

(b)  if such Ordinary Share is publicly traded but is neither listed nor admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal or such other source as the Committee deems reliable;

 

(c)  if none of the foregoing is applicable, by the Board or the Committee in good faith.

 

28.21  Insider ” means an officer or director of the Company or any other person whose transactions in the Company’s Ordinary Shares are subject to Section 16 of the Exchange Act.

 

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28.22  IRS ” means the United States Internal Revenue Service.

 

28.23  Option ” means an award of an option to purchase Shares pursuant to Section 5.

 

28.24  Ordinary Shares ” means the ordinary shares of the Company.

 

28.25  Parent ” means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns shares possessing fifty percent (50%) or more of the total combined voting power of all classes of shares in one of the other corporations in such chain.

 

28.26  Participant ” means a person who holds an Award under this Plan.

 

28.27  Performance Award ” means an award granted pursuant to Section 10 of the Plan.

 

28.28  Performance Factors ” means any of the factors selected by the Committee and specified in an Award Agreement, from among the following objective measures, either individually, alternatively or in any combination, applied to the Company as a whole or any business unit or Subsidiary, either individually, alternatively, or in any combination, on a GAAP or non-GAAP basis, and measured, to the extent applicable on an absolute basis or relative to a pre-established target, to determine whether the performance goals established by the Committee with respect to applicable Awards have been satisfied.

 

(a)  Backlog, Bookings, or Billings, or Book-to-Bill Ratio

 

(b)  Sales, Revenue, Net Sales, or Net Revenue

 

(c)  Profit Before Tax;

 

(d)  Earnings (which may include earnings before interest, taxes, depreciation and/or amortization, or such measures adjusted for the impact of stock-based compensation expenses or other items removed from the Company’s net earnings or adjusted EBITDA or similar measures in its periodic announcements of financial results, and any per share equivalent of any such measure);

 

(e)  Operating income;

 

(f)  Operating profit or loss;

 

(g)  Gross profit or gross margin;

 

(h)  Any one or more operating expenses as a percentage of revenue or otherwise;

 

(i)  Net income or loss;

 

(j)  Earnings or loss per share;

 

(k)  Total stockholder return;

 

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(l)  Market share;

 

(m)  Return on assets or return on net assets;

 

(n)  Public trading price of the Company’s stock;

 

(o)  Change in stockholder value relative to a pre-determined index;

 

(p)  Return on equity or Return on invested capital;

 

(q)  Cash Flow (including free cash flow or operating cash flows)

 

(r)  Balance of cash, cash equivalents and marketable securities;

 

(s)  Cash conversion cycle;

 

(t)  Economic value added;

 

(u)  Individual business objectives, which may be confidential;

 

(v)  Contract awards;

 

(w)  Expense reduction;

 

(x)  Credit rating;

 

(y)  Completion of specifically identified projects, joint venture or other corporate transaction;

 

(z)  Development and implementation of a strategic plan, diversity plan or succession plan;

 

(aa)  Employee satisfaction;

 

(bb)  Employee retention;

 

(cc)  Customer satisfaction;

 

(dd)  New product invention or innovation;

 

(ee)  Attainment of research and development milestones;

 

(ff)  Improvements in productivity;

 

(gg)  Achievement of working-capital targets and changes in working capital; and

 

(hh)  Attainment of objective operating goals and employee metrics.

 

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The Committee may, in recognition of unusual or non-recurring items such as acquisition-related activities or changes in applicable accounting rules, provide for one or more equitable adjustments (based on objective standards) to the Performance Factors to preserve the Committee’s original intent regarding the Performance Factors at the time of the initial award grant. It is within the sole discretion of the Committee to make or not make any such equitable adjustments.

 

28.29  Performance Period ” means one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Factors will be measured for the purpose of determining a Participant’s right to, and the payment of, a Performance Award.

 

28.30  Performance Share ” means an Award granted pursuant to Section 10 of the Plan, the payment of which is contingent upon achieving certain performance goals established by the Committee.

 

28.31  Performance Unit ” means a right granted to a Participant pursuant to Section 10 to receive a designated amount of property other than Shares, the payment of which is contingent upon achieving certain performance goals established by the Committee.

 

28.32  Permitted Transferee ” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law (including adoptive relationships) of the Employee, any person sharing the Employee’s household (other than a tenant or employee), a trust in which these persons (or the Employee) have more than 50% of the beneficial interest, a foundation in which these persons (or the Employee) control the management of assets, and any other entity in which these persons (or the Employee) own more than 50% of the voting interests.

 

28.33  Plan ” means this BORQS Technologies, Inc. 2017 Equity Incentive Plan.

 

28.34  Purchase Price ” means the price to be paid for Shares acquired under the Plan, other than Shares acquired upon exercise of an Option or SAR.

 

28.35  Related Entity ” means any person or entity (including any subsidiary thereof) in or of which the Company or a Subsidiary holds a substantial economic interest, or possesses the power to direct or cause the direction of the management policies, directly or indirectly, through the ownership of voting securities, by contract, or other arrangements as trustee, executor or otherwise, but which, for purposes of the Plan, is not a Subsidiary and which the Board designates as a Related Entity in a matter consistent with Applicable Law, including without limitation any Variable Interest Entity of the Company or any of its Subsidiaries.

 

28.36  Restricted Share Award ” means an award of Shares pursuant to Section 6 of the Plan, or issued pursuant to the early exercise of an Option.

 

28.37  Restricted Share Unit ” means an award granted pursuant to Section 9 of the Plan.

 

28.38  SEC ” means the United States Securities and Exchange Commission.

 

28.39  Securities Act ” means the United States Securities Act of 1933, as amended.

 

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28.40  Service ” shall mean service as an Employee, Consultant and Director, to the Company or a Parent, Subsidiary, Related Entity or Affiliate, subject to such further limitations as may be set forth in the Plan or the applicable Award Agreement. An Employee will not be deemed to have ceased to provide Service in the case of sick leave or any other leave of absence approved by the Company, if (a) such leave is for a period of not more than 90 days, or (b) reemployment upon the expiration of such leave is guaranteed by contract or statute, or (c) formal policy adopted from time to time by the Company’s Board and issued and promulgated to employees in writing provides otherwise. In the case of any Employee on an approved leave of absence or a reduction in hours worked (for illustrative purposes only, a change in schedule from that of full-time to part-time), the Committee may make such provisions respecting suspension of or modification to vesting of the Award while on leave from the employ of the Company or a Parent, Subsidiary, Related Entity or Affiliate or during such change in working hours as it may deem appropriate, except that in no event may an Award be exercised after the expiration of the term set forth in the applicable Award Agreement. An employee shall have terminated employment as of the date he or she ceases to provide Service (regardless of whether the termination is in breach of local employment laws or is later found to be invalid) and employment shall not be extended by any notice period or garden leave mandated by local law, provided however, that a change in status from an employee to a consultant or advisor shall not terminate the service provider’s Service, unless determined by the Committee, in its discretion. The Committee will have sole discretion to determine whether a Participant has ceased to provide Service and the effective date on which the Participant ceased to provide Service.

 

28.41  Shares ” means Ordinary Shares and the ordinary shares or common stock of any successor entity.

 

28.42  Share Appreciation Right ” means an award granted pursuant to Section 8 of the Plan.

 

28.43  Share Bonus Award ” means an award granted pursuant to Section 7 of the Plan.

 

28.44  Subsidiary ” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

 

28.45  Treasury Regulations ” means regulations promulgated by the United States Treasury Department.

 

28.46  Unvested Shares ” means Shares that have not yet vested or are subject to a right of repurchase in favor of the Company (or any successor thereto).

 

 

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Exhibit 10.11

 

WARRANT

 

THIS WARRANT (“WARRANT”) TO PURCHASE SHARES IN THE CAPITAL OF BORQS TECHNOLOGIES, INC. , A BRITISH VIRGIN ISLANDS COMPANY No. 1880410 (THE “COMPANY”) IS ISSUED ON THE ISSUE DATE PURSUANT TO THE TERMS GOVERNING ISSUANCE OF REPLACEMENT WARRANTS OF THAT CERTAIN Merger Agreement, dated as of December 27, 2016 (as amended or modified by the First Amendment to Merger Agreement dated as of May 10, 2017 and the Second Amendment to Merger Agreement dated as of June 29, 2017 between the parties, the “Merger Agreement”), by and among Pacific Special Acquisition Corp., a business company incorporated in the British Virgin Islands with limited liability (the “Purchaser”), Borqs International Holding Corp (THE “SURVIVING COMPANY”), AND CERTAIN OTHER PARTIES THERETO.

 

Company: Borqs Technologies, Inc., a British Virgin Islands company, Business No. 1880410
Warrant Shares: Ordinary Shares
Number of Shares: Up to [●] shares, subject to adjustment
Exchange Price: $5.36 per Share, subject to adjustment
Issue Date: August 18, 2017
Expiration Date: August 26, 2023

  

The term “ Holder ” shall initially refer to [●], a [●] company, which is the initial holder of this Warrant and shall further refer to any subsequent permitted holder of this Warrant from time to time.

  

The Company does hereby certify and agree that Holder that this Warrant is issued in consideration of the cancellation of that warrant of the Surviving Company previously held by Holder and issued to Holder (the “ Previous Warrant ”) pursuant to that certain Loan Agreement between Borqs Hong Kong Limited (the “Borrower”) and [●] (the “ Loan Agreement ”), and that Holder, or its permitted successors and assigns, hereby is entitled to Exchange or Exercise this Warrant in the Company for up to [●] ([●]) shares of the Company’s Ordinary Shares (the “Warrant Shares”). This Warrant is subject to adjustment as set forth in this Warrant. Capitalized terms used but not defined in this Warrant have their meanings as set forth in the Loan Agreement, whether or not the Loan Agreement is then in effect. When the term “convert” or “conversion” in relation to the Warrant is used herein, it includes an Exchange and an Exercise, each as defined in Section 1.3(a), below, as applicable.

  

Section 1.       Term, Price and Exchange of Warrant.

  

1.1     Term of Warrant . This Warrant shall be convertible from the Issue Date until the expiration date set forth above (hereinafter referred to as the “ Expiration Date ”).

  

 

 

  

1.2     Exchange Price . The price per Share at which the Warrant Shares are issuable upon conversion of this Warrant shall be $5.36 per Warrant Share (the “ Exchange Price ”).

 

1.3     Conversion of Warrant .

  

(a)    This Warrant may be exercised, in whole or in part, upon surrender of this Warrant to the Company, together with the Election to Exchange or Exercise attached hereto as Exhibit A (the “ Election ”) duly completed and executed with “Exercise” selected as the mode of conversion, and upon payment to the Company of the Exercise Price for the number of Warrant Shares in respect of which this Warrant is then being exercised (an “ Exercise ”). In whole or in part in lieu of an Exercise, Holder may convert this Warrant on a cashless basis by so indicating in the Election and proceeding in accordance with the remainder of this Section 1.3 (an “ Exchange ”). In each above case, Holder shall surrender this Warrant to the Company at its then principal offices, together with the Election duly completed and executed.

  

(b)       Upon an Exchange, the Holder shall receive Warrant Shares such that, without the payment of any funds, the Holder shall surrender this Warrant in exchange for the number of Warrant Shares equal to “X” (as defined below), computed using the following formula:

 

Y * (A-B)

X = _____________

A

 

Where

  

X = the number of Warrant Shares to be issued to Holder
Y = the number of Warrant Shares to be converted under this Warrant
A = the Fair Market Value of one Warrant Share
B = the Exchange Price (as adjusted to the date of such calculations)
* = multiplied by

 

(c)       For purposes of calculating Fair Market Value for purposes of Exchanging this Warrant, the “Fair Market Value” of one Warrant Share shall be (i) if the Company’s securities become listed on an internationally-recognized securities exchange, inter-dealer quotation system or over-the-counter market (a “ Trading Market ”, the average closing sale price reported on such exchange for such listed securities during the 20-trading day period immediately prior to the date Holder delivers its Election to the Company, or (ii) if the Company’s securities are traded over-the-counter, the highest average of bid and ask price for such securities over the 20-trading day period immediately prior to the day Holder delivers its Election to the Company, in each case of (i) and (ii), above, if the Warrant Shares are convertible into such listed or over-the-counter traded securities other than on a one-to-one basis, multiplied by the ratio at which one Warrant Share converts into such other security. If the Company’s securities are not listed or traded as contemplated in clauses (i) or (ii), above, the Fair Market Value of the Warrant Shares shall be the price per Warrant Share which the Company could obtain from a willing buyer of Warrant Shares sold by the Company from its authorized maximum number of shares, initially as the Board of Directors of the Company (“Board”) shall determine in its reasonable good faith judgment, subject to Holder’s valuation rights below, but in no event less than the price to which a holder of Warrant Shares would be entitled based on an enterprise valuation of the Company (including its Subsidiaries if part of a Group) as a going concern and the application of the rights, preferences and privileges of the Company’s outstanding securities as set forth in the Company’s Constitutional Documents without discount for minority, control or lack of marketability. For the avoidance of doubt, if the Board relies on an appraisal to determine the Fair Market Value of the Warrant Shares, such determined Fair Market Value from such appraisal may not assume the automatic conversion of all convertible securities in deriving such Fair Market Value but, instead, shall be based on enterprise value and application of the rights, preferences and privileges of the Company’s outstanding securities as set forth in the Company’s Constitutional Documents as if the Company (or Group) were being sold in an Acquisition for cash to determine what dollar value each class of security would receive upon such Acquisition. If the Warrant is to be converted in connection with an Acquisition (in fact), the Fair Market Value of a Warrant Share shall be based on the enterprise value specified or implied in such Acquisition and shall be the greater of (A) the value attributable to the Warrant Shares and (B) the value attributable to the Company securities into which the Warrant Shares are (or may be) convertible (but subject to Holder’s conversion directly into such other Company securities). If Holder disagrees the Board's determination, Holder may engage an independent appraiser to determine fair market value of the Warrant Shares the foregoing basis at shared expense between the Company and Holder. If the fair market value difference between the Board's determination and the determination by the Holder's appraiser is less than 30%, then the average between the two determinations shall be deemed to be the fair market value. If the difference is 30% or more, then the parties shall agree a second appraiser, with each party bearing half of the expense of such second appraiser, and the determination of such appraiser shall be deemed to be the fair market value.

 

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(d)      In the event that Holder converts this Warrant in connection with a transaction in which shares of the same class and series as the Warrant Shares are converted into another security, Holder may effect a conversion directly into such other security.

 

(e))      Subject to Section 2 hereof, upon delivery of the duly completed and executed Election, the Company shall issue and deliver within two (2) business days to Holder or such other person as Holder may designate in writing a certificate or certificates and a certified copy of the register of members of the Company maintained under section 41 of the BVI Business Companies Act, 2004 (as amended) evidencing the Holder’s ownership of the number of Warrant Shares so acquired upon the conversion of this Warrant. Such certificate(s) or other legal evidence shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a shareholder of the Company and a holder of record of such Warrant Shares as of the date the Election is delivered to the Company, provided, however, Holder’s admission as a shareholder shall be subject to Holder’s execution and delivery of such agreements as may be required of all shareholders or of an accession or similar agreement by which Holder agrees to be bound by such agreements. If this Warrant is converted in part, a new warrant substantially identical to this Warrant for the number of Shares not converted shall be promptly executed and delivered to Holder by the Company.

 

1.4)      Fractional Interests . The Company shall not be required to issue fractions of Warrant Shares upon the conversion of this Warrant. If any fraction of a Warrant Share would be issuable upon the conversion of this Warrant (or any portion thereof), the Company shall purchase such fraction for an amount in cash equal to the fair market value of a Warrant Share as determined by the Board in its reasonable judgment.

  

1.5        Register . A register of holders (the “Register”) shall be kept by or on behalf of the Company at its registered office or at such other place as may be permitted by applicable law. There shall be entered in the Register:

 

(a) the names and addresses of the person(s) for the time being entitled to be registered as the holders of this Warrant;

 

(b) the number of Warrants held by every such registered holder; and

 

(c) the date on which the name of every such registered holder is entered in the Register in respect of the Warrants standing to its name.

  

Any change in the name or address of the Holder shall be notified to the Company in writing within a reasonable time after the change occurs which shall cause the Register to be altered accordingly. The Holder and any person authorised by the Holder shall be at liberty at all reasonable times during office hours to inspect the Register and to take copies of or extracts from it or any part of it. The Company shall be entitled to treat the Holder as the absolute owner of this Warrant and accordingly shall not, except as ordered by a court of competent jurisdiction or as required by law, be bound to recognise any equitable or other claim to, or interest in, this Warrant on the part of any other person, whether or not it shall have express or other notice of that claim or interest. The Holder will be recognised by the Company as entitled to this Warrant free from any equity, set off or cross claim on the part of the Company against the original or any intermediate holder of such Warrant.

  

1.6        Certain Definitions . For purposes of this Warrant:

 

Acquisition ” means, in any single transaction or series of related transactions: (i) any sale or other disposition (including exclusive license) of all or substantially all of the assets of the Company in whatever form and however consummated, (ii) any reorganization, consolidation, merger or acquisition of the Company or a Controlling interest in the Company, or (iii) any liquidation or deemed liquidation under the Company’s Constitutional Documents.

 

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An “ Affiliate ” of, or person “affiliated” with, a specified Person, is a Person that directly, or indirectly through one or more intermediaries, beneficially owns or is beneficially owned, controls or is controlled by, or is under common control with, the Person specified, and any person or entity that owns or controls directly or indirectly ten percent (10%) or more of the Shares of Company shall be deemed to be an Affiliate of the Company.

 

Constitutional Documents ” means the Company’s Certificate of Incorporation, any Certificate of Incorporation on Change of Name, its Memorandum and Articles of Association (as amended and restated, as applicable) and any agreements between or among the Company and holders of any class or series of its shares.

 

Control ” (including the terms “controlling”, “controlled by” and “under common control with”) means the possession, direct or indirect through one or more Affiliates, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership or voting of voting securities, by contract, or otherwise.

 

Founder(s) ” means the Person(s) who have founded and / or direct the PRC businesses that comprise the business of the Group.

 

Group ” means the Company, together with its direct and indirect subsidiaries and Affiliates, that comprise the business enterprise in which the Company is the beneficial owner, by actual share ownership, contract or otherwise.

 

Liquidity Event ” means a transaction in which any holders of equity in the Group and/or Local Management of the Group (whether the corporate vehicle for such holders now exists or exists in the future) would be reasonably expected to substantially achieve a financial exit or return from their investments in the Group, such as an initial public offering or listing or quotation of the Company’s shares, an Acquisition, a change of Control or any transaction or event with similar effect to any of the foregoing, and the term “ Liquidity Vehicle ” means the entity through which a Liquidity Event is to be ultimately consummated.

 

Local Management ” means the Founder(s) and/or management of the Group operating entities and would typically, but not exclusively, be the Persons who founded and / or managed the operating entities prior to investor participation through the funding of the Company.

  

Localization Transaction ” has the meaning set forth in Section 1.8.

 

Marketable Securities ” means securities meeting all of the following requirements: (i) the issuer thereof is then subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or comparable reporting requirements of the exchange or in the jurisdiction in which the Company’s securities are listed or traded, and is then current in its filing of all required reports and other information thereunder; (ii) the class and series of shares or other security of the issuer that would be received by Holder in connection with the Acquisition were Holder to exercise this Warrant on or prior to the closing thereof is then traded on a Trading Market, (iii) Holder would be able to publicly re-sell, within thirty (30) calendar days following the closing of such Acquisition, all of the issuer’s shares and/or other securities that would be received by Holder in such Acquisition were Holder to exercise this Warrant in full on or prior to the closing of such Acquisition, and (iv) Holder is not subject to any lock-up or similar restriction (whether contractual or regulatory).

 

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Person ” or “ person ” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity of any kind.

 

1.6        Automatic Conversion upon Expiration . Upon the Expiration Date, this Warrant shall automatically be deemed on and as of such date to be Exchanged pursuant to Section 1.3 as to all Warrant Shares (or such other securities) for which this Warrant has become convertible and for which it shall not previously have been converted for Warrant Shares (or if not then outstanding, into such other class and series of securities into which the Warrant Shares is then convertible), and the Company shall promptly deliver a certificate and a certified copy of the register of members of the Company maintained under section 41 of the BVI Business Companies Act, 2004 (as amended) or other legal evidence of ownership of such other securities issued upon such Exchange to Holder.

 

1.7        Treatment of Warrant Upon Acquisition of Company . Without prejudice to Holder’s right to convert this Warrant at any time at its option, upon the closing of any Acquisition in which the sole consideration is cash or Marketable Securities or a combination of the foregoing, Holder shall (at its sole option) either (i) convert this Warrant, and such conversion will be deemed effective immediately prior to the consummation of such Acquisition or (ii) if Holder elects not to convert this Warrant, this Warrant will expire upon the consummation of such Acquisition. The Company shall provide reasonable advance notice of an Acquisition and in no event shall such advance notice be less than ten (10) Business Days. In all other Acquisitions (including without limitation, where the consideration is part cash and part other consideration that is not (all) Marketable Securities), the surviving entity shall (unless Holder elects to convert this Warrant), as a condition to such Acquisition, assume the obligations of the Company under this Warrant mutatis mutandis and to the extent applicable, in which case this Warrant shall be exercisable for the same securities as would be deliverable for the Warrant Shares issuable upon Exchange of the unexchanged portion of this Warrant as if such Warrant Shares were issued shares on the record date for the Acquisition (and the Warrant Price and/or number of Warrant Shares shall be adjusted accordingly).

 

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1.8        Conditional Repurchase Obligation Upon Reorganization of Off-Shore Holding Company Structure .

 

(a)       The Company acknowledges that as of the Issue Date, the Company is the penultimate holding company in a multi-entity group, some of the operating entities of which are entities formed under the laws of jurisdictions other than the British Virgin Islands, including the PRC, and the group has been structured so that as of the Issue Date the Company is anticipated to be the corporate vehicle in which a Liquidity Event will be effected for the benefit of the Group’s beneficial owners. Without limiting the adjustments that may be required under Section 4, if : (i) the Group should be reorganized (whether in anticipation of a Liquidity Event or otherwise) such that after such reorganization a Group entity other than the Company will be the vehicle in which such Liquidity Event is to be consummated (any such Group reorganization transaction, including a so-called “de-VIE” transaction in respect of a PRC localization, a “ Localization Transaction ”), and (ii) in connection with a Localization Transaction (A) for any reason (other than the laws of its own jurisdiction of domicile) Holder is unable to receive and hold its pro rata ownership in the new Liquidity Vehicle (or receive consideration, if the Localization Transaction is consummated directly or indirectly in connection with a Liquidity Event) due to a legal or regulatory impediment (such as, for example only in the case of the PRC, restrictions on non-PRC Person ownership of a warrant or equity in any new PRC Liquidity Vehicle), then, without limiting Holder’s right to transfer this Warrant to or receive an equivalent warrant in such surviving PRC entity in the name of a Holder-designated PRC Person that may lawfully hold such new warrant without such regulatory impediment, or (B) Holder is not provided the opportunity to exchange this Warrant for a warrant or equivalent equity in the new Liquidity Vehicle, then , as a joint and several obligation, the Company, the Borrower under the Loan Agreement (whether or not the Loan Agreement is then in effect) and/or the new Liquidity Vehicle shall, upon initial closing of such Localization Transaction, purchase this Warrant for the amount that Holder would receive on an as-converted into Warrant Shares basis, applying the liquidation preferences and adjustments as would reasonably apply assuming a liquidation of the Company under the Company’s Constitutional Documents, with the value to be assumed for purposes of determining the amount attributable to the Warrant Shares being the Enterprise Valuation (such purchase amount, the “ Warrant Purchase Price ” and such term as defined below).

 

(b)       The Warrant Purchase Price determined in accordance with this Section shall be paid in cash in full upon the initial closing of the Localization Transaction and shall not be subject to any post-Localization Transaction closing contingencies or adjustments, including without limitation, earn-out or escrowed consideration.

 

(c)       The term “ Enterprise Valuation ” means the fair market value of the Group at the time of a Localization Transaction, which shall be mutually agreed between Holder and the Company and which may be inferred from the implied valuation in connection with any then recent arm’s length Group equity or convertible debt financing, the valuation used for purposes of new proposed investment in the Group, as anticipated to be localized, any then recent and comprehensive (from a Group perspective) independent professional valuation report or, failing agreement between the Company and Holder as to the fair market value of the Group, by independent appraisal as contemplated in Section 1.3(c).

 

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Section 2.      Exchange and Transfer of Warrant.

  

(a)     This Warrant may be transferred, in whole or in part, without restriction, subject only to (i) Holder’s compliance with applicable securities laws (which, in the case of Affiliates, shall be deemed satisfied by Holder (and transferee) certification of Affiliate status), and (ii) the transferee holder of the new Warrant assuming the obligations of Holder set forth in this Warrant. A transfer may be registered with the Company by submission to it of the annexed Assignment Form attached hereto as Exhibit B duly completed and executed. After the Company’s registration of a transfer of this Warrant, the Company will issue and deliver to the transferee a new warrant (representing the portion of this Warrant so transferred) upon the same terms and conditions as this Warrant and in substantially identical form, which the Company will register in the new holder’s name. In the event of registration of a partial transfer of this Warrant, the Company shall concurrently issue and deliver to the transferring holder a new warrant that entitles the transferring holder to the balance of this Warrant not so transferred and that otherwise is upon the same terms and conditions as this Warrant. Upon the delivery of this Warrant for transfer, the transferee holder shall for all purposes become the holder of the new warrant issued for the portion of this Warrant so transferred, irrespective of the date of actual delivery of the new warrant representing the portion of this Warrant so transferred.

   

(b)      In the event of the loss, theft or destruction of this Warrant, the Company shall execute and deliver an identical new warrant to Holder in substitution therefor upon the Company's receipt of (i) evidence reasonably satisfactory to the Company of such event, and (ii) if requested by the Company, an indemnity agreement in reasonable and customary form.

  

(c)      The Company shall pay its own and all Holder’s reasonable costs and expenses incurred in connection with the conversion, transfer or replacement of this Warrant, including, without limitation, securities compliance, the costs of preparation, execution and delivery of a new warrant and of certificates or other legal evidence of all Warrant Shares.

 

Section 3.      Certain Covenants.

 

(a)    The Company shall ensure that any approval of its Board and shareholders required for issuance of this Warrant and of the Warrant Shares issuable upon conversion hereof (which shall, for the avoidance of doubt, include any securities into which Warrant Shares are or become convertible) remains in full force and effect until the earlier of conversion or the Expiration Date.

  

(b)     The Company will not, by amendment of its Constitutional Documents or through reorganization, consolidation, merger, amalgamation, sale of assets or otherwise, avoid or seek to avoid the observance or performance of any of the terms of this Warrant. Without limiting the foregoing, the Company will from time to time take all such action as may be necessary or appropriate in order that the Company may validly and legally issue Warrant Shares upon the conversion of this Warrant.

 

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(d)     The Company shall not treat the Warrant or the Warrant Shares as being granted or issued as property transferred in connection with the performance of services or otherwise as compensation for services rendered.

  

(e)       The Company shall not characterize the Warrant as an ownership interest in the Company or Holder as a shareholder of the Company until such time as Holder converts the Warrant for Warrant Shares and is entered as a shareholder of the Company’s register of members.

 

(f)       The Company shall ensure and shall procure that at all times this Warrant is in effect, Holder shall have the benefits accorded “Investors” under that certain Registration Rights Agreement among the Company, the Purchaser Representative and such Investors of even date with this Warrant and the Company shall not consent to any amendment of the Registration Rights Agreement that would have the effect of treating Holder differently than or depriving Holder of benefits that are accorded other Investors under the Registration Rights Agreement.

  

Section 4.     Adjustments to Number of Warrant Shares, Etc.

  

4.1      Adjustments . In order to prevent dilution of the rights granted hereunder, the Number of Shares and Exchange Price shall be subject to adjustment from time to time in accordance with this Section 4. Upon each adjustment of the Exchange Price pursuant to this Section 4, Holder shall thereafter be entitled to acquire upon conversion, at the Exchange Price resulting from such adjustment, the number of Warrant Shares obtainable by multiplying the Exchange Price in effect immediately prior to such adjustment by the number of Warrant Shares acquirable immediately prior to such adjustment and dividing the product thereof by the new Exchange Price resulting from such adjustment.

  

4.2      Subdivisions, Combinations and Stock Dividends . If the Company shall at any time subdivide by split-up or otherwise, the class and series of Company securities into which the Warrant could then be converted into a greater number of shares, or issue additional securities as a dividend, bonus issue or otherwise with respect to such securities into which the Warrant could be converted, then the Exchange Price in effect immediately prior to such subdivision or share dividend or bonus issue shall be proportionately reduced and the number of shares acquirable upon exchange hereunder shall be proportionately increased. Conversely, if the class and series of Company securities into which the Warrant could then be converted are combined into a smaller number of shares, the Exchange Price in effect immediately prior to such combination shall be proportionately increased.

  

4.3      Reclassification, Exchange, Substitutions, Etc. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exchange or exercise of this Warrant, Holder shall be entitled to receive, upon conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Warrant Shares if this Warrant had been converted immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Warrant Shares to Ordinary Shares pursuant to the Company’s Constitutional Documents upon the closing of a public offering of the Company's Ordinary Shares. The Company or its successor shall promptly issue to Holder an amendment to this Warrant setting forth the number and kind of such new securities or other property issuable upon exchange or exercise of this Warrant as a result of such reclassification, exchange, substitution or other event that results in a change of the number and/or class of securities issuable upon exchange or exercise of this Warrant. The amendment to this Warrant shall provide for adjustments (as determined in good faith by the Board) which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 4 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exchange of the new Warrant. The provisions of Sections 4.2 and 4.3 shall similarly apply to successive subdivisions, combinations, Share dividends, distributions, reclassifications, exchanges, substitutions, and dilutive events.

 

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4.4      Notices of Record Date, Etc . In the event that the Company shall:

  

(1)    declare or propose to declare any dividend upon Company securities, whether payable in cash, property, shares or other securities and whether or not a regular cash dividend, or

  

(2)    offer for sale any additional shares of any class or series of the Company’s stock or securities exchangeable for or convertible into such stock in any transaction that would give rise (regardless of waivers thereof) to pre-emptive rights of any class or series of shareholders, or

  

(3)    effect or approve any reclassification, exchange, substitution or recapitalization of the authorized shares of the Company, including any subdivision or combination of its issued shares, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation, or to liquidate, dissolve or wind up (including an assignment for the benefit of creditors), or

  

(4)    offer holders of registration rights the opportunity to participate in any public offering of the Company’s securities, or receive a notice or demand for redemption of Company securities, or

  

(5)    offer shareholders the opportunity to participate in any public offering of the Company’s securities, then , in connection with such event, the Company shall give to Holder:

  

(i)     at least ten (10) days prior written notice of the date on which the books of the Company shall close or a record shall be taken for such a distribution or offer in respect of the matters referred to in (1) or (2) above, or for determining rights to vote in respect of the matters referred to in (3) above; and

  

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(ii)      in the case of the matters referred to in (4) and (5) above, the greater of (A) ten (10) days prior written notice of the date when the same shall take place and (B) the date that notice is or is required to be given to any shareholder.

  

Such notice in accordance with the foregoing clause (1) shall also specify, in the case of any such distribution, the date on which the holders of Company securities shall be entitled thereto and the terms of such distribution, and such notice in accordance with clause (2) shall also specify the date on which the holders of Company securities shall be entitled to convert their stock for securities or other property deliverable upon such reorganization, reclassification, exchange, substitution, consolidation, merger or sale, as the case may be, and the terms of such exchange. Each such written notice shall be given by first class mail, postage prepaid, addressed to the holder of this Warrant at the address of Holder.

 

4.5      Adjustment for Capitalization Table Errors . The parties acknowledge their mutual agreement that the initial Number of Shares is based on the capitalization of the Surviving Company having been, in all material respects, as represented to Holder at the time of the issuance of the Previous Warrant. If the fully-diluted equity of the Company was not, as of the issue date of the Previous Warrant, in fact as represented to the Holder, the Number of Shares and / or Exchange Price shall be equitably adjusted under Section 4.6.

  

4.6      Adjustments by Board . If any event occurs as to which the provisions of this Section 4 are not strictly applicable or if strictly applicable would not fairly protect the rights of Holder in accordance with the essential intent and principles of such provisions, then the Board shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights.

  

4.7      Officer’s Statement as to Adjustments . Whenever the Number of Shares subject to this Warrant is required to be or is adjusted as provided in Section 4, the Company shall forthwith file at the office designated for the conversion of this Warrant a statement, signed by the chief financial officer of the Company, showing in reasonable detail the facts requiring such adjustment and the number of issuable Warrant Shares that will be effective after such adjustment. If such notice relates to an adjustment resulting from an event referred to in Section 4.3, such notice shall be included as part of the notice required to be mailed or published under the provisions of Section 4.4.

  

4.8      Issue of Securities other than Warrant Shares . In the event that at any time, as a result of any adjustment made pursuant to Section 4, Holder thereafter shall become entitled to receive any securities of the Company, other than Warrant Shares, thereafter the number of such other securities so receivable upon conversion of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Shares contained in Section 4.

  

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Section 5.      Rights of the Warrant Holder.

  

This Warrant shall entitle Holder, upon Conversion, to the benefit of all rights as are applicable to any shareholder of the Company holding shares that are the same class and series as the Warrant Shares.

  

Section 6.    Representations, Warranties and Covenants of the Company . The Company represents and warrants to, and covenants with, Holder that:

  

6.1      Corporate Power; Authorization . The Company has all requisite corporate power and has taken all requisite corporate action to execute and deliver this Warrant, to issue the Warrant and Warrant Shares and to carry out and perform all of its obligations hereunder. This Warrant has been duly authorized, executed and delivered on behalf of the Company and constitutes the valid and binding agreement of the Company, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and (ii) as limited by equitable principles generally. Any person executing this Warrant on behalf of the Company is a duly authorized officer of the Company with all necessary legal authority to bind the Company generally and with the specific legal authority to cause the Company to execute and deliver this Warrant.

 

6.2      Validity of Securities . This Warrant, when sold by the Company against the consideration therefor as provided herein, will be validly authorized, issued and fully paid. The issuance and delivery of the Warrant is not subject to any consent, approval, pre-emptive or any similar rights of the shareholders of the Company (which has not been duly secured or waived), including without limitation any pre-emptive rights, rights of first refusal or any liens or encumbrances except for restrictions on transfer provided for herein or under applicable securities laws; and when and if Warrant Shares are issued upon conversion and in accordance with the terms hereof and this Warrant is converted for such Warrant Shares, such shares will be, at each such issuance, validly issued Warrant Shares of the Company, in compliance with all applicable securities laws and free of any liens or encumbrances except for restrictions on transfer provided for herein, in the Constitutional Documents or under such applicable securities laws.

   

6.3      Capitalization . At the Issue Date, the Company is authorized to issue an unlimited number of Ordinary shares of a no par value. As of the Issue Date hereof, the Company has reserved a total of 530,432 Ordinary shares under its 2017 Equity Incentive Plan, of which 0 shares are reserved for issuance upon exercise of outstanding options, and has assumed a total of 3,628,196 outstanding options pursuant to its assumption of the Borqs 2007 Global Share Plan. A true, correct and current copy of the Company’s Constitutional Documents, as proposed to be amended in connection with the consummation of the transactions outlined in the Merger Agreement (the “Merger”), is attached to the Proxy Statement filed with the U.S. Securities and Exchange Commission on July 14, 2017 (the “Proxy Statement”). Except as specified in the Proxy Statement, there are no other options, warrants, conversion privileges or other contractual rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company or other securities.

 

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6.4      No Conflict . The execution and delivery of this Warrant do not, and the consummation of the transactions contemplated hereby and thereby will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit, under, any provision of the Company’s Constitutional Documents, as amended, or any mortgage, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, the effect of which would have a material adverse effect on the Company or materially impair or restrict its power to perform its obligations as contemplated hereby.

  

6.5        Governmental and other Consents . As at the Issue Date, no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any governmental authority or other person or entity is required on the part of the Company in connection with the issuance, sale and delivery of the Warrant and the Warrant Shares, except such filings as shall have been made prior to and shall be effective on and as of the date hereof. All Company and shareholder consents required in connection with issuance of the Warrant and Warrant Shares have either been obtained by the Company or no such consents are required.

  

6.6        Exempt from Registration . As at the Issue Date, assuming the accuracy of the representations and warranties of Holder in Section 7 hereof, the offer, sale and issuance of the Warrant and the Warrant Shares will be exempt from any registration requirements under British Virgin Islands law.

  

Section 7.       Representations and Warranties of Holder . Holder hereby represents and warrants to the Company as of the Issue Date as follows:

 

7.1        Investment Experience . Holder is an “accredited investor” within the meaning of Rule 501 under the Securities Act of the United States of America, and was not organized for the specific purpose of acquiring the Securities. Holder is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Holder has such business and financial experience as is required to give it the capacity to protect its own interests in connection with the purchase of the Warrant and the Warrant Shares.

 

7.2        Investment Intent . Holder is purchasing the Warrant for investment for its own account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act. Holder understands that the Warrant has not been registered under the Securities Act or registered or qualified under any state securities law in reliance on specific exemptions therefrom, which exemptions may depend upon, among other things, the bona fide nature of Holder’s investment intent as expressed herein.

 

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7.3        Authorization . Holder has all requisite power and has taken all requisite action required of it to carry out and perform all of its obligations hereunder. The execution and delivery of this Warrant has been duly authorized, executed and delivered on behalf of Holder and constitutes the valid and binding agreement of Holder, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors’ rights generally and (ii) as limited by equitable principles generally. The consummation of the transactions contemplated herein and the fulfillment of the terms herein will not result in a breach of any of the terms or provisions of Holder’s constitutional documents or instruments. Any person executing this Warrant on behalf of Holder is a duly authorized officer of Holder with all necessary legal authority to bind Holder generally and with the specific legal authority to cause Holder to execute and deliver this Warrant.

 

Section 8.     Notices.

 

All notices to be given under this Warrant shall be in writing and shall be given: (i) personally, or (ii) by reputable private delivery service, (iii) by regular first-class mail, or certified mail return receipt requested, or (iv) by fax, or (v) by electronic mail. If sent by fax or electronic mail, such notice shall also be sent concurrently by one of the other methods provided herein. Notices may be sent to the parties in accordance with their contact details specified below or to any other address, fax number or electronic mail address later designated in writing by a party. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one Business Day following delivery to the private delivery service, or two Business Days following the deposit thereof in the United States mail, with postage prepaid, or upon receipt during the Business Day where received in the case of notices sent by fax or electronic mail, but subject to reasonably concurrent transmission by another method, as specified above. The addresses for such communications shall be:

 

if to Holder, at

 

[●]

 

or if to the Company, at

  

Borqs International Holding Corp.
Tower A, Building B23
Universal Business Park
No. 10 Jiuxiangqiao Road
Chaoyang District, Beijing 100015, China
Attn: Pat Chan, CEO
Facsimile No.: 86-10-5975-6363
Telephone No: 86-10-5975-6336
Email: pat.chan@borqs.com

 

with a copy to:

 

Fenwick & West LLP
801 California Street
Mountain View, CA 94041
Attn: Eva Wang
Facsimile No.: (650) 938-5200
Telephone No.: (650) 335-7878
Email: ewang@fenwick.com

 

Each party hereto may from time to time change its address for notices under this Section 9 by giving at least 10 calendar days' notice of such changes address to the other party hereto.

 

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Section 10.      Amendments and Waivers.

 

This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.

  

Section 11.     Applicable Law; Severability.

  

This Warrant shall be governed by laws of the British Virgin Islands and for the benefit of the Holder, the Company agrees that the courts of the British Virgin Islands have jurisdiction to hear and determine any action, suit or proceeding, and settle any disputes, in connection with this Warrant and accordingly submits to the jurisdiction of the British Virgin Islands courts. The Company waives any objection which it may have to the British Virgin Islands courts on the grounds of inconvenient forum or otherwise as regards proceedings in connection with this Warrant, agrees not to argue before any court or tribunal that such courts are an inappropriate or inconvenient forum and agrees that a judgment or order of the British Virgin Islands courts in connection with this Warrant is conclusive and binding on it and may be enforced in the courts of any other jurisdiction. If any one or more of the provisions contained in this Warrant, or any application of any provision thereof, shall be invalid, illegal, or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and all other applications of any provision thereof shall not in any way be affected or impaired thereby.

 

Section 12.     Specific Performance.

 

Without prejudice to any other rights or remedies that the Holder may have, the Company acknowledges and agrees that damages alone would not be an adequate remedy for any breach of the terms of this Warrant by the Company. Accordingly, the Holder shall be entitled, to the remedies of injunction, specific performance or other equitable relief for any actual breach of the terms of this Warrant.

 

Section 13.     Construction.

  

Section headings are only used in this Agreement for convenience. The Company and Holder each acknowledge that the headings may not describe completely the subject matter of the applicable Section, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against either party under any rule of construction or otherwise.

  

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

14

 

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed on the day and year first above written.

 

COMPANY: ACKNOWLEDGED AND AGREED:
   
BORQS TECHNOLOGIES, INC. HOLDER:
   
  [NAME]

 

By:     By:  
         
Name:     Name:  
         
Title:     Title:  

  

BORQS INTERNATIONAL HOLDING CORP Warrant Signature Page

 

 

 

 

Exhibit A

 

To:      BORQS TECHNOLOGIES, INC.

  

ELECTION TO EXCHANGE OR EXERCISE

  

The undersigned hereby exercises its right to Exchange its Warrant for _________________ fully paid, validly issued and nonassessable:

  

☐ Ordinary Shares

 

The undersigned hereby exercises its right to Exercise its Warrant for _________________ fully paid, validly issued and nonassessable:

 

Ordinary Shares

  

[check one box]

 

covered by the attached Warrant in accordance with the terms thereof.

  

and requests that certificates or other legal evidence of ownership of such Shares be issued in the name of, and delivered to:

 

______________________

______________________

______________________

  

Date: _____________________ [Holder]

 

  By  
  Name:
  Title:

 

 

 

 

Exhibit B

 

ASSIGNMENT FORM

 

To:     BORQS TECHNOLOGIES, INC.

  

The undersigned hereby assigns and transfers this Warrant to

 __________________________________________________

(Insert assignee’s social security or tax identification number)

 

____________________________________________________________________

(Print or type assignee’s name, address and postal code)

 

____________________________________________________________________

 

____________________________________________________________________

 

and irrevocably appoints _______________________________________ to transfer this Warrant on the books of the Company.

 

Date: __________________

  

  [HOLDER]
     
  By:  
 
  Name:

  

Title: __________________________

 

 

 

 

 

Exhibit 10.12

 

PARTIAL ASSIGNMENT AND AMENDMENT OF
BACKSTOP AND SUBSCRIPTION AGREEMENT

 

This PARTIAL ASSIGNMENT AND AMENDMENT OF BACKSTOP AND SUBSCRIPTION AGREEMENT (this “ Agreement ”) is made and entered into as of August 18, 2017, by and between Zhengqi International Holding Limited , a company incorporated in the British Virgin Islands (the “ Assignor ”), EarlyBirdCapital, Inc. (“ Assignee ”), Pacific Special Acquisition Corp., a British Virgin Islands business company with limited liability (the “ Company ”), and Borqs International Holding Corp, an exempted company incorporated under the laws of the Cayman Islands with limited liability (“ Borqs ”). Any capitalized term used but not defined herein shall have the meaning ascribed to such term in the Backstop Agreement (as defined below).

 

WHEREAS , the Company and Assignor are parties to that certain Backstop and Subscription Agreement, dated as of May 11, 2017 (the “ Backstop Agreement ”), pursuant to which Assignor agreed to purchase up to Twenty-Four Million U.S. Dollars ($24,000,000) of the Company’s ordinary shares of no par value (the “ Ordinary Shares ”) through (i) open market or privately negotiated transactions with third parties (with the Assignor not obligated to pay a price of greater than $10.40 per share), (ii) a private placement at a price of $10.40 per share with consummation to occur substantially concurrently with that of the closing (the “ Merger Closing ”) of the transactions contemplated that certain Merger Agreement, dated as of December 27, 2016 (as amended, including by the First Amendment thereto on May 10, 2017 and the Second Amendment thereto on June 29, 2017, the “ Merger Agreement ”), by and among the Company, PAAC Merger Subsidiary Limited, Zhengqi International Holding Limited in its capacity thereunder as the Purchaser Representative, Zhengdong Zou in its capacity thereunder as the Seller Representative, Borqs and, for certain limited purposes thereunder, the Assignor, or (iii) a combination thereof, in order to ensure that there is at least Twenty-Four Million U.S. Dollars ($24,000,000) in funds left in the Trust Account as of the Merger Closing, after giving effect to any redemptions or conversions by Public Stockholders, but before giving effect to the payment of any Transaction Expenses, plus the amount of funds from any private placements of the Company’s capital stock (or binding commitments therefor, other than the Assignor’s obligations under the Backstop Agreement) occurring or to occur at or prior to the Merger Closing (“ Closing Proceeds ”) (although the Assignor is entitled, at its sole election, to purchase additional Ordinary Shares in excess of such $24.0 million Closing Proceeds requirement, up to $24.0 million purchased in total in connection with the Backstop Agreement);

 

WHEREAS , the Backstop Agreement provides in Section 16 thereof that the Company and Borqs will not unreasonably withhold, delay or condition their consent to transfer and assign all or a proportion of the Assignor’s obligations under the Backstop Agreement to an investor that is a “qualified institutional buyer” within the meaning of Rule 144A under the Securities Act or an institutional “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act and who otherwise is reasonably expected to be capable of satisfying the Assignor’s obligations transferred to such assignee, and that such assignee shall be entitled to receive a proportionate share of the Guarantee Escrow Shares based on the portion of the Assignor’s obligations transferred to such assignee, as well as entitled to receive the rights and obligations of the Assignor under the Registration Rights Agreement with respect to its Shares; and

 

WHEREAS , Assignor desires to assign, transfer, convey and delegate to Assignee, and Assignee desires to assume from Assignor, Seven Hundred and Fifty Thousand U.S. Dollars ($750,000) of Assignor’s obligation to purchase Backstop Shares under the Backstop Agreement.

 

 

 

 

NOW THEREFORE , for good and valuable consideration, the receipt and sufficiency which are hereby acknowledged, and intending to be legally bound hereby, the parties hereby agree as follows:

 

1.        Assignment . Assignor hereby assigns, transfers, conveys and delegates to Assignee Seven Hundred and Fifty Thousand U.S. Dollars ($750,000) (the “ Assigned Amount ”) of Assignor’s obligation to purchase Backstop Shares under the Backstop Agreement, and Assignee hereby accepts such assignment, transfer, conveyance and delegation and assumes from Assignee the Assigned Amount of Assignor’s obligation to purchase Backstop Shares under the Backstop Agreement.

 

2.        Guarantee Escrow Shares . In consideration of the assignment and assumption by Assignee of Assignor’s obligations under the Backstop Agreement in accordance with the terms of this Agreement, the parties hereby agree that Assignee shall be entitled to receive three and one hundred twenty-five thousandths percent (3.125%) of the Guarantee Escrow Shares that Assignor is entitled to receive under the Backstop Agreement (rounded to the nearest whole share) at the same time as such shares are received by Assignor, but subject to the same terms and conditions that apply to Assignor under the Backstop Agreement and the Merger Agreement, including the forfeiture of such shares to the extent that the Guarantee Escrow Shares (or equivalent replacement shares) are earned by Borqs’ shareholders under the Merger Agreement. Assignee hereby acknowledges and agrees that the Purchaser Representative shall act on behalf of Assignee with respect to the provisions of Article XII of the Merger Agreement and the Escrow Agreement, as contemplated by the terms and conditions of the Merger Agreement.

 

3.        Representations and Warranties of Assignee . In accordance with Section 16 of the Backstop Agreement, Assignee hereby represents and warrants that it is either a “qualified institutional buyer” within the meaning of Rule 144A under the Securities Act or an institutional “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act. Assignee further hereby makes to the Company, as of the date of this Agreement, each of the representations, warranties and covenants of the Subscriber set forth in Sections 7 and 9 of the Backstop Agreement. Contemporaneously with the execution and delivery of this Agreement, Assignee shall execute and deliver to the Company the Investor Questionnaire attached hereto as Exhibit A (which shall be the “Investor Questionnaire” with respect to Assignee for purposes of the Backstop Agreement).

 

4.        Amendments . The parties hereby agree to amend the Backstop Agreement as follows:

 

(a)       The parties hereby agree that, notwithstanding Section 4(a) of the Backstop Agreement, both Assignor and Assignee shall only be required to fund the Subscription Amount on the date of the Merger Closing and each shall be permitted to fund such amounts without the use of any escrow.

 

(b)       The parties further hereby agree that, notwithstanding Sections 2(c) and 4(b) of the Backstop Agreement, the Backstop Offering will be consummated by the Company immediately prior to the Merger Closing.

 

(c)       The parties further hereby agree that in lieu of a new Registration Rights Agreement, the existing Registration Rights Agreement, dated as of October 14, 2015, by and among the Company and the “Investors” named therein, including both of Assignor and Assignee, will be amended and restated to provide the rights that are contemplated to be included the Registration Rights Agreement by Section 6(a) of the Backstop Agreement.

 

(d)       The parties further agree that any Backstop Shares purchased by Assignee and any Guarantee Escrow Shares received by Assignee shall be included as “Registrable Securities” under Section 5 of the Purchaser UPO (as such term is defined in the Merger Agreement).

 

5.        Consent . In accordance with Section 16 of the Backstop Agreement, the Company and Borqs hereby consent to the assignment and assumption of the Assigned Amount from Assignor to Assignee as set forth herein. In accordance with Section 16 of the Backstop Agreement, Assignee shall be deemed to be the “Subscriber” under the Backstop Agreement (and the Registration Rights Agreement) with respect to the rights and obligations under this Agreement transferred to Assignee hereunder.

 

  2  

 

 

6.        Acknowledgement of Appointment of Purchaser Representative . Each of Assignor and Assignee hereby acknowledge that pursuant to and in accordance with Section 10.14 of the Merger Agreement, the Purchaser Representative is authorized to act on behalf of the Purchaser in connection with the Merger Agreement and the Escrow Agreement. Each of Assignor and Assignee hereby authorize the Purchaser Representative to act on their behalf as their sole and exclusive agent, attorney-in-fact and representative with respect to (i) any determinations (or disputes) under or in connection with the Merger Agreement as to whether Assignor and Assignee are entitled to all or any portion of the Guarantee Escrow Shares and (ii) any matters relating to the Escrow Agreement, including without limitation the disbursement of Guarantee Escrow Shares thereunder.

 

7.        Notices . The parties agree that for purposes of the notice provisions under Section 12 of the Backstop Agreement, Assignee’s address notice shall be as follows:

 

 

 

If to Assignee, to:

 

EarlyBirdCapital, Inc.

366 Madison Ave., 8th Floor

New York, NY 10016

Attn: Steven Levine, CEO

Telephone No.: (212) 661-3808

email: slevine@ebcap.com

With a copy (which will not constitute notice) to:

 

Graubard Miller

The Chrysler Building

405 Lexington Avenue, 11th Floor

New York, New York 10174-1101

Attn: David Miller, Esq.

Telephone No.: (212) 818-8661

Facsimile No.: (212) 818-8881

Email: dmiller@graubard.com

 

and

 

Zhengqi International Holding Limited to the address as set forth with respect to Subscriber in Section 12 of the Backstop Agreement (including persons or entities entitled to copies of notices)

 

 

 

8.        Miscellaneous . Except as expressly provided in this Agreement, all of the terms and
provisions in the Backstop Agreement and shall remain in full force and effect, on the terms and subject to the conditions set forth therein. This Agreement does not constitute, directly or by implication, an amendment, modification or waiver of any provision of the Backstop Agreement, or any other right, remedy, power or privilege of any party to the Backstop Agreement, except as expressly set forth herein. Any reference to the Backstop Agreement in the Backstop Agreement or any other agreement, document, instrument or certificate entered into or issued in connection therewith shall hereinafter mean the Backstop Agreement, as amended or modified, or the provisions thereof waived, by this Agreement (or as the Backstop Agreement may be further amended or modified after the date hereof in accordance with the terms thereof). The provisions of Sections 12 through 25 of the Backstop Agreement are hereby incorporated herein by reference and apply to this Agreement as if all references to the “Agreement” contained therein were instead references to this Agreement.

 

{Remainder of Page Intentionally Left Blank; Signature Page Follows}

 

  3  

 

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the date first written above.

 

  Assignor.
     
  ZHENGQI INTERNATIONAL HOLDING LIMITED
     
  By: /s/ Zhouhong Peng 
  Name:  Zhouhong Peng 
  Title: Director 
     
  Assignee:
     
  NINEPOINT CAPITAL LLC
     
  By: /s/ Yaqi Feng 
  Name: Yaqi Feng
  Title: CEO
     
  The Company:
     
  PACIFIC SPECIAL ACQUISITION CORP.
     
  By: /s/ Zhouhong Peng 
  Name:  Zhouhong Peng
  Title: CEO
     
  Borqs:  
     
  BORQS INTERNATIONAL HOLDING CORP.
     
  By:
  Name:

  Title:                                      

 

[Signature Page to Partial Assignment of Backstop and Subscription Agreement]

 

 

 

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the date first written above.

 

  Assignor.
     
  ZHENGQI INTERNATIONAL HOLDING LIMITED
     
  By:
  Name:   
  Title:  
     
  Assignee:
     
  EARLYBIRDCAPITAL, INC.
     
  By:  
  Name:   
  Title:  
     
  The Company:
     
  PACIFIC SPECIAL ACQUISITION CORP.
     
  By:  
  Name:   
  Title:  
     
  Borqs:
     
  BORQS INTERNATIONAL HOLDING CORP.
     
  By: /s/ Pat Chan
  Name: Pat Chan
  Title:                                        

 

[Signature Page to Partial Assignment and Amendment of Backstop and Subscription Agreement]

 

 

 

 

Exhibit A

 

Investor Questionnaire

 

THIS QUESTIONNAIRE MUST BE ANSWERED FULLY AND RETURNED ALONG WITH YOUR COMPLETED SUBSCRIPTION AGREEMENT IN CONNECTION WITH YOUR PROSPECTIVE PURCHASE OF SHARES FROM PACIFIC SPECIAL ACQUISITION CORP (THE “ COMPANY ”).

 

THE INFORMATION SUPPLIED IN THIS QUESTIONNAIRE WILL BE HELD IN STRICT CONFIDENCE. NO INFORMATION WILL BE DISCLOSED EXCEPT TO THE EXTENT THAT SUCH DISCLOSURE IS REQUIRED BY LAW OR REGULATION, OTHERWISE DEMANDED BY PROPER LEGAL PROCESS OR IN LITIGATION INVOLVING THE COMPANY AND ITS CONTROLLING PERSONS.

 

Capitalized terms used herein without definition shall have the respective meanings given such terms as set forth in the Partial Assignment and Amendment of Backstop and Subscription Agreement by and among Zhengqi International Holding Limited, a company incorporated in the British Virgin Islands, EarlyBirdCapital, Inc., the Company, and Borqs International Holding Corp, Company (the “ Agreement ”).

 

(1)       The undersigned represents and warrants that he, she or it comes within at least one category marked below, and that for any category marked, he, she or it has truthfully set forth, where applicable, the factual basis or reason the undersigned comes within that category. The undersigned agrees to furnish any additional information which the Company reasonably deems necessary in order to verify the answers set forth below.

 

Category A ___ The undersigned is an individual (not a partnership, corporation, etc.) whose individual net worth, or joint net worth with his or her spouse, presently exceeds $1,000,000.

 

Explanation. In calculating net worth, you include all of your assets (other than your primary residence), whether liquid or illiquid, such as cash, stock, securities, personal property and real estate based on the fair market value of such property MINUS all debts and liabilities (except that a mortgage or other debt secured by your primary residence, up to the estimated fair market value of the primary residence at the time of the purchase of the Shares, shall not be included as a liability, provided that if the amount of such indebtedness outstanding at the time of the purchase of the Shares exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of your primary residence, the amount of such excess shall be included as a liability. Further, the amount of any mortgage or other indebtedness secured by your primary residence that exceeds the fair market value of the residence at the time of the purchase of the Shares shall be included as a liability.

 

Category B ___ The undersigned is an individual (not a partnership, corporation, etc.) who had an income in excess of $200,000 in each of the two most recent years, or joint income with his or her spouse in excess of $300,000 in each of those years (in each case including foreign income, tax exempt income and full amount of capital gains and losses but excluding any income of other family members and any unrealized capital appreciation) and has a reasonable expectation of reaching the same income level in the current year.

 

  A- 1  

 

 

Category C ___ The undersigned is a director or executive officer of the Company which is issuing and selling the Shares.

 

Category D ___ The undersigned is a bank, as defined in Section 3(a)(2) of the Securities Act of 1933, as amended (the “ Act ”); a savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Act, whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934; any insurance company as defined in Section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors (describe entity).
 
 

 

Category E ___ The undersigned is a private business development company as defined in Section 202(a) (22) of the Investment Advisors Act of 1940 (describe entity)
 
 

 

Category F ___ The undersigned is either a corporation, partnership, Massachusetts or similar business trust, or any organization described in Section 501(c)(3) of the Internal Revenue Code, in each case not formed for the specific purpose of acquiring the Shares and with total assets in excess of $5,000,000. (describe entity)
 
 

 

Category G ___ The undersigned is a trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Shares, where the purchase is directed by a “sophisticated investor” as defined in Regulation 506(b)(2)(ii) under the Act.
 
 

 

Category H ___ The undersigned is an entity (other than a trust) in which all of the equity owners are “accredited investors” within one or more of the above categories. If relying upon this Category alone, each equity owner must complete a separate copy of this Investor Questionnaire. (describe entity)
 
 

 

The undersigned agrees that the undersigned will notify the Company at any time on or prior to the applicable closing in the event that the representations and warranties in this Investor Questionnaire shall cease to be true, accurate and complete.

 

  A- 2  

 

 

(2)       Suitability (please answer each question)

 

(a) Are you familiar with the risk aspects and the non-liquidity of investments such as the Shares for which you seek to acquire?
     
    YES             NO           

 

(b) Do you understand that there is no guarantee of financial return on this investment and that you run the risk of losing your entire investment?
     
    YES             NO           

 

(3)       Manner in which title is to be held: (circle one)

 

(a) Individual Ownership

 

(b) Community Property

 

(c) Joint Tenant with Right of Survivorship (both parties must sign)

 

(d) Partnership

 

(e) Tenants in Common

 

(f) Company

 

(g) Trust

 

(h) Other

 

(4)       Are you a U.S. person (as defined in the Securities Act)?

 

    YES             NO           

 

(5)       FINRA Affiliation.

 

Are you affiliated or associated with a member of FINRA (please check one):

 

YES _____ NO _____

 

If Yes, please describe:

 

 

 

 

 

 

 

 

 

 

*If subscriber is a Registered Representative with a member of FINRA, have the following acknowledgment signed by the appropriate party:

 

  A- 3  

 

 

The undersigned FINRA firm acknowledges receipt of the notice required by the Conduct Rules of FINRA.

 

 
Name of NASD Member Firm  
     
By:    
  Authorized Officer  
     
Date:    
     

 

{Remainder of page intentionally left blank}

 

  A- 4  

 

 

The undersigned is informed of the significance to the Company of the foregoing representations and answers contained in this Investor Questionnaire and such answers have been provided under the assumption that the Company will rely on them. The undersigned represents and warrants to the Company, as or on behalf of the Subscriber, that the information in this Investor Questionnaire is true, complete and accurate and may be relied upon by the Company. The Subscriber understands that a false representation may constitute a violation of law, and that any person or entity who suffers damage as a result of a false representation may have a claim against the Subscriber for damages

 

Individual Signature:   Entity Signature:
         
 
Signature   Entity Name
         
  By:
Name (Print)      Signature
         
Date:              
      Signatory Name (Print)
         
     
     

Title

         
      Date:       

 

 

A-5

 

 

Exhibit 10.13

 

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

 

THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this “ Agreement ”) is entered into as of August 18, 2017, by and among Pacific Special Acquisition Corp., a British Virgin Islands company with limited liability, which will be known after the consummation of the transactions contemplated by the Merger Agreement (as defined below) as “Borqs Technologies, Inc.” (including any successor entity thereto, the “ Company ”), and the undersigned parties listed under Investor on the signature page hereto (each, an “Investor” and collectively, the “ Investors ”).

 

WHEREAS, the Investors previously held all of the outstanding Ordinary Shares of the Company issued prior to the consummation of the Company’s initial public offering (the “ Initial Shares ”);

 

WHEREAS, certain of the Investors privately purchased a total of 531,875 Units (the “ Private Units ”) simultaneously with the consummation of the Company’s initial public offering and in the closing of an over-allotment option for the Company’s initial public offering;

 

WHEREAS, the Investors and the Company entered into that certain Registration Rights Agreement, dated as of October 14, 2015 (“ Prior Agreement ”), to provide the Investors with certain rights relating to the registration of the Initial Shares, the Private Units and the Working Capital Units (defined below);

 

WHEREAS, on December 27, 2016, the Company entered into that certain Merger Agreement (as amended from time to time in accordance with the terms thereof, including the First Amendment to Merger Agreement dated May 10, 2017 and the Second Amendment to Merger Agreement dated June 29, 2017, the “ Merger Agreement ”) by and among the Company, PAAC Merger Subsidiary Limited, an exempted company formed under the laws of the Cayman Islands with limited liability and a wholly-owned subsidiary of the Company (“ Merger Sub ”), Zhengqi International Holding Limited, a business company incorporated in the British Virgin Islands with limited liability, in its capacity under the Merger Agreement as the Purchaser Representative, Borqs International Holding Corp, a company formed under the laws of the Cayman Islands with limited liability (“ Borqs ”), Zengdong Zou, in the capacity as the Seller Representative thereunder, and for limited purposes thereof, Zhengqi International Holding Limited (the “ Sponsor ”), pursuant to which, subject to the terms and conditions thereof, Merger Sub will merger with and into Borqs, with Borqs continuing as the surviving entity (the “ Merger ”);

 

WHEREAS, on May 11, 2017, the Company and the Sponsor entered into that certain Backstop and Subscription Agreement (as partially assigned to EarlyBird Capital, Inc. (“ EBC ”) for $750,000 in purchase obligations and amended on August 16, 2017, the “ Backstop Agreement ”), pursuant to which the Sponsor agreed to purchase up to $24.0 million of Ordinary Shares through (i) open market or privately negotiated transactions with third parties, (ii) a private placement from the Company with consummation to occur immediately prior to the Merger or (iii) a combination thereof, in order to ensure that there is at least $24.0 million in funds left in the Company’s trust account after redemptions in connection with the Merger and the proceeds from the private placement to be conducted by the Company prior to the Merger (“ Closing Proceeds ”), although Sponsor is entitled, at its sole election, to purchase additional Ordinary Shares in excess of such $24.0 million Closing Proceeds requirement, up to $24.0 million purchased in total in connection with the Backstop Agreement, and of which obligations to purchase in the private placement from the Company thereunder, EBC assumed $750,000 (any shares acquired by the Sponsor or EBC (collectively, the “ Backstop Investors ”) under or in connection with the Backstop Agreement, whether in open market purchases, private purchases or pursuant to a private placement with the Company, “ Backstop Shares ”);

 

WHEREAS, in connection with the Backstop Agreement, upon the consummation of the Merger, the Earnout Shares (as defined below) will be issued in the name of the Backstop Investors and deposited into escrow and the Backstop Investors will have the right to receive certain Earnout Shares if they are not earned by Borqs shareholders pursuant to the terms of the Merger Agreement; and

 

WHEREAS, the Investors and the Company desire to enter into this Agreement to amend and restate the Prior Agreement to provide the Backstop Investors as Investors hereunder with certain rights relating to the registration of the Backstop Shares and the Earnout Shares.

 

 

 

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

1.      DEFINITIONS . The following capitalized terms used herein have the following meanings:

 

Agreement ” means this Agreement, as amended, restated, supplemented, or otherwise modified from time to time.

 

Backstop Agreement ” is defined in the recitals to this Agreement.

 

Backstop Investors ” is defined in the recitals to this Agreement.

 

Backstop Shares ” is defined in the recitals to this Agreement.

 

Borqs ” is defined in the recitals to this Agreement.

 

Business Combination ” means a merger, share exchange, asset acquisition, share purchase, recapitalization, reorganization or other similar business combination with one or more businesses or entities.

 

Closing Proceeds ” is defined in the recitals to this Agreement.

 

Commission ” means the Securities and Exchange Commission, or any other Federal agency then administering the Securities Act or the Exchange Act.

 

Company ” is defined in the preamble to this Agreement.

 

Demand Registration ” is defined in Section 2.1.1.

 

Demanding Holder ” is defined in Section 2.1.1.

 

Earnout Shares ” means any Earnout Shares (as defined in the Merger Agreement) that are ultimately released to the Backstop Investors in the event certain conditions are met and in any case pursuant to the provisions (including the dispute resolution provisions) in the Merger Agreement governing such Earnout Shares, including Section 12.2.

 

EBC ” is defined in the recitals to this Agreement.

 

Exchange Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect at the time.

 

Form S-3 ” is defined in Section 2.3.

 

Indemnified Party ” is defined in Section 4.3.

 

Indemnifying Party ” is defined in Section 4.3.

 

Initial Shares ” is defined in the recitals to this Agreement.

 

Investor ” is defined in the preamble to this Agreement.

 

Investor Indemnified Party ” is defined in Section 4.1.

 

Maximum Number of Shares ” is defined in Section 2.1.4.

 

Merger ” is defined in the recitals to this Agreement.

 

Merger Agreement ” is defined in the recitals to this Agreement.

 

  2  

 

 

Merger Sub ” is defined in the recitals to this Agreement.

 

Notices ” is defined in Section 6.3.

 

Option Securities ” is defined in Section 2.1.4.

 

Ordinary Shares ” means the Ordinary Shares of the Company, no par value.

 

Piggy-Back Registration ” is defined in Section 2.2.1.

 

Prior Agreement ” is defined in the recitals to this Agreement.

 

Private Units ” is defined in the recitals to this Agreement.

 

Register ,” ” Registered ” and “ Registration ” mean a registration effected by preparing and filing a registration statement or similar document in compliance with the requirements of the Securities Act, and the applicable rules and regulations promulgated thereunder, and such registration statement becoming effective.

 

Registrable Securities ” means (i) all of the Initial Shares, (ii) all of the Private Units (and underlying Ordinary Shares), (iii) all of the Working Capital Units (and underlying Ordinary Shares), (iv) all of the Backstop Shares and (v) all of the Earnout Shares. Registrable Securities include any warrants, share capital or other securities of the Company issued as a dividend or other distribution with respect to or in exchange for or in replacement of such Initial Shares, Private Units (and underlying Ordinary Shares), Working Capital Units (and underlying Ordinary Shares), Backstop Shares and Earnout Shares. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when: (a) a Registration Statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been sold, transferred, disposed of or exchanged in accordance with such Registration Statement; (b) such securities shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent public distribution of them shall not require registration under the Securities Act; (c) such securities shall have ceased to be outstanding, or (d) the Registrable Securities are freely saleable under Rule 144 without volume limitations.

 

Registration Statement ” means a registration statement filed by the Company with the Commission in compliance with the Securities Act and the rules and regulations promulgated thereunder for a public offering and sale of equity securities, or securities or other obligations exercisable or exchangeable for, or convertible into, equity securities (other than a registration statement on Form S-4 or Form S-8, or their successors, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another entity).

 

Release Date ” means the date on which the Initial Shares are disbursed from escrow pursuant to Section 3 of that certain Share Escrow Agreement dated as of October 14, 2015 by and among certain of the Investors and Continental Stock Transfer & Trust Company.

 

Securities Act ” means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect at the time.

 

Sponsor ” is defined in the recitals to this Agreement.

 

Underwriter ” means a securities dealer who purchases any Registrable Securities as principal in an underwritten offering and not as part of such dealer’s market-making activities.

 

Units ” means the units of the Company, each comprised of one ordinary share, one right to receive one-tenth of one ordinary share automatically on the consummation of an initial business combination, and one Warrant to purchase one-half of one ordinary share.

 

Warrants means the warrants of the Company underlying the Units, each to purchase one half of one ordinary share.

 

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Working Capital Units ” means any Units held by Investors, officers or directors of the Company or their affiliates which may be issued in payment of working capital loans made to the Company.

 

2.     REGISTRATION RIGHTS .

 

2.1   Demand Registration .

 

2.1.1 Request for Registration . At any time and from time to time on or after (i) the date that the Company consummates a Business Combination with respect to the Private Units (or underlying Ordinary Shares), Working Capital Units (or underlying Ordinary Shares) or Backstop Shares, (ii) upon release of the Earnout Shares or (iii) three months prior to the Release Date with respect to all other Registrable Securities, the holders of a majority-in-interest of such Registrable Securities, as the case may be, held by the Investors, officers or directors of the Company or their affiliates, or the transferees of the Investors, may make a written demand for registration under the Securities Act of all or part of their Registrable Securities, as the case may be (a “ Demand Registration ”). Any demand for a Demand Registration shall specify the number of shares of Registrable Securities proposed to be sold and the intended method(s) of distribution thereof. The Company will notify all holders of Registrable Securities of the demand, and each holder of Registrable Securities who wishes to include all or a portion of such holder’s Registrable Securities in the Demand Registration (each such holder including shares of Registrable Securities in such registration, a “ Demanding Holder ”) shall so notify the Company within fifteen (15) days after the receipt by the holder of the notice from the Company. Upon any such request, the Demanding Holders shall be entitled to have their Registrable Securities included in the Demand Registration, subject to Section 2.1.4 and the provisos set forth in Section 3.1.1. The Company shall not be obligated to effect more than an aggregate of three (3) Demand Registrations under this Section 2.1.1 in respect of all Registrable Securities.

 

2.1.2 Effective Registration . A registration will not count as a Demand Registration until the Registration Statement filed with the Commission with respect to such Demand Registration has been declared effective and the Company has complied with all of its obligations under this Agreement with respect thereto; provided, however, that if, after such Registration Statement has been declared effective, the offering of Registrable Securities pursuant to a Demand Registration is interfered with by any stop order or injunction of the Commission or any other governmental agency or court, the Registration Statement with respect to such Demand Registration will be deemed not to have been declared effective, unless and until, (i) such stop order or injunction is removed, rescinded or otherwise terminated, and (ii) a majority-in-interest of the Demanding Holders thereafter elect to continue the offering; provided, further, that the Company shall not be obligated to file a second Registration Statement until a Registration Statement that has been filed is counted as a Demand Registration or is terminated.

 

2.1.3 Underwritten Offering . If a majority-in-interest of the Demanding Holders so elect and such holders so advise the Company as part of their written demand for a Demand Registration, the offering of such Registrable Securities pursuant to such Demand Registration shall be in the form of an underwritten offering. In such event, the right of any holder to include its Registrable Securities in such registration shall be conditioned upon such holder’s participation in such underwriting and the inclusion of such holder’s Registrable Securities in the underwriting to the extent provided herein. All Demanding Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the Underwriter or Underwriters selected for such underwriting by a majority-in-interest of the holders initiating the Demand Registration.

 

2.1.4 Reduction of Offering . If the managing Underwriter or Underwriters for a Demand Registration that is to be an underwritten offering advises the Company and the Demanding Holders in writing that the dollar amount or number of shares of Registrable Securities which the Demanding Holders desire to sell, taken together with all other Ordinary Shares or other securities which the Company desires to sell and the Ordinary Shares, if any, as to which registration has been requested pursuant to written contractual piggy-back registration rights held by other shareholders of the Company who desire to sell, exceeds the maximum dollar amount or maximum number of shares that can be sold in such offering without adversely affecting the proposed offering price, the timing, the distribution method, or the probability of success of such offering (such maximum dollar amount or maximum number of shares, as applicable, the “ Maximum Number of Shares ”), then the Company shall include in such registration: (i) first, the Registrable Securities as to which Demand Registration has been requested by the Demanding Holders (pro rata in accordance with the number of shares that each such Person has requested be included in such registration, regardless of the number of shares held by each such Person (such proportion is referred to herein as “ Pro Rata ”)) that can be sold without exceeding the Maximum Number of Shares; (ii) second, to the extent that the Maximum Number of Shares has not been reached under the foregoing clause (i), the Ordinary Shares or other securities that the Company desires to sell that can be sold without exceeding the Maximum Number of Shares; (iii) third, to the extent that the Maximum Number of Shares has not been reached under the foregoing clauses (i) and (ii), the Ordinary Shares or other securities registrable pursuant to the terms of the Unit Purchase Option issued to Early Bird Capital, Inc. or its designees in connection with the Company’s initial public offering (the “ Unit Purchase Option ” and such registrable securities, the “ Option Securities ”) as to which “piggy-back” registration has been requested by the holders thereof, Pro Rata, that can be sold without exceeding the Maximum Number of Shares; and (iv) fourth, to the extent that the Maximum Number of Shares have not been reached under the foregoing clauses (i), (ii), and (iii), the Ordinary Shares or other securities for the account of other persons that the Company is obligated to register pursuant to written contractual arrangements with such persons and that can be sold without exceeding the Maximum Number of Shares.

 

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2.1.5 Withdrawal . If a majority-in-interest of the Demanding Holders disapprove of the terms of any underwriting or are not entitled to include all of their Registrable Securities in any offering, such majority-in-interest of the Demanding Holders may elect to withdraw from such offering by giving written notice to the Company and the Underwriter or Underwriters of their request to withdraw prior to the effectiveness of the Registration Statement filed with the Commission with respect to such Demand Registration. If the majority-in-interest of the Demanding Holders withdraws from a proposed offering relating to a Demand Registration, then such registration shall not count as a Demand Registration provided for in Section 2.1.

 

2.2   Piggy-Back Registration .

 

2.2.1 Piggy-Back Rights . If at any time on or after the date the Company consummates a Business Combination the Company proposes to file a Registration Statement under the Securities Act with respect to an offering of equity securities, or securities or other obligations exercisable or exchangeable for, or convertible into, equity securities, by the Company for its own account or for shareholders of the Company for their account (or by the Company and by shareholders of the Company including, without limitation, pursuant to Section 2.1), other than a Registration Statement (i) filed in connection with any employee share option or other benefit plan, (ii) for an exchange offer or offering of securities solely to the Company’s existing shareholders, (iii) for an offering of debt that is convertible into equity securities of the Company or (iv) for a dividend reinvestment plan, then the Company shall (x) give written notice of such proposed filing to the holders of Registrable Securities as soon as practicable but in no event less than ten (10) days before the anticipated filing date, which notice shall describe the amount and type of securities to be included in such offering, the intended method(s) of distribution, and the name of the proposed managing Underwriter or Underwriters, if any, of the offering, and (y) offer to the holders of Registrable Securities in such notice the opportunity to register the sale of such number of shares of Registrable Securities as such holders may request in writing within five (5) days following receipt of such notice (a “ Piggy-Back Registration ”). The Company shall cause such Registrable Securities to be included in such registration and shall use its best efforts to cause the managing Underwriter or Underwriters of a proposed underwritten offering to permit the Registrable Securities requested to be included in a Piggy-Back Registration on the same terms and conditions as any similar securities of the Company and to permit the sale or other disposition of such Registrable Securities in accordance with the intended method(s) of distribution thereof. All holders of Registrable Securities proposing to distribute their securities through a Piggy-Back Registration that involves an Underwriter or Underwriters shall enter into an underwriting agreement in customary form with the Underwriter or Underwriters selected for such Piggy-Back Registration.

 

2.2.2 Reduction of Offering . If the managing Underwriter or Underwriters for a Piggy-Back Registration that is to be an underwritten offering advises the Company and the holders of Registrable Securities in writing that the dollar amount or number of Ordinary Shares which the Company desires to sell, taken together with Ordinary Shares, if any, as to which registration has been demanded pursuant to written contractual arrangements with persons other than the holders of Registrable Securities hereunder, the Registrable Securities as to which registration has been requested under this Section 2.2, and the Ordinary Shares, if any, as to which registration has been requested pursuant to the written contractual piggy-back registration rights of other shareholders of the Company, exceeds the Maximum Number of Shares, then the Company shall include in any such registration:

 

a)       If the registration is undertaken for the Company’s account: (A) first, the Ordinary Shares or other securities that the Company desires to sell that can be sold without exceeding the Maximum Number of Shares; (B) second, to the extent that the Maximum Number of Shares has not been reached under the foregoing clause (A), the Ordinary Shares or other securities, if any, comprised of Registrable Securities and Option Securities, as to which registration has been requested pursuant to the applicable written contractual piggyback registration rights of such security holders, Pro Rata, that can be sold without exceeding the Maximum Number of Shares; and (C) third, to the extent that the Maximum Number of shares has not been reached under the foregoing clauses (A) and (B), the Ordinary Shares or other securities for the account of other persons that the Company is obligated to register pursuant to written contractual piggy-back registration rights with such persons and that can be sold without exceeding the Maximum Number of Shares;

 

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b)       If the registration is a “demand” registration undertaken at the demand of holders of Option Securities, (A) first, the Ordinary Shares or other securities for the account of the demanding persons, Pro Rata, that can be sold without exceeding the Maximum Number of Shares; (B) second, to the extent that the Maximum Number of Shares has not been reached under the foregoing clause (A), the Ordinary Shares or other securities that the Company desires to sell that can be sold without exceeding the Maximum Number of Shares; (C) third, to the extent that the Maximum Number of Shares has not been reached under the foregoing clauses (A) and (B), the shares of Registrable Securities, Pro Rata, as to which registration has been requested pursuant to the terms hereof, that can be sold without exceeding the Maximum Number of Shares; and (D) fourth, to the extent that the Maximum Number of Shares has not been reached under the foregoing clauses (A), (B) and (C), the Ordinary Shares or other securities for the account of other persons that the Company is obligated to register pursuant to written contractual arrangements with such persons, that can be sold without exceeding the Maximum Number of Shares; and

 

c)      If the registration is a “demand” registration undertaken at the demand of persons other than either the holders of Registrable Securities or of Option Securities, (A) first, the Ordinary Shares or other securities for the account of the demanding persons that can be sold without exceeding the Maximum Number of Shares; (B) second, to the extent that the Maximum Number of Shares has not been reached under the foregoing clause (A), the Ordinary Shares or other securities that the Company desires to sell that can be sold without exceeding the Maximum Number of Shares; (C) third, to the extent that the Maximum Number of Shares has not been reached under the foregoing clauses (A) and (B), collectively the Ordinary Shares or other securities comprised of Registrable Securities and Option Securities, Pro Rata, as to which registration has been requested pursuant to the terms hereof and of the Unit Purchase Option, as applicable, that can be sold without exceeding the Maximum Number of Shares; and (D) fourth, to the extent that the Maximum Number of Shares has not been reached under the foregoing clauses (A), (B) and (C), the Ordinary Shares or other securities for the account of other persons that the Company is obligated to register pursuant to written contractual arrangements with such persons, that can be sold without exceeding the Maximum Number of Shares.

 

2.2.3 Withdrawal . Any holder of Registrable Securities may elect to withdraw such holder’s request for inclusion of Registrable Securities in any Piggy-Back Registration by giving written notice to the Company of such request to withdraw prior to the effectiveness of the Registration Statement. The Company (whether on its own determination or as the result of a withdrawal by persons making a demand pursuant to written contractual obligations) may withdraw a Registration Statement at any time prior to the effectiveness of such Registration Statement. Notwithstanding any such withdrawal, the Company shall pay all expenses incurred by the holders of Registrable Securities in connection with such Piggy-Back Registration as provided in Section 3.3.

 

2.2.4 Registrations on Form S-3 . The holders of Registrable Securities may at any time and from time to time, request in writing that the Company register the resale of any or all of such Registrable Securities on Form S-3 or any similar short-form registration which may be available at such time (“ Form S-3 ”); provided, however, that the Company shall not be obligated to effect such request through an underwritten offering. Upon receipt of such written request, the Company will promptly give written notice of the proposed registration to all other holders of Registrable Securities, and, as soon as practicable thereafter, effect the registration of all or such portion of such holder’s or holders’ Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities or other securities of the Company, if any, of any other holder or holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration pursuant to this Section 2.3: (i) if Form S-3 is not available for such offering; or (ii) if the holders of the Registrable Securities, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at any aggregate price to the public of less than $500,000. Registrations effected pursuant to this Section 2.3 shall not be counted as Demand Registrations effected pursuant to Section 2.1.

 

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3.      REGISTRATION PROCEDURES .

 

3.1   Filings; Information . Whenever the Company is required to effect the registration of any Registrable Securities pursuant to Section 2, the Company shall use its best efforts to effect the registration and sale of such Registrable Securities in accordance with the intended method(s) of distribution thereof as expeditiously as practicable, and in connection with any such request:

 

3.1.1 Filing Registration Statement . The Company shall use its best efforts to, as expeditiously as possible after receipt of a request for a Demand Registration pursuant to Section 2.1, prepare and file with the Commission a Registration Statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the sale of all Registrable Securities to be registered thereunder in accordance with the intended method(s) of distribution thereof, and shall use its best efforts to cause such Registration Statement to become effective and use its best efforts to keep it effective for the period required by Section 3.1.3; provided, however, that the Company shall have the right to defer any Demand Registration for up to thirty (30) days, and any Piggy-Back Registration for such period as may be applicable to deferment of any demand registration to which such Piggy-Back Registration relates, in each case if the Company shall furnish to the holders a certificate signed by the President or Chairman of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would be materially detrimental to the Company and its shareholders for such Registration Statement to be effected at such time; provided further, however, that the Company shall not have the right to exercise the right set forth in the immediately preceding proviso more than once in any 365-day period in respect of a Demand Registration hereunder.

 

3.1.2 Copies . The Company shall, prior to filing a Registration Statement or prospectus, or any amendment or supplement thereto, furnish without charge to the holders of Registrable Securities included in such registration, and such holders’ legal counsel, copies of such Registration Statement as proposed to be filed, each amendment and supplement to such Registration Statement (in each case including all exhibits thereto and documents incorporated by reference therein), the prospectus included in such Registration Statement (including each preliminary prospectus), and such other documents as the holders of Registrable Securities included in such registration or legal counsel for any such holders may request in order to facilitate the disposition of the Registrable Securities owned by such holders.

 

3.1.3 Amendments and Supplements . The Company shall prepare and file with the Commission such amendments, including post-effective amendments, and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective and in compliance with the provisions of the Securities Act until all Registrable Securities and other securities covered by such Registration Statement have been disposed of in accordance with the intended method(s) of distribution set forth in such Registration Statement or such securities have been withdrawn or until such time as the Registrable Securities cease to be Registrable Securities as defined by the Agreement.

 

3.1.4 Notification . After the filing of a Registration Statement, the Company shall promptly, and in no event more than two (2) business days after such filing, notify the holders of Registrable Securities included in such Registration Statement of such filing, and shall further notify such holders promptly and confirm such advice in writing in all events within two (2) business days of the occurrence of any of the following: (i) when such Registration Statement becomes effective; (ii) when any post-effective amendment to such Registration Statement becomes effective; (iii) the issuance or threatened issuance by the Commission of any stop order (and the Company shall take all actions required to prevent the entry of such stop order or to remove it if entered); and (iv) any request by the Commission for any amendment or supplement to such Registration Statement or any prospectus relating thereto or for additional information or of the occurrence of an event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of the securities covered by such Registration Statement, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and promptly make available to the holders of Registrable Securities included in such Registration Statement any such supplement or amendment; except that before filing with the Commission a Registration Statement or prospectus or any amendment or supplement thereto, including documents incorporated by reference, the Company shall furnish to the holders of Registrable Securities included in such Registration Statement and to the legal counsel for any such holders, copies of all such documents proposed to be filed sufficiently in advance of filing to provide such holders and legal counsel with a reasonable opportunity to review such documents and comment thereon, and the Company shall not file any Registration Statement or prospectus or amendment or supplement thereto, including documents incorporated by reference, to which such holders or their legal counsel shall object.

 

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3.1.5 State Securities Laws Compliance . The Company shall use its best efforts to (i) register or qualify the Registrable Securities covered by the Registration Statement under such securities or “blue sky” laws of such jurisdictions in the United States as the holders of Registrable Securities included in such Registration Statement (in light of their intended plan of distribution) may request and (ii) take such action necessary to cause such Registrable Securities covered by the Registration Statement to be registered with or approved by such other governmental authorities as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be necessary or advisable to enable the holders of Registrable Securities included in such Registration Statement to consummate the disposition of such Registrable Securities in such jurisdictions; provided, however, that the Company shall not be required to qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph or subject itself to taxation in any such jurisdiction.

 

3.1.6 Agreements for Disposition . The Company shall enter into customary agreements (including, if applicable, an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities. The representations, warranties and covenants of the Company in any underwriting agreement which are made to or for the benefit of any Underwriters, to the extent applicable, shall also be made to and for the benefit of the holders of Registrable Securities included in such registration statement. No holder of Registrable Securities included in such registration statement shall be required to make any representations or warranties in the underwriting agreement except, if applicable, with respect to such holder’s organization, good standing, authority, title to Registrable Securities, lack of conflict of such sale with such holder’s material agreements and organizational documents, and with respect to written information relating to such holder that such holder has furnished in writing expressly for inclusion in such Registration Statement.

 

3.1.7 Cooperation . The principal executive officer of the Company, the principal financial officer of the Company, the principal accounting officer of the Company and all other officers and members of the management of the Company shall cooperate fully in any offering of Registrable Securities hereunder, which cooperation shall include, without limitation, the preparation of the Registration Statement with respect to such offering and all other offering materials and related documents, and participation in meetings with Underwriters, attorneys, accountants and potential investors.

 

3.1.8 Records . The Company shall make available for inspection by the holders of Registrable Securities included in such Registration Statement, any Underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other professional retained by any holder of Registrable Securities included in such Registration Statement or any Underwriter, all financial and other records, pertinent corporate documents and properties of the Company, as shall be necessary to enable them to exercise their due diligence responsibility, and cause the Company’s officers, directors and employees to supply all information requested by any of them in connection with such Registration Statement.

 

3.1.9 Opinions and Comfort Letters . The Company shall furnish to each holder of Registrable Securities included in any Registration Statement a signed counterpart, addressed to such holder, of (i) any opinion of counsel to the Company delivered to any Underwriter and (ii) any comfort letter from the Company’s independent public accountants delivered to any Underwriter. In the event no legal opinion is delivered to any Underwriter, the Company shall furnish to each holder of Registrable Securities included in such Registration Statement, at any time that such holder elects to use a prospectus, an opinion of counsel to the Company to the effect that the Registration Statement containing such prospectus has been declared effective and that no stop order is in effect.

 

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3.1.10 Earnings Statement . The Company shall comply with all applicable rules and regulations of the Commission and the Securities Act, and make available to its shareholders, as soon as practicable, an earnings statement covering a period of twelve (12) months, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder.

 

3.1.11 Listing . The Company shall use its best efforts to cause all Registrable Securities included in any registration to be listed on such exchanges or otherwise designated for trading in the same manner as similar securities issued by the Company are then listed or designated or, if no such similar securities are then listed or designated, in a manner satisfactory to the holders of a majority of the Registrable Securities included in such registration.

 

3.1.12 Road Show . If the registration involves the registration of Registrable Securities involving gross proceeds in excess of $25,000,000, the Company shall use its reasonable efforts to make available senior executives of the Company to participate in customary “road show” presentations that may be reasonably requested by the Underwriter in any underwritten offering.

 

3.2    Obligation to Suspend Distribution . Upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3.1.4(iv), or, in the case of a resale registration on Form S-3 pursuant to Section 2.3 hereof, upon any suspension by the Company, pursuant to a written insider trading compliance program adopted by the Company’s Board of Directors, of the ability of all “insiders” covered by such program to transact in the Company’s securities because of the existence of material non-public information, each holder of Registrable Securities included in any registration shall immediately discontinue disposition of such Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such holder receives the supplemented or amended prospectus contemplated by Section 3.1.4(iv) or the restriction on the ability of “insiders” to transact in the Company’s securities is removed, as applicable, and, if so directed by the Company, each such holder will deliver to the Company all copies, other than permanent file copies then in such holder’s possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice.

 

3.3    Registration Expenses . The Company shall bear all costs and expenses incurred in connection with any Demand Registration pursuant to Section 2.1, any Piggy-Back Registration pursuant to Section 2.2, and any registration on Form S-3 effected pursuant to Section 2.3, and all expenses incurred in performing or complying with its other obligations under this Agreement, whether or not the Registration Statement becomes effective, including, without limitation: (i) all registration and filing fees; (ii) fees and expenses of compliance with securities or “blue sky” laws (including fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities); (iii) printing expenses; (iv) the Company’s internal expenses (including, without limitation, all salaries and expenses of its officers and employees); (v) the fees and expenses incurred in connection with the listing of the Registrable Securities as required by Section 3.1.11; (vi) Financial Industry Regulatory Authority fees; (vii) fees and disbursements of counsel for the Company and fees and expenses for independent certified public accountants retained by the Company (including the expenses or costs associated with the delivery of any opinions or comfort letters requested pursuant to Section 3.1.9); (viii) the fees and expenses of any special experts retained by the Company in connection with such registration and (ix) the fees and expenses of one legal counsel selected by the holders of a majority-in-interest of the Registrable Securities included in such registration. The Company shall have no obligation to pay any underwriting discounts or selling commissions attributable to the Registrable Securities being sold by the holders thereof, which underwriting discounts or selling commissions shall be borne by such holders. Additionally, in an underwritten offering, all selling shareholders and the Company shall bear the expenses of the Underwriter pro rata in proportion to the respective amount of shares each is selling in such offering.

 

3.4    Information . The holders of Registrable Securities shall provide such information as may reasonably be requested by the Company, or the managing Underwriter, if any, in connection with the preparation of any Registration Statement, including amendments and supplements thereto, in order to effect the registration of any Registrable Securities under the Securities Act pursuant to Section 2 and in connection with the Company’s obligation to comply with Federal and applicable state securities laws.

 

3.5    Limitations on Registration Rights . Notwithstanding anything herein to the contrary, (i) EarlyBirdCapital, Inc. may not exercise its rights under Sections 2.1 and 2.2 hereunder after five (5) and seven (7) years after the effective date of the registration statement relating to the Company’s initial public offering, respectively, and (ii) EarlyBirdCapital, Inc. may not exercise its rights under Section 2.1 more than one time.

 

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4.      INDEMNIFICATION AND CONTRIBUTION .

 

4.1    Indemnification by the Company . The Company agrees to indemnify and hold harmless each Investor and each other holder of Registrable Securities, and each of their respective officers, employees, affiliates, directors, partners, members, attorneys and agents, and each person, if any, who controls an Investor and each other holder of Registrable Securities (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) (each, an “ Investor Indemnified Party ”), from and against any expenses, losses, judgments, claims, damages or liabilities, whether joint or several, arising out of or based upon any untrue statement (or allegedly untrue statement) of a material fact contained in any Registration Statement under which the sale of such Registrable Securities was registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained in the Registration Statement, or any amendment or supplement to such Registration Statement, or arising out of or based upon any omission (or alleged omission) to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation promulgated thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration; and the Company shall promptly reimburse the Investor Indemnified Party for any legal and any other expenses reasonably incurred by such Investor Indemnified Party in connection with investigating and defending any such expense, loss, judgment, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such expense, loss, claim, damage or liability arises out of or is based upon any untrue statement or allegedly untrue statement or omission or alleged omission made in such Registration Statement, preliminary prospectus, final prospectus, or summary prospectus, or any such amendment or supplement, in reliance upon and in conformity with information furnished to the Company, in writing, by such selling holder expressly for use therein. The Company also shall indemnify any Underwriter of the Registrable Securities, their officers, affiliates, directors, partners, members and agents and each person who controls such Underwriter on substantially the same basis as that of the indemnification provided above in this Section 4.1.

 

4.2    Indemnification by Holders of Registrable Securities . Each selling holder of Registrable Securities will, in the event that any registration is being effected under the Securities Act pursuant to this Agreement of any Registrable Securities held by such selling holder, indemnify and hold harmless the Company, each of its directors and officers and each Underwriter (if any), and each other selling holder and each other person, if any, who controls another selling holder or such Underwriter within the meaning of the Securities Act, against any losses, claims, judgments, damages or liabilities, whether joint or several, insofar as such losses, claims, judgments, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or allegedly untrue statement of a material fact contained in any Registration Statement under which the sale of such Registrable Securities was registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained in the Registration Statement, or any amendment or supplement to the Registration Statement, or arise out of or are based upon any omission or the alleged omission to state a material fact required to be stated therein or necessary to make the statement therein not misleading, if the statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by such selling holder expressly for use therein, and shall reimburse the Company, its directors and officers, and each other selling holder or controlling person for any legal or other expenses reasonably incurred by any of them in connection with investigation or defending any such loss, claim, damage, liability or action. Each selling holder’s indemnification obligations hereunder shall be several and not joint and shall be limited to the amount of any net proceeds actually received by such selling holder.

 

4.3    Conduct of Indemnification Proceedings . Promptly after receipt by any person of any notice of any loss, claim, damage or liability or any action in respect of which indemnity may be sought pursuant to Section 4.1 or 4.2, such person (the “ Indemnified Party ”) shall, if a claim in respect thereof is to be made against any other person for indemnification hereunder, notify such other person (the “ Indemnifying Party ”) in writing of the loss, claim, judgment, damage, liability or action; provided, however, that the failure by the Indemnified Party to notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability which the Indemnifying Party may have to such Indemnified Party hereunder, except and solely to the extent the Indemnifying Party is actually prejudiced by such failure. If the Indemnified Party is seeking indemnification with respect to any claim or action brought against the Indemnified Party, then the Indemnifying Party shall be entitled to participate in such claim or action, and, to the extent that it wishes, jointly with all other Indemnifying Parties, to assume control of the defense thereof with counsel satisfactory to the Indemnified Party. After notice from the Indemnifying Party to the Indemnified Party of its election to assume control of the defense of such claim or action, the Indemnifying Party shall not be liable to the Indemnified Party for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that in any action in which both the Indemnified Party and the Indemnifying Party are named as defendants, the Indemnified Party shall have the right to employ separate counsel (but no more than one such separate counsel) to represent the Indemnified Party and its controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Indemnified Party against the Indemnifying Party, with the fees and expenses of such counsel to be paid by such Indemnifying Party if, based upon the written opinion of counsel of such Indemnified Party, representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, consent to entry of judgment or effect any settlement of any claim or pending or threatened proceeding in respect of which the Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such judgment or settlement includes an unconditional release of such Indemnified Party from all liability arising out of such claim or proceeding.

 

  10  

 

 

4.4   Contribution .

 

4.4.1 If the indemnification provided for in the foregoing Sections 4.1, 4.2 and 4.3 is unavailable to any Indemnified Party in respect of any loss, claim, damage, liability or action referred to herein, then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the Indemnified Parties and the Indemnifying Parties in connection with the actions or omissions which resulted in such loss, claim, damage, liability or action, as well as any other relevant equitable considerations. The relative fault of any Indemnified Party and any Indemnifying Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such Indemnified Party or such Indemnifying Party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

 

4.4.2 The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 4.4 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding Section 4.4.1.

 

4.4.3 The amount paid or payable by an Indemnified Party as a result of any loss, claim, damage, liability or action referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 4.4, no holder of Registrable Securities shall be required to contribute any amount in excess of the dollar amount of the net proceeds (after payment of any underwriting fees, discounts, commissions or taxes) actually received by such holder from the sale of Registrable Securities which gave rise to such contribution obligation. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

 

5.      UNDERWRITING AND DISTRIBUTION .

 

5.1    Rule 144 . The Company covenants that it shall file any reports required to be filed by it under the Securities Act and the Exchange Act and shall take such further action as the holders of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holders to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 under the Securities Act, as such Rules may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission.

 

6.       MISCELLANEOUS .

 

6.1    Other Registration Rights . The Company represents and warrants that no person, other than the holders of the Registrable Securities and Option Securities, has any right to require the Company to register any of the Company’s share capital for sale or to include the Company’s share capital in any registration filed by the Company for the sale of share capital for its own account or for the account of any other person.

 

  11  

 

 

6.2    Assignment; No Third Party Beneficiaries . This Agreement and the rights, duties and obligations of the Company hereunder may not be assigned or delegated by the Company in whole or in part. This Agreement and the rights, duties and obligations of the holders of Registrable Securities hereunder may be freely assigned or delegated by such holder of Registrable Securities in conjunction with and to the extent of any transfer of Registrable Securities by any such holder. This Agreement and the provisions hereof shall be binding upon and shall inure to the benefit of each of the parties, to the permitted assigns of the Investors or holder of Registrable Securities or of any assignee of the Investors or holder of Registrable Securities. This Agreement is not intended to confer any rights or benefits on any persons that are not party hereto other than as expressly set forth in Article 4 and this Section 6.2.

 

6.3    Notices . All notices, demands, requests, consents, approvals or other communications (collectively, “ Notices ”) required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and shall be personally served, delivered by reputable air courier service with charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile, addressed as set forth below, or to such other address as such party shall have specified most recently by written notice. Notice shall be deemed given on the date of service or transmission if personally served or transmitted by telegram, telex or facsimile; provided, that if such service or transmission is not on a business day or is after normal business hours, then such notice shall be deemed given on the next business day. Notice otherwise sent as provided herein shall be deemed given on the next business day following timely delivery of such notice to a reputable air courier service with an order for next-day delivery.

 

To the Company:

 

Borqs Technologies, Inc.

Tower A, Building B23

Universal Business Park

No. 10 Jiuxiangqiao Road

Chaoyang District, Beijing 100015, China

Attn: Pat Chan, Chief Executive Officer

 

with a copy to:

 

Fenwick & West LLP

Silicon Valley Center

801 California Street,

Mountain View, CA 94041

Attn: Horace L. Nash, Esq. and Eva Wang, Esq.

 

and

 

Ellenoff Grossman & Schole, LLP

1345 Avenue of the Americas, 11 th Floor

New York, NY 10105

Attn: Stuart Neuhauser, Esq.

 

To an Investor, to the address set forth below such Investor’s name on Exhibit A hereto.

 

6.4    Severability . This Agreement shall be deemed severable, and the invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of this Agreement or of any other term or provision hereof. Furthermore, in lieu of any such invalid or unenforceable term or provision, the parties hereto intend that there shall be added as a part of this Agreement a provision as similar in terms to such invalid or unenforceable provision as may be possible that is valid and enforceable.

 

6.5    Counterparts . This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument.

 

6.6   Entire Agreement . This Agreement (including all agreements entered into pursuant hereto and all certificates and instruments delivered pursuant hereto and thereto) constitute the entire agreement of the parties with respect to the subject matter hereof and supersede all prior and contemporaneous agreements, representations, understandings, negotiations and discussions between the parties, whether oral or written.

 

  12  

 

 

6.7    Modifications and Amendments . No amendment, modification or termination of this Agreement shall be binding upon any party unless executed in writing by such party.

 

6.8   Titles and Headings . Titles and headings of sections of this Agreement are for convenience only and shall not affect the construction of any provision of this Agreement.

 

6.9    Waivers and Extensions . Any party to this Agreement may waive any right, breach or default which such party has the right to waive, provided that such waiver will not be effective against the waiving party unless it is in writing, is signed by such party, and specifically refers to this Agreement. Waivers may be made in advance or after the right waived has arisen or the breach or default waived has occurred. Any waiver may be conditional. No waiver of any breach of any agreement or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof nor of any other agreement or provision herein contained. No waiver or extension of time for performance of any obligations or acts shall be deemed a waiver or extension of the time for performance of any other obligations or acts.

 

6.10 Remedies Cumulative . In the event that the Company fails to observe or perform any covenant or agreement to be observed or performed under this Agreement, the Investor or any other holder of Registrable Securities may proceed to protect and enforce its rights by suit in equity or action at law, whether for specific performance of any term contained in this Agreement or for an injunction against the breach of any such term or in aid of the exercise of any power granted in this Agreement or to enforce any other legal or equitable right, or to take any one or more of such actions, without being required to post a bond. None of the rights, powers or remedies conferred under this Agreement shall be mutually exclusive, and each such right, power or remedy shall be cumulative and in addition to any other right, power or remedy, whether conferred by this Agreement or now or hereafter available at law, in equity, by statute or otherwise.

 

6.11 Governing Law . In connection with Section 5-1401 of the General Obligations Law of the State of New York, this Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without regard to principles of conflicts of law that would result in the application of the substantive law of another jurisdiction. The parties hereto agree that any action, proceeding or claim arising out of or relating in any way to this Agreement shall be resolved through final and biding arbitration in accordance with the International Arbitration Rules of the American Arbitration Association (“ AAA ”). The arbitration shall be brought before the AAA International Center for Dispute Resolution’s offices in New York City, New York, will be conducted in English and will be decided by a panel of three arbitrators selected from the AAA Commercial Disputes Panel and that the arbitrator panel’s decision shall be final and enforceable by any court having jurisdiction over the party from whom enforcement is sought. The cost of such arbitrators and arbitration services, together with the prevailing party’s legal fees and expenses, shall be borne by the non-prevailing party or as otherwise directed by the arbitrators. This Agreement may be executed in several original or facsimile counterparts, each one of which shall constitute an original, and together shall constitute but one instrument.

 

6.12 Waiver of Trial by Jury . Each party hereby irrevocably and unconditionally waives the right to a trial by jury in any action, suit, counterclaim or other proceeding (whether based on contract, tort or otherwise) arising out of, connected with or relating to this Agreement, the transactions contemplated hereby, or the actions of the Investor in the negotiation, administration, performance or enforcement hereof.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

  13  

 

 

IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be executed and delivered by their duly authorized representatives as of the date first written above.

 

  COMPANY:
     
  PACIFIC SPECIAL ACQUISITION CORP.
   
  By: /s/ Zhouhong Peng
    Name: Zhouhong Peng
    Title:   CEO
     
  INVESTORS:
     
  Zhengqi International Holding Limited
     
  By: /s/ Zhouhong Peng
    Name : Zhouhong Peng
    Title :   Director
     
    /s/ Jian Tu
    Jian Tu
     
    /s/ Zhouhong Peng
    Zhouhong Peng
     
    /s/ David Boris
    David Boris
     
    /s/ Yaqi Feng
    Yaqi Feng
     
    /s/ Guoxiong Luo
    Guoxiong Luo
     
    /s/ Jason Zexian Shen
    Jason Zexian Shen
     
    /s/ Honghui Deng
    Honghui Deng
     
  EARLY BIRD CAPITAl, INC.
     
  By: /s/ Steven Levine
    Name: Steven Levine
    Title :  CEO

 

[Signature Page to Amended and Restated Registration Rights Agreement]

 

  14  

 

 

EXHIBIT A

INVESTORS

 

Name   Address

Zhengqi International Holding Limited

   
     

Jian Tu

   
     

Zhouhong Peng

   
     

David Boris

   
     

Yaqi Feng

   
     

Guoxiong Luo

   
     

Jason Zexian Shen

   
     

Honghui Deng

   
     

EarlyBirdCapital, Inc.

   

 

 

15

 

Exhibit 16.1

  

 

August 24, 2017

 

 

 

Securities and Exchange Commission

100 F Street, N.E.

Washington, DC 20549

 

Commissioners:

 

We have read the statements made by Borqs Technologies, Inc. (Formerly known as Pacific Special Acquisition Corp.) under Item 4.01 of its Form 8-K dated August 18, 2017. We agree with the statements concerning our Firm under Item 4.01 in such Form 8-K; we are not in a position to agree or disagree with other statements of Borqs Technologies, Inc. (Formerly known as Pacific Special Acquisition Corp.) contained therein.

 

Very truly yours,

 

/s/ Marcum llp

 

 

Marcum llp

 

 

 

Exhibit 21.1

 

BORQS TECHNOLOGIES, INC.

SUBSIDIARIES OF THE REGISTRANT

 

Name of Subsidiary   Jurisdiction of Incorporation or Organization
     
Borqs Hong Kong Limited   Hong Kong
     
Borqs Beijing Limited   People’s Republic of China
     
Borqs Software Solutions Private Limited   India

 

 

Exhibit 99.1

 

BORQS INTERNATIONAL HOLDING CORP

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

    Page
     
Consolidated Financial Statements for the Years Ended December 31, 2014 and 2015    
     
Report of Independent Registered Public Accounting Firm   2
     
Consolidated Balance Sheets as of December 31, 2014 and 2015   3 - 6
     
Consolidated Statements of Operations for the Years Ended December 31, 2014 and 2015   7
     
Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2014 and 2015   8
     
Consolidated Statements of Changes in Shareholders’ Deficit for the Years Ended December 31, 2014 and 2015   9 - 10
     
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2015   11 - 12
     
Notes to the Consolidated Financial Statements   13 - 45

 

  1  
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors of BORQS International Holding Corp

 

We have audited the accompanying consolidated balance sheets of BORQS International Holding Corp (the “Company”) as of December 31, 2014 and 2015, and the related consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ deficit and cash flows for each of the two years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BORQS International Holding Corp at December 31, 2014 and 2015, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

 

/s/ Ernst & Young Hua Ming LLP

Shanghai, the People’s Republic of China

 

December 20, 2016

 

  2  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of US dollars (“US$”))

 

        As of December 31,  
    Note   2014     2015  
        US$     US$  
ASSETS                
Current assets:                
Cash and cash equivalents         13,418       7,787  
Restricted cash         981       770  
Accounts receivable         12,898       6,068  
Accounts receivable from related parties   (17)     132       5,998  
Receivable from Mobile Virtual Network Operator (“MVNO”) franchisees         -       3,295  
Inventories   (5)     2,190       6,264  
Deferred cost of revenues         3,275       984  
Prepaid and other current assets   (6)     3,399       3,225  
                     
Total current assets         36,293       34,391  
                     
Non-current assets:                    
Property and equipment, net   (7)     2,487       2,250  
Intangible assets, net   (8)     9,753       13,262  
Goodwill   (9)     786       741  
Deferred tax asset   (16)     283       1,074  
Deferred cost of revenues         355       177  
Other non-current assets         182       1,184  
                     
Total non-current assets         13,846       18,688  
                     
Total assets         50,139       53,079  

 

The accompanying notes are an integral part of these consolidated financial statements

 

  3  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US dollars (“US$”))

 

        As of December 31,  
    Note   2014     2015  
        US$     US$  
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
Current liabilities:                
Accounts payable (including accounts payable of the Consolidated VIEs without recourse to the primary beneficiary of US$1,277 and US$3,747 as of December 31, 2014 and 2015, respectively)         7,693       6,951  
Accrued expenses and other payables (including accrued expenses and other payables of the Consolidated VIEs without recourse to the primary beneficiary of US$751 and US$1,882 as of December 31, 2014 and 2015, respectively)   (11)     4,167       6,263  
Deferred revenue (including deferred revenue of the Consolidated VIEs without recourse to the primary beneficiary of US$6,297 and US$11,425 as of December 31, 2014 and 2015, respectively)         12,863       17,334  
Income tax payable         -       165  
Short-term bank borrowings (including short-term bank borrowings of the Consolidated VIEs without recourse to the primary beneficiary of US$817 and nil as of December 31, 2014 and 2015, respectively)   (10)     2,817       2,000  
Long-term bank borrowings - current portion   (10)     -       571  
Deferred government grants   (12)     3,056       1,762  
                     
Total current liabilities         30,596       35,046  

 

The accompanying notes are an integral part of these consolidated financial statements

 

  4  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US dollars (“US$”))

 

        As of December 31,  
    Note   2014     2015  
        US$     US$  
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
Non-current liabilities:                
Unrecognized tax benefits   (16)     46       691  
Deferred tax liabilities (including deferred tax liabilities of the Consolidated VIEs without recourse to the primary beneficiary of US$2,032 and US$1,779 as of December 31, 2014 and 2015, respectively)   (16)     2,032       1,779  
Deferred revenue         23       440  
Long-term bank borrowings   (10)     -       381  
Deferred government grants   (12)     4,260       2,252  
                     
Total non-current liabilities         6,361       5,543  
                     
Total liabilities         36,957       40,589  
                     
Commitments and contingencies   (21)                

 

The accompanying notes are an integral part of these consolidated financial statements

 

  5  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US dollars (“US$”))

 

        As of December 31,  
    Note   2014     2015  
        US$     US$  
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
Mezzanine equity:                
Series A convertible redeemable preferred shares (US$0.0001 par value; 39,900,000 shares authorized; 39,900,000 issued and outstanding as of December 31, 2014 and 2015)   (20)     11,970       11,970  
Series B convertible redeemable preferred shares (US$0.0001 par value; 82,857,143 shares authorized; 82,857,143 issued and outstanding as of December 31, 2014 and 2015)   (20)     26,126       26,126  
Series C convertible redeemable preferred shares (US$0.0001 par value; 50,909,089 shares authorized; 50,909,089 issued and outstanding as of December 31, 2014 and 2015)   (20)     19,127       20,848  
Series D convertible redeemable preferred shares (US$0.0001 par value; 23,721,443 shares authorized; 23,721,443 issued and outstanding as of December 31, 2014 and 2015)   (20)     8,246       8,942  
                     
Total mezzanine equity         65,469       67,886  
                     
Shareholders’ deficit:                    
Ordinary shares         54       54  
Additional paid-in capital         1,120       1,124  
Statutory reserve         860       1,270  
Accumulated deficit         (55,614 )     (56,330 )
Accumulated other comprehensive income (loss)   (13)     139       (1,149 )
                     
Total BORQS International Holding Corp shareholders’ deficit         (53,441 )     (55,031 )
                     
Noncontrolling interest         1,154       (365 )
                     
Total shareholders’ deficit         (52,287 )     (55,396 )
                     
Total liabilities, mezzanine equity, noncontrolling interest and shareholders’ deficit         50,139       53,079  
                     

 

The accompanying notes are an integral part of these consolidated financial statements

 

  6  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED STATEMENT OF OPERATIONS

(Amounts in thousands of US dollars (“US$”))

 

        For the year ended
December 31,
 
    Note   2014     2015  
        US$     US$  
Net Revenues:                
Software         17,222       22,468  
Hardware         28,058       32,647  
MVNO         58       16,007  
Others         2,150       3,950  
                     
Total net revenues         47,488       75,072  
                     
Software         (8,966 )     (12,660 )
Hardware         (24,303 )     (26,101 )
MVNO         (786 )     (16,225 )
Others         (1,592 )     (2,980 )
                     
Total cost of revenues         (35,647 )     (57,966 )
                     
Total gross profit         11,841       17,106  
                     
Operating expenses:                    
Sales and marketing expenses         (4,419 )     (7,359 )
General and administrative expenses         (4,197 )     (4,883 )
Research and development expenses         (11,743 )     (7,245 )
                     
Total operating expenses         (20,359 )     (19,487 )
                     
Other operating income         648       3,094  
                     
Operating (loss) income         (7,870 )     713  
                     
Interest income         23       61  
Interest expense         (82 )     (156 )
Other income         282       208  
Other expense         (402 )     (35 )
Foreign exchange gain         72       855  
                     
(Loss) profit before income taxes         (7,977 )     1,646  
                     
Income tax expense   (16)     (194 )     (851 )
                     
Net (loss) income         (8,171 )     795  
                     
Less: net loss attributable to noncontrolling interests         (510 )     (1,316 )
                     
Net (loss) income attributable to Borqs International Holding Corp         (7,661 )     2,111  
                     
Add: accretion to redemption value of convertible redeemable preferred shares         (2,848 )     (2,417 )
Net loss attributable to ordinary shareholders         (10,509 )     (306 )

 

The accompanying notes are an integral part of these consolidated financial statements

 

  7  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME

(Amounts in thousands of US dollars (“US$”))

 

        For the year ended
December 31,
 
    Note   2014     2015  
        US$     US$  
Net (loss) income         (8,171 )     795  
Other comprehensive loss, net of tax of nil:                    
Foreign currency translation adjustments, net of tax of nil         (74 )     (1,288 )
Other comprehensive loss, net of tax of nil   (13)     (74 )     (1,288 )
Comprehensive loss         (8,245 )     (493 )
Less: comprehensive loss attributable to noncontrolling interest         (510 )     (1,519 )
Comprehensive (loss) income attributable to the Borqs International Holding Corp         (7,735 )     1,026  
Change in redemption value of convertible redeemable preferred shares         (2,848 )     (2,417 )
Comprehensive loss attributable to ordinary shareholders         (10,583 )     (1,391 )

 

The accompanying notes are an integral part of these consolidated financial statements

 

  8  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

(Amounts in thousands of US dollars (“US$”) except for number of shares)

 

 

  Note   Number of
ordinary
shares
    Ordinary
shares
    Additional
paid-in
capital
    Accumulated
Statutory
reserves
    Accumulated
other
comprehensive
income
    Accumulated
deficit
    Total BORQS
International
Holding Corp
shareholders’
deficit
    Noncontrolling
interest
   

Total
shareholders’

Deficit

 
Balance as of January 1, 2014         53,816,667       54       1,092             213       (44,245 )     (42,886 )     -       (42,886 )
Consolidated net loss               -       -       -       -       (7,661 )     (7,661 )     (510 )     (8,171 )
Noncontrolling interest addition through acquisition   (4)           -       -       -       -       -       -       1,636       1,636  
Contribution by noncontrolling interest through incorporation               -       -       -       -       -       -       28       28  
Appropriation of statutory reserves               -       -       860       -       (860 )     -       -       -  
Foreign exchange difference               -       -       -       (74 )     -       (74 )     -       (74 )
Accretion to redemption value of convertible redeemable preferred shares               -       -       -       -       (2,848 )     (2,848 )     -       (2,848 )
Vesting of restricted shares         200,000       -       28       -       -       -       28       -       28  
Balance as of December 31, 2014         54,016,667       54       1,120       860       139       (55,614 )     (53,441 )     1,154       (52,287 )

 

The accompanying notes are an integral part of these consolidated financial statements

 

  9  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT (CONTINUED)

(Amounts in thousands of US dollars (“US$”) except for number of shares)

 

    Note   Number of
ordinary
shares
    Ordinary
shares
    Additional
paid-in
capital
    Accumulated
Statutory
reserves
   

Accumulated

other
comprehensive
loss

    Accumulated
deficit
    Total BORQS
International
Holding Corp
shareholders’
deficit
    Noncontrolling
interest
   

Total
shareholders’

deficit

 
                                                           
Balance as of January 1, 2015       54,016,667       54       1,120       860       139       (55,614 )     (53,441 )     1,154       (52,287 )
Consolidated net income                 -       -       -       -       2,111       2,111       (1,316 )     795  
Appropriation of statutory reserves                 -       -       410       -       (410 )     -       -       -  
Foreign exchange difference                 -       -       -       (1,288 )     -       (1,288 )     (203 )     (1,491 )
Accretion to redemption value of convertible redeemable preferred shares                 -       -       -       -       (2,417 )     (2,417 )     -       (2,417 )
Vesting of restricted shares         33,333       -       4       -       -       -       4       -       4  
                                                                             
Balance as of December 31, 2015         54,050,000       54       1,124       1,270       (1,149 )     (56,330 )     (55,031 )     (365 )     (55,396 )

 

The accompanying notes are an integral part of these consolidated financial statements

 

  10  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands of US dollars (“US$”))

 

    For the year ended
December 31,
 
    2014     2015  
    US$     US$  
             
CASH FLOWS FROM OPERATING ACTIVITIES            
Net (loss) income     (8,171 )     795  
Adjustments to reconcile net (loss) income to net cash (used in) generated from operating activities:                
Foreign exchange gain     (72 )     (855 )
Loss (gain) on disposal of property and equipment     8       (350 )
Depreciation of property and equipment     1,373       1,371  
Amortization of intangible assets     594       1,109  
Deferred income tax benefits     (189 )     (1,044 )
                 
Changes in operating assets and liabilities, net of the effects of an acquisition:                
Restricted cash     (818 )     211  
Accounts receivable     (8,709 )     6,830  
Accounts receivable from related parties     8,556       (5,866 )
Receivable from MVNO franchisees     -       (3,295 )
Inventories     (573 )     (4,074 )
Deferred cost of revenues     (489 )     2,469  
Prepaid expenses and other current assets     (1,400 )     579  
Accounts payable     4,206       (742 )
Accrued expenses and other payables     65       2,100  
Unrecognized tax benefits     46       645  
Deferred revenue     608       4,888  
Income tax payable     -       165  
Deferred government grants     (174 )     (3,302 )
                 
Net cash (used in) generated from operating activities     (5,139 )     1,634  

 

The accompanying notes are an integral part of these consolidated financial statements

 

  11  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Amounts in thousands of US dollars (“US$”))

 

    For the year ended
December 31,
 
    2014     2015  
    US$     US$  
CASH FLOWS FROM INVESTING ACTIVITIES            
Purchases of property and equipment     (481 )     (798 )
Purchases of intangible assets     (692 )     (5,175 )
Proceeds from disposal of property and equipment     69       14  
Acquisition of business, net of cash acquired     238       -  
Loan to a third party     -       (1,482 )
Repayments of a loan to a third party     -       75  
                 
Net cash used in investing activities     (866 )     (7,366 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Contribution by noncontrolling interest through incorporation     28       -  
Proceeds from issuance of Series D convertible redeemable preferred shares     8,000       -  
Payment of Series D convertible redeemable preferred shares issuance costs     (126 )     -  
Proceeds from short-term bank borrowings     2,000       -  
Repayments of short-term bank borrowings     -       (817 )
Proceeds from long-term bank borrowings     -       999  
Repayments of long-term bank borrowings     -       (47 )
Net cash generated from financing activities     9,902       135  
                 
Effect of foreign exchange rate changes on cash and cash equivalents     (2 )     (34 )
                 
Net increase (decrease) in cash and cash equivalents     3,895       (5,631 )
Cash and cash equivalents at beginning of year     9,523       13,418  
                 
Cash and cash equivalents at end of year     13,418       7,787  

 

The accompanying notes are an integral part of these consolidated financial statements

 

  12  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION

 

BORQS International Holding Corp (the “Company”) was incorporated under the laws of the Cayman Islands on July 27, 2007. The Company and its consolidated subsidiaries, variable interest entities (the “VIE”) and the VIE’s subsidiaries (collectively referred to the “Group”) are principally engaged in the provision of commercial grade Android+ platform solutions, hardware product sales and MVNO services in the People’s Republic of China (the “PRC”).

 

(a) As of December 31, 2015, the details of the Company’s major subsidiaries, Consolidated VIEs and the subsidiaries of the VIEs are as follows:

 

  Entity   Date of incorporation/
Acquisition
  Place of incorporation   Percentage of direct or indirect ownership by the Company     Principal activities
          Direct      
  Subsidiaries:              
 

BORQS Hong Kong Limited

(“Borqs HK”) (1)

  July 19, 2007   Hong Kong     100 %   Provision of software and service solutions and hardware products sales
 

BORQS Beijing Ltd.

(“Borqs Beijing”) (1)

  September 4, 2007   PRC     100 %   Provision of software and service solutions and hardware products sales
 

BORQS Software Solutions Private Limited

(“Borqs India”) (1)

  July 17, 2009   India     100 %   Provision of software and service solutions
                       
  VIE:                    
                       
 

Beijing Big Cloud Network Technology Co., Ltd.

(“Big Cloud Network”) (1) / (2)

  April 18, 2014   PRC     Nil     Holding company
                       
  Subsidiaries of the VIE:                    
                       
 

Yuantel (Beijing) Investment Management Co., Ltd.

(“Yuantel Investment”) (2) / (3)

  July 11, 2014   PRC     79 %   Holding company
 

Yuantel (Beijing) Telecommunications Technology Co., Ltd.

(“Yuantel Telecom”) (2) / (3)

  July 11, 2014   PRC     75.05 %   Provision of MVNO services

 

  (1) Collectively, the “PRC Subsidiaries”.
  (2) Collectively, the “Consolidated VIEs”.
  (3) On July 11, 2014, the Company through Big Cloud Network acquired controlling interest in Yuantel Investment and its subsidiary, (Note 4).

 

  13  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION (CONTINUED)

 

(b) PRC laws and regulations prohibit foreign ownership in certain telecommunication related businesses. To comply with these foreign ownership restrictions, the Group conducts its businesses in the PRC through the VIE using contractual agreements (the “VIE Agreements”).

 

The Group funds Big Cloud Network through loans to the two Big Cloud Network’s shareholders, (collectively the “Nominee Shareholders”). The effective control of Big Cloud Network is held by the Group, through a series of contractual agreements between Borqs Beijing and Big Cloud Network whereby Big Cloud Network became a consolidated VIE of the Group. Through the contractual agreements, the Group receives substantially all of the economic benefits of Big Cloud Network.

 

Big Cloud Network provides MVNO services in China through its 79% owned entity of Yuantel Investment which owns 95% of Yuantel Telecom; therefore Big Cloud Network effective owns 75.05% of Yuantel Telecom which is the entity that operates the business and holds the MVNO license from the Chinese Ministry of Industry and Information Technology.

 

The following is a summary of the key terms of the VIE Agreements:

 

Loan agreement

 

On June 23, 2014, Borqs Beijing and the Nominee Shareholders entered into loan agreements for Borqs Beijing to provide interest free loans of RMB50,000 to the Nominee Shareholders, respectively, for the purpose of providing capital to Big Cloud Network to develop its MVNO business. There is no fixed term for the loans.

 

Power of attorney agreement

 

The Nominee Shareholders of Big Cloud Network entered into the power of attorney agreement whereby they authorized Borqs Beijing or its designated party to act on behalf of the Nominee Shareholders as exclusive agent and attorney with all respect to all matters concerning the shareholding including but not limited to (1) attend shareholders’ meetings of Big Cloud Network; (2) exercise all the shareholders’ rights, including voting rights; and (3) designate and appoint on behalf of each shareholder the senior management members of Big Cloud Network. The power of attorney remains irrevocable and continuously valid from the date of execution so long as each Nominee Shareholder remains as a shareholder of Big Cloud Network. The power of attorney agreement was subsequently reassigned to the Company.

 

Exclusive option agreement

 

Pursuant to the exclusive option agreement entered into between the Nominee Shareholders and Borqs Beijing or its designated party, the Nominee Shareholders granted Borqs Beijing or its designated party, an irrevocable and exclusive right to purchase all or part of the equity interests held by the Nominee Shareholders in Big Cloud Network, to the extent permitted under the PRC laws, at an amount equal to RMB10 or the minimum consideration permitted under the applicable PRC law. The purchase consideration in excess of RMB 10 shall be refunded by the Nominee Shareholders to Borqs Beijing or Borqs Beijing may deduct the excess amount upon payment of consideration. The Nominee Shareholders shall not declare dividend or any form of distribution or grant loans in any form without the prior consent of Borqs Beijing or its designated party. The term of the agreement is 10 years, expiring on June 22, 2024 which will be automatically renewed every three-year thereafter if Borqs Beijing or its designated party does not provide notice of termination to the Nominee Shareholders fifteen days prior to expiration.

 

Exclusive technical & support agreement

 

Pursuant to the agreement entered into between Borqs Beijing and Big Cloud Network, Big Cloud Network engaged Borqs Beijing or its designated party as its exclusive provider of technical, consulting and other services in relation to its major business during the contractual period in return for service fees which will be determined at the sole discretion of Borqs Beijing or its designated party. The term of the agreement is 10 years, expiring on June 22, 2024, which will be automatically renewed every three-year thereafter if Borqs Beijing or its designated party does not provide notice of termination to the Nominee Shareholders fifteen days prior to expiration.

 

  14  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION (CONTINUED)

 

Business cooperation agreement

 

Pursuant to the business cooperation agreement entered into between Borqs Beijing and Big Cloud Network, Borqs Beijing or its designated party agreed to provide unlimited financial support for the VIE’s daily operating activities through entrusted loans and agree to forgo the right to seek repayment.

 

Share pledge agreement

 

Pursuant to the agreement, the Nominee Shareholders pledged all of their equity interests in Big Cloud Network to Borqs Beijing as collateral to guarantee the repayment of the loans and to secure their obligations under the above agreements. The Nominee Shareholders agreed not to transfer or otherwise create any encumbrance on their equity interests in Big Cloud Network without prior consent of Borqs Beijing. The share pledge agreements will remain effective until all the obligations under above agreements have been satisfied in full or all of the guarantee liabilities have been repaid.

 

Despite the lack of technical majority ownership, there exists a parent-subsidiary relationship between Borqs Beijing’s designee, the Company, and Big Cloud Network through the irrevocable power of attorney agreement, whereby the Nominee Shareholders effectively assigned all of the voting rights underlying their equity interest in Big Cloud Network to the Company. Furthermore, pursuant to the exclusive option agreement and share pledge agreement, the Company, via Borqs Beijing, obtained effective control over Big Cloud Network through the ability to exercise all the rights of Nominee Shareholders and therefore the power to govern the activities that most significantly impact the economic performance of Big Cloud Network. In addition, through the VIE agreements the Company demonstrates its ability and intention to continue the ability to absorb substantially all the expected losses and the majority of the profit of the VIE, and therefore have the rights to the economic benefits of the VIE. Thus, the Company consolidates Big Cloud Network and its subsidiaries through the primary beneficiary, the Company, under ASC 810-10 Consolidation Overall.

 

In the opinion of the Company’s management and PRC counsel, (i) the ownership structure of the Consolidated VIEs is in compliance with all existing PRC laws and regulations in any material respect, (ii) each of the VIE agreements is valid, legally binding and enforceable to each party of such agreements and will not result in any violation of PRC laws or regulations currently in effect; and (iii) each of the Group’s PRC subsidiaries, VIE and VIE’s subsidiaries have the necessary corporate power and authority to conduct its business as described in its business scope under its business license, which is in full force and effect, and the Group’s business operation in PRC are in compliance with existing PRC laws and regulations.

 

However, uncertainties in the PRC legal system could cause the relevant regulatory authorities to find the current VIE agreements and businesses to be in violation of any existing or future PRC laws or regulations. If the Company, the primary beneficiary or any of its current or future VIEs are found in violation of any existing or future laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including levying fines, confiscating the income of the primary beneficiary, and the VIE, revoking the business licenses or operating licenses of the primary beneficiary, and VIE, shutting down the Group’s servers, discontinuing or placing restrictions or onerous conditions on the Group’s operations, requiring the Group to undergo a costly and disruptive restructuring or enforcing actions that could be harmful to the Group’s business. Any of these actions could cause significant disruption to the Group’s business operations and severely damage the Group’s reputation, which would in turn materially and adversely affect the Group’s business and results of operations. In addition, if the imposition of any of these penalties causes the primary beneficiary to lose the rights to direct the activities of VIE or the right to receive its economic benefits, the Company, through the primary beneficiary, would no longer be able to consolidate the VIE.

 

In addition, if the VIE or the Nominee Shareholders fail to perform their obligations under the VIE Agreements, the Group may have to incur substantial costs and expend resources to enforce the primary beneficiary’ rights under the contracts. The Group may have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. All of these VIE Agreements are governed by PRC laws and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit the Group’s ability to enforce these contractual arrangements. Under PRC laws, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would incur additional expenses and delay. In the event the Group is unable to enforce these VIE Agreements, the primary beneficiary may not be able to exert effective control over its VIE, and the Group’s ability to conduct its business may be negatively affected.

 

  15  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION (CONTINUED)

 

(c) VIE disclosures

 

Consolidated VIEs contributed 5% and 27% of the Group's consolidated revenues for the years ended December 31, 2014 and 2015. As of December 31, 2014 and 2015, the Consolidated VIEs accounted for an aggregate of 30% and 40%, respectively, of the consolidated total assets, and 43% and 64%, respectively, of the consolidated total liabilities.

 

The Consolidated VIEs mainly operate the MVNO services. The VIE also holds the MVNO license, which is a revenue-producing asset recorded on the Group’s consolidated balance sheets. The Group expects increases in percentage of revenue generated from the Consolidated VIEs compared to the whole Group for the foreseeable future as the Group focuses on strengthening telecommunication platforms to strategically grow the Group’s MVNO business.

 

The Group believes that there are no assets held in the Consolidated VIEs that can be used only to settle obligations of the Consolidated VIEs, except for registered capital and the PRC statutory reserves. Relevant PRC laws and regulations restrict the Consolidated VIEs from transferring a portion of their net assets, equivalent to the balance of its statutory reserve and its share capital, to the Company in the form of loans and advances or cash dividends. Please refer to Note 18 for disclosure of restricted net assets. As the Consolidated VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the Consolidated VIEs do not have recourse to the general credit of the Company for any of the liabilities of the Consolidated VIEs. There were no pledges or collateralization of the Consolidated VIEs’ assets.

 

The following tables represent the financial information of the Consolidated VIEs as of December 31, 2014 and 2015 and for the years ended December 31, 2014 and 2015 before eliminating the intercompany balances and transactions between the Consolidated VIEs and other entities within the Group:

 

      As of December 31,  
      2014     2015  
      US$     US$  
               
  ASSETS            
  Current assets:            
  Cash and cash equivalents     2,434       2,455  
  Restricted cash     981       770  
  Accounts receivable     65       70  
  Receivable from MVNO franchisees     -       3,295  
  Inventories     142       145  
  Prepaid expenses and other current assets     379       347  
  Prepayment to WFOE     -       454  
                   
  Total current assets     4,001       7,536  
                   
  Non-current assets:                
  Property and equipment, net     261       876  
  Intangible assets, net     9,675       10,879  
  Goodwill     786       741  
  Deferred tax asset     283       1,074  
  Other non-current assets     182       196  
                   
  Total non-current assets     11,187       13,766  
                   
  Total assets     15,188       21,302  

 

  16  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION (CONTINUED)

 

(c) VIE disclosures (Continued)

 

      As of December 31,  
      2014     2015  
      US$     US$  
  Current liabilities:            
  Accounts payable     1,277       3,747  
  Accrued expenses and other payables     751       1,882  
  Deferred revenue     6,297       11,425  
  Short-term bank borrowings     817       -  
  Intercompany payables     4,623       6,969  
Total current liabilities     13,765       24,023  
                   
  Non-current liabilities                
  Deferred tax liabilities     2,032       1,779  
                   
  Total non-current liabilities     2,032       1,779  
                   
  Total liabilities     15,797       25,802  
         
      For the Year Ended
December 31,
 
      2014     2015  
      US$     US$  
  Net revenues     2,208       19,957  
  Net loss     (2,372 )     (5,029 )
                   
      For the Year Ended
December 31,
 
      2014     2015  
      US$     US$  
  Net cash provided by operating activities     1,595       2,413  
  Net cash used in investing activities     (210 )     (1,622 )
  Net cash provided by (used in) financing activities     817       (770 )
  Net increase in cash and cash equivalents     2,202       21  

 

  17  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a) Basis of presentation

 

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

 

(b) Principles of consolidation

 

The consolidated financial statements include the financial statements of the Company, its subsidiaries and Consolidated VIEs, for which, the Company is the primary beneficiary. All significant inter-company transactions and balances between the Company, its subsidiaries and the Consolidated VIEs are eliminated upon consolidation. Results of acquired subsidiaries and its Consolidated VIEs are consolidated from the date on which control is transferred to the Company.

 

(c) Use of estimates

 

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Areas where management uses subjective judgment include, but are not limited to, estimating the useful lives of long-lived assets and intangible assets, assessing the initial valuation of the assets acquired and liabilities assumed in a business combination and the subsequent impairment assessment of long-lived assets, intangible assets and goodwill, determining the provisions for accounts receivable and inventories, accounting for deferred income taxes and uncertain tax benefits, valuation for share-based compensation arrangements and convertible redeemable preferred shares. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates, and as such, differences may be material to the consolidated financial statements.

 

(d) Foreign currency

 

The functional currency of the Company and its non-PRC subsidiaries, excluding Borqs India, is the United States dollar. The functional currency of Borqs India is Rupee, whereas the functional currency of the Company’s PRC subsidiaries and its Consolidated VIEs is the Chinese Renminbi (“RMB”) as determined based on the criteria of ASC 830, Foreign Currency Matters . The Company uses the US$ as its reporting currency. Transactions denominated in foreign currencies are re-measured into the functional currency at the exchange rates prevailing on the transaction dates. Foreign currency denominated financial assets and liabilities are re-measured at the balance sheet date exchange rate. Exchange gains and losses are included in foreign exchange gains and losses in the consolidated statements of operations.

 

Assets and liabilities of the Company’s PRC subsidiaries are translated into US$ at fiscal year-end exchange rates. Equity amounts are translated at historical exchange rates. Income and expense items are translated at average exchange rates prevailing during the fiscal year. Translation adjustments arising from translation of foreign currency financial statements are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income (loss) in the consolidated statements of comprehensive income (loss).

 

(e) Cash and cash equivalents

 

Cash and cash equivalents consist of cash on hand and bank deposits which are unrestricted as to withdrawal and use. All highly liquid investments with a stated maturity of 90 days or less from the date of purchase are classified as cash equivalents.

 

(f) Restricted cash

 

Restricted cash mainly represents short-term deposits with China United Network Communications Group Co., Ltd. (“China Unicom”) as guarantee for minimum purchase requirements, and therefore are not available for the Group’s use until the end of contract period with China Unicom.

 

  18  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(g) Accounts receivable

 

Accounts receivable are carried at net realizable value. An allowance of doubtful accounts is recorded in the period when the collection of full amount is no longer probable. The Group reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Group considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends. As of December 31, 2014 and 2015, the Group evaluated and wrote off the doubtful accounts as they were determined to be uncollectible. Thus, there was no allowance for doubtful accounts outstanding.

 

(h) Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Adjustments to reduce the cost of inventories to its net market value are made, if required, for decreases in sales prices, obsolescence or similar reductions in the estimated net realizable value. Inventories provision of US$1,037 and US$1,109 was recorded as of December 31, 2014 and 2015, respectively.

 

(i) Property and equipment

 

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, as follows:

 

  Category   Estimated useful life
       
  Computer and network equipment   3-5 years
  Office equipment   5 years
  Motor vehicles   5 years
  Leasehold improvements  

Over the shorter of lease term or the

estimated useful lives of the assets

 

Repair and maintenance costs are charged to expense as incurred, whereas the costs of betterments that extend the useful life of property and equipment are capitalized as additions to the related assets. Retirements, sale and disposals of assets are recorded by removing the cost and accumulated depreciation with any resulting gain or loss reflected in the consolidated statements of operations.

 

Property and equipment that are purchased or constructed which require a period of time before the assets are ready for their intended use are accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, including installation costs. Construction-in-progress is transferred to specific property and equipment accounts and commences depreciation when these assets are ready for their intended use.

 

(j) Intangible assets

 

Intangible assets are carried at cost less accumulated amortization and any recorded impairment. Intangible assets acquired in a business combination are recognized initially at fair value at the date of acquisition. Intangible assets with finite useful lives are amortized using a straight-line method. These amortization methods reflect the estimated pattern in which the economic benefits of the respective intangible assets are to be consumed.

 

Development costs of software to be sold, leased, or otherwise marketed are subject to capitalization beginning when technological feasibility is reached, in accordance with ASC 985-20, Costs of Software to be Sold, Leased, or Marketed .

 

Intangible assets have weighted average useful lives from the date of purchase as follow:

 

  Purchased software   9.5 years
  MVNO license (Note 4)   10 years
  Capitalized software development costs   3 years

 

  19  
 

 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(k) Business combination

 

The Group acquired Yuantel in July 2014 and accounted for the acquisition pursuant to ASC 805, Business Combinations (“ASC 805”), which requires the Group to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of the acquisition date fair value of consideration transferred and the contingent considerations plus the acquisition date fair value of the noncontrolling interests, if any, over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. In cases where the Group acquires less than 100% ownership interest, it will derive the fair value of the acquired business as a whole, which will typically include a control premium and subtract the consideration transferred for the controlling interest to identify the fair value of the noncontrolling interest.

 

In connection with this acquisition, the Group determines the estimated fair value of acquired identifiable intangible and tangible assets as well as assumed liabilities with the assistance of an independent third party valuation firm. The Group derives estimates of the fair value of assets acquired and liabilities assumed using reasonable assumptions based on historical experiences and on the information obtained from management of the acquired companies. Critical estimates in valuing certain of the acquired intangible assets required to but were not limited to the following: deriving estimates of future expected cash flows from the acquired business and the determination of an appropriate discount rate. Unanticipated events may occur which may affect the accuracy or validity of such assumptions or estimates.

 

In case where the Group acquired the remaining interest in a subsidiary once it has obtained control, such transaction is accounted for as an equity transaction where the difference between the fair value of the purchase consideration and the carrying amount of the noncontrolling interests is recorded in additional paid-in capital.

 

(l) Goodwill

 

Goodwill represents the excess of the purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of an acquired business. The Group’s goodwill as of December 31, 2014 and 2015 was related to its acquisition of Yuantel Investment, (Note 4). In accordance with ASC 350, Goodwill and Other Intangible Assets ( “ASC 350” ) , recorded goodwill amounts are not amortized, but rather are tested for impairment annually or more frequently if there are indicators of impairment present.

 

The performance of the impairment test in accordance to ASC 350 involves a two-step process. The first step of the impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. Fair value is primarily determined by computing the future discounted cash flows expected to be generated by the reporting unit. If the reporting unit’s carrying value exceeds its fair value, goodwill may be impaired. If this occurs, the Group performs the second step of the goodwill impairment test to determine the amount of impairment loss.

 

The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit’s goodwill. If the implied goodwill fair value is less than its carrying value, the difference is recognized an impairment loss.

 

In accordance with ASC 350, the Group assigned and assessed goodwill for impairment at the reporting unit level. A reporting unit is an operating segment or one level below the operating segment. The Company has determined that it has two operating segments as its reporting units, namely Yuantel and Connected Solutions. Goodwill is recorded at the Yuantel reporting unit.

 

  20  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(m) Impairment of long-lived assets

 

The Group evaluates its long-lived assets or asset group, including intangible assets with indefinite and finite lives, for impairment. Intangible assets with indefinite lives that are not subject to amortization are tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the assets might be impaired in accordance with ASC 350. Such impairment test compares the fair values of assets with their carrying values with an impairment loss recognized when the carrying values exceed fair values.

 

For long-lived assets and intangible assets with finite lives that are subject to depreciation and amortization are tested for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying amount of an asset or a Group of long-lived assets may not be recoverable. When these events occur, the Group evaluates impairment by comparing the carrying amount of the assets to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Group would recognize an impairment loss based on the excess of the carrying amount of the asset group over its fair value.

 

(n) Fair value of financial instruments

 

The Group’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable and payable, accounts receivable from related parties, receivable from MVNO franchisees, short-term and long-term bank borrowings and convertible redeemable preferred shares. Other than the long-term bank borrowings and convertible redeemable preferred shares, the carrying values of these financial instruments approximate their fair values due to their short-term maturities.

 

The Group applies ASC 820, Fair Value Measurements and Disclosures, (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 requires disclosures to be provided on fair value measurement.

 

ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 — Other inputs that are directly or indirectly observable in the marketplace.

 

Level 3 — Unobservable inputs which are supported by little or no market activity.

 

ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach; and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

 

During the years ended December 31, 2014 and 2015, there is no financial instrument measured at fair value. The carrying amounts of long-term bank borrowings approximate their fair values since they bear interest rates which approximate market interest rates. The convertible redeemable preferred shares are initially recognized at its fair value.

 

  21  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(o) Revenue recognition

 

The Group is mainly engaged in the business of providing 1) Android+ platform solutions and services, 2) hardware product sales, and 3) MVNO services. The Group recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable, and collectability is reasonably assured.

 

1. Android+ platform solutions and services

 

Android+ platform solutions

 

The Group provides customized Android+ software platform solutions that are developed to maximize the commercial grade quality or performance of open source Android+ software for integration with particular chipsets. The Group also provides customized Android+ service platform solutions that are end to end software developed for mobile operators to allow data synchronization between their platform and mobile devices. The Group charges its customers, mainly including mobile device manufacturers and mobile operators, fixed fees for project-based software contracts, as well as per chip or per mobile device royalty fees.

 

The project-based software contracts are generally considered multiple element arrangements as they consist of perpetual software licenses, software development services such as customization, modification, implementation and integration, and post-contract customer support (“PCS”) where customers have the right to receive bug fixes, telephone support and unspecified upgrades on a when-and-if available basis. Pursuant to ASC 985-605, Revenue Recognition: Software (“ASC 985-605”), given the project-based software contracts require significant customization that are generally completed within one year from the contract dates, the Group accounts for the entire software contracts in conformity with the relevant guidance in ASC 605-35, Revenue Recognition: Contract Accounting , applying the completed contract method.

 

As the Group was unable to establish vendor specific objective evidence of the fair value of PCS and PCS is the only undelivered element upon completion of software projects, the entire software project fixed fees are recognized ratably over the PCS service period. PCS service periods are generally 12 months, with ranges from six months to three years, and commences upon completion of customer acceptance of the completed software projects. Costs incurred to complete the software projects are deferred to match revenue recognition.

 

Where the Group is entitled to receive on going usage based royalties determined based on the chip or mobile device sales, the usage-based royalties are recognized according to the customers’ usage reports, generally on a quarterly basis.

 

Service contracts

 

The Group provides research and development services to certain customers for their mobile-computing related development projects where fees are charged on a time and material basis and the Group is not responsible for the outcome of such development projects. The revenue is recognized proportionately as the services are delivered and is included as software revenues on the consolidated statement of operations.

 

2. Hardware product sales

 

The Group provides total solutions on original design manufacturer (“ODM”) basis to customers of mobile devices. Revenue is recognized when sale of each final hardware product to the customers are delivered. Warranty is provided to all customers, which is not considered an additional service; rather, an integral part of the product sales. ASC 450, Contingencies, specifically addresses the accounting for standard warranties. The Group believes that accounting for its standard warranty pursuant to ASC 450 does not impact revenue recognition because the cost of honoring the warranty can be reliably estimated. The Group has determined the likelihood of claims arising from warranties to be remote based on strong quality control procedures in the production process and historical experience with regard to claims being made by customers. The basis for the warranty accrual will be reviewed periodically based on actual experience. The Group does not sell extended warranty coverage.

 

  22  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(o) Revenue recognition (Continued)

 

3. MVNO

 

On July 11, 2014, the Group, through the VIE, acquired and obtained control of Yuantel Investment, which mainly operates the MVNO business, (Note 4). The license to operate such MVNO business is issued by the Chinese Ministry of Industry and Information Technology and the core mobile network is provided by the PRC government owned China Unicom. Yuantel Investment receives wholesale rates for mobile voice and data services from China Unicom and repackages the voice and data services into competitive bundles for Chinese consumers.

 

In accordance with ASC 605-45, Revenue Recognition; Principal agent consideration, the Group is the principal in providing the bundled voice and data services to Chinese consumers, thus revenue is recognized on a gross basis. As sales of bundled services are mostly pre-paid by the consumers, cash received in advance of voice and data consumption are recognized as deferred revenue. Revenue is recognized when the services are actually used. Pre-paid bundled services do not expire.

 

Sales of the bundles are mostly made through agents and franchisees. Bundled services sold to agents are discounted and not refundable to the Group. The Group accounts for such discounts as reductions of revenue in accordance with ASC 605-50 (“ASC 605-50”) Customer Payments and Incentives .

 

The Group enters into profit sharing arrangements with franchisees under which bundled services may be returned to the Group if not sold to the consumers. The franchisees receive certain percentages of profits made by the Group on the sales of the bundled services as they are used by the consumers. The Group accounts for profit sharing with franchisees as selling expenses in the consolidated statements of operations. Discounts provided by franchisees to consumers are recognized by the Group as reductions of revenue in accordance with ASC 605-50.

 

  23  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(p) Cost of revenues

 

Cost of revenues consists primarily of telecommunication costs, depreciation of long-lived assets, amortization of acquired intangible asset, payroll and other related costs of operations. Deferred cost of revenues was US$3,630 and US$1,161 for the years ended December 31, 2014 and 2015.

 

(q) Advertising expenditures

 

Advertising expenditures are expensed as incurred and are included in sales and marketing expenses, which amounted to US$207 and US$46 for the years ended December 31, 2014 and 2015, respectively.

 

(r) Research and development expenses

 

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with research and platform development. Research and development expenses also include rent, depreciation and other related expenses. Research and development expenses are expensed as incurred.

 

(s) Government grants

 

Government grants are provided by the relevant PRC municipal government authorities to subsidize the cost of certain technology development projects. The amount of such government grants are determined solely at the discretion of the relevant government authorities and there is no assurance that the Group will continue to receive these government grants in the future. Government grants are recognized when it is probable that the Group will comply with the conditions attached to them, and the grants are received. When the grant relates to an expense item, it is recognized in the consolidated statement of operations over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate, as a reduction of the related operating expense. When the grant relates to an asset, it is recognized as deferred government grants and released to the consolidated statement of operations in equal amounts over the expected useful life of the related asset, when operational, as a reduction of the related depreciation expense.

 

(t) Leases

 

Leases are classified at the inception date as either a capital lease or an operating lease. The Group did not enter into any leases whereby it is the lessor for any of the periods presented. As the lessee, a lease is a capital lease if any of the following conditions exists: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease term is at least 75% of the property’s estimated remaining economic life, or d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. The Group did not enter into any capital leases for the years ended December 31, 2014 and 2015.

 

All other leases are accounted for as operating leases wherein rental payments are expensed on a straight-line basis over the periods of their respective lease terms. The Group leases office space under operating lease agreements. Certain lease agreements contain rent holidays and escalating rent. Rent holidays and escalating rent are considered in determining the straight-line rent expense to be recorded over the lease term. The lease term begins on the date of initial possession of the lease property for purposes of recognizing lease expense on a straight-line basis over the term of the lease.

 

  24  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(u) Income taxes

 

The Group accounts for income taxes using the liability method. Current income taxes are provided for in accordance with the laws of the relevant tax authorities. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Group records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The Group applies ASC 740, Accounting for Income Taxes, (“ASC 740”) , to account for uncertainty in income taxes. ASC 740 prescribes a recognition threshold a tax position is required to meet before being recognized in the financial statements.

 

The Group has elected to classify interest related to unrecognized tax benefits, if and when required, as part of “income tax expense” in the consolidated statements of operations.

 

The Group elected to early adopt ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Thus, all the deferred income tax assets and liabilities are classified as noncurrent in the consolidated balance sheet statement of financial position.

 

(v) Share-based compensation

 

The Group accounts for share-based compensation in accordance with ASC 718, Compensation-Stock Compensation: Overall , (“ASC 718”).

 

In accordance with ASC 718, the Group determines whether an award should be classified and accounted for as a liability award or equity award. All grants of share-based awards to employees classified as equity awards are measured based on their grant date fair values and recognized as compensation expense over the requisite service period and/or performance period in the consolidated statements of operations.

 

The Group recognizes compensation expense using the accelerated method for share-based awards granted with service and performance conditions. According to ASC 718, the amount of compensation cost recognized (or attributed) when achievement of a performance condition is probable depends on the relative satisfaction of the performance condition based on performance to date. According to ASC 718, probable means the future event or events are likely to occur and the Group interprets “probable” to be generally in excess of a 70% likelihood of occurrence.

 

The Group elected to early adopt ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting to account for forfeitures as they occur.

 

  25  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(w) Comprehensive income (loss)

 

Comprehensive income (loss) is defined as the increase (decrease) in equity of the Group during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. Accumulated other comprehensive income (loss) of the Group includes foreign currency translation adjustments related to the Company and its PRC subsidiaries, whose functional currency is RMB.

 

(x) Employee benefits

 

The full-time employees of the Group’s PRC subsidiaries are entitled to staff welfare benefits including medical care, housing fund, pension benefits and unemployment insurance, which are governmental mandated defined contribution plans. These entities are required to accrue for these benefits based on certain percentages of the employees’ respective salaries, subject to certain ceilings, in accordance with the relevant PRC regulations, and make cash contributions to the state-sponsored plans out of the amounts accrued.

 

(y) Recent accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, Revenue Recognition and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is originally effective for the annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. ASU No. 2015-14, Revenue from Contracts with Customers , (“ASU 2015-14”), deferred the effective date of ASU 2014-09 by one year. As a result, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017 and interim periods therein. Early adoption is permitted to the original effective date. The Group is currently evaluating the impact of adopting the new revenue standard on its consolidated financial statements.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810) — Amendments to the Consolidation Analysis, (“ASU 2015-02”). ASU 2015-02 amends the criteria for determining which entities are considered VIEs, amends the criteria for determining if a service provider possesses a variable interest in a VIE and ends the deferral granted to investment companies for application of the VIE consolidation model. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after 15 December 2015. The guidance may be applied retrospectively or through a cumulative effect adjustment to equity as of the beginning of the year of adoption. Early adoption is permitted, including adoption in an interim period. The Group is evaluating the effects, if any, of the adoption of this revised guidance on its consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, (“ASU 2015-11”). The guidance simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Entities will continue to apply their existing impairment models to inventories that are accounted for using last-in first-out (LIFO) and the retail inventory method (RIM). For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, and the guidance must be applied prospectively after the date of adoption. The Group is currently evaluating the impact of the adoption of ASU 2015-11 on its consolidated financial statements.

 

  26  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(y) Recent accounting pronouncements(Continued)

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, (“ASU 2016-02”) . ASU 2016-02 specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public companies for annual reporting periods and interim periods within those years beginning after December 15, 2018. Early adoption is permitted. The Group is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), (“ASU 2016-08”) which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. This guidance will be effective for the company in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. The Group is still evaluating the effect if any, that this guidance will have on its consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments which addresses eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance will be effective for the Group for fiscal year ending December 31, 2018, and early adoption is permitted. The Group is evaluating the effect that this guidance will have on its consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective for the Group for fiscal year ending December 31, 2018, and early adoption is permitted. The Group is evaluating the effect that this guidance will have on its consolidated financial statements.

 

  27  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

3. CONCENTRATION OF RISKS

 

(a) Credit risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and restricted cash, accounts receivable, accounts receivable from related parties and receivable from MVNO franchisees. As of December 31, 2014 and 2015, the aggregate amount of cash and cash equivalents and restricted cash of US$7,132 and US$6,634, respectively, were held at major financial institutions located in the PRC, and US$7,276 and US$1,923, respectively, were deposited with major financial institutions located outside the PRC. Management believes that these financial institutions are of high credit quality and continually monitors the credit worthiness of these financial institutions. Historically, deposits in Chinese banks are secure due to the state policy on protecting depositors’ interests. However, China promulgated a new Bankruptcy Law in August 2006 that came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank may go into bankruptcy. In addition, since China’s concession to the World Trade Organization, foreign banks have been gradually permitted to operate in China and have been significant competitors against Chinese banks in many aspects, especially since the opening of the Renminbi business to foreign banks in late 2006. Therefore, the risk of bankruptcy of those Chinese banks in which the Company has deposits has increased. In the event of bankruptcy of one of the banks which holds the Company’s deposits, it is unlikely to claim its deposits back in full since it is unlikely to be classified as a secured creditor based on PRC laws.

 

Accounts receivable, accounts receivable from related parties and receivable from MVNO franchisees are both typically unsecured, and are derived from revenues earned from customers. The risk is mitigated by credit evaluations the Group performs on its ongoing credit evaluations of its customers’ financial conditions and ongoing monitoring process of outstanding balances. The Group maintains reserves for estimated credit losses and these losses have generally been within expectations.

 

(b) Business supplier, customer, and economic risk

 

The Group participates in a dynamic and competitive high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Group’s future financial position, results of operations or cash flows: changes in the overall demand for services; competitive pressures due to new entrants; advances and new trends in new technology; control of telecommunication infrastructures by local regulators and industry standards; strategic relationships or customer relationships; regulatory considerations; and risks associated with the Group’s ability to attract and retain employees necessary to support its growth.

 

(i) Business supplier risk – The Group’s MVNO operations are dependent upon telecommunication resources provided by China Unicom. There is no guarantee that the supply of telecommunication resources provided by China Unicom will be renewed annually. Further, there is no guarantee around the continuance of the MVNO license granted by the PRC government Ministry of Industry and Information Technology which may be amended or discontinued in light of changes to political, economic and social reforms.

 

(ii) Customer risk – The success of the Group’s business going forward will rely in part on Group’s ability to continue to obtain and expand business from existing customers while also attracting new customers. The Group has a diversified base of customers covering its services and the revenue from the largest single customer accounted for 18% and 9% of the Group’s total net revenues for the two years ended December 31, 2014 and 2015, respectively, and the accounts receivable from the largest single customer accounted for 1% and 50% of the Group’s total accounts receivable and accounts receivable from related parties for the years ended December 31, 2014 and 2015, respectively.

 

(iii) Economic risk – The Group’s operations could be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 20 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

 

(c) Foreign currency exchange rate risk

 

From July 21, 2005, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. The appreciation of the US$ against RMB was approximately 0.4% and 6.1% in the years ended December 31, 2014 and 2015, respectively. The appreciation of the US$ against Rupee was approximately 2.3% and 4.7% in the years ended December 31, 2014 and 2015, respectively.

 

  28  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

4. BUSINESS ACQUISITION

 

On July 11, 2014, Big Cloud Network, the VIE of the Company, acquired the controlling interest represented by 79% of the equity interest in Yuantel Investment, for an aggregate purchase price of US$7,354. Of the aggregate US$3,677 purchase price, was injected into Yuantel Investment in 2014 and 2015, respectively.

 

The Company entered into a new business, MVNO business in the PRC as a result of the acquisition.

 

The following table summarizes the fair values of the assets acquired and liabilities assumed and the noncontrolling interest at the date of acquisition on July 11, 2014.

 

      USD’000  
         
  Current assets     7,976  
  Other non-current assets     182  
  Property and equipment, net     121  
  Purchased software     50  
  MVNO license     9,560  
  Deferred tax assets, non-current     165  
           
  Total identifiable assets acquired     18,054  
           
  Short-term borrowings     (817 )
  Accounts payable     (620 )
  Deferred revenue - current     (5,669 )
  Other current liabilities     (648 )
  Deferred tax liability, non-current     (2,103 )
           
  Total liabilities assumed     (9,857 )
           
  Net identifiable assets acquired     8,197  
           
  NCI measured at fair value     1,629  
  Goodwill     786  
  Purchase consideration (i)     7,354  

 

(i) US$ 3,677 cash consideration was paid in 2014

 

  29  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

4. BUSINESS ACQUISITIONS (CONTINUED)

 

The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and noncontrolling interests is based on various assumptions and valuation methodologies requiring considerable judgment from management. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. The US$9,560 of acquired intangible asset is the MVNO license with an estimated useful life of ten years. The Group performed the valuation of the MVNO license with the assistance of an independent third party valuation firm. The fair value of the license was determined based on the income approach, using assumptions including discount rate of 20.5% considering risk inherent in the existing MVNO business model and industry comparisons. Terminal value is based on the expected life of asset of ten years, and forecasted cash flows over that period. The ten-year cash flow projection was derived taking into consideration of actual operating results and management best estimates about future developments as well as certain industry and regulatory expectations.

 

The goodwill recognized is attributable primarily to anticipated future growth within the Company’s MVNO business. None of the goodwill is expected to be deductible for income tax purposes. For the years ended December 31, 2014 and 2015, there were no changes in the recognized amounts of goodwill.

 

The fair value of the 21% noncontrolling interest was estimated to be US$1,629. The fair value of the noncontrolling interest was estimated by deriving the fair value of the acquired business including a control premium as a whole and then subtracting the considerations transferred. The fair value of the acquired business was estimated using the income approach. As Yuantel Investment is a private entity, the fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC 820 Fair value measurement. The fair value estimates are based on a discount rate of 20.5%, long-term sustainable growth rate of 3%, financial multiples of companies in the same industry and adjustment for the lack of marketability that market participants would consider when estimating the fair value of the Yuantel Investment.

 

5. INVENTORIES

 

Inventories consisted of the following as of December 31, 2014 and 2015:

 

      As of December 31,  
      2014     2015  
      US$     US$  
               
  Raw materials     1,800       4,004  
  Goods in transit     378       291  
  Work in process     2       1,307  
  Finished goods     1,047       1,771  
                   
  Less: Provision     (1,037 )     (1,109 )
                   
  Inventories, net     2,190       6,264  

 

  30  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

      As of December 31,  
      2014     2015  
      US$     US$  
               
  Staff advances     214       253  
  Receivable from a third party payment platform     264       -  
  Rental and other deposits     841       823  
  VAT recoverable     2,072       1,676  
  Loan to a third party     -       473  
  Others     8       -  
                   
        3,399       3,225  

 

7. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

      As of December 31,  
      2014     2015  
      US$     US$  
  At cost:            
  Leasehold improvements     949       894  
  Computer and network equipment     5,250       5,800  
  Office equipment     843       784  
  Motor vehicles     36       171  
        7,078       7,649  
  Less: accumulated depreciation     (4,591 )     (5,399 )
                   
        2,487       2,250  

 

Depreciation expense was US$1,373 and US$1,371 for the years ended December 31, 2014 and 2015, respectively, and were included in the following captions:

 

      For the year ended
December 31,
 
      2014     2015  
      US$     US$  
               
  Cost of revenues     541       472  
  Sales and marketing expenses     83       54  
  General and administrative expenses     66       144  
  Research and development expenses     683       701  
                   
        1,373       1,371  

 

  31  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

8. INTANGIBLE ASSETS, NET

 

The following table presents the Group’s intangible assets as of the respective balance sheet dates:

 

      Software     Capitalized software development costs    

MVNO

License
(Note 4)

    Total  
      US$     US$     US$     US$  
                           
  Balance as of January 1, 2014     45       -       -       45  
  Additions     742       -       9,560       10,302  
  Amortization expense     (116 )     -       (478 )     (594 )
                                   
  Balance as of December 31, 2014     671       -       9,082       9,753  
  Additions     1,871       3,304       -       5,175  
  Amortization expense     (170 )     (38 )     (901 )     (1,109 )
  Foreign currency translation difference     (35 )     -       (522 )     (557 )
                                   
  Balance as of December 31, 2015     2,337       3,266       7,659       13,262  

 

The intangible assets are amortized using the straight-line method, which is the Group’s best estimate of how these assets will be economically consumed over their respective estimated useful lives of 3-10 years.

 

Amortization expense was approximately US$594 and US$1,109 for the years ended December 31, 2014 and 2015, respectively.

 

The annual estimated amortization expenses for the intangible assets for each of the next five years are as follows:

 

      US$  
         
  2016     2,241  
  2017     2,219  
  2018     2,083  
  2019     1,077  
  2020     1,077  
           
        8,697  

 

9. GOODWILL

 

The changes in the carrying amount of goodwill were as follows:

 

      As of December 31,  
      2014     2015  
      US$     US$  
               
  Balance as of January 1     -       786  
  Goodwill acquired     786       -  
  Foreign currency translation difference     -       (45 )
                   
  Balance as of December 31     786       741  

 

No impairment charge was recorded in any of the two years ended December 31, 2014 and 2015.

 

  32  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

10. BANK BORROWINGS

 

Bank borrowings are as follows as of the respective balance sheet dates:

 

      As of December 31,  
      2014     2015  
      US$     US$  
               
  Short-term bank borrowings     2,817       2,000  
  Long-term bank borrowings, current portion     -       571  
        2,817       2,571  
                   
  Long-term bank borrowings, non-current portion     -       381  
                   
  Total bank borrowings     2,817       2,952  

 

The short-term bank borrowings outstanding as of December 31, 2014 and 2015 bore a weighted average interest rate of 7.16% and 7.03% per annum, respectively, and were denominated in RMB & US$. These borrowings were obtained from financial institutions and have terms of three months to one year. The long-term bank borrowings (including current portion) outstanding as of December 31, 2015 bore a weighted average interest rate of 2.65%, and were denominated in US$. These borrowings were obtained from financial institutions located in the PRC and Hong Kong, and have a term of 1.5 years.

 

Bank borrowings as of December 31, 2014 and 2015 were unsecured.

 

11. ACCRUED EXPENSES AND OTHER PAYABLES

 

The components of accrued expenses and other payables are as follows:

 

      As of December 31,  
      2014     2015  
      US$     US$  
               
  Payroll and welfare payable     2,631       2,811  
  Accrued royalty     925       900  
  VAT, business and other taxes payable     202       343  
  Payables for office supply and utility     272       419  
  Payables for purchase of property and equipment     -       462  
  Professional service fees     -       228  
  Deposits from agents     101       1,068  
  Others     36       32  
        4,167       6,263  

 

  33  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

12. DEFERRED GOVERNMENT GRANTS

 

The government grants received are required to be used in the construction of property and equipment. These grants are initially deferred and subsequently recognized in the statement of operations when the Group has complied with the conditions or performance obligations attached to the related government grants, if any, and the grants are no longer refundable. Grants that subsidize the construction cost of property and equipment are amortized over the life of the related assets as a non-operating income.

 

      For the year ended
December 31,
 
      2014     2015  
      US$     US$  
               
  Balance at beginning of the year     7,490       7,316  
  Additions     817       -  
  Recognized as other operating income     (964 )     (2,880 )
  Foreign currency translation difference     (27 )     (422 )
  Balance at end of the year     7,316       4,014  

 

13. ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The changes in accumulated other comprehensive loss, net of tax of nil, are as follows:

 

      Foreign currency translation     Total  
      US$     US$  
  Balance as of January 1, 2014     213       213  
  Current year other comprehensive loss     (74 )     (74 )
  Balance as of December 31, 2014     139       139  
  Current year other comprehensive loss     (1,288 )     (1,288 )
  Balance as of December 31, 2015     (1,149 )     (1,149 )

 

14. MAINLAND CHINA EMPLOYEE CONTRIBUTION PLAN

 

As stipulated by the regulations of the PRC, full-time employees of the Group in the PRC participate in a government-mandated multiemployer defined contribution plan organized by municipal and provincial governments. Under the plan, certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. The Group is required to make contributions to the plan based on certain percentages of employees’ salaries. The total expenses the Group incurred for the plan were US$2,629 and US$2,238, respectively, for the years ended December 31, 2014 and 2015.

 

  34  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

15. SHARE BASED COMPENSATION

 

  (a) Share-based awards under the 2007 Plan

 

In order to provide additional incentives to employees and to promote the success of the Company’s business, the Company adopted a share incentive plan in (the “2007 Plan”) December 2007, which was last amended in February 2011. The 2007 Plan allows the Company to grant options to employees, directors, consultants or members of the board of directors of the Group. Under the 2007 Plan, the maximum aggregate number of shares that may be issued shall not exceed 38,700,000. The terms of the options shall not exceed ten years from the date of grant. 25% of the shares subject to the options shall vest on the first anniversary of the vesting commencement date, and 1/48 of the shares subject to the options shall vest each month thereafter over the next three years, provided the optionee continues to be a service provider to the Company. Thus, there is an explicit service condition of 4 years. In addition, the options contain a performance condition whereby vesting will commence upon the earlier to occur of an initial public offering or a change in control as defined in the 2007 Plan, provided there is continued employment of the optionees on such date.

 

In the years ended December 31, 2014 and 2015, the Company granted 6,031,270 and 6,425,190 shares of options, respectively, to purchase ordinary shares to employees, officers, and directors with the exercise price of $0.459 per share.

 

The following table summarizes the Company’s option activities under the 2007 Plan:

 

      Number of options    

Weighted average

exercise

price

    Weighted average remaining contractual term     Aggregate intrinsic value  
            (US$)     (Years)     (US$)  
                           
  Outstanding, January 1, 2014     34,797,968       0.24       6.85       308  
  Granted     7,031,270       0.46                  
  Forfeited     12,274,608       0.30                  
                                   
  Outstanding, December 31, 2014     29,554,630       0.27       6.88       308  
                                   
  Vested and expect to vest at December 31, 2014     29,554,630       0.27       6.88       308  
                                   
  Outstanding, January 1, 2015     29,554,630       0.27       6.88       308  
  Granted     6,525,190       0.46                  
  Forfeited     4,042,580       0.36                  
                                   
  Outstanding, December 31, 2015     32,037,240       0.30       5.26       308  
                                   
  Vested and expect to vest at December 31, 2015     32,037,240       0.30       5.26       308  

 

As of December 31, 2015, no options were vested and exercisable given the performance condition in place described above. Historically, compensation cost related to performance options that only vest upon the consummation of an initial public offering or change in control event was recognized when the offering or change in control event was consummated. Accordingly, the Group has not recognized any compensation cost to date.

 

  35  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

15. SHARE BASED COMPENSATION (CONTINUED)

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the fair value of the underlying stock at each reporting date, for those awards that have an exercise price below the estimated fair value of the Company’s shares.

 

As of December 31, 2014 and 2015, the Company had options outstanding to purchase an aggregate of 5,500,000 shares and 5,500,000 shares with an exercise price below the fair value of the Company’s shares, resulting in an aggregate intrinsic value of US$308 and US$308, respectively.

 

The Company calculated the estimated fair value of the options on the respective grant dates using the binomial-lattice option valuation model with the following assumptions for each applicable period which takes into account variables such as volatility, dividend yield, and risk-free interest rate, contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option.

 

      Year 2014     Year 2015  
               
  Risk-free interest rates     2.31%-2.34%       1.95%-2.28%  
  Expected life (years)     10 years       10 years  
  Expected volatility     41%-47%       40%-45%  
  Expected dividend yield     0 %     0 %
  Exercise multiple     2.20       2.20  
  Post-vesting forfeit rate     10 %     10 %
  Fair value of underlying ordinary shares     US$0.086-US$0.106       US$0.158-US$0.231  
  Fair value of share option     US$0.008-US$0.028       US$0.026-US$0.096  

 

(b) Restricted Share Units

 

On February 17, 2012, the Company issued 800,000 ordinary shares to certain employees at a price of US$0.1375 per share for total cash proceeds of US$110,000. All of the 800,000 ordinary shares were subject to transfer restrictions and repurchase by the Company upon termination of employment at issuance price before the service condition is fulfilled. At grant date, ¼ of total number of shares were not subject to repurchase, and vested immediately. The remaining shares were subject to repurchase and vested over a service term of three years. The US$110,000 received upon issuance of the shares was initially recorded as a liability and reclassified to equity upon vesting. Shares subject to repurchase prior to vesting were excluded from outstanding ordinary shares.

 

Compensation expense related to restricted shares was immaterial and nil as of December 31, 2014 and 2015.

 

  36  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

16. TAXATION

 

Enterprise income tax (“EIT”)

 

Cayman Islands

 

The Company is incorporated in the Cayman Islands and conducts its primary business operations through the subsidiaries and VIEs in the PRC, India and Hong Kong. Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gains.

 

Hong Kong

 

BORQS HK is subject to Hong Kong profits tax rate of 16.5% for the years ended December 31, 2014 and 2015. No provision for BORQS HKD profits tax has been made in the consolidated financial statements as the entity had losses in the years ended December 31, 2014 and 2015.

 

India

 

BORQS INDIA is subject to income tax rate of 32.45% for the years ended December 31, 2014 and 2015. Amounts of US$336 and US$1,158 are included as current income tax expense for the years ended December 31, 2014 and 2015, respectively.

 

The PRC

 

The Company’s PRC subsidiaries are incorporated in the PRC and subject to PRC EIT on the taxable income in accordance with the relevant PRC income tax laws.

 

Effective January 1, 2008, the statutory corporate income tax rate is 25%, except for certain entities eligible for preferential tax rates.

 

BORQS Beijing was qualified for a High and New Technology Enterprises (“HNTE”) since 2012 and is eligible for a 15% preferential tax rate from 2012 to 2014. In July 2015, BORQS Beijing obtained a new HNTE certificate, which will expire in July 2018. In accordance with the PRC Income Tax Laws, an enterprise awarded with the HNTE status may enjoy a reduced EIT rate of 15%. For the years ended December 31, 2014 and 2015, BORQS Beijing enjoyed a preferential tax rate of 15%.

 

Yuantel Telecom was qualified for a High and New Technology Enterprises (“HNTE”) since 2011 and is eligible for a 15% preferential tax rate from 2011 to 2013. In October 2014, Yuantel Telecom obtained a new HNTE certificate, which will expire in October 2017. In accordance with the PRC Income Tax Laws, an enterprise awarded with the HNTE status may enjoy a reduced EIT rate of 15%. For the years ended December 31, 2014 and 2015, Yuantel Telecom enjoyed a preferential tax rate of 15%.

 

The Company’s other PRC subsidiaries were subject to EIT at a rate of 25% for the years ended December 31, 2014 and 2015.

 

The New EIT Law also provides that enterprises established under the laws of foreign countries or regions and whose “place of effective management” is located within the PRC are considered PRC tax resident enterprises and subject to PRC income tax at the rate of 25% on worldwide income. The definition of “place of effective management” refers to an establishment that exercises, in substance, overall management and control over the production and business, personnel, accounting, properties, etc. of an enterprise. As of December 31, 2015, no detailed interpretation or guidance has been issued to define “place of effective management”. Furthermore, as of December 31, 2015, the administrative practice associated with interpreting and applying the concept of “place of effective management” is unclear. If the Company is deemed as a PRC tax resident, it would be subject to PRC tax under the New CIT Law. The Company will continue to monitor changes in the interpretation or guidance of this law.

 

  37  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

16. TAXATION (CONTINUED)

 

(Loss) profit before income taxes consists of:

 

      For the year ended
December 31,
 
      2014     2015  
      US$     US$  
               
  Non-PRC     (8,004 )     3,241  
  PRC     27       (1,595 )
                   
        (7,977 )     1,646  

 

Income tax expense comprises of:

 

      For the year ended
December 31,
 
      2014     2015  
      US$     US$  
               
  Current     (241 )     (1,389 )
  Deferred     47       538  
                   
        (194 )     (851 )

 

The reconciliation of tax computed by applying the statutory income tax rate of 25% for the years ended December 31, 2014 and 2015 applicable to the PRC operations to income tax expense is as follows:

 

      For the year ended
December 31,
 
      2014     2015  
      US$     US$  
               
  (Loss) profit before income taxes     (7,977 )     1,646  
                   
  Income tax benefit (expense) computed at the statutory income tax rate at 25%     1,994       (412 )
  Non-deductible expenses     (170 )     (166 )
  Non-taxable income     -       742  
  Preferential rate     623       (423 )
  Current and deferred tax rate differences     -       790  
  Tax loss expired     (426 )     -  
  Foreign rate differences     (825 )     (292 )
  Change of valuation allowance     (1,267 )     (1,643 )
  Unrecognized tax benefits     (123 )     558  
  Interest expense     -       (5 )
                   
  Income tax expense     (194 )     (851 )

 

  38  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

16. TAXATION (CONTINUED)

 

Deferred Taxes

 

The significant components of deferred taxes are as follows:

 

      As of December 31,  
      2014     2015  
      US$     US$  
  Deferred tax assets            
  Inventories provision     155       166  
  Accrued salary and welfare payable     24       107  
  Property and equipment     36       46  
  Tax losses     8,571       10,901  
  Valuation allowance     (8,503 )     (10,146 )
  Total deferred tax assets     283       1,074  
                   
  Deferred tax liabilities                
  Intangible assets     2,032       1,779  
                   
  Total deferred tax liabilities     2,032       1,779  

 

As of December 31, 2015, the Company had net tax operating losses from its PRC subsidiaries and its Consolidated VIEs, as per filed tax returns, of US$50,657, which will expire from 2016 to 2020.

 

As of December 31, 2015, the Company intends to permanently reinvest the undistributed earnings from its foreign subsidiaries and the Consolidated VIEs to fund future operations. The amount of unrecognized deferred tax liabilities for temporary differences related to investments in foreign subsidiaries and the Consolidated VIEs is not determined because such a determination is not practicable.

 

  39  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

16. TAXATION (CONTINUED)

 

Unrecognized Tax Benefits

 

As of December 31, 2014 and 2015, the Company recorded an unrecognized tax benefits of US$620 and US$2,177, respectively, of which, US$574 and US$1,491, respectively, are presented on a net basis against the deferred tax assets related to tax loss carry forwards on the consolidated balance sheets. The unrecognized tax benefits and its related interest are primarily related to under-reported intercompany profit. The amount of unrecognized tax benefits will change in the next 12 months, pending clarification of current tax law or audit by the tax authorities, however, an estimate of the range of the possible change cannot be made at this time. As of December 31, 2014 and 2015, unrecognized tax benefits of US$46 and US$686, if ultimately recognized, will impact the effective tax rate.

 

A roll-forward of unrecognized tax benefits is as follows:

 

      For the year ended December 31,  
      2014     2015  
      US$     US$  
               
  Balance at beginning of year     -       620  
  Additions based on tax positions related to the current year     620       1,557  
                   
  Balance at end of year     620       2,177  

 

In the years ended December 31, 2014 and 2015, the Company recorded interest expense accrued in relation to the unrecognized tax benefit of nil and US$5 in income tax expense, respectively. Accumulated interest expense recorded by the Company was nil and US$5 as of December 31, 2014 and 2015, respectively. As of December 31, 2015, the tax years ended December 31, 2010 through 2015 for the PRC subsidiaries and the VIE remain open for statutory examination by the PRC tax authorities.

 

  40  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

17. RELATED PARTY TRANSACTIONS

 

  (a) Related parties

 

  Names of related parties   Relationship with the Company
  Intel Capital Corporation (“Intel”) and its affiliates   Intel is a holder of Series C Preference Shares

 

(b) Other than disclosed elsewhere, the Company had the following significant related party transactions for the years ended December 31, 2014 and 2015:

 

      For the year ended
December 31,
 
      2014     2015  
      US$     US$  
  Software services provided to:            
  Intel Semiconductor (US) Ltd     540       -  
  Intel Corporation     5,148       6,204  
  Intel Korea Limited     1,337       -  
  Intel Asia-Pacific Research and Development Ltd     1,618       328  
                   
  Hardware sold to:                
  Intel Corporation     20       55  

 

(c) The Company had the following related party balances as of December 31, 2014 and 2015:

 

      As of December 31,  
      2014     2015  
      US$     US$  
  Accounts receivable from related parties:            
  Current:            
  Intel Corporation     -       5,949  
  Intel (China) Co., Ltd.     55       5  
  Intel Asia-Pacific Research and Development Ltd     77       44  

 

All balances with the related parties as of December 31, 2014 and 2015 were unsecured, interest-free and have no fixed terms of repayment.

 

  41  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

18 RESTRICTED NET ASSETS

 

The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by the Company’s PRC subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s PRC subsidiaries.

 

In accordance with the PRC Regulations on Enterprises with Foreign Investment and the articles of association of the Company’s PRC subsidiaries, a foreign-invested enterprise established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A foreign-invested enterprise is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors for all foreign-invested enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Borqs Beijing was established as foreign-invested enterprise and, therefore, is subject to the above mandated restrictions on distributable profits. As of December 31, 2014 and 2015, the Company’s PRC subsidiaries had appropriated US$860 and US$1,270, respectively, in its statutory reserves.

 

As a result of these PRC laws and regulations subject to the limit discussed above that require annual appropriations of 10% of after-tax income to be set aside, prior to payment of dividends as general reserve fund, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company. Amounts restricted include paid-in capital and statutory reserve funds of the Company’s PRC subsidiaries and the equity of the Consolidated VIEs, as determined pursuant to PRC generally accepted accounting principles, totaling an aggregate of US$72,212 as of December 31, 2015.

 

19. SHARE CAPITAL

 

Authorized capital

 

On August 15, 2014, the Group increased the authorized shares of the Group from US$455,584 to US$514,888 divided into 309,651,804 ordinary shares at par value of $0.001 per share, 40,000,000 Series A redeemable convertible preference shares, 82,857,143 Series B redeemable convertible preference shares, 52,727,271 Series C redeemable convertible preference shares and 29,651,804 Series D redeemable convertible preference shares, all at par value of $0.001 per share.

 

Ordinary share reserved for future issuance

 

The Group has reserved the following shares of ordinary shares for issuance at December 31, 2015, in connection with the following:

 

  Conversion of series A convertible redeemable preference shares     39,900,000  
  Conversion of series B convertible redeemable preference shares     82,857,143  
  Conversion of series C convertible redeemable preference shares     50,909,089  
  Conversion of series D convertible redeemable preference shares     23,721,443  
  Ordinary shares options outstanding     34,590,097  
  Ordinary shares options available for future grants under the 2007 Plan     4,109,903  
           
  Total     236,087,675  

 

  42  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

20. CONVERTIBLE CONTINGENTLY REDEEMABLE PREFERRED SHARES

 

On December 27, 2007, March 17, 2008, September 26, 2008 and October 8, 2008, the Company issued 19,800,000, 3,100,000, 12,000,000 and 5,000,000 Series A convertible redeemable preference shares (the “Series A Preference Shares”), respectively, to certain external investors at a price of $0.20 per share for a total cash consideration of $7,980. The cash proceeds received was $7,889, net of issuance costs of $91.

 

On June 26, 2009, August 19, 2009 and October 12, 2009, the Company issued 64,285,715,15,000,000 and 3,571,428 Series B convertible redeemable preferred shares (the “Series B Preference Shares”), respectively, to certain external investors at a price of $0.21 per share for a total consideration of $17,400 (includes cash proceeds of $14,400 and $3,000 upon conversion of convertible notes). The cash proceeds received was $14,242, net of issuance costs of $158.

 

On February 14, 2011 and May 24, 2012, the Company issued 38,181,817 and 5,454,545 Series C convertible redeemable preference shares (the “Series C Preference Shares”), to certain external investors at the price of $0.275 per share for a total cash consideration of $12,000. The cash proceeds received was $11,817, net of issuance costs of $183.

 

On August 20, 2014 the Company issued 23,721,443 Series D convertible redeemable preference shares (the “Series D Preference Shares”), to certain external investors at the price of $0.33725 per share for a total cash consideration of $8,000. The cash proceeds received was $7,874, net of issuance costs of $126.

 

The significant terms of the Series A, Series B, Series C, and Series D convertible redeemable preference shares (together “Preference Shares”) are summarized as follows.

 

Conversion

 

Preference Shares can be converted into ordinary shares at the option of the holder at any time by dividing the applicable original purchase price by the applicable conversion price which is initially equal to the original purchase price and as such, the initial conversion ratio for each Preference Share into each ordinary share shall be one-for-one.

 

Preference Shares shall automatically be converted into ordinary shares at the then-effective conversion rate applicable to the relevant series of Preference Shares: (a) in the event of the closing of a Qualified IPO; or (b) in relation only to Series A and Series B Preference Shares, upon the approval and written consent of a majority of the outstanding Series A and Series B Preference Shares holders to convert their respective Preference Shares into ordinary shares.

 

The conversion price is subject to additional adjustments if the Company makes certain dilutive issuances of shares.

 

Dividends

 

Series D Preference Shares shall receive dividends at an annual rate of six percent (6%) of the original purchase price in preference and priority to any dividends on the Series A, Series B, Series C Preference Shares and ordinary shares. Dividends on Series D Preference Shares shall be cumulative whether declared by the Board of Directors or not.

 

Each holder of Series A, Series B and Series C Preference Shares is entitled to receive non-cumulative dividends when and if declared by the Board of Directors of the Company in preference and priority to any dividends on ordinary shares, after all accumulated dividends on the Series D Preferred shares have been paid or set aside for payment to the holders of Series D Preferred Shares in a calendar year.

 

Any additional dividends declared, after all accumulated dividends and declared dividends on the Preference Shares have been paid or set aside for payment to the holders of Preference Shares in a calendar year, shall be distributed among all holders of ordinary shares and Preference Shares.

 

  43  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

20. CONVERTIBLE CONTINGENTLY REDEEMABLE PREFERRED SHARES (CONTINUED)

 

Redemption

 

The earliest redemption date of Series A Preference Shares is at any time after the sixth anniversary of the first issuance date of Series A Preference Shares.

 

All outstanding Series B, Series C, and Series D Preference Shares can be redeemed at the election of the majority holders at any time after the earlier of (A) the fifth anniversary of the first issuance date of the respective Series B, Series C or Series D Preference Shares, and (B) the date on which the Company redeems Series A, Series B, or Series C Preference Shares. Any holder of Series A Preference Shares who is also a holder of Series B Preference Shares must redeem its Series B Preference Shares together with its Series A Preference Shares.

 

Series A and Series B Preference Shares can also be redeemed at the option of the holders when Intel has elected to redeem all of its Series C Preferred Shares for investigation or for breach as defined in the Memorandum of Association and Articles of Association.

 

Prior to Series D Preference Shares become available under (A) and (B) above, all outstanding Series D Preference Shares can be redeemed at any time of a holder of Series D Preferred Shares’ election to redeem for breach event or to redeem for investigation and opinion of auditor event as defined in the Memorandum of Association and Articles of Association.

 

Preference Shares are redeemed at a price equal to 150% the original purchase price plus any unpaid declared dividends. The redemption price for Preference Shares under the event of Intel’s election to redeem for investigation or a holder of Series D Preferred Shares’ election to redeem for investigation and opinion of auditor is set to be 100% of the original purchase price and 150% of the original purchase price under the event of a holder of Preferred Shares’ election to redeem for breach.

 

Winding up / Liquidation

 

In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, distributions to the shareholders of the Company shall be made as stated below.

 

The holders of Series D Preference Shares then outstanding are entitled to be paid first out of the assets of the Company available for distribution a liquidation preference in an amount per Preference Share equal to the sum of (i) 150% of the original purchase price as adjusted and (ii) all unpaid accumulated dividends, in priority to any other holders of Preference Shares or ordinary shares.

 

Upon full payment of the Series D Preference Share liquidation preference, the holders of Series A, Series B and Series C Preference Shares then outstanding shall be entitled to be paid first out of the assets of the Company available for distribution (and prior and in preference to any payment on the ordinary shares) a liquidation preference in an amount per Series A, Series B and Series C Preference Share equal to the sum of (i) the original purchase price applicable to such Preference Share as adjusted and (ii) all unpaid declared dividends. The holders of Series C Preference Shares shall receive their liquidation preference amount in preference to holders of Series A and Series B Preference Shares. Subject to the prior payment of all amounts due to the holders of Preference Shares, the balance of all remaining assets available for distribution are made with equal priority and pro rata amongst the holders of ordinary shares and the holders of Preference Shares on an as–converted basis.

 

Voting

 

Each share of Preference Share has voting rights equal to an equivalent number of shares of ordinary shares into which it is convertible and votes together as one class with the ordinary shares. All directors of the Company’s board of directors are elected by the holders of the outstanding ordinary shares and the Preference Shares, voting together as a single class on an as-converted basis.

 

  44  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

20. CONVERTIBLE CONTINGENTLY REDEEMABLE PREFERRED SHARES (CONTINUED)

 

Accounting for convertible redeemable preference shares

 

The Preference Shares have been classified as mezzanine equity as they can be redeemed at the option of the holders. The initial carrying values of the Preference Shares are the total consideration received at their respective dates of issuance net of issuance costs. There were no embedded features that qualified for bifurcation and separate accounting in accordance with ASC 815-10 Derivatives and Hedging .

 

As of December 31, 2014 and 2015, no dividend was declared by the Company. US$160 and US$640 of dividend was accumulated to the holders of the Series D Preferred Shares as of December 31, 2014 and 2015.

 

During the years ended December 31, 2014 and 2015, the Company recorded charges to accumulated deficit and mezzanine equity of US$2,848, and US$2,417, respectively, to accrete the carrying value of the Preference Shares to their redemption value.

 

21. COMMITMENTS AND CONTINGENCIES

 

Operating lease commitments

 

The Company leases buildings in the PRC and India under non-cancelable operating leases expiring on different dates. For the years ended December 31, 2014 and 2015, total rental expenses for all operating leases amounted to US$ 1,204 and US$ 1,368, respectively.

 

As of December 31, 2015, the Company has future minimum lease payments under non-cancelable operating leases with initial terms in excess of one year in relation to office buildings consisting of the following:

 

 

      US$  
         
  2016     1,555  
  2017     517  
  2018     14  
  2019     5  
  2020 and thereafter     -  
           
        2,091  

 

Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases.

 

Telecommunication resources purchase commitment

 

As of December 31, 2015, the Company had outstanding purchase commitments in relation to the purchase of telecommunication resources from China Unicom consisting of the following:

 

      US$  
           
  2016     18,480  

 

Income Taxes

 

As of December 31, 2015, the Group recognized an accrual of US$691 for unrecognized tax benefits and its interest (Note 16). The final outcome of the tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws or expiration of statutes of limitation. However, due to the uncertainties associated with the status of examinations, including the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future cash outflows associated with these tax uncertainties. As of December 31, 2015, the Company classified the accrual for unrecognized tax benefits as a non-current liability.

 

22. SUBSEQUENT EVENTS

 

Other than disclosed in the financial statements, there are no significant subsequent events as of the date of the report when the financial statements are issued.

   

  45  
 

 

 

BORQS INTERNATIONAL HOLDING CORP

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

    Page
     
Consolidated Financial Statements for the Years Ended December 31, 2015 and 2016    
     
Report of Independent Registered Public Accounting Firm   47
     
Consolidated Balance Sheets as of December 31, 2015 and 2016   48 - 51
     
Consolidated Statements of Operations for the Years Ended December 31, 2015 and 2016   52
     
Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2015 and 2016   53
     
Consolidated Statements of Shareholders’ Deficit for the Years Ended December 31, 2015 and 2016   54 - 55
     
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015 and 2016   56 - 57
     
Notes to the Consolidated Financial Statements   58 - 92

 

  46  
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of BORQS International Holding Corp

 

We have audited the accompanying consolidated balance sheets of BORQS International Holding Corp (the “Company”) as of December 31, 2015 and 2016, and the related consolidated statements of operations, comprehensive (loss) income, shareholders’ deficit and cash flows for each of the two years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BORQS International Holding Corp at December 31, 2015 and 2016, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

 

Ernst & Young Hua Ming LLP

Shanghai, the People’s Republic of China

 

May 12, 2017

 

  47  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of US dollars (“US$”))

 

        As of December 31,  
    Note   2015     2016  
        US$     US$  
ASSETS                
Current assets:                
Cash and cash equivalents         7,787       3,610  
Restricted cash         770       1,153  
Accounts receivable         6,068       28,257  
Accounts receivable from related parties   (17)     5,998       490  
Receivable from Mobile Virtual Network Operator (“MVNO”) franchisees         3,295       4,319  
Inventories   (5)     6,264       12,682  
Deferred cost of revenues         984       969  
Prepaid and other current assets   (6)     3,225       6,599  
                     
Total current assets         34,391       58,079  
                     
Non-current assets:                    
Property and equipment, net   (7)     2,250       1,488  
Intangible assets, net   (8)     13,262       15,498  
Goodwill   (9)     741       693  
Deferred tax assets   (16)     1,074       1,054  
Deferred cost of revenues         177       689  
Other non-current assets         1,184       529  
                     
Total non-current assets         18,688       19,951  
                     
Total assets         53,079       78,030  

 

The accompanying notes are an integral part of these consolidated financial statements

 

  48  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US dollars (“US$”))

 

        As of December 31,  
    Note   2015     2016  
        US$     US$  
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
Current liabilities:                
Accounts payable (including accounts payable of the Consolidated VIEs without recourse to the primary beneficiary of US$3,747 and US$4,598 as of December 31, 2015 and 2016, respectively)         6,951       22,691  
Accrued expenses and other payables (including accrued expenses and other payables of the Consolidated VIEs without recourse to the primary beneficiary of US$1,882 and US$2,778 as of December 31, 2015 and 2016, respectively)   (11)     6,263       7,634  
Deferred revenue (including deferred revenue of the Consolidated VIEs without recourse to the primary beneficiary of US$11,425 and US$9,134 as of December 31, 2015 and 2016, respectively)         17,334       11,995  
Income tax payable         165       847  
Short-term bank borrowings (including short-term bank borrowings of the Consolidated VIEs without recourse to the primary beneficiary of nil and US$721 as of December 31, 2015 and 2016, respectively)   (10)     2,000       6,306  
Long-term bank borrowings-current portion   (10)     571       1,381  
Deferred government grants   (12)     1,762       264  
                     
Total current liabilities         35,046       51,118  

 

The accompanying notes are an integral part of these consolidated financial statements

 

  49  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US dollars (“US$”))

 

        As of December 31,  
    Note   2015     2016  
        US$     US$  
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
Non-current liabilities:                
Unrecognized tax benefits   (16)     691       1,755  
Warrant liabilities   (10)     -       1,344  
Deferred tax liabilities (including deferred tax liabilities of the Consolidated VIEs without recourse to the primary beneficiary of US$1,779 and US$1,539 as of December 31, 2015 and 2016, respectively)   (16)     1,779       1,539  
Deferred revenue         440       2,428  
Long-term bank borrowings   (10)     381       4,491  
Deferred government grants   (12)     2,252       1,844  
                     
Total non-current liabilities         5,543       13,401  
                     
Total liabilities         40,589       64,519  
                     
Commitments and contingencies   (22)                

 

The accompanying notes are an integral part of these consolidated financial statements

 

  50  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US dollars (“US$”))

 

        As of December 31,  
    Note   2015     2016  
        US$     US$  
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
Mezzanine equity:                
Series A convertible redeemable preferred shares (US$0.001 par value; 39,900,000 shares authorized; 39,900,000 issued and outstanding as of December 31, 2015 and 2016)   (20)     11,970       11,970  
Series B convertible redeemable preferred shares (US$0.001 par value; 82,857,143 shares authorized; 82,857,143 issued and outstanding as of December 31, 2015 and 2016)   (20)     26,126       26,126  
Series C convertible redeemable preferred shares (US$0.001 par value; 50,909,089 shares authorized; 50,909,089 issued and outstanding as of December 31, 2015 and 2016)   (20)     20,848       21,069  
Series D convertible redeemable preferred shares (US$0.001 par value; 23,721,443 shares authorized; 23,721,443 issued and outstanding as of December 31, 2015 and 2016)   (20)     8,942       9,697  
                     
Total mezzanine equity         67,886       68,862  
                     
Shareholders’ deficit:                    
Ordinary shares         54       54  
Additional paid-in capital         1,124       1,124  
Statutory reserve         1,270       1,898  
Accumulated deficit         (56,330 )     (54,706 )
Accumulated other comprehensive loss   (13)     (1,149 )     (2,626 )
                     
Total BORQS International Holding Corp shareholders’ deficit         (55,031 )     (54,256 )
                     
Noncontrolling interest         (365 )     (1,095 )
                     
Total shareholders’ deficit         (55,396 )     (55,351 )
                     
Total liabilities, mezzanine equity, noncontrolling interest and shareholders’ deficit         53,079       78,030  

 

The accompanying notes are an integral part of these consolidated financial statements

 

  51  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED STATEMENT OF OPERATIONS

(Amounts in thousands of US dollars (“US$”))

 

        For the year ended
December 31,
 
    Note   2015     2016  
        US$     US$  
Net Revenues:                
Software         22,468       14,912  
Hardware         32,647       70,536  
MVNO         16,007       29,309  
Others         3,950       5,829  
                     
Total net revenues         75,072       120,586  
                     
Software         (12,660 )     (6,347 )
Hardware         (26,101 )     (57,452 )
MVNO         (16,225 )     (28,784 )
Others         (2,980 )     (1,709 )
                     
Total cost of revenues         (57,966 )     (94,292 )
                     
Total gross profit         17,106       26,294  
                     
Operating expenses:                    
Sales and marketing expenses         (7,359 )     (5,874 )
General and administrative expenses         (4,883 )     (10,042 )
Research and development expenses         (7,245 )     (6,886 )
Changes in the fair value of warrant liabilities         -       (12 )
                     
Total operating expenses         (19,487 )     (22,814 )
                     
Other operating income         3,094       1,760  
                     
Operating income         713       5,240  
                     
Interest income         61       65  
Interest expense         (156 )     (797 )
Other income         208       114  
Other expense         (35 )     (59 )
Foreign exchange gain         855       692  
                     
Profit before income taxes         1,646       5,255  
                     
Income tax expense   (16)     (851 )     (2,659 )
                     
Net income         795       2,596  
                     
Less: net loss attributable to noncontrolling interests         (1,316 )     (632 )
                     
Net income attributable to Borqs International Holding Corp         2,111       3,228  
                     
Add: accretion to redemption value of convertible redeemable preferred shares         (2,417 )     (976 )
Net (loss) income attributable to ordinary shareholders         (306 )     2,252  

 

The accompanying notes are an integral part of these consolidated financial statements

 

  52  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME

(Amounts in thousands of US dollars (“US$”))

 

        For the year ended
December 31,
 
    Note   2015     2016  
        US$     US$  
Net income         795       2,596  
Other comprehensive loss, net of tax of nil:                    
Foreign currency translation adjustments, net of tax of nil         (1,288 )     (1,477 )
Other comprehensive loss, net of tax of nil   (13)     (1,288 )     (1,477 )
Comprehensive (loss) income         (493 )     1,119  
Less: comprehensive loss attributable to noncontrolling interest         (1,519 )     (730 )
Comprehensive income (loss) attributable to Borqs International Holding Corp         1,026       1,849  
Change in redemption value of convertible redeemable preferred shares         (2,417 )     (976 )
Comprehensive (loss) income attributable to ordinary shareholders         (1,391 )     873  

 

The accompanying notes are an integral part of these consolidated financial statements

 

  53  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(Amounts in thousands of US dollars (“US$”) except for number of shares)

 

   

Note

 

Number of ordinary shares

   

Ordinary shares

   

Additional paid-in capital

   

Accumulated statutory reserves

   

Accumulated other comprehensive loss

   

Accumulated deficit

   

Total BORQS International Holding Corp shareholders’ deficit

   

Noncontrolling interest

   

Total shareholders’

deficit

 
                                                           
Balance as of January 1, 2015         54,016,667       54       1,120       860       139       (55,614 )     (53,441 )     1,154       (52,287 )
Consolidated net income                 -       -       -       -       2,111       2,111       (1,316 )     795  
Appropriation of statutory reserves                 -       -       410       -       (410 )     -       -       -  
Foreign exchange difference                 -       -       -       (1,288 )     -       (1,288 )     (203 )     (1,491 )
Accretion to redemption value of convertible redeemable preferred shares                 -       -       -       -       (2,417 )     (2,417 )     -       (2,417 )
Vesting of restricted shares         33,333       -       4       -       -       -       4       -       4  
                                                                             
Balance as of December 31, 2015         54,050,000       54       1,124       1,270       (1,149 )     (56,330 )     (55,031 )     (365 )     (55,396 )

 

The accompanying notes are an integral part of these consolidated financial statements

 

  54  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT (CONTINUED)

(Amounts in thousands of US dollars (“US$”) except for number of shares)

 

    Note   Number of ordinary shares     Ordinary shares     Additional paid-in capital     Accumulated statutory reserves     Accumulated other comprehensive loss     Accumulated deficit     Total BORQS International Holding Corp shareholders’ deficit     Noncontrolling interest    

Total shareholders’

deficit

 
                                                           
Balance as of January 1, 2016         54,050,000       54       1,124       1,270       (1,149 )     (56,330 )     (55,031 )     (365 )     (55,396 )
Consolidated net income                 -       -       -       -       3,228       3,228       (632 )     2,596  
Appropriation of statutory reserves                 -       -       628       -       (628 )     -       -       -  
Foreign exchange difference                 -       -       -       (1,477 )     -       (1,477 )     (98 )     (1,575 )
Accretion to redemption value of convertible redeemable preferred shares                 -       -       -       -       (976 )     (976 )     -       (976 )
                                                                             
Balance as of December 31, 2016         54,050,000       54       1,124       1,898       (2,626 )     (54,706 )     (54,256 )     (1,095 )     (55,351 )

 

The accompanying notes are an integral part of these consolidated financial statements

 

  55  
 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands of US dollars (“US$”))

 

 

    For the year ended
December 31,
 
    2015     2016  
    US$     US$  
             
CASH FLOWS FROM OPERATING ACTIVITIES            
Net income     795       2,596  
Adjustments to reconcile net income to net cash generated from (used in) operating activities:                
Foreign exchange gain     (855 )     (692 )
(Gain) loss on disposal of property and equipment     (350 )     1  
Depreciation of property and equipment     1,371       1,011  
Amortization of intangible assets     1,109       2,146  
Deferred income tax benefits     (1,044 )     (220 )
Interest expense     -       352  
Changes in the fair value of warrant liabilities     -       12  
                 
Changes in operating assets and liabilities, net of the effects of an acquisition:                
Restricted cash     211       (383 )
Accounts receivable     6,830       (22,189 )
Accounts receivable from related parties     (5,866 )     5,508  
Receivable from MVNO franchisees     (3,295 )     (1,024 )
Inventories     (4,074 )     (6,418 )
Deferred cost of revenues     2,469       (497 )
Prepaid expenses and other current assets     579       (3,175 )
Accounts payable     (742 )     15,740  
Accrued expenses and other payables     2,100       1,371  
Unrecognized tax benefits     645       1,064  
Deferred revenue     4,888       (3,351 )
Income tax payable     165       682  
Deferred government grants     (3,302 )     (1,906 )
                 
Net cash generated from (used in) operating activities     1,634       (9,372 )

 

The accompanying notes are an integral part of these consolidated financial statements

 

  56  
 

 

BORQS INTERNATIONAL HOLDING CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Amounts in thousands of US dollars (“US$”))

 

    For the year ended
December 31,
 
    2015     2016  
    US$     US$  
CASH FLOWS FROM INVESTING ACTIVITIES            
Purchases of property and equipment     (798 )     (494 )
Purchases of intangible assets     (5,175 )     (5,230 )
Proceeds from disposal of property and equipment     14       1  
Loan to a third party     (1,482 )     -  
Repayments of a loan to a third party     75       457  
                 
Net cash used in investing activities     (7,366 )     (5,266 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from short-term bank borrowings     -       6,776  
Repayments of short-term bank borrowings     (817 )     (2,000 )
Proceeds from long-term bank borrowings     999       6,000  
Repayments of long-term bank borrowings     (47 )     (571 )
Net cash generated from financing activities     135       10,205  
                 
Effect of foreign exchange rate changes on cash and cash equivalents     (34 )     256  
                 
Net decrease in cash and cash equivalents     (5,631 )     (4,177 )
Cash and cash equivalents at beginning of year     13,418       7,787  
                 
Cash and cash equivalents at end of year     7,787       3,610  

 

The accompanying notes are an integral part of these consolidated financial statements

 

  57  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION

 

BORQS International Holding Corp (the “Company”) was incorporated under the laws of the Cayman Islands on July 27, 2007. The Company and its consolidated subsidiaries, variable interest entities (the “VIE”) and the VIE’s subsidiaries (collectively referred to the “Group”) are principally engaged in the provision of commercial grade Android+ platform solutions, hardware product sales and MVNO services in the People’s Republic of China (the “PRC”).

 

(a) As of December 31, 2016, the details of the Company’s major subsidiaries, Consolidated VIEs and the subsidiaries of the VIE are as follows:

 

  Entity   Date of incorporation/
Acquisition
 

Place of incorporation

  Percentage of direct or indirect ownership by the Company   Principal activities
            Direct    
  Subsidiaries:                
  BORQS Hong Kong Limited
(“Borqs HK”) (1)
  July 19, 2007   Hong Kong   100%   Provision of software and service solutions and hardware products sales
  BORQS Beijing Ltd.
(“Borqs Beijing”) (1)
  September 4, 2007   PRC   100%   Provision of software and service solutions and hardware products sales
  BORQS Software Solutions Private Limited (“Borqs India”) (1)   July 17, 2009   India   100%   Provision of software and service solutions
                   
  VIE:                
                   
  Beijing Big Cloud Network Technology Co., Ltd. (“Big Cloud Network”) (1) / (2)   April 18, 2014   PRC   Nil   Holding company
                   
  Subsidiaries of the VIE:                
                   
  Yuantel (Beijing) Investment Management Co., Ltd.
(“Yuantel Investment”) (2) / (3)
  July 11, 2014   PRC   79%   Holding company
  Yuantel (Beijing) Telecommunications Technology Co., Ltd.
(“Yuantel Telecom”) (2) / (3)
  July 11, 2014   PRC   75.05%   Provision of MVNO  services

 

(1) Collectively, the “PRC Subsidiaries”.
(2) Collectively, the “Consolidated VIEs”.
(3) On July 11, 2014, the Company through Big Cloud Network acquired controlling interest in Yuantel Investment and its subsidiary, (Note 4).

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION (CONTINUED)

 

(b) PRC laws and regulations prohibit foreign ownership in certain telecommunication related businesses. To comply with these foreign ownership restrictions, the Group conducts its businesses in the PRC through the VIE using contractual agreements (the “VIE Agreements”).

 

The Group funds Big Cloud Network through loans to the two Big Cloud Network’s shareholders, (collectively the “Nominee Shareholders”). The effective control of Big Cloud Network is held by the Group, through a series of contractual agreements between Borqs Beijing and Big Cloud Network whereby Big Cloud Network became a consolidated VIE of the Group. Through the contractual agreements, the Group receives substantially all of the economic benefits of Big Cloud Network.

 

Big Cloud Network provides MVNO services in China through its 79% owned entity of Yuantel Investment which owns 95% of Yuantel Telecom; therefore Big Cloud Network effective owns 75.05% of Yuantel Telecom which is the entity that operates the business and holds the MVNO license from the Chinese Ministry of Industry and Information Technology.

 

The following is a summary of the key terms of the latest VIE Agreements:

 

Loan agreement

 

Borqs Beijing and the Nominee Shareholders entered into loan agreements for Borqs Beijing to provide interest free loans of RMB50,000 to the Nominee Shareholders, respectively, for the purpose of providing capital to Big Cloud Network to develop its MVNO business. There is no fixed term for the loans.

 

Power of attorney agreement

 

The Nominee Shareholders of Big Cloud Network entered into the power of attorney agreement whereby they authorized Borqs Beijing or its designated party to act on behalf of the Nominee Shareholders as exclusive agent and attorney with all respect to all matters concerning the shareholding including but not limited to (1) attend shareholders’ meetings of Big Cloud Network; (2) exercise all the shareholders’ rights, including voting rights; and (3) designate and appoint on behalf of each shareholder the senior management members of Big Cloud Network. The power of attorney remains irrevocable and continuously valid from the date of execution so long as each Nominee Shareholder remains as a shareholder of Big Cloud Network. The power of attorney agreement was subsequently reassigned to the Company.

 

Exclusive option agreement

 

Pursuant to the exclusive option agreement entered into between the Nominee Shareholders and Borqs Beijing or its designated party, the Nominee Shareholders granted Borqs Beijing or its designated party, an irrevocable and exclusive right to purchase all or part of the equity interests held by the Nominee Shareholders in Big Cloud Network, to the extent permitted under the PRC laws, at an amount equal to RMB10 or the minimum consideration permitted under the applicable PRC law. The purchase consideration in excess of RMB10 shall be refunded by the Nominee Shareholders to Borqs Beijing or Borqs Beijing may deduct the excess amount upon payment of consideration. The Nominee Shareholders shall not declare dividend or any form of distribution or grant loans in any form without the prior consent of Borqs Beijing or its designated party. The term of the agreement is 10 years, expiring on June 22, 2024 which will be automatically renewed every three-year thereafter if Borqs Beijing or its designated party does not provide notice of termination to the Nominee Shareholders fifteen days prior to expiration.

 

Exclusive technical & support agreement

 

Pursuant to the agreement entered into between Borqs Beijing and Big Cloud Network, Big Cloud Network engaged Borqs Beijing or its designated party as its exclusive provider of technical, consulting and other services in relation to its major business during the contractual period in return for service fees which will be determined at the sole discretion of Borqs Beijing or its designated party. The term of the agreement is 10 years, expiring on June 22, 2024, which will be automatically renewed every three-year thereafter if Borqs Beijing or its designated party does not provide notice of termination to the Nominee Shareholders fifteen days prior to expiration.

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION (CONTINUED)

 

Business cooperation agreement

 

Pursuant to the business cooperation agreement entered into between Borqs Beijing and Big Cloud Network, Borqs Beijing or its designated party agreed to provide unlimited financial support for the VIE’s daily operating activities through entrusted loans and agree to forgo the right to seek repayment.

 

Share pledge agreement

 

Pursuant to the agreement, the Nominee Shareholders pledged all of their equity interests in Big Cloud Network to Borqs Beijing as collateral to guarantee the repayment of the loans and to secure their obligations under the above agreements. The Nominee Shareholders agreed not to transfer or otherwise create any encumbrance on their equity interests in Big Cloud Network without prior consent of Borqs Beijing. The share pledge agreements will remain effective until all the obligations under above agreements have been satisfied in full or all of the guarantee liabilities have been repaid.

 

Despite the lack of technical majority ownership, there exists a parent-subsidiary relationship between Borqs Beijing’s designee, the Company, and Big Cloud Network through the irrevocable power of attorney agreement, whereby the Nominee Shareholders effectively assigned all of the voting rights underlying their equity interest in Big Cloud Network to the Company. Furthermore, pursuant to the exclusive option agreement and share pledge agreement, the Company, via Borqs Beijing, obtained effective control over Big Cloud Network through the ability to exercise all the rights of Nominee Shareholders and therefore the power to govern the activities that most significantly impact the economic performance of Big Cloud Network. In addition, through the VIE agreements the Company demonstrates its ability and intention to continue the ability to absorb substantially all the expected losses and the majority of the profit of the VIE, and therefore have the rights to the economic benefits of the VIE. Thus, the Company consolidates Big Cloud Network and its subsidiaries through the primary beneficiary, the Company, under ASC 810-10 Consolidation Overall.

 

In the opinion of the Company’s management and PRC counsel, (i) the ownership structure of the Consolidated VIEs is in compliance with all existing PRC laws and regulations in any material respect, (ii) each of the VIE agreements is valid, legally binding and enforceable to each party of such agreements and will not result in any violation of PRC laws or regulations currently in effect; and (iii) each of the Group’s PRC subsidiaries, VIE and VIE’s subsidiaries have the necessary corporate power and authority to conduct its business as described in its business scope under its business license, which is in full force and effect, and the Group’s business operation in PRC are in compliance with existing PRC laws and regulations.

 

However, uncertainties in the PRC legal system could cause the relevant regulatory authorities to find the current VIE agreements and businesses to be in violation of any existing or future PRC laws or regulations. If the Company, the primary beneficiary or any of its current or future VIEs are found in violation of any existing or future laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including levying fines, confiscating the income of the primary beneficiary, and the VIE, revoking the business licenses or operating licenses of the primary beneficiary, and VIE, shutting down the Group’s servers, discontinuing or placing restrictions or onerous conditions on the Group’s operations, requiring the Group to undergo a costly and disruptive restructuring or enforcing actions that could be harmful to the Group’s business. Any of these actions could cause significant disruption to the Group’s business operations and severely damage the Group’s reputation, which would in turn materially and adversely affect the Group’s business and results of operations. In addition, if the imposition of any of these penalties causes the primary beneficiary to lose the rights to direct the activities of VIE or the right to receive its economic benefits, the Company, through the primary beneficiary, would no longer be able to consolidate the VIE.

 

In addition, if the VIE or the Nominee Shareholders fail to perform their obligations under the VIE Agreements, the Group may have to incur substantial costs and expend resources to enforce the primary beneficiary’ rights under the contracts. The Group may have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. All of these VIE Agreements are governed by PRC laws and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit the Group’s ability to enforce these contractual arrangements. Under PRC laws, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would incur additional expenses and delay. In the event the Group is unable to enforce these VIE Agreements, the primary beneficiary may not be able to exert effective control over its VIE, and the Group’s ability to conduct its business may be negatively affected.

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION (CONTINUED)

 

(c) VIE disclosures

 

Consolidated VIEs contributed 27% and 29% of the Group's consolidated revenues for the years ended December 31, 2015 and 2016. As of December 31, 2015 and 2016, the Consolidated VIEs accounted for an aggregate of 40% and 23%, respectively, of the consolidated total assets, and 64% and 41%, respectively, of the consolidated total liabilities.

 

The Consolidated VIEs mainly operate the MVNO services. The VIE also holds the MVNO license, which is a revenue-producing asset recorded on the Group’s consolidated balance sheets. The Group expects increases in percentage of revenue generated from the Consolidated VIEs compared to the whole Group for the foreseeable future as the Group focuses on strengthening telecommunication platforms to strategically grow the Group’s MVNO business.

 

The Group believes that there are no assets held in the Consolidated VIEs that can be used only to settle obligations of the Consolidated VIEs, except for registered capital and the PRC statutory reserves. Relevant PRC laws and regulations restrict the Consolidated VIEs from transferring a portion of their net assets, equivalent to the balance of its statutory reserve and its share capital, to the Company in the form of loans and advances or cash dividends. Please refer to Note 18 for disclosure of restricted net assets. As the Consolidated VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the Consolidated VIEs do not have recourse to the general credit of the Company for any of the liabilities of the Consolidated VIEs. There were no pledges or collateralization of the Consolidated VIEs’ assets.

 

The following tables represent the financial information of the Consolidated VIEs as of December 31, 2015 and 2016 and for the years ended December 31, 2015 and 2016 before eliminating the intercompany balances and transactions between the Consolidated VIEs and other entities within the Group:

 

      As of December 31,  
      2015     2016  
      US$     US$  
               
  ASSETS            
  Current assets:                
 

Cash and cash equivalents

    2,455       414  
  Restricted cash     770       1,153  
  Accounts receivable     70       129  
  Receivable from MVNO franchisees     3,295       4,319  
  Inventories     145       67  
  Prepaid expenses and other current assets     347       926  
  Prepayment to WFOE     454       -  
                   
  Total current assets     7,536       7,008  
                   
  Non-current assets:                
  Property and equipment, net     876       987  
  Intangible assets, net     10,879       8,609  
  Goodwill     741       693  
  Deferred tax assets     1,074       1,054  
  Other non-current assets     196       58  
                   
  Total non-current assets     13,766       11,401  
                   
  Total assets     21,302       18,409  

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION (CONTINUED)

 

(c) VIE disclosures (Continued)

 

      As of December 31,  
      2015     2016  
      US$     US$  
  Current liabilities:            
  Accounts payable     3,747       4,598  
  Accrued expenses and other payables     1,882       2,778  
  Deferred revenue     11,425       9,134  
  Short-term bank borrowings     -       721  
  Intercompany payables     6,969       7,923  
  Total current liabilities     24,023       25,154  
                   
  Non-current liabilities                
  Deferred tax liabilities     1,779       1,539  
                   
  Total non-current liabilities     1,779       1,539  
                   
  Total liabilities     25,802       26,693  

 

      For the Year Ended December 31,  
      2015     2016  
      US$     US$  
  Net revenues     19,957       35,138  
  Net loss     (5,029 )     (3,381 )

 

      For the Year Ended December 31,  
      2015     2016  
      US$     US$  
  Net cash provided by (used in) operating activities     2,413       (2,128 )
  Net cash used in investing activities     (1,622 )     (634 )
  Net cash (used in) provided by financing activities     (770 )     721  
  Net increase (decrease)  in cash and cash equivalents     21       (2,041 )

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a) Basis of presentation

 

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

 

(b) Principles of consolidation

 

The consolidated financial statements include the financial statements of the Company, its subsidiaries and Consolidated VIEs, for which, the Company is the primary beneficiary. All significant inter-company transactions and balances between the Company, its subsidiaries and the Consolidated VIEs are eliminated upon consolidation. Results of acquired subsidiaries and its Consolidated VIEs are consolidated from the date on which control is transferred to the Company.

 

(c) Use of estimates

 

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Areas where management uses subjective judgment include, but are not limited to, estimating the useful lives of long-lived assets and intangible assets, assessing the initial valuation of the assets acquired and liabilities assumed in a business combination and the subsequent impairment assessment of long-lived assets, intangible assets and goodwill, determining the provisions for accounts receivable and inventories, accounting for deferred income taxes and uncertain tax benefits, valuation for share-based compensation arrangements, warrants for Series D convertible redeemable preferred shares and convertible redeemable preferred shares. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates, and as such, differences may be material to the consolidated financial statements.

 

(d) Foreign currency

 

The functional currency of the Company and its non-PRC subsidiaries, excluding Borqs India, is the United States dollar. The functional currency of Borqs India is Rupee, whereas the functional currency of the Company’s PRC subsidiaries and its Consolidated VIEs is the Chinese Renminbi (“RMB”) as determined based on the criteria of ASC 830, Foreign Currency Matters . The Company uses the US$ as its reporting currency. Transactions denominated in foreign currencies are re-measured into the functional currency at the exchange rates prevailing on the transaction dates. Foreign currency denominated financial assets and liabilities are re-measured at the balance sheet date exchange rate. Exchange gains and losses are included in foreign exchange gains and losses in the consolidated statements of operations.

 

Assets and liabilities of the Company’s PRC subsidiaries are translated into US$ at fiscal year-end exchange rates. Equity amounts are translated at historical exchange rates. Income and expense items are translated at average exchange rates prevailing during the fiscal year. Translation adjustments arising from translation of foreign currency financial statements are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income (loss) in the consolidated statements of comprehensive income (loss).

 

(e) Cash and cash equivalents

 

Cash and cash equivalents consist of cash on hand and bank deposits which are unrestricted as to withdrawal and use. All highly liquid investments with a stated maturity of 90 days or less from the date of purchase are classified as cash equivalents.

 

(f) Restricted cash

 

Restricted cash mainly represents short-term deposits with China United Network Communications Group Co., Ltd. (“China Unicom”) as guarantee for minimum purchase requirements, and therefore are not available for the Group’s use until the end of contract period with China Unicom.

 

  63  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(g) Accounts receivable

 

Accounts receivable are carried at net realizable value. An allowance of doubtful accounts is recorded in the period when the collection of full amount is no longer probable. The Group reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Group considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends. As of December 31, 2015 and 2016, the Group evaluated and wrote off the doubtful accounts as they were determined to be uncollectible. Thus, there was no allowance for doubtful accounts outstanding.

 

(h) Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Adjustments to reduce the cost of inventories to its net market value are made, if required, for decreases in sales prices, obsolescence or similar reductions in the estimated net realizable value. Inventories provision of US$1,109 and US$1, 038 was recorded as of December 31, 2015 and 2016, respectively.

 

(i) Property and equipment

 

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, as follows:

 

  Category   Estimated useful life
       
  Computer and network equipment   3-5 years
  Office equipment   5 years
  Motor vehicles   5 years
  Leasehold improvements  

Over the shorter of lease term or the estimated useful lives of the assets

 

Repair and maintenance costs are charged to expense as incurred, whereas the costs of betterments that extend the useful life of property and equipment are capitalized as additions to the related assets. Retirements, sale and disposals of assets are recorded by removing the cost and accumulated depreciation with any resulting gain or loss reflected in the consolidated statements of operations.

 

Property and equipment that are purchased or constructed which require a period of time before the assets are ready for their intended use are accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, including installation costs. Construction-in-progress is transferred to specific property and equipment accounts and commences depreciation when these assets are ready for their intended use.

 

(j) Intangible assets

 

Intangible assets are carried at cost less accumulated amortization and any recorded impairment. Intangible assets acquired in a business combination are recognized initially at fair value at the date of acquisition. Intangible assets with finite useful lives are amortized using a straight-line method. These amortization methods reflect the estimated pattern in which the economic benefits of the respective intangible assets are to be consumed.

 

Development costs of software to be sold, leased, or otherwise marketed are subject to capitalization beginning when technological feasibility is reached, in accordance with ASC 985-20, Costs of Software to be Sold, Leased, or Marketed .

 

Intangible assets have weighted average useful lives from the date of purchase as follow:

 

  Purchased software   6.7 years
  MVNO license (Note 4)   10 years
  Capitalized software development costs   3 years

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(k) Business combination

 

The Group acquired Yuantel in July 2014 and accounted for the acquisition pursuant to ASC 805, Business Combinations (“ASC 805”), which requires the Group to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of the acquisition date fair value of consideration transferred and the contingent considerations plus the acquisition date fair value of the noncontrolling interests, if any, over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. In cases where the Group acquires less than 100% ownership interest, it will derive the fair value of the acquired business as a whole, which will typically include a control premium and subtract the consideration transferred for the controlling interest to identify the fair value of the noncontrolling interest.

 

In connection with this acquisition, the Group determines the estimated fair value of acquired identifiable intangible and tangible assets as well as assumed liabilities with the assistance of an independent third party valuation firm. The Group derives estimates of the fair value of assets acquired and liabilities assumed using reasonable assumptions based on historical experiences and on the information obtained from management of the acquired companies. Critical estimates in valuing certain of the acquired intangible assets required to but were not limited to the following: deriving estimates of future expected cash flows from the acquired business and the determination of an appropriate discount rate. Unanticipated events may occur which may affect the accuracy or validity of such assumptions or estimates.

 

In case where the Group acquired the remaining interest in a subsidiary once it has obtained control, such transaction is accounted for as an equity transaction where the difference between the fair value of the purchase consideration and the carrying amount of the noncontrolling interests is recorded in additional paid-in capital.

 

(l) Goodwill

 

Goodwill represents the excess of the purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of an acquired business. The Group’s goodwill as of December 31, 2015 and 2016 was related to its acquisition of Yuantel Investment, (Note 4). In accordance with ASC 350, Goodwill and Other Intangible Assets ( “ASC 350” ) , recorded goodwill amounts are not amortized, but rather are tested for impairment annually or more frequently if there are indicators of impairment present.

 

The performance of the impairment test in accordance to ASC 350 involves a two-step process. The first step of the impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. Fair value is primarily determined by computing the future discounted cash flows expected to be generated by the reporting unit. If the reporting unit’s carrying value exceeds its fair value, goodwill may be impaired. If this occurs, the Group performs the second step of the goodwill impairment test to determine the amount of impairment loss.

 

The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit’s goodwill. If the implied goodwill fair value is less than its carrying value, the difference is recognized an impairment loss.

 

In accordance with ASC 350, the Group assigned and assessed goodwill for impairment at the reporting unit level. A reporting unit is an operating segment or one level below the operating segment. The Company has determined that it has two operating segments as its reporting units, namely Yuantel and Connected Solution. Goodwill is recorded at the Yuantel reporting unit.

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(m) Impairment of long-lived assets

 

The Group evaluates its long-lived assets or asset group, including intangible assets with indefinite and finite lives, for impairment. Intangible assets with indefinite lives that are not subject to amortization are tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the assets might be impaired in accordance with ASC 350. Such impairment test compares the fair values of assets with their carrying values with an impairment loss recognized when the carrying values exceed fair values.

 

For long-lived assets and intangible assets with finite lives that are subject to depreciation and amortization are tested for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying amount of an asset or a Group of long-lived assets may not be recoverable. When these events occur, the Group evaluates impairment by comparing the carrying amount of the assets to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Group would recognize an impairment loss based on the excess of the carrying amount of the asset group over its fair value.

 

(n) Fair value of financial instruments

 

The Group’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable and payable, accounts receivable from related parties, receivable from MVNO franchisees, short-term and long-term bank borrowings, warrants for Series D convertible redeemable preferred shares and convertible redeemable preferred shares. Other than the long-term bank borrowings, warrants for Series D convertible redeemable preferred shares and convertible redeemable preferred shares, the carrying values of these financial instruments approximate their fair values due to their short-term maturities.

 

The Group applies ASC 820, Fair Value Measurements and Disclosures, (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 requires disclosures to be provided on fair value measurement.

 

ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 — Other inputs that are directly or indirectly observable in the marketplace.

 

Level 3 — Unobservable inputs which are supported by little or no market activity.

 

ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach; and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

 

During the year ended December 31, 2015 there is no financial instrument measured at fair value. The warrants for Series D convertible redeemable preferred shares was fair valued as of December 31, 2016. The carrying amounts of long-term bank borrowings approximate their fair values since they bear interest rates which approximate market interest rates. The convertible redeemable preferred shares are initially recognized at its fair value.

 

  66  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(o) Revenue recognition

 

The Group is mainly engaged in the business of providing 1) Android+ platform solutions and services, 2) hardware product sales, and 3) MVNO services. The Group recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable, and collectability is reasonably assured.

 

1. Android+ platform solutions and services

 

Android+ platform solutions

 

The Group provides customized Android+ software platform solutions that are developed to maximize the commercial grade quality or performance of open source Android+ software for integration with particular chipsets. The Group also provides customized Android+ service platform solutions that are end to end software developed for mobile operators to allow data synchronization between their platform and mobile devices. The Group charges its customers, mainly including mobile device manufacturers and mobile operators, fixed fees for project-based software contracts, as well as per chip or per mobile device royalty fees.

 

The project-based software contracts are generally considered multiple element arrangements as they consist of perpetual software licenses, software development services such as customization, modification, implementation and integration, and post-contract customer support (“PCS”) where customers have the right to receive bug fixes, telephone support and unspecified upgrades on a when-and-if available basis. Pursuant to ASC 985-605, Revenue Recognition: Software (“ASC 985-605”), given the project-based software contracts require significant customization that are generally completed within one year from the contract dates, the Group accounts for the entire software contracts in conformity with the relevant guidance in ASC 605-35, Revenue Recognition: Contract Accounting , applying the completed contract method.

 

As the Group was unable to establish vendor specific objective evidence of the fair value of PCS and PCS is the only undelivered element upon completion of software projects, the entire software project fixed fees are recognized ratably over the PCS service period. PCS service periods are generally 12 months, with ranges from six months to three years, and commences upon completion of customer acceptance of the completed software projects. Costs incurred to complete the software projects are deferred to match revenue recognition.

 

Where the Group is entitled to receive on going usage based royalties determined based on the chip or mobile device sales, the usage-based royalties are recognized according to the customers’ usage reports, generally on a quarterly basis.

 

Service contracts

 

The Group provides research and development services to certain customers for their mobile-computing related development projects where fees are charged on a time and material basis and the Group is not responsible for the outcome of such development projects. The revenue is recognized proportionately as the services are delivered and is included as software revenues on the consolidated statement of operations.

 

2. Hardware product sales

 

The Group provides total solutions on original design manufacturer (“ODM”) basis to customers of mobile devices. Revenue is recognized when sale of each final hardware product to the customers are delivered. Warranty is provided to all customers, which is not considered an additional service; rather, an integral part of the product sales. ASC 450, Contingencies, specifically addresses the accounting for standard warranties. The Group believes that accounting for its standard warranty pursuant to ASC 450 does not impact revenue recognition because the cost of honoring the warranty can be reliably estimated. The Group has determined the likelihood of claims arising from warranties to be remote based on strong quality control procedures in the production process and historical experience with regard to claims being made by customers. The basis for the warranty accrual will be reviewed periodically based on actual experience. The Group does not sell extended warranty coverage.

 

  67  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(o) Revenue recognition (Continued)

 

3. MVNO

 

On July 11, 2014, the Group, through the VIE, acquired and obtained control of Yuantel Investment, which mainly operates the MVNO business, (Note 4). The license to operate such MVNO business is issued by the Chinese Ministry of Industry and Information Technology and the core mobile network is provided by the PRC government owned China Unicom. Yuantel Investment receives wholesale rates for mobile voice and data services from China Unicom and repackages the voice and data services into competitive bundles for Chinese consumers.

 

In accordance with ASC 605-45, Revenue Recognition; Principal agent consideration, the Group is the principal in providing the bundled voice and data services to Chinese consumers, thus revenue is recognized on a gross basis. As sales of bundled services are mostly pre-paid by the consumers, cash received in advance of voice and data consumption are recognized as deferred revenue. Revenue is recognized when the services are actually used. Pre-paid bundled services do not expire.

 

Sales of the bundles are mostly made through agents and franchisees. Bundled services sold to agents are discounted and not refundable to the Group. The Group accounts for such discounts as reductions of revenue in accordance with ASC 605-50 (“ASC 605-50”) Customer Payments and Incentives .

 

The Group enters into profit sharing arrangements with franchisees under which bundled services may be returned to the Group if not sold to the consumers. The franchisees receive certain percentages of profits made by the Group on the sales of the bundled services as they are used by the consumers. The Group accounts for profit sharing with franchisees as selling expenses in the consolidated statements of operations. Pursuant to the Company’s policy, the amount of discounts that may be provided by the franchisees to consumers is capped at 5%, based on which, the Group recognized the maximum amount of discounts that may be provided by the franchisees as reductions of revenue in accordance with ASC 605-50.

 

  68  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(p) Cost of revenues

 

Cost of revenues consists primarily of telecommunication costs, depreciation of long-lived assets, amortization of acquired intangible asset, payroll and other related costs of operations. Deferred cost of revenues was US$1,161 and US$1,658 for the years ended December 31, 2015 and 2016.

 

(q) Advertising expenditures

 

Advertising expenditures are expensed as incurred and are included in sales and marketing expenses, which amounted to US$46 and US$78 for the years ended December 31, 2015 and 2016, respectively.

 

(r) Research and development expenses

 

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with research and platform development. Research and development expenses also include rent, depreciation and other related expenses. Research and development expenses are expensed as incurred.

 

(s) Government grants

 

Government grants are provided by the relevant PRC municipal government authorities to subsidize the cost of certain technology development projects. The amount of such government grants are determined solely at the discretion of the relevant government authorities and there is no assurance that the Group will continue to receive these government grants in the future. Government grants are recognized when it is probable that the Group will comply with the conditions attached to them, and the grants are received. When the grant relates to an expense item, it is recognized in the consolidated statement of operations over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate, as a reduction of the related operating expense. When the grant relates to an asset, it is recognized as deferred government grants and released to the consolidated statement of operations in equal amounts over the expected useful life of the related asset, when operational, as a reduction of the related depreciation expense.

 

(t) Leases

 

Leases are classified at the inception date as either a capital lease or an operating lease. The Group did not enter into any leases whereby it is the lessor for any of the periods presented. As the lessee, a lease is a capital lease if any of the following conditions exists: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease term is at least 75% of the property’s estimated remaining economic life, or d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. The Group did not enter into any capital leases for the years ended December 31, 2015 and 2016.

 

All other leases are accounted for as operating leases wherein rental payments are expensed on a straight-line basis over the periods of their respective lease terms. The Group leases office space under operating lease agreements. Certain lease agreements contain rent holidays and escalating rent. Rent holidays and escalating rent are considered in determining the straight-line rent expense to be recorded over the lease term. The lease term begins on the date of initial possession of the lease property for purposes of recognizing lease expense on a straight-line basis over the term of the lease.

 

  69  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(u) Income taxes

 

The Group accounts for income taxes using the liability method. Current income taxes are provided for in accordance with the laws of the relevant tax authorities. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Group records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The Group applies ASC 740, Accounting for Income Taxes, (“ASC 740”) , to account for uncertainty in income taxes. ASC 740 prescribes a recognition threshold a tax position is required to meet before being recognized in the financial statements.

 

The Group has elected to classify interest related to unrecognized tax benefits, if and when required, as part of “income tax expense” in the consolidated statements of operations.

 

The Group elected to early adopt ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Thus, all the deferred income tax assets and liabilities are classified as noncurrent in the consolidated balance sheet statement of financial position.

 

(v) Share-based compensation

 

The Group accounts for share-based compensation in accordance with ASC 718, Compensation-Stock Compensation: Overall , (“ASC 718”).

 

In accordance with ASC 718, the Group determines whether an award should be classified and accounted for as a liability award or equity award. All grants of share-based awards to employees classified as equity awards are measured based on their grant date fair values and recognized as compensation expense over the requisite service period and/or performance period in the consolidated statements of operations.

 

The Group recognizes compensation expense using the accelerated method for share-based awards granted with service and performance conditions. According to ASC 718, the amount of compensation cost recognized (or attributed) when achievement of a performance condition is probable depends on the relative satisfaction of the performance condition based on performance to date. According to ASC 718, probable means the future event or events are likely to occur and the Group interprets “probable” to be generally in excess of a 70% likelihood of occurrence.

 

The Group elected to early adopt ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting to account for forfeitures as they occur.

 

  70  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(w) Comprehensive (loss )income

 

Comprehensive (loss) income is defined as the increase (decrease) in equity of the Group during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. Accumulated other comprehensive (loss) income of the Group includes foreign currency translation adjustments related to the Company and its PRC subsidiaries, whose functional currency is RMB.

 

(x) Segment reporting

 

In accordance with ASC 280 “Segment Reporting” (“ASC 280”), the Group has two operating segments, namely Yuantel and Connected Solution as the Group’s chief executive officer, who has been identified as the Group’s chief operating decision maker (“CODM”) reviews the operating results of the two difference service lines in order to allocate resources and assess performance for the Group.

 

(y) Employee benefits

 

The full-time employees of the Group’s PRC subsidiaries are entitled to staff welfare benefits including medical care, housing fund, pension benefits and unemployment insurance, which are governmental mandated defined contribution plans. These entities are required to accrue for these benefits based on certain percentages of the employees’ respective salaries, subject to certain ceilings, in accordance with the relevant PRC regulations, and make cash contributions to the state-sponsored plans out of the amounts accrued.

 

(z) Comparatives

 

Certain items reported in the prior year’s consolidated financial statements have been reclassified to conform to the current year’s presentation.

 

(aa) Recent accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, Revenue Recognition and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is originally effective for the annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. ASU No. 2015-14, Revenue from Contracts with Customers , (“ASU 2015-14”), deferred the effective date of ASU 2014-09 by one year. As a result, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017 and interim periods therein. Early adoption is permitted to the original effective date. Management developed an adoption plan based on which the Company is in the process of evaluating the effects of adopting new revenue standard, including the selection of the adoption method, the identification of differences, if any, from the application of current revenue recognition standard and the impact of such differences, if any, on its consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, (“ASU 2015-11”). The guidance simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Entities will continue to apply their existing impairment models to inventories that are accounted for using last-in first-out (LIFO) and the retail inventory method (RIM). For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, and the guidance must be applied prospectively after the date of adoption. The Group is currently evaluating the impact of the adoption of ASU 2015-11 on its consolidated financial statements.

 

  71  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(aa) Recent accounting pronouncements(Continued)

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, (“ASU 2016-02”) . ASU 2016-02 specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public companies for annual reporting periods and interim periods within those years beginning after December 15, 2018. Early adoption is permitted. The Group is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.

 

In March 2015, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), (“ASU 2016-08”) which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. This guidance will be effective for the company in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. The Group is still evaluating the effect if any, that this guidance will have on its consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”), Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. The standard will replace “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. The standard is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted. The Group is evaluating the effect that this guidance will have on its consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments which addresses eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance will be effective for the Group for fiscal year ending December 31, 2018, and early adoption is permitted. The Group is evaluating the effect that this guidance will have on its consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective for the Group for fiscal year ending December 31, 2018, and early adoption is permitted. The Group is evaluating the effect that this guidance will have on its consolidated financial statements.

 

In January 2017, FASB has issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, clarifying the definition of a business. The ASU affects all companies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Group is evaluating the effect that this guidance will have on its consolidated financial statements.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”), Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This standard is effective for public business entities in the first quarter of 2020. Early adoption is permitted. The Group is evaluating the effect that this guidance will have on its consolidated financial statements.

 

  72  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

3. CONCENTRATION OF RISKS

 

(a) Credit risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and restricted cash, accounts receivable, accounts receivable from related parties and receivable from MVNO franchisees. As of December 31, 2015 and 2016, the aggregate amount of cash and cash equivalents and restricted cash of US$6,634 and US$2,563, respectively, were held at major financial institutions located in the PRC, and US$1,923 and US$2,200, respectively, were deposited with major financial institutions located outside the PRC. Management believes that these financial institutions are of high credit quality and continually monitors the credit worthiness of these financial institutions. Historically, deposits in Chinese banks are secure due to the state policy on protecting depositors’ interests. However, China promulgated a new Bankruptcy Law in August 2006 that came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank may go into bankruptcy. In addition, since China’s concession to the World Trade Organization, foreign banks have been gradually permitted to operate in China and have been significant competitors against Chinese banks in many aspects, especially since the opening of the Renminbi business to foreign banks in late 2006. Therefore, the risk of bankruptcy of those Chinese banks in which the Company has deposits has increased. In the event of bankruptcy of one of the banks which holds the Company’s deposits, it is unlikely to claim its deposits back in full since it is unlikely to be classified as a secured creditor based on PRC laws.

 

Accounts receivable, accounts receivable from related parties and receivable from MVNO franchisees are both typically unsecured, and are derived from revenues earned from customers. The risk is mitigated by credit evaluations the Group performs on its ongoing credit evaluations of its customers’ financial conditions and ongoing monitoring process of outstanding balances. The Group maintains reserves for estimated credit losses and these losses have generally been within expectations.

 

(b) Business supplier, customer, and economic risk

 

The Group participates in a dynamic and competitive high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Group’s future financial position, results of operations or cash flows: changes in the overall demand for services; competitive pressures due to new entrants; advances and new trends in new technology; control of telecommunication infrastructures by local regulators and industry standards; strategic relationships or customer relationships; regulatory considerations; and risks associated with the Group’s ability to attract and retain employees necessary to support its growth.

 

(i) Business supplier risk – The Group’s MVNO operations are dependent upon telecommunication resources provided by China Unicom. There is no guarantee that the supply of telecommunication resources provided by China Unicom will be renewed annually. Further, there is no guarantee around the continuance of the MVNO license granted by the PRC government Ministry of Industry and Information Technology which may be amended or discontinued in light of changes to political, economic and social reforms.

 

(ii) Customer risk – The success of the Group’s business going forward will rely in part on Group’s ability to continue to obtain and expand business from existing customers while also attracting new customers. The Group has a diversified base of customers covering its services and the revenue from the largest single customer A accounted for 9% and from the largest single customer B accounted for 23% of the Group’s total net revenues for the two years ended December 31, 2015 and 2016, respectively, and the accounts receivable from the largest single customer A accounted for 50% and from the largest single customer B 25% of the Group’s total accounts receivable and accounts receivable from related parties for the years ended December 31, 2015 and 2016, respectively.

 

(iii) Economic risk – The Group’s operations could be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 20 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

 

  (c) Foreign currency exchange rate risk

 

From July 21, 2005, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. The appreciation of the US$ against RMB was approximately 6.1% and 6.8% in the years ended December 31, 2015 and 2016, respectively. The appreciation of the US$ against Rupee was approximately 4.7% and 3.3% in the years ended December 31, 2015 and 2016, respectively.

 

  73  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

4. BUSINESS ACQUISITION

 

On July 11, 2014, Big Cloud Network, the VIE of the Company, acquired the controlling interest represented by 79% of the equity interest in Yuantel Investment, for an aggregate purchase price of US$7,354. Of the aggregate US$3,677 purchase price, was injected into Yuantel Investment in 2014 and 2015, respectively.

 

The Company entered into a new business, MVNO business in the PRC as a result of the acquisition.

 

The following table summarizes the fair values of the assets acquired and liabilities assumed and the noncontrolling interest at the date of acquisition on July 11, 2014.

 

      US$  
         
  Current assets     7,976  
  Other non-current assets     182  
  Property and equipment, net     121  
  Purchased software     50  
  MVNO license     9,560  
  Deferred tax assets, non-current     165  
           
  Total identifiable assets acquired     18,054  
           
  Short-term borrowings     (817 )
  Accounts payable     (620 )
  Deferred revenue-current     (5,669 )
  Other current liabilities     (648 )
  Deferred tax liability, non-current     (2,103 )
           
  Total liabilities assumed     (9,857 )
           
  Net identifiable assets acquired     8,197  
           
  NCI measured at fair value     1,629  
  Goodwill     786  
  Purchase consideration (i)     7,354  

 

(i) US$ 3,677 cash consideration was paid in 2014

 

  74  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

4. BUSINESS ACQUISITIONS (CONTINUED)

 

The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and noncontrolling interests is based on various assumptions and valuation methodologies requiring considerable judgment from management. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. The US$9,560 of acquired intangible asset is the MVNO license with an estimated useful life of ten years. The Group performed the valuation of the MVNO license with the assistance of an independent third party valuation firm. The fair value of the license was determined based on the income approach, using assumptions including discount rate of 20.5% considering risk inherent in the existing MVNO business model and industry comparisons. Terminal value is based on the expected life of asset of ten years, and forecasted cash flows over that period. The ten-year cash flow projection was derived taking into consideration of actual operating results and management best estimates about future developments as well as certain industry and regulatory expectations.

 

The goodwill recognized is attributable primarily to anticipated future growth within the Company’s MVNO business. None of the goodwill is expected to be deductible for income tax purposes. For the years ended December 31, 2015 and 2016, there were no changes in the recognized amounts of goodwill.

 

The fair value of the 21% noncontrolling interest was estimated to be US$1,629. The fair value of the noncontrolling interest was estimated by deriving the fair value of the acquired business including a control premium as a whole and then subtracting the considerations transferred. The fair value of the acquired business was estimated using the income approach. As Yuantel Investment is a private entity, the fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC 820 Fair value measurement. The fair value estimates are based on a discount rate of 20.5%, long-term sustainable growth rate of 3%, financial multiples of companies in the same industry and adjustment for the lack of marketability that market participants would consider when estimating the fair value of the Yuantel Investment.

 

5. INVENTORIES

 

Inventories consisted of the following as of December 31, 2015 and 2016:

 

      As of December 31,  
      2015     2016  
      US$     US$  
               
  Raw materials     4,004       5,406  
  Goods in transit     291       7,164  
  Work in process     1,307       1,023  
  Finished goods     1,771       127  
                   
  Less: Provision     (1,109 )     (1,038 )
                   
  Inventories, net     6,264       12,682  

 

  75  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

      As of December 31,  
      2015     2016  
      US$     US$  
               
  Staff advances     253       293  
  Receivable from OEM     -       3,739  
  Rental and other deposits     823       1,048  
  VAT recoverable     1,676       963  
  Loan to a third party     473       519  
  Others     -       37  
                   
        3,225       6,599  

 

7. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

      As of December 31,  
      2015     2016  
      US$     US$  
  At cost:            
  Leasehold improvements     894       837  
  Computer and network equipment     5,800       5,801  
  Office equipment     784       763  
  Motor vehicles     171       220  
        7,649       7,621  
  Less: accumulated depreciation     (5,399 )     (6,133 )
                   
        2,250       1,488  

 

Depreciation expense was US$1,371 and US$1,011 for the years ended December 31, 2015 and 2016, respectively, and were included in the following captions:

 

      For the year ended December 31,  
      2015     2016  
      US$     US$  
               
  Cost of revenues     472       347  
  Sales and marketing expenses     54       15  
  General and administrative expenses     144       277  
  Research and development expenses     701       372  
                   
        1,371       1,011  

 


  76  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

8. INTANGIBLE ASSETS, NET

 

The following table presents the Group’s intangible assets as of the respective balance sheet dates:

 

      Software     Capitalized software development costs    

MVNO

License (Note 4)

    Total  
      US$     US$     US$     US$  
                           
  Balance as of January 1, 2015     671       -       9,082       9,753  
  Additions     1,871       3,304       -       5,175  
  Amortization expense     (170 )     (38 )     (901 )     (1,109 )
  Foreign currency translation difference     (35 )     -       (522 )     (557 )
                                   
  Balance as of December 31, 2015     2,337       3,266       7,659       13,262  
  Additions     315       4,915       -       5,230  
  Amortization expense     (205 )     (1,098 )     (843 )     (2,146 )
  Foreign currency translation difference     (153 )     (209 )     (486 )     (848 )
                                   
  Balance as of December 31, 2016     2,294       6,874       6,330       15,498  

 

The intangible assets are amortized using the straight-line method, which is the Group’s best estimate of how these assets will be economically consumed over their respective estimated useful lives of 3-10 years.

 

Amortization expense was approximately US$1,109 and US$2,146 for the years ended December 31, 2015 and 2016, respectively.

 

The annual estimated amortization expenses for the intangible assets for each of the next five years are as follows:

 

      US$  
         
  2017     3,731  
  2018     3,669  
  2019     2,597  
  2020     2,597  
  2021     1,025  
           
        13,619  

 

9. GOODWILL

 

The changes in the carrying amount of goodwill were as follows:

 

      As of December 31,  
      2015     2016  
      US$     US$  
               
  Balance as of January 1     786       741  
  Foreign currency translation difference     (45 )     (48 )
                   
  Balance as of December 31     741       693  

 

No impairment charge was recorded in any of the two years ended December 31, 2015 and 2016.

 

  77  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

10. BANK BORROWINGS

 

Bank borrowings are as follows as of the respective balance sheet dates:

 

      As of December 31,  
      2015     2016  
      US$     US$  
               
  Short-term bank borrowings     2,000       6,306  
  Long-term bank borrowings, current portion     571       1,381  
        2,571       7,687  
                   
  Long-term bank borrowings, non-current portion     381       4,491  
                   
  Total borrowings     2,952       12,178  

 

The short-term bank borrowings outstanding as of December 31, 2015 and 2016 bore a weighted average interest rate of 7.03% and 6.89% per annum, respectively, and were denominated in RMB & US$. These borrowings were obtained from financial institutions and have terms of three months to one year. The long-term bank borrowings (including current portion) outstanding as of December 31, 2016 bore a weighted average interest rate of 7.95%, and were denominated in US$. These borrowings were obtained from financial institutions located in Hong Kong and US, and have terms of 2 to 3 years.

 

Bank borrowings as of December 31, 2016 were pledged by the account receivable amounted to US$36,192.

 

In August 2016, the Company issued 2,515,123 and 1,900,800 warrants (“2016 Warrants”) to two banks in connection with a short term loan facility of $2,000,000 and a long term loan facility of $6,000,000 respectively, for working capital purpose. The 2016 Warrants entitle the banks to subscribe for Series D Preference Shares at the exercise price of $0.5059. The 2016 Warrants shall lapse and expire after 5 and 7 years from their issuance dates, respectively.

 

As the 2016 Warrants were granted to the banks for loan facilities (Note 10), their fair value on the issuance date were recognized as deferred borrowing costs presented as deductions of the carrying value of the term loans. The deferred borrowing costs are recognized over the life of the term loans as financing cost, using the effective interest rate method. As the 2016 Warrants are convertible into Series D Preference Shares classified as mezzanine equity, the 2016 Warrants are financial liabilities in accordance with ASC 480, Distinguishing Liabilities from Equity that are remeasured at the end of each reporting period with an adjustment for fair value through earnings.

 

11. ACCRUED EXPENSES AND OTHER PAYABLES

 

The components of accrued expenses and other payables are as follows:

 

      As of December 31,  
      2015     2016  
      US$     US$  
               
  Payroll and welfare payable     2,811       3,235  
  Accrued liability     900       50  
  VAT, business and other taxes payable     343       831  
  Payables for office supply and utility     419       743  
  Payables for purchase of property and equipment     462       432  
  Professional service fees     228       -  
  Deposits from agents     1,068       2,315  
  Others     32       28  
        6,263       7,634  

 

  78  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

12. DEFERRED GOVERNMENT GRANTS

 

The government grants received are required to be used in the construction of property and equipment. These grants are initially deferred and subsequently recognized in the statement of operations when the Group has complied with the conditions or performance obligations attached to the related government grants, if any, and the grants are no longer refundable. Grants that subsidize the construction cost of property and equipment are amortized over the life of the related assets as a non-operating income.

 

      For the year ended December 31,  
      2015     2016  
      US$     US$  
               
  Balance at beginning of the year     7,316       4,014  
  Recognized as other operating income     (2,880 )     (1,650 )
  Foreign currency translation difference     (422 )     (256 )
  Balance at end of the year     4,014       2,108  

 

13. ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The changes in accumulated other comprehensive loss, net of tax of nil, are as follows:

 

      Foreign currency translation     Total  
      US$     US$  
  Balance as of January 1, 2015     139       139  
  Current year other comprehensive loss     (1,288 )     (1,288 )
  Balance as of December 31, 2015     (1,149 )     (1,149 )
  Current year other comprehensive loss     (1,477 )     (1,477 )
  Balance as of December 31, 2016     (2,626 )     (2,626 )

 

14. MAINLAND CHINA EMPLOYEE CONTRIBUTION PLAN

 

As stipulated by the regulations of the PRC, full-time employees of the Group in the PRC participate in a government-mandated multiemployer defined contribution plan organized by municipal and provincial governments. Under the plan, certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. The Group is required to make contributions to the plan based on certain percentages of employees’ salaries. The total expenses the Group incurred for the plan were US$2,238 and US$2,362, respectively, for the years ended December 31, 2015 and 2016.

  79  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

15. SHARE BASED COMPENSATION

 

  (a) Share-based awards under the 2007 Plan

 

In order to provide additional incentives to employees and to promote the success of the Company’s business, the Company adopted a share incentive plan in (the “2007 Plan”) December 2007, which was last amended in February 2011. The 2007 Plan allows the Company to grant options to employees, directors, consultants or members of the board of directors of the Group. Under the 2007 Plan, the maximum aggregate number of shares that may be issued shall not exceed 38,700,000. The terms of the options shall not exceed ten years from the date of grant. 25% of the shares subject to the options shall vest on the first anniversary of the vesting commencement date, and 1/48 of the shares subject to the options shall vest each month thereafter over the next three years, provided the optionee continues to be a service provider to the Company. Thus, there is an explicit service condition of 4 years. In addition, the options contain a performance condition whereby vesting will commence upon the earlier to occur of an initial public offering or a change in control as defined in the 2007 Plan, provided there is continued employment of the optionees on such date.

 

In the years ended December 31, 2015 and 2016, the Company granted 6,525,190 and 610,000 shares of options, respectively, to purchase ordinary shares to employees, officers, and directors with the exercise price of $0.459 and $0.56 per share.

 

The following table summarizes the Company’s option activities under the 2007 Plan:

 

      Number of options    

Weighted average

exercise

price

    Weighted average remaining contractual term     Aggregate intrinsic value  
            (US$)     (Years)     (US$)  
                           
  Outstanding, January 1, 2015     29,554,630       0.27       6.88       308  
  Granted     6,525,190       0.46                  
  Forfeited     (4,042,580 )     0.36                  
                                   
  Outstanding, December 31, 2015     32,037,240       0.30       4.97       308  
                                   
  Vested and expect to vest at December 31, 2015     32,037,240       0.30       4.97       308  
                                   
  Outstanding, January 1, 2016     32,037,240       0.30       4.97       308  
  Granted     610,000       0.56                  
  Forfeited     (5,190,297 )     0.34                  
                                   
  Outstanding, December 31, 2016     27,456,943       0.30       5.26       308  
                                   
  Vested and expect to vest at December 31, 2016     27,456,943       0.30       5.26       308  

 

As of December 31, 2016, no options were vested and exercisable given the performance condition in place described above. Historically, compensation cost related to performance options that only vest upon the consummation of an initial public offering or change in control event was recognized when the offering or change in control event was consummated. Accordingly, the Group has not recognized any compensation cost to date.

 

  80  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

15. SHARE BASED COMPENSATION (CONTINUED)

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the fair value of the underlying stock at each reporting date, for those awards that have an exercise price below the estimated fair value of the Company’s shares.

 

As of December 31, 2015 and 2016, the Company had options outstanding to purchase an aggregate of 5,500,000 shares and 5,500,000 shares with an exercise price below the fair value of the Company’s shares, resulting in an aggregate intrinsic value of US$308 and US$308, respectively.

 

The Company calculated the estimated fair value of the options on the respective grant dates using the binomial-lattice option valuation model with the following assumptions for each applicable period which takes into account variables such as volatility, dividend yield, and risk-free interest rate, contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option.

 

      Year 2015     Year 2016  
               
  Risk-free interest rates     1.95%-2.28 %     1.58%-2.60 %
  Expected life (years)     10 years       10 years  
  Expected volatility     40%-45 %     45%-46 %
  Expected dividend yield     0 %     0 %
  Exercise multiple     2.20       2.20  
  Post-vesting forfeit rate     10 %     10 %
  Fair value of underlying ordinary shares     US$0.158-US$0.231       US$0.615-US$0.697  
  Fair value of share option     US$0.026-US$0.096       US$0.309-US$0.315  

 

  81  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

16. TAXATION

 

Enterprise income tax (“EIT”)

 

Cayman Islands

 

The Company is incorporated in the Cayman Islands and conducts its primary business operations through the subsidiaries and VIEs in the PRC, India and Hong Kong. Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gains.

 

Hong Kong

 

BORQS HK is subject to Hong Kong profits tax rate of 16.5% for the years ended December 31, 2015 and 2016. No provision for BORQS HKD profits tax has been made in the consolidated financial statements as the entity had losses in the years ended December 31, 2015 and 2016.

 

India

 

BORQS INDIA is subject to income tax rate of 32.45% for the years ended December 31, 2015 and 2016. Amounts of US$1,158 and US$1,684 are included as current income tax expense for the years ended December 31, 2015 and 2016, respectively.

 

The PRC

 

The Company’s PRC subsidiaries are incorporated in the PRC and subject to PRC EIT on the taxable income in accordance with the relevant PRC income tax laws.

 

Effective January 1, 2008, the statutory corporate income tax rate is 25%, except for certain entities eligible for preferential tax rates.

 

BORQS Beijing was qualified for a High and New Technology Enterprises (“HNTE”) since 2012 and is eligible for a 15% preferential tax rate from 2012 to 2014. In July 2015, BORQS Beijing obtained a new HNTE certificate, which will expire in July 2018. In accordance with the PRC Income Tax Laws, an enterprise awarded with the HNTE status may enjoy a reduced EIT rate of 15%. For the years ended December 31, 2015 and 2016, BORQS Beijing enjoyed a preferential tax rate of 15%.

 

Yuantel Telecom was qualified for a High and New Technology Enterprises (“HNTE”) since 2011 and is eligible for a 15% preferential tax rate from 2011 to 2013. In October 2014, Yuantel Telecom obtained a new HNTE certificate, which will expire in October 2017. In accordance with the PRC Income Tax Laws, an enterprise awarded with the HNTE status may enjoy a reduced EIT rate of 15%. For the years ended December 31, 2015 and 2016, Yuantel Telecom enjoyed a preferential tax rate of 15%.

 

The Company’s other PRC subsidiaries were subject to EIT at a rate of 25% for the years ended December 31, 2015 and 2016.

 

The New EIT Law also provides that enterprises established under the laws of foreign countries or regions and whose “place of effective management” is located within the PRC are considered PRC tax resident enterprises and subject to PRC income tax at the rate of 25% on worldwide income. The definition of “place of effective management” refers to an establishment that exercises, in substance, overall management and control over the production and business, personnel, accounting, properties, etc. of an enterprise. As of December 31, 2016, no detailed interpretation or guidance has been issued to define “place of effective management”. Furthermore, as of December 31, 2016, the administrative practice associated with interpreting and applying the concept of “place of effective management” is unclear. If the Company is deemed as a PRC tax resident, it would be subject to PRC tax under the New CIT Law. The Company will continue to monitor changes in the interpretation or guidance of this law.

 

  82  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

16. TAXATION (CONTINUED)

 

Profit before income taxes consists of:

 

      For the year ended December 31,  
      2015     2016  
      US$     US$  
               
  Non-PRC     3,241       2,777  
  PRC     (1,595 )     2,478  
                   
        1,646       5,255  

 

Income tax expense comprises of:

 

      For the year ended December 31,  
      2015     2016  
      US$     US$  
               
  Current     (1,895 )     (2,879 )
  Deferred     1,044       220  
                   
        (851 )     (2,659 )

 

The reconciliation of tax computed by applying the statutory income tax rate of 25% for the years ended December 31, 2015 and 2016 applicable to the PRC operations to income tax expense is as follows:

 

      For the year ended December 31,  
      2015     2016  
      US$     US$  
               
  Profit before income taxes     1,646       5,255  
                   
  Income tax expense computed at the statutory income tax rate at 25%     (412 )     (1,314 )
  Non-deductible expenses     (166 )     (491 )
  Non-taxation income     1,300       414  
  Preferential rate     (423 )     400  
  Current and deferred tax rate differences     790       310  
  Foreign rate differences     (292 )     560  
  Change of valuation allowance     (1,643 )     (2,529 )
  Deferred tax             74  
  Interest expense     (5 )     (83 )
                   
  Income tax expense     (851 )     (2,659 )

 

  83  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

16. TAXATION (CONTINUED)

 

Deferred Taxes

 

The significant components of deferred taxes are as follows:

 

      As of December 31,  
      2015     2016  
      US$     US$  
  Deferred tax assets            
  Inventories provision     166       156  
  Accrued salary and welfare payable     107       274  
  Property and equipment     46       20  
  Tax losses     10,901       13,279  
  Valuation allowance     (10,146 )     (12,675 )
  Total deferred tax assets     1,074       1,054  
                   
  Deferred tax liabilities                
  Intangible assets     1,779       1,539  
                   
  Total deferred tax liabilities     1,779       1,539  

 

As of December 31, 2016, the Company had net tax operating losses from its PRC subsidiaries and its Consolidated VIEs, as per filed tax returns, of US$58,219, which will expire from 2015 to 2020. The Company has net tax operating loss from its HK subsidiary of US$10,615, which will not expire.

 

As of December 31, 2016, the Company intends to permanently reinvest the undistributed earnings from its foreign subsidiaries and the Consolidated VIEs to fund future operations. The amount of unrecognized deferred tax liabilities for temporary differences related to investments in foreign subsidiaries and the Consolidated VIEs is not determined because such a determination is not practicable.

 

  84  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

16. TAXATION (CONTINUED)

 

Unrecognized Tax Benefits

 

As of December 31, 2015 and 2016, the Company recorded an unrecognized tax benefits of US$2,177 and US$4,053, respectively, of which, US$1,491 and US$2,381, respectively, are presented on a net basis against the deferred tax assets related to tax loss carry forwards on the consolidated balance sheets. The unrecognized tax benefits and its related interest are primarily related to under-reported intercompany profit. The amount of unrecognized tax benefits will change in the next 12 months, pending clarification of current tax law or audit by the tax authorities, however, an estimate of the range of the possible change cannot be made at this time. As of December 31, 2015 and 2016, unrecognized tax benefits of US$669 and US$1,681, if ultimately recognized, will impact the effective tax rate.

 

A roll-forward of unrecognized tax benefits is as follows:

 

      For the year ended December 31,  
      2015     2016  
      US$     US$  
               
  Balance at beginning of year     620       2,177  
  Additions based on tax positions related to the current year     1,557       1,876  
                   
  Balance at end of year     2,177       4,053  

 

In the years ended December 31, 2015 and 2016, the Company recorded interest expense accrued in relation to the unrecognized tax benefit of US$5 and US$83 in income tax expense, respectively. Accumulated interest expense recorded by the Company was US$5 and US$88 as of December 31, 2015 and 2016, respectively. As of December 31, 2016, the tax years ended December 31, 2011 through 2016 for the PRC subsidiaries and the VIE remain open for statutory examination by the PRC tax authorities.

 

  85  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

17. RELATED PARTY TRANSACTIONS

 

  (a) Related parties

 

  Names of related parties   Relationship with the Company
  Intel Capital Corporation (“Intel”) and its affiliates   Intel is a holder of Series C Preference Shares

 

(b) Other than disclosed elsewhere, the Company had the following significant related party transactions for the years ended December 31, 2015 and 2016:

 

      For the year ended December 31,  
      2015     2016  
      US$     US$  
  Software services provided to:            
  Intel Corporation     6,204       271  
  Intel (China) Co., Ltd.     5       9  
  Intel Asia-Pacific Research and Development Ltd     328       119  
  Intel (China) Research Center Co., Ltd     -       57  
                   
  Hardware sold to:                
  Intel Corporation     55       -  

 

(c) The Company had the following related party balances as of December 31, 2015 and 2016:

 

      As of December 31,  
      2015     2016  
      US$     US$  
  Accounts receivable from related parties:            
  Current:            
  Intel Corporation     5,949       481  
  Intel (China) Co., Ltd.     5       -  
  Intel Asia-Pacific Research and Development Ltd     44       9  

 

All balances with the related parties as of December 31, 2015 and 2016 were unsecured, interest-free and have no fixed terms of repayment.

 

  86  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

18. RESTRICTED NET ASSETS

 

The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by the Company’s PRC subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s PRC subsidiaries.

 

In accordance with the PRC Regulations on Enterprises with Foreign Investment and the articles of association of the Company’s PRC subsidiaries, a foreign-invested enterprise established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A foreign-invested enterprise is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors for all foreign-invested enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Borqs Beijing was established as foreign-invested enterprise and, therefore, is subject to the above mandated restrictions on distributable profits. As of December 31, 2015 and 2016, the Company’s PRC subsidiaries had appropriated US$1,270 and US$ 1,898, respectively, in its statutory reserves.

 

As a result of these PRC laws and regulations subject to the limit discussed above that require annual appropriations of 10% of after-tax income to be set aside, prior to payment of dividends as general reserve fund, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company. Amounts restricted include paid-in capital and statutory reserve funds of the Company’s PRC subsidiaries and the equity of the Consolidated VIEs, as determined pursuant to PRC generally accepted accounting principles, totaling an aggregate of US$73,302 as of December 31, 2016.

 

19. SHARE CAPITAL

 

Authorized capital

 

On August 15, 2014, the Group increased the authorized shares of the Group from US$455,584 to US$514,888 divided into 309,651,804 ordinary shares at par value of $0.001 per share, 40,000,000 Series A redeemable convertible preference shares, 82,857,143 Series B redeemable convertible preference shares, 52,727,271 Series C redeemable convertible preference shares and 29,651,804 Series D redeemable convertible preference shares, all at par value of $0.001 per share.

 

Ordinary share reserved for future issuance

 

The Group has reserved the following shares of ordinary shares for issuance at December 31, 2016, in connection with the following:

 

  Conversion of series A convertible redeemable preference shares     39,900,000  
  Conversion of series B convertible redeemable preference shares     82,857,143  
  Conversion of series C convertible redeemable preference shares     50,909,089  
  Conversion of series D convertible redeemable preference shares     23,721,443  
  Conversion of series D warrant shares     4,415,923  
  Ordinary shares options outstanding     27,456,943  
  Ordinary shares options available for future grants under the 2007 Plan     11,243,057  
           
  Total     240,503,598  

 

  87  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

20. CONVERTIBLE CONTINGENTLY REDEEMABLE PREFERRED SHARES

 

On December 27, 2007, March 17, 2008, September 26, 2008 and October 8, 2008, the Company issued 19,800,000, 3,100,000, 12,000,000 and 5,000,000 Series A convertible redeemable preference shares (the “Series A Preference Shares”), respectively, to certain external investors at a price of $0.20 per share for a total cash consideration of $7,980. The cash proceeds received was $7,889, net of issuance costs of $91.

 

On June 26, 2009, August 19, 2009 and October 12, 2009, the Company issued 64,285,715,15,000,000 and 3,571,428 Series B convertible redeemable preferred shares (the “Series B Preference Shares”), respectively, to certain external investors at a price of $0.21 per share for a total consideration of $17,400 (includes cash proceeds of $14,400 and $3,000 upon conversion of convertible notes). The cash proceeds received was $14,242, net of issuance costs of $158.

 

On February 14, 2011 and May 24, 2012, the Company issued 38,181,817 and 5,454,545 Series C convertible redeemable preference shares (the “Series C Preference Shares”), to certain external investors at the price of $0.275 per share for a total cash consideration of $12,000. The cash proceeds received was $11,817, net of issuance costs of $183.

 

On August 20, 2014 the Company issued 23,721,443 Series D convertible redeemable preference shares (the “Series D Preference Shares”), to certain external investors at the price of $0.33725 per share for a total cash consideration of $8,000. The cash proceeds received was $7,874, net of issuance costs of $126.

 

The significant terms of the Series A, Series B, Series C, and Series D convertible redeemable preference shares (together “Preference Shares”) are summarized as follows.

 

Conversion

 

Preference Shares can be converted into ordinary shares at the option of the holder at any time by dividing the applicable original purchase price by the applicable conversion price which is initially equal to the original purchase price and as such, the initial conversion ratio for each Preference Share into each ordinary share shall be one-for-one.

 

Preference Shares shall automatically be converted into ordinary shares at the then-effective conversion rate applicable to the relevant series of Preference Shares: (a) in the event of the closing of a Qualified IPO; or (b) in relation only to Series A and Series B Preference Shares, upon the approval and written consent of a majority of the outstanding Series A and Series B Preference Shares holders to convert their respective Preference Shares into ordinary shares.

 

The conversion price is subject to additional adjustments if the Company makes certain dilutive issuances of shares.

 

Dividends

 

Series D Preference Shares shall receive dividends at an annual rate of six percent (6%) of the original purchase price in preference and priority to any dividends on the Series A, Series B, Series C Preference Shares and ordinary shares. Dividends on Series D Preference Shares shall be cumulative whether declared by the Board of Directors or not.

 

Each holder of Series A, Series B and Series C Preference Shares is entitled to receive non-cumulative dividends when and if declared by the Board of Directors of the Company in preference and priority to any dividends on ordinary shares, after all accumulated dividends on the Series D Preferred shares have been paid or set aside for payment to the holders of Series D Preferred Shares in a calendar year.

 

Any additional dividends declared, after all accumulated dividends and declared dividends on the Preference Shares have been paid or set aside for payment to the holders of Preference Shares in a calendar year, shall be distributed among all holders of ordinary shares and Preference Shares.

 

  88  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

20. CONVERTIBLE CONTINGENTLY REDEEMABLE PREFERRED SHARES (CONTINUED)

 

Redemption

 

The earliest redemption date of Series A Preference Shares is at any time after the sixth anniversary of the first issuance date of Series A Preference Shares.

 

All outstanding Series B, Series C, and Series D Preference Shares can be redeemed at the election of the majority holders at any time after the earlier of (A) the fifth anniversary of the first issuance date of the respective Series B, Series C or Series D Preference Shares, and (B) the date on which the Company redeems Series A, Series B, or Series C Preference Shares. Any holder of Series A Preference Shares who is also a holder of Series B Preference Shares must redeem its Series B Preference Shares together with its Series A Preference Shares.

 

Series A and Series B Preference Shares can also be redeemed at the option of the holders when Intel has elected to redeem all of its Series C Preferred Shares for investigation or for breach as defined in the Memorandum of Association and Articles of Association.

 

Prior to Series D Preference Shares become available under (A) and (B) above, all outstanding Series D Preference Shares can be redeemed at any time of a holder of Series D Preferred Shares’ election to redeem for breach event or to redeem for investigation and opinion of auditor event as defined in the Memorandum of Association and Articles of Association.

 

Preference Shares are redeemed at a price equal to 150% the original purchase price plus any unpaid declared dividends. The redemption price for Preference Shares under the event of Intel’s election to redeem for investigation or a holder of Series D Preferred Shares’ election to redeem for investigation and opinion of auditor is set to be 100% of the original purchase price and 150% of the original purchase price under the event of a holder of Preferred Shares’ election to redeem for breach.

 

Winding up / Liquidation

 

In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, distributions to the shareholders of the Company shall be made as stated below.

 

The holders of Series D Preference Shares then outstanding are entitled to be paid first out of the assets of the Company available for distribution a liquidation preference in an amount per Preference Share equal to the sum of (i) 150% of the original purchase price as adjusted and (ii) all unpaid accumulated dividends, in priority to any other holders of Preference Shares or ordinary shares.

 

Upon full payment of the Series D Preference Share liquidation preference, the holders of Series A, Series B and Series C Preference Shares then outstanding shall be entitled to be paid first out of the assets of the Company available for distribution (and prior and in preference to any payment on the ordinary shares) a liquidation preference in an amount per Series A, Series B and Series C Preference Share equal to the sum of (i) the original purchase price applicable to such Preference Share as adjusted and (ii) all unpaid declared dividends. The holders of Series C Preference Shares shall receive their liquidation preference amount in preference to holders of Series A and Series B Preference Shares. Subject to the prior payment of all amounts due to the holders of Preference Shares, the balance of all remaining assets available for distribution are made with equal priority and pro rata amongst the holders of ordinary shares and the holders of Preference Shares on an as–converted basis.

 

Voting

 

Each share of Preference Share has voting rights equal to an equivalent number of shares of ordinary shares into which it is convertible and votes together as one class with the ordinary shares. All directors of the Company’s board of directors are elected by the holders of the outstanding ordinary shares and the Preference Shares, voting together as a single class on an as-converted basis.

 

  89  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

20. CONVERTIBLE CONTINGENTLY REDEEMABLE PREFERRED SHARES (CONTINUED)

 

Accounting for convertible redeemable preference shares

 

The Preference Shares have been classified as mezzanine equity as they can be redeemed at the option of the holders. The initial carrying values of the Preference Shares are the total consideration received at their respective dates of issuance net of issuance costs. There were no embedded features that qualified for bifurcation and separate accounting in accordance with ASC 815-10 Derivatives and Hedging .

 

As of December 31, 2015 and 2016, no dividend was declared by the Company. US$640 and US$720 of dividend was accumulated to the holders of the Series D Preferred Shares as of December 31, 2015 and 2016.

 

21. FAIR VALUE MEASUREMENTS

 

The Company applies ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 requires disclosures to be provided on fair value measurement.

 

ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1— Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2— Include other inputs that are directly or indirectly observable in the marketplace.

Level 3— Unobservable inputs which are supported by little or no market activity.

 

ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach; and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

 

2016 Warrants are classified within Level 3. We estimated the fair value of these warrants as of December 31, 2016 using the binomial-lattice option valuation model, based on the remaining contractual term of the warrants, risk-free interest rates and expected volatility of the price of the underlying Series D Preferred Shares. The assumptions used, including the market value of the underlying Series D Preferred Shares and the expected volatility, were subjective unobservable inputs.

 

Liabilities measured at fair value on a recurring basis are summarized below:

 

      Fair value measurement using:        
      Quoted prices in active markets for identical assets
(Level 1)
    Significant other observable inputs
(Level 2)
    Unobservable inputs
(Level 3)
    Fair value at December 31, 2016  
      US$     US$     US$     US$  
  Warrant liabilities               -                -       1,344       1,344  
                                   
  Liabilities     -       -       1,344       1,344  

 

      Warrant liabilities  
      US$  
  Fair value at January 1, 2016     -  
  Increase in liability     1,332  
  Changes in the fair value     12  
  Fair value at December 31, 2016     1,344  

 

  90  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

22. COMMITMENTS AND CONTINGENCIES

 

Operating lease commitments

 

The Company leases buildings in the PRC and India under non-cancelable operating leases expiring on different dates. For the years ended December 31, 2015 and 2016, total rental expenses for all operating leases amounted to US$1,368 and US$1,340, respectively.

 

As of December 31, 2016, the Company has future minimum lease payments under non-cancelable operating leases with initial terms in excess of one year in relation to office buildings consisting of the following:

 

      US$  
         
  2017     633  
  2018     -  
  2019     -  
  2020     -  
  2021 and thereafter     -  
           
        633  

 

Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases.

 

Income Taxes

 

As of December 31, 2016, the Group recognized an accrual of US$1,755 for unrecognized tax benefits and its interest (Note 16). The final outcome of the tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws or expiration of statutes of limitation. However, due to the uncertainties associated with the status of examinations, including the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future cash outflows associated with these tax uncertainties. As of December 31, 2016, the Company classified the accrual for unrecognized tax benefits as a non-current liability.

 

  91  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

23. SEGMENT REPORTING

 

The operations of the Company are organized into two segments, consisting of Yuantel and Connected Solution.

 

The CODM measures the performance of each segment based on metrics of revenue and earnings from operations and uses these results to evaluate the performance of, and to allocate resources to each of the segments. CODM does not evaluate operating segments using asset information.

 

The CODM evaluates performance based on each reporting segment’s net revenue and operating profit. The table below provides a summary of the Group’s operating segment results for the years ended December 31, 2015 and 2016:

 

  FY2016   Yuantel     Connected Solution     Total segments     Eliminations     Consolidated  
                                 
  Net revenue                              
  -External customers     35,138       85,448       120,586       -       120,586  
  -Inter-segment     -       2,016       2,016       (2,016 )     -  
  Total net revenue     35,138       87,464       122,602       (2,016 )     120,586  
                                           
  Operating profit     (3,589 )     8,829       5,240       -       5,240  

 

  FY2015   Yuantel     Connected Solution     Total segments     Eliminations     Consolidated  
                                 
  Net revenue                              
  -External customers     19,957       55,115       75,072       -       75,072  
  -Inter-segment     -       3,615       3,615       (3,615 )     -  
  Total net revenue     19,957       58,730       78,687       (3,615 )     75,072  
                                           
  Operating profit     (5,968 )     6,789       821       (108 )     713  

 

      For the year ended
December 31,
 
      2015     2016  
      US$     US$  
               
  PRC     28,442       41,214  
  Outside PRC                
  United States     14,978       34,526  
  India     7,949       25,126  
  Rest of the world     23,703       19,720  
  Total net revenue     75,072       120,586  

 

24. SUBSEQUENT EVENTS

 

Issuance of Series E Preference Shares

 

On February 8, 2017 and March 2, 2017, the Group issued an aggregate of 10,325,126 and 2,950,036 Series E redeemable convertible preference shares (the “Series E Preference Shares”), respectively, for a purchase price of $0.678 per share. Concurrently, during the months of February and March 2017, warrants to purchase up to an aggregate of 3,917,202, 1,588,481 and 1,588,481 Series E redeemable convertible preference shares were issued and exercised at an exercise price of $0.001.

 

Merger of PAAC Subsidiary Limited

 

On December 27, 2016 and as amended on May 10, 2017, the Group entered into a merger agreement with Pacific Special Acquisition Corp (“Pacific”) to effect a merger where the Group will be the operating company. As consideration for the merger, Pacific issued to original shareholders of the Group a numbers of ordinary shares at $10.40 per share based on the adjusted equity valuation of the Group as of the closing of the merger. The merger is also subject to certain earn-out criteria based upon the Group achieving specific performance targets for the four quarters subsequent to the merger. Additionally, at the effective time of the merger, the holders of the Group issued and outstanding warrants will receive replacement warrants to acquire the ordinary shares of Pacific, and the holders of the Group issued and outstanding share options will have their options assumed by Pacific and will instead acquire Pacific Ordinary Shares upon exercise of such options, in each case with the number of shares and exercise price equitably adjusted.

 

  92  
 

   

BORQS INTERNATIONAL HOLDING CORP

 

INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

    Page
     
Unaudited Condensed Consolidated Financial Statements for the Six Months Ended June 30, 2016 and 2017    
     
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2016 and June 30, 2017   94 - 97
     
Unaudited Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2016 and 2017   98
     
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Six Months Ended June 30, 2016 and 2017   99
     
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Deficit for the Six Months Ended June 30, 2017   100
     
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2017   101 - 102
     
Notes to the Unaudited Condensed Consolidated Financial Statements   103 - 124

 

  93  
 

 

BORQS INTERNATIONAL HOLDING CORP

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of US dollars (“US$”))

 

        As of December 31,     As of
June 30,
 
    Note   2016     2017  
        US$     US$  
ASSETS                
Current assets:                    
Cash and cash equivalents         3,610       6,460  
Restricted cash         1,153       3,385  
Accounts receivable         28,257       32,773  
Accounts receivable from related parties   (15)     490       955  
Receivable from Mobile Virtual Network Operator (“MVNO”) franchisees         4,319       4,438  
Inventories   (4)     12,682       5,514  
Deferred cost of revenues         969       393  
Prepaid and other current assets   (5)     6,599       11,105  
                     
Total current assets         58,079       65,023  
                     
Non-current assets:                    
Property and equipment, net   (6)     1,488       1,357  
Intangible assets, net   (7)     15,498       17,899  
Goodwill   (8)     693       710  
Deferred tax asset   (14)     1,054       1,079  
Deferred cost of revenues         689       1,294  
Other non-current assets         529       1,122  
                     
Total non-current assets         19,951       23,461  
                     
Total assets         78,030       88,484  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

  94  
 

 

BORQS INTERNATIONAL HOLDING CORP

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US dollars (“US$”))

 

        As of December 31,     As of
June 30,
 
    Note   2016     2017  
        US$     US$  
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
Current liabilities:                    
Accounts payable (including accounts payable of the Consolidated VIEs without recourse to the primary beneficiaries of US$4,598 and US$3,601 as of December 31, 2016 and June 30, 2017, respectively)         22,691       21,567  
Accrued expenses and other payables (including accrued expenses and other payables of the Consolidated VIEs without recourse to the primary beneficiaries of US$2,778 and US$3,175 as of December 31, 2016 and June 30, 2017, respectively)   (10)     7,634       8,857  
Advances from customers         -       1,202  
Amount due to a related party   (15)     -       510  
Deferred revenue (including deferred revenue of the Consolidated VIEs without recourse to the primary beneficiaries of US$9,134 and US$7,775 as of December 31, 2016 and June 30, 2017, respectively)         11,995       8,087  
Income tax payable         847       1,629  
Short-term bank borrowings (including short-term bank borrowings of the Consolidated VIEs without recourse to the primary beneficiaries of US$721 and US$738 as of December 31, 2016 and June 30, 2017, respectively)   (9)     6,306       6,796  
Long-term bank borrowings – current portion   (9)     1,381       2,917  
Deferred government grants   (11)     264       -  
                     
Total current liabilities         51,118       51,565  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

  95  
 

 

BORQS INTERNATIONAL HOLDING CORP

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US dollars (“US$”))  

 

        As of December 31,     As of
June 30,
 
    Note   2016     2017  
        US$     US$  
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
Non-current liabilities:                    
Unrecognized tax benefits   (14)     1,755       1,481  
Warrant liabilities   (10)     1,344       1,505  
Deferred tax liabilities (including deferred tax liabilities of the Consolidated VIEs without recourse to the primary beneficiaries of US$1,539 and US$1,511 as of December 31, 2016 and June 30, 2017, respectively)   (14)     1,539       1,511  
Deferred revenue         2,428       2,912  
Long-term bank borrowings   (9)     4,491       4,764  
Deferred government grants   (11)     1,844       1,888  
                     
Total non-current liabilities         13,401       14,061  
                     
Total liabilities         64,519       65,626  
                     
Commitments and contingencies   (19)                

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

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BORQS INTERNATIONAL HOLDING CORP

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US dollars (“US$”))

 

        As of December 31,     As of
June 30,
 
    Note   2016     2017  
        US$     US$  

LIABILITIES AND SHAREHOLDERS’ DEFICIT

               
Mezzanine equity:                    
Series A convertible redeemable preferred shares (US$0.0001 par value; 39,900,000 shares authorized; 39,900,000 issued and outstanding as of December 31, 2016 and June 30, 2017, respectively)   (17)     11,970       11,970  
Series B convertible redeemable preferred shares (US$0.0001 par value; 82,857,143 shares authorized; 82,857,143 issued and outstanding as of December 31, 2016 and June 30, 2017, respectively)   (17)     26,126       26,126  
Series C convertible redeemable preferred shares (US$0.0001 par value; 50,909,089 shares authorized; 50,909,089 issued and outstanding as of December 31, 2016 and June 30, 2017, respectively)   (17)     21,069       21,069  
Series D convertible redeemable preferred shares (US$0.0001 par value; 23,721,443 shares authorized; 23,721,443 issued and outstanding as of December 31, 2016 and June 30, 2017, respectively)   (17)     9,697       9,697  
Series E convertible redeemable preferred shares (US$0.0001 par value; 13,275,162 shares authorized; nil and 13,275,162 issued and outstanding as of December 31, 2016 and June 30, 2017, respectively)   (17)     -       3,490  
                     
Total mezzanine equity         68,862       72,352  
                     
Shareholders’ deficit:                    
Ordinary shares         54       54  
Series E-1 convertible preferred shares   (17)     -       2,708  
Additional paid-in capital         1,124       4,768  
Statutory reserve         1,898       1,898  
Accumulated deficit         (54,706 )     (56,220 )
Accumulated other comprehensive loss         (2,626 )     (1,760 )
                     
Total BORQS International Holding Corp shareholder’s deficit         (54,256 )     (48,552 )
                     
Noncontrolling interest         (1,095 )     (942 )
                     
Total shareholders’ deficit         (55,351 )     (49,494 )
                     
Total liabilities, mezzanine equity, noncontrolling interest and shareholders’ deficit         78,030       88,484  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

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BORQS INTERNATIONAL HOLDING CORP

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Amounts in thousands of US dollars (“US$”))

 

        Six Months ended June 30,  
    Note   2016     2017  
        US$     US$  
Net Revenues:                    
Software         7,625       6,583  
Hardware         25,509       32,801  
MVNO         16,043       13,628  
Others         1,414       1,036  
                     
Total net revenues         50,591       54,048  
                     
Software         (2,510 )     (2,598 )
Hardware         (18,778 )     (29,246 )
MVNO         (15,325 )     (9,820 )
Others         (1,093 )     (488 )
                     
Total cost of revenues         (37,706 )     (42,152 )
                     
Total gross profit         12,885       11,896  
                     
Operating expenses:                    
Sales and marketing expenses         (2,972 )     (2,985 )
General and administrative expenses         (3,943 )     (4,866 )
Research and development expenses         (4,414 )     (2,820 )
Changes in the fair value of warrant liabilities         -       (161 )
                     
Total operating expenses         (11,329 )     (10,832 )
                     
Other operating income         910       267  
                     
Operating income         2,466       1,331  
                     
Interest income         47       10  
Interest expense         (164 )     (1,143 )
Other income         61       354  
Other expense         (58 )     (276 )
Foreign exchange gain (loss)         342       (333 )
                     
Profit (loss) before income taxes         2,694       (57 )
                     
Income tax expense   (14)     (1,276 )     (890 )
                     
Net income (loss)         1,418       (947 )
                     
Less: net (loss) income attributable to noncontrolling interests         (660 )     119  
                     
Net income (loss) attributable to Borqs International Holding Corp         2,078       (1,066 )
                     
Add: accretion to redemption value of convertible redeemable preferred shares         (597 )     (448 )
                     
Net income (loss) attributable to ordinary shareholders         1,481       (1,514 )

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

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BORQS INTERNATIONAL HOLDING CORP

UNAUDITED CONSOLIDATED CONDENSED INTERIM STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands of US dollars (“US$”))

 

    Six Months ended
June 30,
 
    2016     2017  
      US$       US$  
Net income (loss)     1,418       (947 )
Other comprehensive (loss) income, net of tax of nil:                
Foreign currency translation adjustments, net of tax of nil     (504 )     866  
Other comprehensive (loss) income, net of tax of nil     (504 )     866  
Comprehensive income (loss)     914       (81 )
Less: comprehensive (loss) income attributable to noncontrolling interest     (631 )     153  
Comprehensive income (loss) attributable to the Borqs International Holding Corp     1,545       (234 )
Change in redemption value of convertible redeemable preferred shares     (597 )     (448 )
Comprehensive income (loss) attributable to ordinary shareholders     948       (682 )

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

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BORQS INTERNATIONAL HOLDING CORP

UNAUDITED CONSOLIDATED CONDENSED INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

(Amounts in thousands of US dollars (“US$”) except for number of shares)

 

    Number of ordinary shares     Ordinary shares    

Series E-1

convertible preferred shares

    Additional paid-in capital     Accumulated statutory reserves    

Accumulated

other comprehensive loss

    Accumulated deficit     Total
shareholders’ deficit
    Noncontrolling interest    

Total

deficit

 
                                                                                 
Balance as of January 1, 2017     54,050,000       54       -       1,124       1,898       (2,626 )     (54,706 )     (54,256 )     (1,095 )     (55,351 )
Consolidated net (loss) income     -       -       -       -       -       -       (1,066 )     (1,066 )     119       (947 )
Foreign exchange difference     -       -       -       -       -       866       -       866       34       900  
Issuance of series E-1 convertible preferred shares     -       -       2,708       -       -       -       -       2,708       -       2,708  
Beneficiary conversion feature of series E convertible redeemable preferred shares     -       -       -       3,258       -       -       -       3,258       -       3,258  
Accretion to redemption value of convertible redeemable preferred shares     -       -       -       -       -       -       (448 )     (448 )     -       (448 )
Issuance of ordinary shares     450,000       -       -       386       -       -       -       386       -       386  
                                                                                 
Balance as of June 30, 2017     54,500,000       54       2,708       4,768       1,898       (1,760 )     (56,220 )     (48,552 )     (942 )     (49,494 )

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

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BORQS INTERNATIONAL HOLDING CORP

UNAUDITED CONSOLIDATED CONDENSED INTERIM STATEMENTS OF CASH FLOWS

(Amounts in thousands of US dollars (“US$”))

 

    Six Months ended
June 30,
 
    2016     2017  
    US$     US$  
             
CASH FLOWS FROM OPERATING ACTIVITIES                
Net income (loss)     1,418       (947 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:                
Foreign exchange (gain) loss     (342 )     333  
Depreciation of property and equipment     603       455  
Amortization of intangible assets     1,144       1,905  
Deferred income taxes benefits     (114 )     (53 )
Interest expense     -       518  
Changes in the fair value of warrant liabilities     -       161  
                 
Changes in operating assets and liabilities,                
Restricted cash     (436 )     (2,232 )
Accounts receivable     (8,696 )     (4,516 )
Accounts receivable from related parties     5,137       (465 )
Receivable from MVNO franchisees     (1,511 )     (119 )
Inventories     (3,836 )     7,168  
Deferred cost of revenues     (546 )     (29 )
Prepaid expenses and other current assets     1,608       (5,031 )
Accounts payable     5,507       (1,124 )
Accrued expenses and other payables     178       1,547  
Unrecognized tax benefits     620       (274 )
Advances from customers     -       1,202  
Amount due to related parties-current     -       510  
Deferred revenue     (257 )     (3,424 )
Income tax payable     (111 )     782  
Deferred government grants     (1,414 )     (220 )
                 
Net cash used in operating activities     (1,048 )     (3,853 )

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

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BORQS INTERNATIONAL HOLDING CORP

UNAUDITED CONSOLIDATED CONDENSED INTERIM STATEMENTS OF CASH FLOWS (CONTINUED)

(Amounts in thousands of US dollars (“US$”))

 

    Six Months ended
June 30,
 
    2016     2017  
    US$     US$  
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchases of property and equipment     (77 )     (186 )
Purchases of intangible assets     (2,552 )     (3,998 )
Proceeds from disposal of property and equipment     4       -  
Repayments of a loan to a third party     224       244  
                 
Net cash used in investing activities     (2,401 )     (3,940 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from issuance of ordinary shares     -       62  
Proceeds from issuance of Series E convertible redeemable preferred shares     -       9,000  
Proceeds from exercise of warrants for Series E-1 convertible preferred shares (“Series E-1 Warrants”)     -       8  
Payment of the issuance costs for Series E convertible redeemable preferred shares     -       (312 )
Repayments of short-term bank borrowings     754       -  
Proceeds from long-term bank borrowings     (286 )     2,000  
Repayments of long-term bank borrowings     -       (286 )
                 
Net cash generated from financing activities     468       10,472  
                 
Effect of foreign exchange rate changes on cash and cash equivalents     158       171  
                 
Net (decrease) increase in cash and cash equivalents     (2,823 )     2,850  
Cash and cash equivalents at beginning of period     7,787       3,610  
                 
Cash and cash equivalents at end of period     4,964       6,460  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION

 

BORQS International Holding Corp (the “Company”) was incorporated under the laws of the Cayman Islands on July 27, 2007. The Company and its consolidated subsidiaries, variable interest entities (the “VIE”) and the VIE’s subsidiaries (collectively referred to the “Group”) are principally engaged in the provision of commercial grade Android+ platform solutions, hardware product sales and MVNO services in the People’s Republic of China (the “PRC”).

 

  (a) As of June 30, 2017, the details of the Company’s major subsidiaries. Consolidated VIEs and the subsidiaries of the VIEs are as follows:

 

  Entity   Date of incorporation/
Acquisition
  Place of incorporation   Percentage of direct or indirect ownership by the Company Direct     Principal activities
  Subsidiaries:                    
 

BORQS Hong Kong Limited (“Borqs HK”) (1)

  July 19, 2007   Hong Kong     100 %   Provision of software and service solutions and hardware products sales
 

BORQS Beijing Ltd. (“Borqs Beijing”) (1)

  September 4, 2007   PRC     100 %   Provision of software and service solutions and hardware products sales
  BORQS Software Solutions Private Limited (“Borqs India”) (1)   July 17, 2009   India     100 %   Provision of software and service solutions
  VIE:                    
 

Beijing Big Cloud Network Technology Co., Ltd.
(“Big Cloud Network”) (1) / (2)

  April 18, 2014   PRC     Nil     Holding company
  Subsidiaries of the VIE:                    
  Yuantel (Beijing) Investment Management Co., Ltd.
(“Yuantel Investment”) (2) / (3)
  July 11, 2014   PRC     79 %   Holding company
 

Yuantel (Beijing) Telecommunications Technology Co., Ltd.
(“Yuantel Telecom”) (2) / (3)

  July 11, 2014   PRC     75.05 %   Provision of MVNO and other services

   

  (1) Collectively, the “PRC Subsidiaries”.
  (2) Collectively, the “Consolidated VIEs”.
  (3) On July 11, 2014, the Company through Big Cloud Network acquired controlling interest in Yuantel Investment and its subsidiary.

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION (CONTINUED)

 

  (b) PRC laws and regulations prohibit foreign ownership in certain telecommunication related businesses. To comply with these foreign ownership restrictions, the Group conducts its businesses in the PRC through the VIE using contractual agreements (the “VIE Agreements”).

 

The Group funds Big Cloud Network through loans to the two Big Cloud Network’s shareholders, (collectively the “Nominee Shareholders”). The effective control of Big Cloud Network is held by the Group, through a series of contractual agreements between Borqs Beijing and Big Cloud Network whereby Big Cloud Network became a consolidated VIE of the Group. Through the contractual agreements, the Group receives substantially all of the economic benefits of Big Cloud Network.

 

Big Cloud Network provides MVNO services in China through its 79% owned entity of Yuantel Investment which owns 95% of Yuantel Telecom; therefore Big Cloud Network effectively owns 75.05% of Yuantel Telecom which is the entity that operates the business and holds the MVNO license from the Chinese Ministry of Industry and Information Technology.

 

Consolidated VIEs contributed 35% and 27% of the Group's consolidated revenues for the six months ended June 30, 2016 and 2017. As of December 31, 2016 and June 30, 2017, the Consolidated VIEs accounted for an aggregate of 24% and 24%, respectively, of the consolidated total assets, and 41% and 45%, respectively, of the consolidated total liabilities.

 

The Consolidated VIEs mainly operate the MVNO services. The VIE also holds the MVNO license, which is a revenue-producing asset recorded on the Group’s consolidated balance sheets. The Group expects increases in percentage of revenue generated from the Consolidated VIEs compared to the whole Group for the foreseeable future as the Group focuses on strengthening telecommunication platforms to strategically grow the Group’s MVNO business.

 

The Group believes that there are no assets held in the Consolidated VIEs that can be used only to settle obligations of the Consolidated VIEs, except for registered capital and the PRC statutory reserves. Relevant PRC laws and regulations restrict the Consolidated VIEs from transferring a portion of their net assets, equivalent to the balance of its statutory reserve and its share capital, to the Company in the form of loans and advances or cash dividends. Please refer to Note 16 for disclosure of restricted net assets. As the Consolidated VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the Consolidated VIEs do not have recourse to the general credit of the Company for any of the liabilities of the Consolidated VIEs. There were no pledges or collateralization of the Consolidated VIEs’ assets.

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION (CONTINUED)

 

(c) VIE disclosures (Continued)

 

The following tables represent the financial information of the Consolidated VIEs as of December 31, 2016 and June 30, 2017 and for the six months ended June 30, 2016 and 2017 before eliminating the intercompany balances and transactions between the Consolidated VIEs and other entities within the Group:

 

      As of December 31,     As of
June 30,
 
      2016     2017  
      US$     US$  
               
  ASSETS                
  Current assets:                
 

Cash and cash equivalents

    414       854  
  Restricted cash     1,153       3,385  
  Accounts receivable     129       1,022  
  Receivable from MVNO franchisees     4,319       4,438  
  Inventories     67       92  
  Prepaid expenses and other current assets     926       509  
                   
  Total current assets     7,008       10,300  
                   
  Non-current assets:                
  Property and equipment, net     987       934  
  Intangible assets, net     8,609       8,357  
  Goodwill     693       710  
  Deferred tax asset     1,054       1,079  
  Other non-current assets     58       45  
                   
  Total non-current assets     11,401       11,125  
                   
  Total assets     18,409       21,425  

   

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION (CONTINUED)

 

(c) VIE disclosures (Continued)

 

      As of December 31,     As of
June 30,
 
      2016     2017  
      US$     US$  
  Current liabilities:                
  Accounts payable     4,598       3,601  
  Accrued expenses and other payables     2,778       3,175  
  Deferred revenue     9,134       7,775  
  Short-term bank borrowings     721       738  
  Intercompany payables     7,923       12,824  
                   
  Total current liabilities     25,154       28,113  
                   
  Non-current liabilities                
  Deferred tax liabilities     1,539       1,511  
                   
  Total non-current liabilities     1,539       1,511  
                   
  Total liabilities     26,693       29,624  

 

      Six Months Ended
June 30,
 
      2016     2017  
        US$       US$  
  Net revenues     17,457       14,664  
  Net (loss) income     (3,089 )     4  

 

      Six Months Ended
June 30,
 
      2016     2017  
        US$       US$  
  Net cash (used in) provided by operating activities     (1,749 )     457  
  Net cash used in investing activities     (21 )     (17 )
  Net cash provided by financing activities     754       -  
  Net (decrease) increase in cash and cash equivalents     (1,016 )     440  

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a) Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("US GAAP") and applicable rules and regulations of the Securities and Exchange Commission, regarding financial reporting, and include all normal and recurring adjustments that management of the Group considers necessary for a fair presentation of its financial position and operation results. Certain information and footnote disclosures normally included in financial statements prepared in conformity with US GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these statements should be read in conjunction with the Company's consolidated financial statements as of and for the two years in the period ended December 31, 2016.

 

(b) Principles of consolidation

 

The consolidated financial statements include the financial statements of the Company, its subsidiaries and Consolidated VIEs, for which, the Company is the primary beneficiary. All significant inter-company transactions and balances between the Company, its subsidiaries and the Consolidated VIEs are eliminated upon consolidation. Results of acquired subsidiaries and its Consolidated VIEs are consolidated from the date on which control is transferred to the Company.

 

(c) Use of estimates

 

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Areas where management uses subjective judgment include, but are not limited to, estimating the useful lives of long-lived assets and intangible assets, assessing the initial valuation of the assets acquired and liabilities assumed in a business combination and the subsequent impairment assessment of long-lived assets, intangible assets and goodwill, determining the provisions for accounts receivable and inventories, accounting for deferred income taxes and uncertain tax benefits, valuation for share-based compensation arrangements, warrants for Series D convertible redeemable preferred shares and convertible redeemable preferred shares. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates, and as such, differences may be material to the consolidated financial statements.

 

(d) Foreign currency

 

The functional currency of the Company and its non-PRC subsidiaries, excluding Borqs India, is the United States dollar. The functional currency of Borqs India is Rupee, whereas the functional currency of the Company’s PRC subsidiaries and its Consolidated VIEs is the Chinese Renminbi (“RMB”) as determined based on the criteria of ASC 830, Foreign Currency Matters . The Company uses the US$ as its reporting currency. Transactions denominated in foreign currencies are re-measured into the functional currency at the exchange rates prevailing on the transaction dates. Foreign currency denominated financial assets and liabilities are re-measured at the balance sheet date exchange rate. Exchange gains and losses are included in foreign exchange gains and losses in the consolidated statements of operations.

 

Assets and liabilities of the Company’s PRC subsidiaries are translated into US$ at fiscal year-end exchange rates. Equity amounts are translated at historical exchange rates. Income and expense items are translated at average exchange rates prevailing during the fiscal year. Translation adjustments arising from translation of foreign currency financial statements are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive loss in the consolidated statements of comprehensive loss.

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(e) Accounts receivable

 

As of December 31, 2016 and June 30, 2017, the Group evaluated and wrote off the doubtful accounts as they were determined to be uncollectible. Thus, there was no allowance for doubtful accounts outstanding.

 

(f) Revenue recognition

 

The Group is mainly engaged in the business of providing 1) Android+ platform solutions and services, 2) hardware product sales, and 3) MVNO services. The Group recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable, and collectability is reasonably assured.

 

1. Android+ platform solutions and services

 

Android+ platform solutions

 

The Group provides customized Android+ software platform solutions that are developed to maximize the commercial grade quality or performance of open source Android+ software for integration with particular chipsets. The Group also provides customized Android+ service platform solutions that are end to end software developed for mobile operators to allow data synchronization between their platform and mobile devices. The Group charges its customers, mainly including mobile device manufacturers and mobile operators, fixed fees for project-based software contracts, as well as per chip or per mobile device royalty fees.

 

The project-based software contracts are generally considered multiple element arrangements as they consist of perpetual software licenses, software development services such as customization, modification, implementation and integration, and post-contract customer support (“PCS”) where customers have the right to receive bug fixes, telephone support and unspecified upgrades on a when-and-if available basis. Pursuant to ASC 985-605, Revenue Recognition: Software (“ASC 985-605”) given the project-based software contracts require significant customization that are generally completed within one year from the contract dates, the Group accounts for the entire software contracts in conformity with the relevant guidance in ASC 605-35, Revenue Recognition: Contract Accounting , applying the completed contract method.

 

As the Group was unable to establish vendor specific objective evidence of the fair value of PCS and PCS is the only undelivered element upon completion of software projects, the entire software project fixed fees are recognized ratably over the PCS service period. PCS service periods are generally 12 months, with ranges from Six Months to three years, and commences upon completion of customer acceptance of the completed software projects. Costs incurred to complete the software projects are deferred to match revenue recognition.

 

Where the Group is entitled to receive on going usage based royalties determined based on the chip or mobile device sales. The usage-based royalties are recognized according to the customers’ usage reports generally on a quarterly basis.

 

Service contracts

 

The Group provides research and development services to certain customers for their mobile-computing related development projects where fees are charged on a time and material basis and the Group is not responsible for the outcome of such development projects. The revenue is recognized proportionately as the services are delivered and is included as software revenue on the consolidated statement of operations.

 

2. Hardware product sales

 

The Group provides total solutions on original design manufacturer (“ODM”) basis to customers of mobile devices. Revenue is recognized when sale of each final hardware product to the customers are delivered. Warranty is provided to all customers, which is not considered an additional service; rather, an integral part of the product sales. ASC 450, Contingencies, specifically addresses the accounting for standard warranties. The Group believes that accounting for its standard warranty pursuant to ASC 450 does not impact revenue recognition because the cost of honoring the warranty can be reliably estimated. The Group has determined the likelihood of claims arising from warranties to be remote based on strong quality control procedures in the production process and historical experience with regard to claims being made by customers. The basis for the warranty accrual will be reviewed periodically based on actual experience. The Group does not sell extended warranty coverage.

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(f) Revenue recognition (Continued)

 

3. MVNO

 

On July 11, 2014, the Group, through the VIE, acquired and obtained control of Yuantel Investment, which mainly operates the MVNO business. The license to operate such MVNO business is issued by the Chinese Ministry of Industry and Information Technology and the core mobile network is provided by the PRC government owned China Unicom. Yuantel Investment receives wholesale rates for mobile voice and data services from China Unicom and repackages the voice and data services into competitive bundles for Chinese consumers.

 

In accordance with ASC 605-45, Revenue Recognition; Principal agent consideration, the Group is the principal in providing the bundled voice and data services to Chinese consumers, thus revenue is recognized on a gross basis. As sales of bundled services are mostly pre-paid by the consumers, cash received in advance of voice and data consumption are recognized as deferred revenue. Revenue is recognized when the services are actually used. Pre-paid bundled services do not expire.

 

Sales of the bundles are mostly made through agents and franchisees. Bundled services sold to agents are discounted and not refundable to the Group. The Group accounts for such discounts as reductions of revenue in accordance with ASC 605-50 (“ASC 605-50”) Customer Payments and Incentives .

 

The Group enters into profit sharing arrangements with franchisees under which bundled services may be returned to the Group if not sold to the consumers. The franchisees receive certain percentages of profits made by the Group on the sales of the bundled services as they are used by the consumers. The Group accounts for profit sharing with franchisees as selling expenses in the consolidated statements of operations. Pursuant to the Company’s policy, the amount of discounts that may be provided by the franchisees to consumers is capped at 5%, based on which, the Group recognized the maximum amount of discounts that may be provided by the franchisees as reductions of revenue in accordance with ASC 605-50.

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

3. CONCENTRATION OF RISKS

 

(a) Credit risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and restricted cash, accounts receivable, accounts receivable from related parties and receivable from MVNO franchisees. As of December 31, 2016 and June 30, 2017, the aggregate amount of cash and cash equivalents and restricted cash of US$2,563 and US$6,360, respectively, were held at major financial institutions located in the PRC, and US$2,200 and US$3,485, respectively, were deposited with major financial institutions located outside the PRC. Management believes that these financial institutions are of high credit quality and continually monitors the credit worthiness of these financial institutions. Historically, deposits in Chinese banks are secure due to the state policy on protecting depositors’ interests. However, China promulgated a new Bankruptcy Law in August 2006 that came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank may go into bankruptcy. In addition, since China’s concession to the World Trade Organization, foreign banks have been gradually permitted to operate in China and have been significant competitors against Chinese banks in many aspects, especially since the opening of the Renminbi business to foreign banks in late 2006. Therefore, the risk of bankruptcy of those Chinese banks in which the Company has deposits has increased. In the event of bankruptcy of one of the banks which holds the Company’s deposits, it is unlikely to claim its deposits back in full since it is unlikely to be classified as a secured creditor based on PRC laws.

 

Accounts receivable, accounts receivable from related parties and receivable from MVNO franchisees are typically unsecured, and are derived from revenues earned from customers. The risk is mitigated by credit evaluations the Group performs on its ongoing credit evaluations of its customers’ financial conditions and ongoing monitoring process of outstanding balances. The Group maintains reserves for estimated credit losses and these losses have generally been within expectations.

 

(b) Business supplier, customer, and economic risk

 

The Group participates in a dynamic and competitive high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Group’s future financial position, results of operations or cash flows: changes in the overall demand for services; competitive pressures due to new entrants; advances and new trends in new technology; control of telecommunication infrastructures by local regulators and industry standards; strategic relationships or customer relationships; regulatory considerations; and risks associated with the Group’s ability to attract and retain employees necessary to support its growth.

 

(i) Business supplier risk – The Group’s MVNO operations are dependent upon telecommunication resources provided by China Unicom. There is no guarantee that the supply of telecommunication resources provided by China Unicom will be renewed annually. Further, there is no guarantee around the continuance of the MVNO license granted by the PRC Ministry of Industry and Information Technology which may be amended or discontinued in light of changes to political, economic and social reforms.

 

(ii) Customer risk – The success of the Group’s business going forward will rely in part on Group’s ability to continue to obtain and expand business from existing customers while also attracting new customers. The Group has a diversified base of customers covering its services and the revenue from the largest single customer accounted for 1% and 31% of the Group’s total net revenues for the six months ended June 30, 2016 and 2017, respectively, and the accounts receivable from the largest single customer A accounted for 25% and from the largest single customer B 17% of the Group’s total accounts receivable and accounts receivable from related parties as of December 31, 2016 and June 30, 2017, respectively.

 

(iii) Economic risk – The Group’s operations could be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 20 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

 

  (c) Foreign currency exchange rate risk

 

From July 21, 2005, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. The depreciation and appreciation of the US$ against RMB was approximately (2.1%) and 2.3% in the six month periods ended June 30, 2016 and 2017, respectively. The appreciation of the US$ against Rupee was approximately 3.0% and 4.7% in the six months ended June 30, 2016 and 2017, respectively.

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

  

4. INVENTORIES

 

Inventories consisted of the following as of December 31, 2016 and June 30, 2017:

 

      As of December 31,     As of
June 30,
 
      2016     2017  
      US$     US$  
                   
  Raw materials     5,406       5,638  
  Goods in transit     7,164       220  
  Work in process     1,023       327  
  Finished goods     127       281  
        13,720       6,466  
  Less: Provision     (1,038 )     (952 )
                   
  Inventories, net     12,682       5,514  

 

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

      As of December 31,     As of
June 30,
 
      2016     2017  
      US$     US$  
                   
  Staff advances     293       391  
  Advances to OEM     3,739       5,707  
  Rental and other deposits     1,048       828  
  VAT recoverable     963       3,134  
  Loan to a third party     519       1,042  
  Others     37       3  
                   
        6,599       11,105  

 

6. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

      As of December 31,     As of
June 30,
 
      2016     2017  
        US$       US$  
  At cost:                
  Leasehold improvements     837       900  
  Computer and network equipment     5,801       5,997  
  Office equipment     763       844  
  Motor vehicles     220       229  
        7,621       7,970  
  Less: accumulated depreciation     (6,133 )     (6,613 )
                   
        1,488       1,357  

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

6. PROPERTY AND EQUIPMENT, NET (CONTINUED)

 

Depreciation expense was US$603 and US$455 for the six months ended June 30, 2016 and 2017, respectively, and were included in the following captions:

 

      Six Months ended
June 30,
 
      2016     2017  
      US$     US$  
                   
  Cost of revenues     237       156  
  Sales and marketing expenses     16       14  
  General and administrative expenses     120       117  
  Research and development expenses     230       168  
                   
        603       455  

 

7. INTANGIBLE ASSETS, NET

 

The following table presents the Group’s intangible assets as of the respective balance sheet dates:

 

      Software     Capitalized software development costs    

MVNO

license

    Total  
        US$       US$       US$       US$  
                                   
  Balance as of January 1, 2016     2,337       3,266       7,659       13,262  
  Additions     260       2,292       -       2,552  
  Amortization expense     (163 )     (540 )     (441 )     (1,144 )
  Foreign currency translation difference     (49 )     (68 )     (158 )     (275 )
                                   
  Balance as of June 30, 2016     2,385       4,950       7,060       14,395  
                                   
  Balance as of January 1, 2017     2,294       6,874       6,330       15,498  
  Additions     74       3,924       -       3,998  
  Amortization expense     (117 )     (1,356 )     (432 )     (1,905 )
  Foreign currency translation difference     54       102       152       308  
                                   
  Balance as of June 30, 2017     2,305       9,544       6,050       17,899  

   

The intangible assets are amortized using the straight-line method, which is the Company’s best estimate of how these assets will be economically consumed over their respective estimated useful lives of 3-10 years.

 

Amortization expenses were approximately US$1,144 and US$1,905 for the six months ended June 30, 2016 and 2017, respectively.

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

8. GOODWILL

 

The changes in the carrying amount of goodwill were as follows:

 

      As of December 31,     As of
June 30,
 
      2016     2017  
      US$     US$  
                   
  Balance at the beginning of the period     741       693  
  Foreign currency translation difference     (48 )     17  
                   
  Balance at the end of the period     693       710  

 

No impairment charge was recorded in any of the six months ended June 30, 2016 and 2017.

 

9. BANK BORROWINGS

 

Bank borrowings are as follows as of the respective balance sheet dates:

 

      As of December 31,     As of June 30,  
      2016     2017  
      US$     US$  
                   
  Short-term bank borrowings     6,306       6,796  
  Long-term bank borrowings, current portion     1,381       2,917  
        7,687       9,713  
                   
  Long-term bank borrowings, non-current portion     4,491       4,764  
                   
  Total bank borrowings     12,178       14,477  

 

The short-term bank borrowings outstanding as of December 31, 2016 and June 30, 2017 bore a weighted average interest rate of 6.89% and 7.09% per annum, respectively, and were denominated in RMB & US$. These borrowings were obtained from financial institutions and have terms of six months to one year. The long-term bank borrowings (including current portion) outstanding as of June 30, 2017 bore a weighted average interest rate of 7.98%, and were denominated in US$. These loans were obtained from financial institutions located in the PRC and Hong Kong, and have terms of 2 to 3 years.

 

Bank borrowings as of June 30, 2017 were pledged by accounts receivable amounted to US$24,904.

 

In August 2016, the Company issued 2,515,123 and 1,900,800 warrants (“2016 Warrants”) to two banks in connection with a short term loan facility of $2,000,000 and a long term loan facility of $6,000,000 respectively, for working capital purpose. The 2016 Warrants entitle the banks to subscribe for Series D convertible redeemable preferred shares at the exercise price of $0.5059. The 2016 Warrants shall lapse and expire after 5 and 7 years from their issuance dates, respectively.

 

As the 2016 Warrants were granted to the banks for loan facilities, their fair value on the issuance date were recognized as deferred borrowing costs presented as deductions of the carrying value of the term loans. The deferred borrowing costs are recognized over the life of the term loans as financing cost, using the effective interest rate method. As the 2016 Warrants are convertible into Series D convertible redeemable preferred shares classified as mezzanine equity, the 2016 Warrants are financial liabilities in accordance with ASC 480, Distinguishing Liabilities from Equity that are re-measured at the end of each reporting period with an adjustment for fair value through earnings.

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

  

10. ACCRUED EXPENSES AND OTHER PAYABLES

 

The components of accrued expenses and other payables are as follows:

 

      As of December 31,     As of
June 30,
 
      2016     2017  
      US$     US$  
                   
  Payroll and welfare payable     3,235       2,665  
  Accrued liability     50       381  
  VAT and other taxes payable     831       1,044  
  Payables for office supply and utility     743       832  
  Payables for purchase of property and equipment     432       443  
  Professional service fees     -       690  
  Deposits from agents     2,315       2,769  
  Others     28       33  
        7,634       8,857  

 

11. DEFERRED GOVERNMENT GRANTS

 

The government grants received are required to be used in construction of property and equipment. These grants are initially deferred and subsequently recognized in the statement of operations when the Company has complied with the conditions or performance obligations attached to the related government grants, if any, and the grants are no longer refundable. Grants that subsidize the construction cost of property and equipment are amortized over the life of the related assets as other operating income.

 

      Six Months ended
June 30,
 
      2016     2017  
      US$     US$  
                   
  Balance at beginning of the period     4,014       2,108  
  Additions     -       -  
  Recognized as other operating income     (896 )     (271 )
  Foreign currency translation difference     (83 )     51  
  Balance at end of the period     3,035       1,888  

 

12. MAINLAND CHINA EMPLOYEE CONTRIBUTION PLAN

 

As stipulated by the regulations of the PRC, full-time employees of the Company in the PRC participate in a government-mandated multiemployer defined contribution plan organized by municipal and provincial governments. Under the plan, certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. The Company is required to make contributions to the plan based on certain percentages of employees’ salaries. The total expenses for the plan were US$1,573 and US$1,139 respectively, for the six months ended June 30, 2016 and 2017.

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

  

13. SHARE BASED COMPENSATION

 

Share-based awards under the 2007 Plan

 

During the six months ended June 30, 2016 and 2017, the Company granted 200,000 and 7,800,000 shares of options, respectively, to purchase ordinary shares to employees, officers, and directors with the exercise price of $0.459 and 0.678 per share, respectively. The terms of the options shall not exceed ten years from the date of grant. Options will vest according to schedules stipulated in the award agreements, provided the optionee continues to be a service provider to the Company. In addition, the options contain a performance condition whereby vesting will commence upon the earlier to occur of an initial public offering or a change in control as defined in the 2007 Plan, provided there is continued employment of the optionees on such date.

 

The following table summarizes the Company’s option activities under the 2007 Plan:

 

      Number of options    

Weighted average

exercise

price

    Weighted average remaining contractual term     Aggregate intrinsic value  
            (US$)     (Years)     (US$)  
                                   
  Outstanding, January 1, 2016     32,037,240       0.30       4.97       308  
  Granted     200,000       0.47                  
  Forfeited     (524,350 )     0.40                  
                                   
  Outstanding, June 30, 2016     31,712,890       0.30       4.77       308  
                                   
  Vested and expected to vest at June 30, 2016     31,712,890       0.30       4.77       308  
                                   
  Outstanding, January 1, 2017     27,456,943       0.30       5.26       308  
  Granted     7,800,000       0.68                  
  Forfeited     (458,904 )     0.45                  
                                   
  Outstanding, June 30, 2017     34,798,039       0.38       5.71       308  
                                   
  Vested and expected to vest at June 30, 2017     34,798,039       0.38       5.71       308  

 

As of June 30, 2017, no options were vested and exercisable given the performance condition in place described above. Historically, compensation cost related to performance options that only vest upon the consummation of an initial public offering or change in control event was recognized when the offering or change in control event was consummated. Accordingly, the Group has not recognized any compensation cost to date.

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

  

13. SHARE BASED COMPENSATION (CONTINUED)

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the fair value of the underlying stock at each reporting date, for those awards that have an exercise price below the estimated fair value of the Company’s shares.

 

As of December 31, 2016 and June 30, 2017, the Company had options outstanding to purchase an aggregate of 5,500,000 shares and 5,500,000 shares with an exercise price below the fair value of the Company’s shares, resulting in an aggregate intrinsic value of US$308, respectively.

 

The Company calculated the estimated fair value of the options on the respective grant dates using the binomial-lattice option valuation model with the following assumptions for each applicable period which takes into account variables such as volatility, dividend yield, and risk-free interest rate, contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option:

 

      June 30,
2016
    June 30,
2017
 
                   
  Risk-free interest rates     1.95%-2.28 %     2.41 %
  Expected life (years)     10 years       10 years  
  Expected volatility     40%-45 %     45 %
  Expected dividend yield     0 %     0 %
  Exercise multiple     2.20       2.20  
  Post-vesting forfeit rate     10 %     10 %
  Fair value of underlying ordinary shares     $0.158- $0.231     $0.720  
  Fair value of share option     $0.026- $0.096       $0.298- $0.425  

 

Ordinary shares issued in 2017

 

On March 17, the Company issued 450,000 ordinary shares to certain employees and a non employee for a total proceeds of US$62. The fair value of the ordinary shares in excess of the proceeds received by the Company was immediately recognized as compensation expense.

 

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BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

  

14. TAXATION

 

Profit (loss) before income taxes consists of:

 

      Six Months ended
June 30,
 
      2016     2017  
      US$     US$  
                   
  Non-PRC     4,053       1,384  
  PRC     (1,359 )     (1,441 )
                   
        2,694       (57 )

 

Income tax expense comprises of:

 

      Six Months ended
June 30,
 
      2016     2017  
      US$     US$  
                   
  Current     (1,184 )     (943 )
  Deferred     (92 )     53  
                   
        (1,276 )     (890 )

 

The reconciliation of tax computed by applying the statutory income tax rate of 25% for the six months ended June 30, 2016 and 2017 applicable to the PRC operations to income tax expense is as follows:

 

      Six Months ended
June 30,
 
      2016     2017  
      US$     US$  
                   
  Profit before income taxes     2,694       (57 )
                   
  Income tax expense (benefit) computed at the statutory income tax rate at 25%     (674 )     14  
  Non-deductible expenses     (42 )     (304 )
  Non-taxable income     126       67  
  Preferential rate     74       (102 )
  Current and deferred tax rate differences     321       (120 )
  Foreign rate differences     (7 )     (266 )
  Change in valuation allowance     (1,087 )     (116 )
  Deferred tax     18       -  
  Interest expense     (5 )     (63 )
                   
  Income tax expense     (1,276 )     (890 )

 

  117  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

  

14. TAXATION (CONTINUED)

 

Deferred Tax

 

The significant components of deferred taxes are as follows:

 

      As of December 31,     As of
June 30,
 
      2016     2017  
      US$     US$  
  Deferred tax assets            
  Inventory provision     156       143  
  Accrued salary and welfare     274       176  
  Property and equipment     20       13  
  Tax losses     13,279       13,538  
  Valuation allowance     (12,675 )     (12,791 )
                   
  Total deferred tax assets     1,054       1,079  

 

  Deferred tax liabilities            
  Intangible assets     1,539       1,511  
                   
  Total deferred tax liabilities     1,539       1,511  

 

As of June 30, 2017, the Company had net tax operating losses from its PRC subsidiaries and its Consolidated VIEs, as per filed tax returns, of US$37,663, which will expire from 2017 to 2022. The Company has net tax operating loss from its HK subsidiary of US$21,719, which will not expire.

 

As of June 30, 2017, the Company intends to permanently reinvest the undistributed earnings from its foreign subsidiaries and the Consolidated VIEs to fund future operations. The amount of unrecognized deferred tax liabilities for temporary differences related to investments in foreign subsidiaries and the Consolidated VIEs is not determined because such a determination is not practicable.

 

  118  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

14. TAXATION (CONTINUED)

 

Unrecognized Tax Benefits

 

As of June 30, 2016 and 2017, the Company recorded an unrecognized tax benefits of US$2,522 and US$3,870, respectively, of which, US$1,221 and US$2,424, respectively, are presented on a net basis against the deferred tax assets related to tax loss carry forwards on the consolidated balance sheets. The unrecognized tax benefits and its related interest are primarily related to under-reported intercompany profit. The amount of unrecognized tax benefits will change in the next 12 months, pending clarification of current tax law or audit by the tax authorities, however, an estimate of the range of the possible change cannot be made at this time. As of June 30, 2016 and 2017, unrecognized tax benefits of US$1,301 and US$1,577, if ultimately recognized, will impact the effective tax rate.

 

A roll-forward of unrecognized tax benefits is as follows:

 

      Six Months ended
June 30,
 
      2016     2017  
      US$     US$  
               
  Balance at beginning of the period     2,177       4,053  
                   
  Reversal based on tax positions related to prior years     -       (353 )
  Additions based on tax positions related to the current year     345       170  
                   
  Balance at end of the period     2,522       3,870  

 

In the six months ended June 30, 2016 and 2017, the Company recorded interest expense accrued in relation to the unrecognized tax benefit of US$5 and US$63 in income tax expense, respectively. Accumulated interest expense recorded by the Company was US$10 and US$151 as of June 30, 2016 and 2017, respectively. As of June 30, 2017, the tax years ended December 31, 2012 through 2017 for the PRC subsidiaries and the VIE remain open for statutory examination by the PRC tax authorities.

 

  119  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

  

15. RELATED PARTY TRANSACTIONS

 

  (a) Related parties

 

  Names of related parties   Relationship with the Company
  Intel Capital Corporation (“Intel”) and its affiliates   Intel is a holder of Series C and Series D convertible redeemable preferred shares
  Qualcomm Global Trading PTE. Ltd (“Qualcomm”)and its affiliates   Qualcomm is a holder of Series E convertible redeemable preferred shares and Series E-1 convertible preferred shares

 

(b) Other than disclosed elsewhere, the Company had the following significant related party transactions for the six months periods ended June 30, 2016 and 2017:

 

      Six Months ended
June 30,
 
      2016     2017  
      US$     US$  
  Services provided to:                
  Intel Corporation     271       -  
  Intel Asia-Pacific Research and Development Ltd     94       65  
  Intel (China) Co., Ltd.     9       9  
  Intel (China) Research Center Co., Ltd     58       8  
  Qualcomm India Private Limited     *       3,967  
                   
  Hardware sold to :                
  Qualcomm India Private Ltd     *       12  
                   
  Purchased from:                
  Qualcomm Incorporated     *       398  
  Qualcomm CDMA Technologies Asia Pacific PTE. Ltd     *       1,732  
  Qualcomm Technologies, Inc.     *       75  

 

(c) The Company had the following related party balances as of December 31, 2016 and June 30, 2017:

 

      As of December 31,     As of
June 30,
 
      2016     2017  
        US$       US$  
  Amounts due from related parties:                
  Current:                
  Intel Corporation     481       -  
  Intel Asia-Pacific Research and Development Ltd     9       -  
  Qualcomm India Private Ltd     *       955  
                   
  Amounts due to related parties:                
  Current:                
  Qualcomm Incorporated     *       144  
  Qualcomm CDMA Technologies Asia Pacific PTE. Ltd    

*

      366  

 

All balances outstanding with the related parties as of December 31, 2016 and June 30, 2017 were unsecured, interest-free and have no fixed terms of repayment.

 

* Qualcomm became a related party of the Group beginning in February 2017 upon its purchase of the Series E convertible redeemable preferred shares and the related Series E-1 Warrants.

 

  120  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

  

16. RESTRICTED NET ASSETS

 

The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by the Company’s PRC subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s PRC subsidiaries.

 

In accordance with the PRC Regulations on Enterprises with Foreign Investment and the articles of association of the Company’s PRC subsidiaries, a foreign-invested enterprise established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A foreign-invested enterprise is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors for all foreign-invested enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Borqs Beijing was established as foreign-invested enterprise and, therefore, is subject to the above mandated restrictions on distributable profits. As of December 31, 2016 and June 30, 2017, the Company’s PRC subsidiaries had appropriated US$1,898, respectively, in its statutory reserves.

 

As a result of these PRC laws and regulations subject to the limit discussed above that require annual appropriations of 10% of after-tax income to be set aside, prior to payment of dividends as general reserve fund, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company. Amounts restricted include paid-in capital and statutory reserve funds of the Company’s PRC subsidiaries and the equity of the Consolidated VIEs, as determined pursuant to PRC generally accepted accounting principles, totaling an aggregate of US$83,762 as of June 30, 2017.

 

  121  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

  

17. PREFERRED SHARES

 

On February 8, 2017 and March 2, 2017, the Group closed the issuances of an aggregate of 10,325,126 and 2,950,036 series E redeemable convertible preferred shares (the “Series E Preferred Shares”), respectively, for a purchase price of $0.678 per share. Concurrently, Series E-1 Warrants to purchase up to an aggregate of 7,094,164 Series E-1 convertible preferred shares (the “Series E-1 Preferred Shares”) were issued and immediately exercised, at $0.001 per share. The total cash proceeds received was US$9,008, net of issuance costs of US$312. Net proceeds were allocated to the Series E Preferred Shares and Series E-1 Preferred Shares based on their relative fair value on closing dates.

 

Series E-1 Preferred Shares shall vote with Series E Preferred Shares as a single class. Series E-1 Preferred Shares do not have any redemption rights nor any other rights preferential to the ordinary shares

 

At the respective closing date of the Series E Preferred Shares, beneficiary conversion feature was identified and recorded as a reduction of Series E Preferred Shares with an offsetting credit to additional paid-in capital.

 

Series A, Series B, Series C, Series D and Series E redeemable convertible preferred shares (collectively, the “Convertible Redeemable Preferred Shares”) were accreted to redemption value based on the terms stipulated in the Memorandum of Association (“MOA”). Changes in the redemption value are recorded against retained earnings.

 

The following is the roll-forward of the carrying amounts of Convertible Redeemable Preferred Shares for the six months ended June 30, 2017:

 

      Six Months ended June 30,  
      US$  
           
  Balance as of January 1, 2017     68,862  
  Issuance of Series E Preferred Shares     6,300  
  Beneficiary conversion feature     (3,258 )
  Change in redemption value     448  
           
  Balance as of June 30, 2017     72,352  
           

 

18. FAIR VALUE MEASUREMENT

 

The Company applies ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 requires disclosures to be provided on fair value measurement.

 

ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1— Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2— Include other inputs that are directly or indirectly observable in the marketplace.

Level 3— Unobservable inputs which are supported by little or no market activity.

 

ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach; and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

 

2016 Warrants are classified within Level 3. We estimated the fair value of these warrants as of December 31, 2016 and June 30, 2017 using the binomial-lattice option valuation model, based on the remaining contractual term of the warrants, risk-free interest rates and expected volatility of the price of the underlying Series D Convertible Redeemable Preferred Shares. The assumptions used, including the market value of the underlying Series D Preferred Shares and the expected volatility, were subjective unobservable inputs.

 

  122  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

  

18. FAIR VALUE MEASUREMENT (CONTINUED)

 

Liabilities measured at fair value on a recurring basis are summarized below:

 

      Fair value measurement using:        
      Quoted prices in active markets for identical assets
(Level 1)
    Significant other observable inputs
(Level 2)
    Unobservable inputs
(Level 3)
    Fair value at June 30, 2017  
        US$       US$       US$       US$  
  Warrant liabilities     -       -       1,505       1,505  
                                   
  Liabilities     -       -       1,505       1,505  

 

      Warrant liabilities  
        US$  
  Fair value at January 1, 2017     1,344  
  Changes in the fair value     161  
  Fair value at June 30, 2017     1,505  

 

19. COMMITMENTS AND CONTINGENCIES

 

Operating lease commitments

 

The Company leases buildings in the PRC, and India under non-cancelable operating leases expiring on different dates. For the six months ended June 2016 and 2017, total rental expenses for all operating leases amounted to US$740 and US$728, respectively.

 

As of June 30, 2017, the Company has future minimum lease payments under non-cancelable operating leases with initial terms in excess of one year in relation to office buildings consisting of the following:

 

      US$  
         
  2017     1,228  
  2018     354  
  2019     345  
  2020 and thereafter     -  
           
        1,927  

 

Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases.

 

Income Taxes

 

As of June 30, 2017, the Group has recognized an accrual of US$1,481 for unrecognized tax benefits and its interest (Note 14). The final outcome of the tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws or expiration of statutes of limitation. However, due to the uncertainties associated with the status of examinations, including the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future cash outflows associated with these tax uncertainties. As of June 30, 2017 the Group classified the accrual for unrecognized tax benefits as a non-current liability.

 

  123  
 

 

BORQS INTERNATIONAL HOLDING CORP

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED

INTERIM FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

  

20. SUBSEQUENT EVENTS

 

Merger of PAAC Subsidiary Limited

 

On December 27, 2016 and as amended on May 10, 2017, the Company entered into an agreement with Borqs Technologies, Inc. (formerly known as “Pacific Special Acquisition Corp.”) (“Borqs Technologies”) to effect an acquisition whereby Borqs Technologies will merge with the Company (the “Merger”). The Merger was consummated on August 18, 2017.

 

As consideration for the Merger, Borqs Technologies issued to the Company’s shareholders 25,913,950 of ordinary shares (“Merger Consideration Shares”). Additionally, the holders of the Company issued and outstanding warrants received replacement warrants to acquire an aggregate of 417,166 Borqs Technologies’ ordinary shares (“Replacement Warrants”), and the holders of the Company issued and outstanding options had their options assumed by Borqs Technologies and now hold options to acquire Borqs Technologies’ ordinary shares upon exercise of those options (“Assumed Options”). The number of shares and exercise price of the Replacement Warrants and the Assumed Options were equitably adjusted to reflect the terms of the Merger Agreement.

 

Of the Merger Consideration Shares, a total of 25,913,950 ordinary shares were issued to the Company’s shareholders at closing, with 942,467 of such shares deposited into escrow for indemnification obligations (“Indemnity shares”), 2,352,285 of such shares deposited in escrow subject to Borqs Technologies meeting certain earn-out requirements (“Earnout Shares” and together with the Indemnity Shares, the “Escrow Shares”) in the event certain net income earnout conditions are met during the period July 1, 2017 to June 30, 2018 (“Earnout Period”) and 1,178,084 of such shares were issued to a financial advisor engaged by the Company in connection with the Business Combination.

 

The Merger will be accounted for as a reverse acquisition whereby the Company will be treated as the “acquired” company for financial reporting purposes. This determination was primarily based on the Group comprising the ongoing operations of the combined entity, with its senior management operating the combined entity going forward, and the Company’s shareholders having the majority voting power of the combined entity.

 

 

124

Exhibit 99.2

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

Pacific is providing the following unaudited pro forma condensed combined financial information to aid you in your analysis of the financial aspects of the Business Combination.

 

The following unaudited pro forma condensed combined balance sheet as of June 30, 2017 combines the unaudited historical condensed consolidated interim balance sheet of Borqs as of June 30, 2017 with the audited historical consolidated balance sheet of Pacific as of June 30, 2017, giving effect to the Business Combination as if it had been consummated as of June 30, 2017.

 

The following unaudited pro forma condensed combined income statement for the year ended June 30, 2017 combines the unaudited historical condensed consolidated interim statement of operations of Borqs for the twelve months ended June 30, 2017 with the audited historical statement of operations of Pacific for the year ended June 30, 2017, giving effect to the Business Combination as if it had occurred on July 1, 2016.

 

The historical financial information has been adjusted to give effect to pro forma events that are related and/or directly attributable to the Business Combination, are factually supportable and are expected to have a continuing impact on the combined results. The adjustments presented in the unaudited pro forma condensed combined financial statements have been identified and presented to provide relevant information necessary for an accurate understanding of the combined company upon consummation of the Business Combination.

 

The historical financial information of Borqs was derived from the unaudited condensed consolidated interim financial statements of Borqs for the six months ended June 30, 2017 and 2016 included elsewhere in this Current Report on Form 8-K. The historical financial information of Pacific was derived from the audited financial statements of Pacific for the year ended June 30, 2017 This information should be read together with Borqs’ and Pacific’s audited and unaudited financial statements and related notes, “ Borqs’ Management’s Discussion and Analysis of Financial Condition and Results of Operations ,” “Pacific’s Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and other financial information included elsewhere in this Current Report on Form 8-K.

 

The unaudited pro forma condensed combined financial information is for illustrative purposes only. The financial results may have been different had the companies always been combined. You should not rely on the unaudited pro forma condensed combined financial information as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that the combined company will experience. Borqs and Pacific have not had any historical relationship prior to the Business Combination. Accordingly, no pro forma adjustments were required to eliminate activities between the companies.

 

The Business Combination is accounted for as a reverse merger in accordance with accounting principles generally accepted in the United States of America. Under this method of accounting, Pacific is treated as the “acquired” company for financial reporting purposes. This determination was primarily based on Borqs comprising the ongoing operations of the combined entity, Borqs’ senior management comprising the senior management of the combined company, and Borqs’ shareholders having a majority of the voting power of the combined company. Accordingly, for accounting purposes, the Business Combination is treated as the equivalent of Borqs issuing stock for the net assets of Pacific, accompanied by a recapitalization. The net assets of Pacific are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination are those of Borqs.

 

The unaudited pro forma condensed combined financial statements give effect to Pacific’s extension of the date by which it had to consummate a Business Combination. As a result of the extension amendment, 653,996 ordinary shares were redeemed for $6,801,558, which was released from the trust account. In addition, the pro forma condensed combined financial statements give effect to the monthly contribution of $0.03 per share, or $612,000 in the aggregate, to the trust account for each public share that was not redeemed in connection with the extension amendment.

 

Pursuant to the Merger Agreement, as amended, the aggregate consideration paid in the Business Combination consists of Merger Consideration Shares. The number of shares comprising the Merger Consideration Shares was calculated in accordance with the terms of the Merger Agreement, and was determined to be 25,913,950 ordinary shares. The aggregate number of the Company’s ordinary shares issued to Borqs’ equity holders at the closing of the Business Combination is equal to (A) $270,000,000 less (B) the amount of Closing Net Indebtedness (as defined in the Merger Agreement) plus (C) the amount, if any, by which the Closing Net Working Capital (as defined in the Merger Agreement) exceeds the Target Maximum Net Working Capital Amount (as defined in the Merger Agreement) minus (D) the amount, if any, by which the Target Minimum Net Working Capital Amount (as defined in the Merger Agreement) exceeds the Closing Net Working Capital plus (E) the amount of Excess Capped; Expenses (as defined in the Merger Agreement), if any, divided by (b) $10.40.

 

  1  
 

 

Based upon the adjusted equity valuation of Borqs of $269,505,229 as of the closing, a total of 25,913,950 Merger Consideration Shares were issued, of which 2,352,285 of such shares are serving as the Earnout Shares. The Earnout Shares have been deposited into escrow to be released (or with respect to certain of such Earnout Shares, to be cancelled in connection with an issuance of replacement shares by Pacific) to the Sellers in the event specified net income earnout conditions for the period of July 1, 2017 to June 30, 2018 (the “Earnout Period”) are met. The 2,352,285 Earnout Shares (the “Backstop Guarantee Shares”) have been issued in the name of the Backstop Investor. To the extent the earnout conditions are not met, the Backstop Guarantee Shares will be released to the Backstop Investor. To the extent that the earnout conditions are met, the Backstop Guarantee Shares will be cancelled and replacement shares will be reissued to the Sellers. Four percent (4%) of (a) the shares otherwise due to the Sellers at the Closing (excluding any Earnout Shares), or 942,467 shares, and (b) any Earnout Shares earned by the Sellers (collectively, the “Indemnity Escrow Shares”, and together with any dividends, distributions or other income on the Indemnity Escrow Shares, the “Indemnity Escrow Property”) have been deposited in escrow to support certain indemnification obligations under the Merger Agreement.

 

As a condition to the Business Combination and as further discussed in the accompanying Current Report on Form 8-K, the Backstop Investors purchased $10.8 million of our ordinary shares through a private placement that occurred simultaneously with that of the Business Combination, in order to ensure that there is at least $24.0 million in cash available in the Company immediately following the Business Combination (the “Backstop”). As consideration for the Backstop, the Backstop Investor is entitled to receive the Backstop Guarantee Shares to the extent that certain net income earnout milestones are not achieved.

 

As a result of the Business Combination (i) after 3,841,131 ordinary shares were redeemed and converted into cash, (ii) an adjusted equity valuation of $269,505,229, (iii) the issuance of the Indemnity Escrow Shares to the Sellers (initially deposited in escrow), (iv) the issuance of 2,353,285 Backstop Guarantee Shares to the Backstop Commitment Investor (initially deposited in escrow), and (v) no investments by Commitment Investors, resulting in the issuance of no Commitment Escrow Shares, Pacific’s existing shareholders, including our Sponsor and EarlyBirdCapital, own approximately 23.5% of the outstanding ordinary shares of the Company, and Sellers, including their financial advisor, own approximately 76.5% of the outstanding ordinary shares of the Company.

 

Included in the shares outstanding and weighted average shares outstanding as presented in the pro forma condensed combined financial statements are 23,561,665 of the Company’s ordinary shares issued to Borqs and its financial advisor.

 

The continuing impact from the changes in the value of the contingent consideration in connection with the Earnout Shares is not reflected in these unaudited pro forma condensed combined financial statements, as such value is variable in nature and dependent on Borqs’ future performance.

 

  2  
 

 

PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2017
(UNAUDITED) (in thousands)  

 

    (A)     (B)     Pro Forma       Pro Forma
Balance
 
 
    Borqs     Pacific     Adjustments     Sheet  
Assets                        
Current assets:                        
Cash and cash equivalents   $ 6,460     $ 319     $ 53,703 (2)        
                      10,048 (3)        
                      (3,818 ) (4)        
                      (1,398 ) (5)        
                      (40,409 ) (6)   $ 24,905  
Restricted cash     3,385                   3,385  
Accounts receivable     32,773                   32,773  
Accounts receivable from related parties     955                   955  
Receivable from MVNO franchises     4,438                   4,438  
Inventories     5,514                   5,514  
Deferred cost of revenues     393                   393  
Prepaid expenses and current assets     11,105       30             11,135  
Total Current Assets     65,023       349       18,126       83,498  
Non-current assets:                                
Cash and marketable securities held in Trust Account           53,550       153 (1)        
                      (53,703 ) (2)      
Property and equipment, net     1,357                   1,357  
Intangible assets, net     17,899                   17,899  
Goodwill     710                   710  
Deferred tax asset     1,079                   1,079  
Deferred cost of revenues     1,294                   1,294  
Other assets     1,122                   1,122  
Total Non-Current Assets     23,461       53,550       (53,255 )     23,461  
Total Assets   $ 88,484     $ 53,899     $ (35,424 )   $ 106,959  
                                 
Liabilities                                
Current liabilities:                                
Accounts payable and accrued expenses   $ 30,424     $ 266     $ (266 ) (4)   $ 30,424  
Advance from related parties     510       286       (286 ) (5)     510  
Convertible promissory note – related party           500       (500 ) (5)      
Promissory note – related party           459       153 (1)        
                      (612 ) (5)      
Advances from customers     1,202                   1,202  
Short-term bank borrowings     6,796                   6,796  
Deferred revenue     8,087                   8,087  
Current portion of long-term bank borrowings     2,917                   2,917  
Income tax payable     1,629                   1,629  
Total Current Liabilities     51,565       1,511       (1,511 )     51,565  
Non-current liabilities:                                
Long-term bank borrowings     4,764                   4,764  
Unrecognized tax benefits     1,481                   1,481  
Warrant liabilities     1,505                   1,505  
Deferred tax liabilities     1,511                   1,511  
Deferred revenue     2,912                   2,912  
Non-current portion of deferred government grants     1,888                   1,888  
Total Non-Current Liabilities     14,061                   14,061  
Total Liabilities     65,626       1,511       (1,511 )     65,626  
                                 
Commitments and Contingencies                                
Mezzanine Equity                                
Ordinary shares subject to possible redemption           47,388       (47,388 ) (6)      
Series A convertible redeemable preferred shares     11,970             (11,970 ) (7)      
Series B convertible redeemable preferred shares     26,126             (26,126 ) (7)      
Series C convertible redeemable preferred shares     21,069             (21,069 ) (7)      
Series D convertible redeemable preferred shares     9,697             (9,697 ) (7)      
Series E convertible redeemable preferred shares     3,490             (3,490 ) (7)      
Total Mezzanine Equity     72,352       47,388       (119,740 )      
                                 
Shareholders’ Equity (Deficit)                                
Ordinary shares     54       7,158       10,798 (3)        
                      6,979 (6)        
                      77,670 (7)     102,659  
Series E-1 convertible preferred shares     2,708             (2,708 ) (7)      
Additional paid-in capital     4,768             (4,768 ) (7)        
                      21,692 (8)     21,692  
Statutory reserve     1,898                   1,898  
Other comprehensive loss     (1,760 )                 (1,760 )
Accumulated deficit     (54,220 )     (2,158 )     (750 ) (3)        
                      (3,552 ) (4)        
                      2,158 (7)        
                      (21,692 ) (8)     (82,214 )
Total Borqs Shareholders’ Equity (Deficit)     (48,552 )     5,000       85,827       42,275  
Non-controlling interest     (942 )                 (942 )
Total Shareholders’ Equity (Deficit)     (49,494 )     5,000       85,827       41,333  
Total Liabilities, Mezzanine Equity and Shareholders’ Equity   $ 88,484     $ 53,899     $ (35,424 )   $ 106,959  

 

  3  
 

 

Pro Forma Adjustments to the Unaudited Condensed Combined Balance Sheet

 

(A) Derived from the unaudited consolidated balance sheet of Borqs as of June 30, 2017.
(B) Derived from the audited balance sheet of Pacific as of June 30, 2017.

 

(1) To reflect the monthly funding of $0.03 per share for each public share of Pacific’s ordinary shares that were not redeemed in connection with the Extension Vote. Our Sponsor has agreed to contribute as a loan $0.03 for each public share that was not redeemed, for each calendar month that is needed by Pacific to complete the Business Combination or anther business combination from April 20, 2017 until the August 21, 2017 or until such earlier date as determined by the board of directors (the “Extended Termination Date”). The amount of the Contribution will not bear interest and will be repayable to the Sponsor upon consummation of the Business Combination.
(2) To liquidate investments held in trust by Pacific.
(3) To reflect the proceeds received from the issuance of 966,136 ordinary shares to the Backstop Investor and 72,155 shares to EarlyBirdCapital in lieu of cash commissions.
(4) To record payment of legal, financial advisory, accounting, printing and other professional fees related to the Business Combination.
(5) To record repayment of advances from related parties.
(6) As a result of 3,841,131 ordinary shares redeemed by Pacific shareholders, $ 40,409 of ordinary shares subject to redemption was paid in cash to the redeeming shareholders and the remaining balance of $ 6,979 was transferred to permanent equity.
(7) To reflect the recapitalization of Borqs through the issuance of 23,561,665 of the Company’s ordinary shares and the elimination the historical accumulated deficit of Pacific, the accounting acquiree.
(8) To record a one-time share-based compensation expense for vested options that have met the service condition requirements upon consummation of the Business Combination. The remaining unvested portion of the options will be expensed over the requisite service periods, with a continuous impact on the combined Company’s operating results post-Business Combination (see Note (1) to the pro forma condensed combined income statement).
(9) Upon the consummation of the Business Combination, 6,281,875 rights converted into 628,187 ordinary shares, no par value.

 

  4  
 

 

PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED JUNE 30, 2017
(UNAUDITED)
(in thousands except share and per share amounts)  

 

    (A)     (B)     Pro Forma       Pro Forma
Income
 
    Borqs     Pacific     Adjustments     Statement  
Net revenues   $ 124,043     $     $     $ 124,043  
Cost of revenues     98,738                   98,738  
Gross profit     25,305                   25,305  
Operating expenses:                                
Sales and marketing     5,887                   5,887  
General and administrative     10,965       1,966       1,264 (1)        
                      (1,381 ) (2)     12,814  
Research and development     5,292                   5,292  
Change in fair value of warrant liabilities     161                   161  
Other operating income     (1,105 )                 (1,105 )
Total operating expenses     21,200       1,966       (117 )     23,049  
Net operating income (loss)     4,105       (1,966 )     117       2,256  
Other income (expense):                                
Unrealized loss on securities held in Trust Account           16       (16 ) (3)      
Interest income     28       185       (185 ) (3)     28  
Interest expense     (1,776 )                 (1,776 )
Other income (expense)     130                   130  
Foreign exchange gain     17                   17  
Income (loss) before income taxes     2,504       (1,765 )     (84 )     655  
Income tax expense     (2,273 )           2,109 (5)     (164 )
Net income (loss)     231       (1,765 )     2,025       491  
Accretion to redemption value of preferred shares     (827 )           827 (4)      
Net income attributable to non-controlling interest     (147 )                 (147 )
Net income (loss) attributable to the Company’s ordinary shareholders   $ (743 )   $ (1,765 )   $ 2,852     $ 344  
Weighted average shares outstanding, basic             2,463,542       28,243,872 (6)     30,707,414  
Basic net income (loss) per share           $ (0.72 )           $ 0.01  
Weighted average shares outstanding, diluted             2,463,542       36,070,710 (6)     38,534,252  
Diluted net income (loss) per share           $ (0.72 )           $ 0.01  

 

  5  
 

 

Pro Forma Adjustments to the Unaudited Condensed Combined Income Statement

 

(A) Derived from the unaudited condensed consolidated interim statements of operations of Borqs for the twelve months ended June 30, 2017.
(B) Derived from the audited statements of operations of Pacific for the year ended June 30, 2017.

 

(1) To record share-based compensation expense on options that became exercisable as a result of the Business Combination. This represents the estimated ongoing vesting expense as a result of option holders achieving service conditions post Business Combination, excluding the one-time share-based compensation expense recorded for options with service conditions satisfied at the time of the Business Combination consummation. The fair value of the options was estimated using the Black-Scholes option pricing model with the following assumptions:

 

    June 30,
2017
 
Fair Value of Pacific ordinary shares   $ 10.40  
Exercise price   $ 4.02  
Expected term – Years     10.00  
Expected volatility     35.00 %
Expected dividend yield     0.00 %
Risk-free interest rate     2.22 %
Black-Scholes Value   $ 7.61  

 

(2) To eliminate direct, incremental costs of the Business Combination which are reflected in the historical financial statements of Pacific in the amount of $1,381 as of June 30, 2017. There were no such amounts recorded in the historical financial statements of Borqs.
(3) To eliminate unrealized gain and interest income on marketable securities held in the trust account as of the beginning of the period.
(4) To eliminate the accretion to the redemption value on preferred shares as of the beginning of the period.
(5) To record normalized income tax benefit of 25.0% for pro forma financial presentation purposes.
(6) As the Business Combination is being reflected as if it had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted net income (loss) per share assumes that the shares issuable relating to the Business Combination have been outstanding for the entire periods presented. The Pacific public shares used in the weighted average shares calculation is computed as the sum of the public shares outstanding, plus the shares issued to the investor, less the shares redeemed. Weighted average common shares outstanding — basic and diluted is calculated as follows:

 

    Year Ended
June 30,
2017
 
Weighted average shares calculation, basic      
Pacific weighted average public shares outstanding     2,463,542  
Pacific rights converted to shares     628,187  
Pacific shares subject to redemption reclassified to equity     663,484  
Pacific shares issued to Backstop Investors     1,038,251  
Pacific shares issued in Business Combination     25,913,950  
Weighted average shares outstanding     30,707,414  
         
Percent of shares owned by Borqs’ holders and advisor     76.7 %
Percent of shares owned by Pacific and EarlyBirdCapital     23.3 %

 

  6  
 

 

Pro Forma Adjustments to the Unaudited Condensed Combined Income Statement
(Continued)

 

    Year Ended
June 30, 2017
 
Weighted average shares calculation, basic      
Existing Borqs holders and advisor     23,561,665  
Pacific holders and EarlyBirdCapital     7,145,749  
Weighted average shares, basic     30,707,414  
         
Weighted average shares calculation, diluted        
Pacific holders and EarlyBirdCapital     7,145,749  
Pacific shares issued in Business Combination     23,561,665  
Pacific warrants underlying public shares     3,140,937  
Unit purchase options     640,000  
Share options     3,628,734  
Warrants     417,167  
Weighted average shares outstanding     38,534,252  
         
Percent of shares owned by Borqs’ holders and advisor     71.6 %
Percent of shares owned by Pacific and EarlyBirdCapital     28.4 %
         
Weighted average shares calculation, diluted        
Existing Borqs holders and advisor     27,607,566  
Pacific holders and EarlyBirdCapital     10,926,686  
Weighted average shares, diluted     38,534,252  

 

 

7

 

 

Exhibit 99.3

 

FOR IMMEDIATE RELEASE

 

BORQS TECHNOLOGIES, INC. FILES 8-K WITH JUNE 30, 2017 FINANCIAL RESULTS

AND ANNOUNCES STOCK BUY-BACK

 

New York (August 24, 2017) – Borqs Technologies, Inc. (the “Company”), a global leader in software, products and cloud solutions for the Internet of Things (IoT), announced its mid-year June 30, 2017 operational results today via a Form 8-K filed with the U.S. Securities and Exchange Commission, four business days after BORQS International Holding Corp completed its merger on August 18, 2017 with Pacific Special Acquisition Corp, which changed its name to Borqs Technologies, Inc. The Company’s ordinary shares and warrants trade on the Nasdaq stock market under the symbols BRQS and BRQSW, respectively.

 

Results of Operations for January through June of 2017

 

As details of the Company’s results of operations for the first six months of 2017 are described in the Form 8-K, this release serves to provide a summary of such results. Net revenue on a consolidated basis for the six months ended June 30, 2017 was $54.05 million as compared to $50.59 million for the same period last year. Gross profit was $11.90 million for the first half of 2017 and $12.89 million in 2016. Gross margin for the first six months of 2017 was 22.01% as compared to 25.47% a year ago. The decline in gross profitability was attributed to a larger component in hardware sales in 2017. Operating expenses for the first half of 2017 declined to $10.83 million from $11.33 million for the same period a year ago, resulting in $1.06 million of operating income for January through June of 2017 as compared to $1.56 million in 2016. The financials outlined above reflect the results of operations of BORQS International Holding Corp for the first half of 2017, prior to its merger with Pacific Special Acquisition Corp.

 

In the first six months of 2017, the Company incurred non-cash G&A expenses of $0.16 million due to a change in the fair value of warrants issued to commercial lenders and $0.32 million of non-cash stock based compensation for executives. Excluding these two items, the first half 2017 non-US-GAAP adjusted operating income was $1.55 million as compared to $1.56 million in the first half of 2016.

 

In the first six months of 2017, the Company incurred much higher interest expense of $1.14 million as compared to only $0.16 million for the same period a year ago. This was attributed to a non-cash amortization of the fair value of the warrants in the amount of $0.52 million that was charged to interest expenses, and there was no such charge in the same period of 2016.

 

This resulted in a loss before income taxes of $0.06 million for the first six months of 2017 as compared to an income before income taxes of $2.69 million a year ago. Despite the slight net loss for this 2017 period, there was still a tax payable incurred in the amount of $0.89 million. Our taxes payable historically had been significantly higher than the statutory tax rates because some of the losses in our subsidiaries cannot be used to offset gains in other subsidiaries, even within the same jurisdiction. This resulted in a net loss after taxes in the first half of 2017 of $0.95 million as compared to a net income after taxes in the first half of 2016 of $1.42 million.

 

Non-US GAAP adjustments: In another presentation format where adjustments are made for the non-cash charges for amortization and changes in fair value of the warrants, and non-cash stock based compensation, we resulted in non-US-GAAP adjusted net income of $0.06 million for the first half of 2017; there were no such charges for the first half of 2016 so the adjusted net income for the same period in 2016 remained the same as the unadjusted figure at $1.42 million. EBITDA, an often-used measure of earnings before interest, taxes, depreciation and amortization, for the first six months of 2017 was $3.44 million while that for 2016 was $4.56 million. Further, when other non-operational factors such as exchange rate (loss)/gain and non-recurring government grants were removed, adjusted EBITDA for the first six months of 2017 was $3.5 million versus that of 2016 was $3.3 million.

 

 

 

 

 

    2017   2016
Reconciliation of non-US GAAP adjustments   1st half   1st half
         
Operating income   $ 1,064,242     $ 1,556,000  
Change in fair value of warrants   $ 160,852     $ -  
Stock based compensation   $ 324,000     $ -  
Adjusted non-US GAAP operating income   $ 1,549,094     $ 1,556,000  
                 
                 
Income (loss) after income taxes   $ (947,131 )   $ 1,418,000  
Interest expense from amortization of warrants   $ 518,301     $ -  
Change in fair value of warrants   $ 160,852     $ -  
Stock based compensation   $ 324,000     $ -  
Adjusted non-US GAAP income after income taxes   $ 56,022     $ 1,418,000  
                 
                 
Income (loss) after income taxes   $ (947,131 )   $ 1,418,000  
Interest   $ 1,133,000     $ 117,000  
Provisions for income taxes   $ 890,134     $ 1,276,000  
Depreciation and amortization   $ 2,360,000     $ 1,747,000  
EBITDA   $ 3,436,002     $ 4,558,000  
                 
Exchange rate (loss) gain   $ (333,013 )   $ 342,000  
Non-recurring government grants   $ 266,872     $ 910,000  
Adjusted EBITDA   $ 3,502,143     $ 3,306,000  
                 

 

 

Board Approved Buy-back of Shares

 

The Board of Directors of the Borqs Technologies, Inc. believes that the current market price of the Company’s ordinary shares does not reflect the Company’s inherent long-term value and has approved a share buy-back program. The management of the Company is authorized to conduct open market repurchases of its ordinary shares from today forward until December 31, 2017, in accordance with circumstances, volume and time window allowable under securities laws and regulations, at a price not higher than $10.40 per share, up to an aggregate repurchase price of $6 million. The buy-back program does not obligate the Company to repurchase a minimum number of shares, and the program may be modified, suspended, or discontinued without prior notice.

 

Pat Chan, Chairman and CEO of Borqs commented: “We look forward to delivering our projected results going forward as a Nasdaq listed company. We also deem the undue market stress on our share price as a new public company justifies our re-purchase of some of our outstanding shares as we firmly believe in the value of our Company and the collective effort of our team. We believe that the funds used for such stock buy-back will not negatively impact our ongoing operational cash needs.”

 

 

 

 

 

About BORQS

 

Borqs Technologies, Inc., which is headquartered in Beijing, China with R&D centers in Bangalore, India and Beijing, was founded in 2007 by respected veterans in the communication technologies industry from Canada, China, India and the United States. Borqs has world renowned investors including Intel Capital, Qualcomm Ventures, Norwest Venture Partners, SK Telecom China Fund, Keytone Ventures and GSR Ventures. 

 

Borqs is a global leader in software and products for IoT providing customizable, differentiated and scalable Android-based smart connected devices and cloud service solutions. Deloitte named BORQS as one of the fastest growing technology companies in China & Asia Pacific in 2011, 2012 and 2013. In 2013, 2014, 2015 and 2016, BORQS was awarded Company of the Year for Innovation & Leadership in Mobile Technology for Asia Pacific from the International Alternative Investment Review. Recently BORQS received the "50 Most Promising IoT Solution Providers 2016" recognition from CIO Review magazine. For more info, visit: http://www.borqs.com/

 

 

Forward-Looking Statements

 

This press release includes “forward-looking statements” regarding the Company’s planned capital return, including statements regarding the anticipated size, timing and price of its stock buy-back program. These statements involve risks and uncertainties that could cause actual results to differ materially from what is expected or implied. Words such as “expects”, “believes”, “anticipates”, “intends”, “estimates”, “seeks”, “may”, “might”, “plan”, “possible”, “should” and variations and similar words and expressions are intended to identify such forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Such forward-looking statements relate to future events or future results, based on currently available information and reflect managements’ current beliefs. A number of factors could cause actual events or results to differ materially from the events and results discussed in the forward-looking statements. Such factors include, among other things: the future financial performance of the Company; the ability of the Company to meet the NASDAQ Capital Market’s listing standards; unexpected costs, liabilities or delays in the buy-back program; and general economic conditions. In addition, please refer to the Risk Factors section of the Company’s proxy statement and its Forms 10-K and 10-Q for additional information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

 

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