UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)    
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

  For the fiscal year ended December 31, 2017  

 

Or
 
 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

     
For the transition period from            to            .

 

Commission file number: 001- 37593

 

BORQS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

British Virgin Islands  

N/A

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

Building B23-A,

Universal Business Park

No. 10 Jiuxianqiao Road

Chaoyang District, Beijing, 100015 China

(Address of principal executive offices, including zip code)

 

(86) 10-5975-6336

(Registrant’s Telephone Number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Name of Each Exchange on Which Registered

Ordinary Shares, no par value per share

 

The Nasdaq Stock Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐    No ☒

 

Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐    No ☒

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.  Yes ☒    No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒    No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer  ☐ Accelerated filer ☐

Non-accelerated filer ☒

(Do not check if a

smaller reporting company)

Smaller reporting company ☐ 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.☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No ☒

 

The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, which was Pacific Special Acquisition Corp as of June 30, 2017 with 5,042,817 shares held by non-affiliates, based on the closing sale price of the Registrant’s ordinary shares on June 30, 2017, the last business day of the Registrant’s most recently completed second fiscal quarter, as reported on The Nasdaq Stock Market which was $10.25 per share, was approximately $51.7 million. Ordinary shares held by each executive officer and director and by each person who may be deemed to be an affiliate of the Registrant have been excluded from this computation. The determination of affiliate status for this purpose is not necessarily a conclusive determination for other purposes. As of March 27, 2018, the Registrant had 31,307,522 of its ordinary shares, no par value, outstanding.

 

 

 

 

 

 

BORQS TECHNOLOGIES, INC.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2017

 

TABLE OF CONTENTS

 

PART I
Item 1. Business 1
Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 33
Item 2. Properties 33
Item 3. Legal Proceedings 33
Item 4. Mine Safety Disclosures 33
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 34
Item 6. Selected Financial Data 37
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 50
Item 8. Financial Statements and Supplementary Data 51
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 108
Item 9A. Controls and Procedures 108
Item 9B. Other Information 108
PART III
Item 10. Directors, Executive Officers and Corporate Governance  109
Item 11. Executive Compensation 114
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 119
Item 13. Certain Relationships and Related Transactions, and Director Independence 121
Item 14. Principal Accounting Fees and Services 123
PART IV
Item 15. Exhibits, Financial Statement Schedules 124
Signatures 127

 

i

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in Item 7 of this report, and other materials accompanying this Annual Report on Form 10-K contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “may,” “will,” and similar expressions and the negatives thereof identify forward-looking statements, which generally are not historical in nature. These forward-looking statements include, but are not limited to, statements concerning the following: 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 . Management believes that these forward-looking statements were reasonable when made. However, you should not place undue reliance on any such forward-looking statements because such statements speak only as of the date when made and may be based on assumptions that do not prove to be accurate. Borqs Technologies, Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, occurring after the date of this Annual Report on Form 10-K. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. For a detailed discussion of these risks and uncertainties, see the “Business” and “Risk Factors” sections in Items 1 and 1A, respectively, of this Annual Report on Form 10-K.

 

ii

 

 

PART I

 

Item 1.     Business

 

Overview

 

Borqs Technologies, Inc. (“we”, “the Company” or “Borqs”) is a global leader in software, development services and products providing customizable, differentiated and scalable Android-based smart connected devices and cloud service solutions. We are 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.

 

Our Connected Solutions business unit 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. We provide 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 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.

 

Our MVNO business unit 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, and acts as a sales and promotion channel for the products developed by the Connected Solutions BU.

 

The Connected Solutions business unit represented 73.4%, 70.9% and 79.2% of our net revenues in the years ended December 31, 2015, 2016 and 2017, respectively. In the years ended December 31, 2015, 2016 and 2017, Borqs generated 85%, 93% and 86% of its net revenues from customers headquartered outside of China and 15%, 7% and 14 % of its net revenues from customers headquartered within China. As of December 31, 2017, Borqs had 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 12.3 million units worldwide.

 

We have dedicated significant resources to research and development, and have research and development centers in Beijing, China and Bangalore, India. As of December 31, 2017, 352 of our 612 employees were technical professionals dedicated to platform research and development and product specific customization.

 

On January 8, 2018, we entered into a letter of intent to acquire a 60% equity interest in Shanghai KADI Machinery Technology Co., Ltd (“KADI”), a Chinese company that develops software and hardware solutions for electric vehicle control modules, such as charging, battery management and vehicle controls. We are currently negotiating a definitive agreement to acquire such equity interest for an aggregate of $11.7 million in cash to be paid to KADI and ordinary shares with an agreed-upon value of $3.3 million to be issued to selling shareholders of KADI. KADI is not a customer or a supplier of Borqs. In accordance with the letter of intent, we have made three of four scheduled cash advances to KADI due of $150,000, with the fourth payment due in April 2018. These advances will be deducted from our initial cash payments to KADI under the definitive agreement to be negotiated. If this transaction is not consummated within nine months after signing of the letter of intent, the advance payments will be converted into shares representing five percent of the outstanding capital stock of KADI. There are no termination fees or penalties under the letter of intent.

 

We have achieved significant growth since inception in 2007. Net revenues increased from $75.1 million in 2015 to $120.6 million in 2016 and $154.3 million to 2017. We recorded net income of $0.8 million and $2.6 million in 2015 and 2016, respectively. For 2017, we had a net loss of $12.4 million, which included non-cash merger related costs of $14.5 million.

 

The following customers accounted for 10% or more of our total revenues for the years indicated:

 

  2017 Reliance Retail Limited 41.4%
    Alpha Network, Limited 13.1%
       
  2016 Reliance Retail Limited 16.6%
    Alpha Network, Limited 14.6%
       
  2015 Alpha Network, Limited 25.7%
    Qualcomm India Private Limited 10.0%

 

  1  

 

 

Corporate Organizational Chart

 

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.

 

 

Wholly-owned Subsidiaries and Consolidated Affiliated Entities

 

The following is a summary of our material subsidiaries and affiliated entities:

 

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

 

  2  

 

 

Borqs Hong Kong Limited (“Borqs Hong Kong”), a limited company established under the laws of Hong Kong in 2007, engages in the software and services business and is 100% owned by Borqs International Holding Corp;

 

Borqs Software Solutions Private Limited (“Borqs Software Solutions”), a private limited company established under the laws of India in 2009, engages in the R&D for software and is 99.99% owned by Borqs International Holding Corp and 0.01% owned by Borqs Hong Kong;

 

Borqs Korea (“Borqs Korea”), a company established under the laws of South Korea in 2012, engages in the R&D of software and is 100% owned by Borqs Hong Kong;

 

Beijing Borqs Software Technology Co, Ltd. (“Borqs Software”), a company established under the laws of the PRC in 2008, 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 (“BC-Tech”), which is 100% owned by Borqs Beijing;

 

Beijing Borqs Wireless Technology Co, Ltd. (“Borqs Wireless”), a company established under the laws of the PRC in 2013, engages in software development and engineering projects as well as other software and services business and is 100% owned by BC-Tech, which is 100% owned by Borqs Beijing;

 

YuanTel (Beijing) Telecommunications Technology Co., Ltd. (“YuanTel Telecom”), a company established under the laws of the PRC in 2004, 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. (“BC-NW”), which is 100% beneficially owned and controlled by Borqs International through contractual control arrangements; and

 

Beijing Tongbaohuida Technology Co., Ltd. (“Tongbaohuida”), a company established under the laws of the PRC in 2012 and is 100% owned by YuanTel Telecom. Tongbaohuida has been inactive for the years 2015, 2016 and 2017.

 

Business Units

 

We have two business units, Connected Solutions and MVNO. 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.

 

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, approximately 4.5 million at the end of 2016, and approximately 5.37 million at the end of 2017.

 

The MVNO BU provides bundled voice and data services to Chinese consumers, serving as the principal in doing so and recognizing revenue 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.

 

  3  

 

 

Solutions

 

 

The Connected Solutions BU helps customers design, develop and realize the commercialization of their connected devices. The MVNO BU helps customers 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.

 

Our Connected Solutions business unit 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. We provide 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 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.

 

  4  

 

 

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. As of December 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 12 million units worldwide.

 

Our MVNO business unit 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, and acts as a sales and promotion channel for the products developed by the Connected Solutions BU.

 

Customers

 

The Company’s primary customers are mobile chipset manufacturers, mobile device OEMs and mobile operators. In 2017, Reliance Retail Limited and Alpha Network, Limited Corp accounted for approximately 41% and 13% of our revenues, respectively. In 2016, Reliance Retail Limited and Alpha Network Limited accounted for approximately 17% and 15% of our revenues, respectively. In 2015, Alpha Network Limited and Qualcomm India Private Limited accounted for approximately 26% and 10% of our revenues, respectively. The majority of the Company’s customers are located outside of China.

 

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 serves as a contract manufacturer of the products for Reliance, using Colmei Technology International Ltd. (“Colmei”) and its affiliate Shenzhen Crave Communication Co., Ltd. (“Crave”) to source necessary components. Due to Crave’s large manufacturing volume, it is able to negotiate favorable component pricing. The Connected Solutions BU benefits from Crave’s and Colmei’s component purchasing power and business referred to the Company by Crave and Colmei. The Company sells the final products to its customers, which are responsible for marketing and retail distribution.

 

The MVNO BU serves all the domestic China market. Operating under the brand name Yuantel, the MVNO BU 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.

 

Research and Development

 

The Company has dedicated significant resources to research and development, with research and development centers in Beijing, China and Bangalore, India. As of December 31, 2017, 352 of our 612 employees 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’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 (“U.S. 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.

 

The Company has been granted 130 patents in China and six patents in the United States, and as of December 31, 2017 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.

 

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Competition

 

The Company believes that the marketplace for connected devices and MVNO 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).

 

The market for connected devices and MVNO solutions is rapidly evolving, and in the future the Company may not be able to compete successfully against current and potential competitors. The Company expects competition to intensify as new 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 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 have sizable software teams and global coverage, but they are very weak in hardware design and manufacturing expertise;

 

Some of the Company’s competitors have significantly greater financial, technical, marketing, sales and other resources and significantly greater name recognition than we have.

 

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.

 

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 leading chipset vendors 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. These relationships enable the Company to develop a competitive product portfolio.

 

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

 

The Company has focused on building its innovative technology platform to serve customers across the core parts of the Android platform value chain. We believe the Company was first to develop commercial grade software to support video telephony for Android. In collaboration with China Mobile, the Company developed the base chipset software to deploy Android-based mobile devices to support China Mobile’s TD-SCDMA network.

 

Global customer base and extensive industry relationships .

 

The Company had more than 50 customers as of December 31, 2017, 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. Through 2017, the Company has collaborated with more than six mobile chipset manufacturers (including Intel, Qualcomm, Marvell) and 29 connected device OEMs (including LGE, Micromax, Acer, Motorola and Vizio) 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 (including AT&T, China Mobile, Claro, Orange, Reliance Jio, Sprint, Verizon) on four continents.

 

Significant resources dedicated to research and development; Patents .

 

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 evolving customer needs across the core parts of the Android platform value chain.

 

  7  

 

 

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, 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.

 

The Company’s operations are also subject to trial licenses granted by the Ministry of Industry & Information Technology of China, or MIIT, under the mobile virtual 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 trial licenses issued thereunder, including those of the Company, 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. All MVNOs in China, including the Company, will continue to operate and provide mobile communication services for subscribers based on the trial licenses.

 

The MIIT issued a Notice on the Official Commercial Use of Mobile Communication Resale Business (Draft for Comments), or the Draft Notice, on January 24, 2018, which requires an enterprise that has obtained a trial license, or the Pilot Enterprise to execute commercial contracts with a basic telecommunications company and apply for the telecommunications business license to replace the trial license after certain date to be provided in the official version of the Draft Commercial Use Notice, or the Official Notice. The Pilot Enterprise is allowed to continue to carry out its MNVO business during such application period. According to the Draft Notice, the Pilot Enterprise will be ordered to terminate its MVNO business under certain circumstances, including (1) termination of cooperation between the Pilot Enterprise and the basic telecommunications enterprise resulting in Pilot Enterprise’s failure to operate its business; (2) failure to obtain the telecommunications business license within 2 years since the date of promulgation of the Official Notice; (3) occurrence of serious telecommunication fraud cases or malignant group accidents due to the Pilot Enterprise’s malpractice. The MIIT is currently soliciting comments on this Draft Notice and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. It is also uncertain whether the Official Notice would have any substantial changes from the Draft Notice.

 

Employees 

 

As of December 31, 2017, we had 612 employees. None of our employees are represented by a labor union. Most of the Company’s employees are located in China, and a large percentage of its research and development personnel are located in India.

 

The Company pays most of employees a base salary and performance-based bonuses, including annual incentive bonuses and project-based bonuses. It pays commissions to sales personnel. Employees are also eligible to participate in the Company’s stock incentive program.

 

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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 its 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, campus recruitment at leading technical universities and institutions, job fairs and internal referrals from current employees.

 

The Company offers 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 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.

 

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 of 4,400 square meters for other offices and research and development facilities in India. The following table sets forth the location, approximate size and primary use and expiration date of all the Company’s materially important physical facilities as of December 31, 2017. Extension beyond the expiration of both leases will be up to negotiation with the property owners.

 

Locations   Approximate Size   Primary Uses   Lease Expiration Date
Beijing, China   3600 sq. meters   Principal executive office and research and development   May 31, 2020
Bangalore, India   4400 sq. meters   Research and development   December 9, 2020
Total   8000 sq. meters        

 

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Employees

 

As of December 31, 2017, we had 612 employees. None of our employees are represented by a labor union.

 

Segments

 

We operate in two reportable segments, which are mobile virtual network operator services (“MVNO” or “Yuantel”), and Connected Solutions. See Note 2, Segment Reporting, of our notes to consolidated financial statements.

 

Geographic Concentration

 

The following table sets forth the Company’s connected solutions net revenues from customers, in absolute amount and as a percentage of net revenues, based on location of the customer’s headquarters. Our MVNO net revenues, which were $20.0 million, $35.1 million and $32.1 million in 2015, 2016 and 2017, respectively, were related to customers in China. These figures do not take into account the geographic location of end-users of customer products:

 

    For the year ended December 31,  
    2015     2016     2017  
    $     %     $     %     $     %  
    ($ in thousands)  
China     8,485       15.4 %     6,076       7.1 %     17,687       14.5 %
India     7,949       14.4 %     25,126       29.4 %     70,421       57.6 %
United States     14,978       27.2 %     34,526       40.4 %     23,312       9.1 %
Rest of the World     23,703       43.0 %     19,720       23.1 %     10,813       8.8 %
Net Revenues     55,115       100.0 %     85,448       100.0 %     122,233       100 %

 

The Company’s connected solutions 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 2017, revenues from customers with headquarters in China declined slightly, and we engaged a significant new customer in India during the second half of 2016 and this customer continued to place orders with us in 2017.

 

Available Information

 

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other periodic reports are available free of charge on our website ( www.borqs.com ) as soon as reasonably practicable after we have electronically filed such materials with, or furnished such materials to the Securities and Exchange Commission. They are also available at www.sec.gov .

 

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Item 1A.     Risk Factors

 

Factors That Could Affect Future Results

 

You should carefully consider the risks below, as well as other information included or incorporated by reference in this report, before making an investment decision. We operate in a dynamic and rapidly changing environment that involves many risks and uncertainties that could cause actual results to differ materially from results contemplated by forward-looking statements in this report.  The occurrence of any of the events or developments described below could materially and adversely affect our business, financial condition, results of operations and growth prospects. In such an event, the market price of our ordinary shares could decline, and you may lose all or part of your investment. Because of the factors discussed below, other information included or incorporated by reference in this report and other factors affecting our operating results, past performance should not be considered a reliable indicator of future performance. The risks discussed in this report are not the only risks we face. Risks and uncertainties of which we are not currently aware, or which we currently deem to be immaterial, may also adversely affect our business, financial condition or operating results.

 

Risks Related to Our Business and Industry

 

Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.

 

Our quarterly operating results, including the levels of our revenue, gross margin, profitability, cash flow and deferred revenue, may vary significantly in the future, and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control and, as a result, may not fully reflect the underlying performance of our business. Fluctuations in quarterly results may negatively impact the value of our ordinary shares. Factors that may cause fluctuations in our quarterly financial results include, but are not limited to:

 

our ability to attract new customers;

 

our ability to convert users of our limited free versions to paying customers;

 

the addition or loss of large customers, including through acquisitions or consolidations;

 

our customer retention rate;

 

the timing of recognition of revenue;

 

the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure;

 

network outages or security breaches;

 

general economic, industry and market conditions;

 

increases or decreases in the number of features in our services or pricing changes upon any renewals of customer agreements;

 

changes in our pricing policies or those of our competitors;

 

the timing and success of new services and service introductions by us and our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners; and

 

the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies.

 

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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 projects could significantly reduce our net revenues and harm our business.

 

We derive a significant portion of our net revenues from a small number of major customers and key projects. Our five largest customers in 2017, 2016 and 2015 accounted for 69.3%, 51.5% and 57.8% of our net revenues in 2017, 2016 and 2015, respectively. Our ability to maintain close relationships with major customers is essential to the success of our business. However, the volume of work performed for specific customers varies significantly from year-to-year and project-to-project, and we are typically are not the exclusive solutions provider for our customers, and we do not have long-term purchase commitments from customers. A major customer in one year may not provide the same level of net revenues for us in any subsequent year. 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.

 

Many 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, pricing pressure from competitors, a change in a customer’s business strategy, or failure of a chipset manufacturer or device OEM to develop competitive products. Our customers may 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 provide mobile communication services as a mobile virtual network operator in China. The current license to operate such services is based on a government issued extension of a trial license, and if we cannot obtain a renewed license or the current extension is terminated, we will need to cease operating as a MVNO and our total revenues will be significantly reduced.

 

In 2014, after acquiring YuanTel Investment, we entered into the MVNO business. Our MVNO business unitcontributed 26.6%, 29.1% and 20.8% of our net revenues in 2015, 2016 and 2017, respectively. The ability of our MVNO business unit 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 virtual 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 trial 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. All MVNOs in China, including us, will continue to operate and provide mobile communication services for subscribers based on the trial licenses.

 

The MIIT issued a Notice on the Official Commercial Use of Mobile Communication Resale Business (Draft for Comments), or the Draft Notice, on January 24, 2018, which requires an enterprise that has obtained a trial license, or the Pilot Enterprise to execute commercial contracts with a basic telecommunications company and apply for the telecommunications business license to replace the trial license after certain date to be provided in the official version of the Draft Commercial Use Notice, or the Official Notice. The Pilot Enterprise is allowed to continue to carry out its MNVO business during such application period. According to the Draft Notice, the Pilot Enterprise will be ordered to terminate its MVNO business under certain circumstances, including (1) termination of cooperation between the Pilot Enterprise and the basic telecommunications enterprise resulting in Pilot Enterprise’s failure to operate its business; (2) failure to obtain the telecommunications business license within 2 years since the date of promulgation of the Official Notice; (3) occurrence of serious telecommunication fraud cases or malignant group accidents due to the Pilot Enterprise’s malpractice. The MIIT is currently soliciting comments on this Draft Notice and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. It is also uncertain whether the Official Notice would have any substantial changes from the Draft Notice. Thus, we cannot assure you that we are able to obtain the official MVNO license after the promulgation of Official Notice.

 

If we cannot obtain the official MVNO license after the promulgation of Official Notice, we will be forced to cease this operation, and our total revenues will be significantly reduced and our investment into this business will be completely lost. We rely on China Unicom, the incumbent operator, to provide us with attractive and competitive bulk wholesale rates of voice-per-minute and MB-of-data to compete with our competitors. If we are not provided competitive bulk wholesale rates from China Unicom, we will not be able to maintain our gross margin and will not be able to operate profitably, which may lead to shutting down the MVNO Business Unit entirely.

 

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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 given a warning 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 require 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 Beijing Big Cloud Network Technology Co., Ltd. (“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 Borqs Beijing and entered into exclusive option agreements with Borqs Beijing 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.

 

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 multiple rapidly evolving industries. 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.

 

Our industry is rapidly evolving and subject to continuous technological developments. Our success depends on our ability to keep up with technological developments and changing customers demands. As a result, we need to 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 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.

 

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We face intense competition 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.

 

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. 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.

 

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.

 

Our MVNO business unit faces 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, 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.

 

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 integrate acquired companies and their operations may be adversely affected by many factors, including 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 undertake 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 undertake 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.

 

Most of our engagements with customers are for a specific project only and do not provide for long-term 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 software fees, relating to one-time research and engineering work performed for customers. For 2015, 2016 and 2017, our net revenues from software fees were $22.5 million, $14.9 million and $11.2 million, representing 29.9%, 12.4% and 7.3% 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;

 

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.

 

  15  

 

 

Because of the characteristics of open source software, there may be fewer technology barriers to entry in 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.

 

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.

 

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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If we fail to effectively manage our technical operations infrastructure, our customers may experience service outages and delays in the further deployment of our services, which may adversely affect our business.

 

We have experienced significant growth in the number of users and the amount of data that our operations infrastructure supports. We seek to maintain sufficient capacity in our operations infrastructure to meet the needs of all of our customers. We also seek to maintain excess capacity to facilitate the rapid provisioning of new customer deployments and the expansion of existing customer deployments. In addition, we need to properly manage our technological operations infrastructure in order to support version control, changes in hardware and software parameters and the evolution of our services. However, the provision of new hosting infrastructure requires significant lead-time. We have experienced, and may in the future experience, website disruptions, outages and other performance problems. These problems may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks, fraud, spikes in customer usage and denial of service issues. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time, which may harm our reputation and operating results. Furthermore, if we do not accurately predict our infrastructure requirements, our existing customers may experience service outages that may subject us to financial penalties, financial liabilities and customer losses. If our operations infrastructure fails to keep pace with increased sales, customers may experience delays as we seek to obtain additional capacity, which could adversely affect our reputation and our revenue.

 

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.

 

The international nature of our business exposes us 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;

 

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current and future tariffs and other trade barriers, such as those recently announced by the United States on goods imported to the U.S. from China, and 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 properly comply with 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.

 

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.

 

Our 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. In China our industry has experienced significant levels of employee attrition. Our attrition rates were 18% in 2015, 12% in 2016, and 16% in 2017. 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 service 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 person 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 “— Risks Related to Doing Business in China — Uncertainties with respect to the PRC legal system could harm us.”

 

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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 March 27, 2018, our top six shareholders owned approximately two-thirds of our ordinary shares, including Zhengqi International Holding Ltd., Intel Capital Corporation, Norwest Venture Partners X, L.P., Asset Horizon International Limited, Keytone Ventures L.P., and GSR Ventures II, which beneficially owned approximately 15.3%, 12.1%,10.7%, 10.5%, 9.7% and 7.8% respectively. 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.

 

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.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

 

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used the framework set forth in the report Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication and (v) monitoring.

 

Based on that evaluation, our management concluded that these controls were not effective at December 31, 2017. We did not maintain sufficient controls over financial reporting processes due to an insufficient complement of internal personnel with a level of accounting knowledge, experience and training in the application of U.S. GAAP to ensure that the consolidated financial statements were prepared in compliance with U.S. GAAP and SEC requirements properly. This deficiency constitutes as a material weakness of our internal control over financial reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

 

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used the framework set forth in the report Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication and (v) monitoring.

 

Based on that evaluation, our management concluded that these controls were not effective at December 31, 2017. We did not maintain sufficient controls over financial reporting processes due to an insufficient complement of internal personnel with a level of accounting knowledge, experience and training in the application of U.S. GAAP to ensure that the consolidated financial statements were prepared in compliance with U.S. GAAP and SEC requirements properly. This deficiency constitutes as a material weakness of our 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 required to maintain effective disclosure controls and procedures and effective internal control over financial reporting. 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. As described elsewhere in this Annual Report, we have identified material weaknesses, significant deficiencies and other deficiencies in 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. 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.

 

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In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on The Nasdaq Stock Market.

 

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. At that 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. Failing to maintain effective disclosure controls and internal control over financial reporting could have a material adverse effect on our business and operating results and could cause a decline in the price of our ordinary shares.

 

We are subject to 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 will continue to be listed on Nasdaq or, if listed, that we will be able to comply with the continued listing standards of Nasdaq.

 

To continue listing our ordinary shares on The Nasdaq Stock Market, we will be required to demonstrate compliance with Nasdaq’s continued listing requirements, particularly the requirement to maintain a minimum number of holders (300 round-lot holders) — to which the Company is currently not in compliance. Nasdaq has granted us until April 10, 2018 to regain compliance with this requirement and prevent the delisting of our ordinary shares from trading on Nasdaq. We cannot assure you that we will be able to meet this continued listing requirement or maintain other listing standards. If our ordinary shares are delisted by Nasdaq, likely adverse consequences include:

 

less liquid trading market for our ordinary shares;

 

more limited market quotations for our shares;

 

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

 

more limited research coverage by stock analysts;

 

loss of reputation; and

 

more difficult and more expensive equity financings in the future.

 

Our proposed acquisition of KADI involves transactional and integration risks.

 

We have entered into a letter of intent to acquire a 60% equity interest in Shanghai KADI Machinery Technology Co., Ltd (“KADI”), a Chinese company that develops software and hardware solutions for electric vehicle control modules, such as charging, battery management and vehicle controls. We have not yet finalized a definitive agreement to complete this acquisition, but we are committed to making advance payments totaling $600,000 by the end of April 2018. These advances will be deducted from our initial cash payments to KADI under the definitive agreement to be negotiated. If this transaction is not consummated within nine months after signing of the letter of intent, the advance payments will be converted into shares representing five percent of the outstanding capital stock of KADI. There are no termination fees or penalties under the letter of intent. Assuming we proceed to enter into a definite agreement with KADI and consummate the proposed acquisition, there is no assurance that we can obtain any necessary financing funds in time for KADI to set up correctly for manufacturing products. There is no assurance that the management of KADI will successfully integrate with our management team to gain the intended benefits of this acquisition. We are dependent on the current leadership of KADI’s chairman and chief executive, and if he is unable or unwilling to dedicate his full time to KADI’s business, or if he were to resign or start a competing business, our business and financial results would be adversely affected.

 

Our repurchase of shares from Zhengqi may adversely affect our liquidity and working capital.

 

We have agreed to repurchase 966,136 of our ordinary shares from our largest shareholder, Zhengqi Interntional Holding Limited, at the original purchase price and for an aggregate amount of $10.05 million. The repurchase transaction is not yet completed, though the repurchase funds have been transferred to Zhengqi in anticipation of satisfaction of closing conditions and the 966,136 repurchase shares currently remain outstanding. This repurchase limits our available cash and may adversely affect our ability to carry out our operations normally due to this reduction in working capital.

 

Our repurchase of shares from Zhengqi may trigger litigation by other shareholders.

 

If the Zhengqi repurchase transaction is not completed, up to 1,278,776 shares currently in escrow may not be timely released to the former Borqs International shareholders based on their respective proportionate interests in the merger consideration, and they may sue the Company for any damages they suffer as a result. Further, our agreement to repurchase shares from Zhengqi was not extended to all investors who purchased shares in the August 2017 private placement. Since we repurchased those shares at a premium to current market prices, other purchasers may seek similar treatment. In addition, a minority of our shareholders will not benefit from the expected return of up to 1,278,776 escrowed earnout shares to the original Borqs International shareholders. Those minority shareholders will receive no direct benefit of proposed repurchase and return, and there is no assurance that those minority holders will not make claims against us. Any such litigation could be time-consuming and costly, and could materially adversely affect our financial condition and results of operations.

 

Dependency on Crave and Colmei and financial risks.

 

Our agreement to purchase shares of Crave and Colmei from the shareholders of those companies may lead us to be more dependent on Crave and Colmei for access to important components and manufacturing capacity. There is no assurance that Crave and Colmei can provide competitive pricing of components and for manufacturing services. There is no assurance that the value of our ownership of Crave and Colmei will not decline, potentially causing a material adverse effect on our financial condition.

 

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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.

 

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.

 

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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.

 

On February 3, 2015, the State Administration of Taxation, or 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, where a non-resident enterprise transfers taxable assets, through the offshore transfer of a foreign intermediate holding company, the non-resident enterprise, being the transferor, maybe subject to PRC enterprise income tax, if the indirect transfer is considered to be an arrangement which does not have a reasonable commercial purpose to circumvent enterprise income tax payment obligations. In addition, Public Notice 7 further provides certain criteria 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.

 

On October 17, 2017, the SAT issued the Announcement on Issues Relating to Withholding at Source of Income Tax of Non-Resident Enterprises, or Announcement 37, which became effective on December 1, 2017. The Announcement 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.

 

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 Public Notice 7 and Announcement 37. 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 Public Notice 7 and Announcement 37. As a result, we may be required to expend valuable resources to comply with Public Notice 7 and Announcement 37 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 Public Notice 7 and Announcement 37 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 Public Notice 7 and Announcement 37, 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.

 

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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.

 

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.

 

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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 August 21, 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. In February 2018, the SAT issued the Announcement on Issues Relating to Beneficial Owners under Tax Treaties , or the SAT Announcement 9, which became effective from April 1, 2018 and supersedes the Notice on Interpretation and Determination of Beneficial Owners under Tax Treaties issued by the SAT on October 27, 2009 (or the Circular 601) and the Announcement Regarding Recognition of Beneficial Owners under Tax Treaties released by the SAT on June 29, 2012 (or the Announcement 30). Pursuant to Announcement 9, applicants who intend to prove their status of the “beneficial owner” shall submit the relevant documents to the relevant tax bureau according to the Announcement on Issuing the Measures for the Administration of Non-Resident Taxpayers’ Enjoyment of the Treatment under Tax Agreements and the SAT Announcement 9. “Beneficial Owners” are residents who have ownership and the right to dispose of the income or the rights and properties giving rise to the income. These rules also set forth certain adverse factors against the recognition of a “Beneficial Owner”, such as not carrying out substantive business activities. Whether a non-resident enterprise may obtain tax benefits under the relevant tax treaty will be subject to approval of the relevant PRC tax authority and will be determined by the PRC tax authority on a case-by-case basis. SAT Announcement 9 further provides that a comprehensive analysis should be made when determining the beneficial owner status based on various factors supported by 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.

 

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 foreign currency may limit our ability to receive and use our revenue effectively.

 

The PRC government imposes controls on the conversion of the Renminbi into foreign currencies and, in certain cases, the remittance of foreign 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 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 approval from SAFE 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.

 

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

 

The value of China’s Renminbi (“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 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.

 

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 to register with the local SAFE branch as required under Circular 37 and Circular 13 as applicable. As of the date of this Annual 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. Besides, we have also issued certain shares to PRC citizens and requested them to register with the local SAFE branch as required under Circular 37 and Circular 13. We cannot assure you, however, that the all of these individuals can successfully complete required filings or updates on a timely manner, or at all. 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. We plan to process the SAFE application for our ESOP within the year 2018.

 

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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.

 

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.

 

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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 and was revised on December 28, 2012. 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.

 

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 us 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.

 

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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 Annual 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.

 

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.

 

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If additional remedial measures are imposed on China-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging those firms’ failure to meet specific criteria with respect to requests for the production of documents, we could be unable to timely file our future financial statements in compliance with the requirements of U.S. securities law.

 

In December 2012, the SEC instituted proceedings against five China-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ work papers related to their audits of China-based companies that are publicly traded in the U.S. The SEC has the authority to deny to any person, temporarily or permanently, the ability to practice before the SEC who is found by to have willfully violated any such laws or rules and regulations. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of the five firms from practicing before the SEC for a period of six months. Four of these China-based accounting firms appealed to the SEC against this decision and, on February 6, 2015, each of the four China-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. These firms’ ability to continue to serve all their respective clients is not affected by the settlement. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to the firms’ audit documents via the China Securities Regulatory Commission. If the firms do not follow these procedures, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings. The settlement did not require the firms to admit to any violation of law and preserves the firms’ legal defenses in the event the administrative proceeding is restarted

 

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, companies listed in the U.S. with major Chinese operations may find it difficult or impossible to retain auditors in respect of their operations in China, which could result in financial statements being determined to not be in compliance with the requirements of the Securities Exchange Act of 1934 (“Exchange Act”), including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our ordinary shares may be adversely affected.

 

If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delay or abandonment of this offering, delisting of our ordinary shares from The Nasdaq Stock Market or deregistration from the SEC, which would substantially reduce or effectively terminate the trading of our ordinary shares in the U.S.

 

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.

 

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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.

 

Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.

 

Item 1B.   Unresolved Staff Comments

 

None.

 

Item 2.     Properties

 

The Company leases facilities for its Beijing headquarters totaling 3,600 square meters for approximately $94,500 per month, and the lease ends on May 31, 2020. The Company also leases facilities for its R&D center in Bangalore, India totaling 4,400 square meters for approximately $55,600 per month, the lease end on December 9, 2020.

 

Item 3.     Legal Proceedings

 

We are from time to time, a party to various litigation, administrative, judicial or other proceedings involving law enforcement and other regulatory agencies, and customer disputes incidental to the conduct of our business. At the present time, we believe that none of these matters are material.

 

Item 4.     Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information for our Ordinary Shares

 

From October 15, 2015 to August 18, 2017, our units were traded on The Nasdaq Stock Market under the symbol “PAACU”, and from October 29, 2015 to August 18, 2017, our ordinary shares, rights and warrants were each traded on The Nasdaq Stock Market under the symbols “PAAC,” “PAACR” and “PAACW,” respectively.

 

On August 18, 2017, we completed the acquisition of Borqs International in an all-stock transaction (the “Merger”). From August 21, 2017, our ordinary shares and warrants have been traded on The Nasdaq Stock Market under the symbol “BRQS” and “BRQSW”, respectively. On February 27, 2018, The Nasdaq Stock Market filed a notification of removal from listing on Form 25 to delist our warrants.

 

The following table sets forth, for the periods indicated, the high and low intra-day sales prices of our ordinary shares and warrants reported on The Nasdaq Stock Market.

 

    Fiscal Year Ended December 31, 2017     Fiscal Year Ended December 31, 2016  
   

Fourth

Quarter

   

Third

Quarter

   

Second

Quarter

   

First

Quarter

   

Fourth

Quarter

   

Third

Quarter

   

Second

Quarter

   

First

Quarter

 
Ordinary Shares                                                
High   $ 6.018     $ 10.50     $ 10.50     $ 10.40     $ 13.00     $ 11.20     $ 10.43     $ 10.02  
Low   $ 4.00     $ 5.10     $ 10.25     $ 10.25     $ 10.20     $ 10.06     $ 10.00     $ 9.86  
Warrants                                                                
High   $ 0.2967     $ 0.597       N/A       N/A       N/A       N/A       N/A       N/A  
Low   $ 0.0111     $ 0.25       N/A       N/A       N/A       N/A       N/A       N/A  

 

Stockholders

 

As of March 27, 2018 there were 31,307,522 ordinary shares outstanding held by 270 holders of record, including Cede & Co. as nominee for each of the respective public shareholders, and 6,281,875 of our warrants outstanding held by two holders of record.

 

Dividends

 

We have never declared or paid any cash dividends on our shares, and we do not currently intend to pay any cash dividends for the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends on our ordinary shares will be at the discretion of our board of directors and will depend upon, among other factors, our financial condition, operating results, current and anticipated cash needs, plans for expansion and other factors that our board may deem relevant.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

The Company did not repurchase any of its outstanding ordinary shares or warrants in 2017.

 

On January 10, 2018, the Company entered into a stock repurchase agreement (“Stock Repurchase Agreement”) with Zhengqi International Holding Limited (“Zhengqi”), pursuant to which we agreed to repurchase 966,136 of our ordinary shares that were originally issued and sold to Zhengqi on August 18, 2017, at an aggregate purchase price of approximately $10 million, or $10.40 per share. In addition, Zhengqi agreed to forfeit all of its rights to 1,278,776 shares that had been held in escrow and which will instead be treated as part of the merger consideration shares under the merger agreement pursuant to which the Company acquired Borqs International. The Stock Repurchase Agreement provides that those shares will be treated in the following manner: 51,151 shares (4% of the total) became additional shares placed in an indemnity escrow account; and 1,227,625 shares will be distributed to the former Borqs International shareholders based on their respective proportionate interests in the merger consideration. The funds used to repurchase the shares from Zhengqi were the same amount of funds Zhengqi provided to the Company when the shares were sold to Zhengqi on August 18, 2017 under the Backstop and Subscription Agreement between the Company, Zhengqi and EarlyBirdCapital, described below. The repurchase transaction is not yet completed, though funds have been transferred to Zhengqi in anticipation of satisfaction of closing conditions and the 966,136 repurchase shares currently remain outstanding.

 

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Pursuant to the Stock Repurchase Agreement, the Company and Zhengqi also agreed to use their best efforts to amend the Company’s charter to provide that until August 18, 2018, if any Board member not appointed by Zhengqi is absent from a meeting, then an equal number of Board members appointed by Zhengqi shall also be absent or otherwise not participate in or influence voting of our Board in such meeting.

 

Recent Sales of Unregistered Securities and Use of Proceeds

 

Share Issuance to Zhengqi and EarlyBirdCapital

 

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 described below, Zhengqi and its assignees were entitled to receive 2,352,285 ordinary shares if Company performance targets were not achieved; if those targets were achieved, those shares (to the extent earned) would be delivered to the former shareholders of Borqs International. These shares were issued on August 18, 2017 in the name of Zhengqi and deposited in escrow, with Zhengqi entitled to all voting rights and dividend rights (other than equity securities paid as dividends). Any portion of these shares that are earned by the former shareholders of Borqs International will be forfeited by Zhengqi and the Company will issue new equivalent shares to the former shareholders of Borqs International, with 4% of these shares deposited in escrow to support indemnification obligations under the Merger Agreement. In connection with our acquisition of Borqs International by way of merger, we amended our charter amended to require, for future acquisitions by the Company prior to September 30, 2018 having a value in excess of $60 million, the approval of at least two-thirds of the members of our then-serving board of directors, to grant Zhengqi information rights relating to such acquisitions, and, if requested by Zhengqi, to provide a fairness opinion in respect of such acquisitions.

 

On May 11, 2017, Pacific and Zhengqi entered into a Backstop and Subscription Agreement, pursuant to which Zhengqi agreed to purchase up to $24.0 million of our 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 our acquisition of Borqs International by way of merger or (iii) a combination thereof, in order to ensure that there was at least $24.0 million in the trust account together with proceeds from any private placement to be conducted prior to the closing of our acquisition of Borqs International by way of merger. Zhengqi was entitled, at its sole election, to purchase additional ordinary shares in excess of such $24.0 million 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 obligations of Zhengqi to purchase Pacific ordinary shares in the private placement under the Backstop and Subscription Agreement were assigned to EarlyBirdCapital. In connection with our merger with Borqs International and as consideration for the Backstop and Subscription Agreement, Pacific sold 1,038,251 ordinary shares for an aggregate consideration of approximately $10.8 million. On January 10, 2018 we repurchased 966,136 of these ordinary shares, as described under “—Purchases of Equity Securities by the Issuer and Affiliated Purchasers.”

 

Share Issuance to Crave and Colmei Selling Shareholders

 

On January 18, 2018, we entered into an agreement with Crave and Colmei, along with the shareholders of Crave and Colmei (“Selling Shareholders”), pursuant to which the Selling Shareholders agreed to sell to the Company and the Company agreed to acquire 13.8% of the outstanding shares of Crave and 13.8% of the outstanding shares of Colmei from the Selling Shareholders which will not result in the Company’s significant influence in either Colmei or Crave. Under the agreement, on March 22, 2018, the Company issued 473,717 ordinary shares issued to the order of the Selling Shareholders and agreed to pay $10.0 million cash to the Selling Shareholders over a period of 36 months. If approved by the Company’s board of directors, the Company will also issue additional shares to the Selling Shareholders if the aggregate value of the Company shares initially issued to the Selling Shareholders under this agreement is less than $3.0 million on August 18, 2018.

 

Our major customer Reliance of India placed significant orders with the Company due to the fact that the Company serves as a contract manufacturer of the products for Reliance, using Crave to source necessary components. Due to Crave’s large manufacturing volume, it is able to negotiate favorable component pricing. Colmei and Crave are controlled by common owners, and we own approximately 13.8% of each. In addition, Colmei has the ability to obtain favorable financing for the Company to procure large projects. Our investments in Colmei and Crave provide us with access to acceptable financing terms, competitive component pricing and prioritized production capacity.

 

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Share Purchase by Employees of our Subsidiary in India

 

In effort to gain compliance with Nasdaq’s listing requirement that the Company have at least 300 round lot shareholders by April 10, 2018, we implemented a restricted ordinary shares purchase program with eligible employees of our wholly-owned subsidiary in India, Borqs Software Solutions Private Ltd. Eligible employees were allowed to voluntarily participate in the program, pursuant to which 222 individuals purchased an aggregate of 29,170 ordinary shares, consisting of between 100 and 250 restricted ordinary shares per individual. The purchase price for the shares was set at $9.40 per share, which was the closing price of the Company’s ordinary shares on Nasdaq on March 19, 2018, the day immediately prior to the transaction date. Program participants paid for their purchases by having the purchase amounts deducted from their regular compensation on March 23, 2018.

 

Performance Graph

 

The following performance graph shall not be deemed to be incorporated by reference by means of any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under those acts.

 

The graph compares the cumulative total return of our ordinary shares from August 18, 2017 through December 29, 2017, the last trading day in 2017, with the performance of the Nasdaq Composite Index and the Nasdaq Computer Index over those periods. The graph assumes that (i) $100 was invested in our ordinary shares at the closing price on August 18, 2017, (ii) $100 was invested in each of the Nasdaq Composite Index and the Nasdaq Computer Index at the closing price of the respective indices on that date. To date, no cash dividends have been declared or paid on our ordinary shares. The stock price performance of the following graph is not necessarily indicative of future stock price performance.

 

 

    8/18/2017     12/29/2017  
Borqs Technologies, Inc.   $ 100     $ 73.15  
Nasdaq Composite Index   $ 100     $ 111.05  
Nasdaq Computer Index   $ 100     $ 112.71  

 

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Item 6.     Selected Financial Data

 

The following selected consolidated financial data should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations section and our consolidated financial statements and notes thereto included elsewhere in this Annual Report. The selected consolidated statements of operations data for each of the years in the three-year period ended December 31, 2017, and the consolidated balance sheet data as of December 31, 2017 and 2016, are derived from our audited consolidated financial statements that have been included in this Annual Report. The selected consolidated balance sheet data as of December 31, 2015 are derived from our audited consolidated financial statements that have not been included in this Annual Report on Form 10-K.

 

    Fiscal Years Ended December 31,  
Consolidated Statements of Income and Comprehensive Income Data:   2015     2016     2017  
    ($ in thousands)  
Net revenues     75,072       120,586       154,307  
Gross profit     17,067       25,150       27,166  
Operating expenses*     (19,448 )     (21,670 )     (35,348 )
Other operating income     3,094       1,760       272  
Operating income (loss)     713       5,240       (7,910 )
Profit (loss) before income taxes     1,646       5,255       (10,040 )
Income tax expense     (851 )     (2,659 )     (2,319 )
Net income (loss) before deduction of noncontrolling interests     795       2,596       (12,359 )

  

(* Operating expenses in 2017 included $14.5 million in non-cash merger related expenses.)

 

    Fiscal Years Ended
December 31,
 
Consolidated Balance Sheets Data:   2016     2017  
    ($ in thousands)  
Cash and cash equivalents     3,610       13,060  
Accounts receivable     28,257       65,720  
Inventories     12,682       17,031  
Property, plant and equipment, net     1,488       1,362  
Total assets     78,030       148,732  
Total liabilities     64,519       101,727  
Total shareholders’ deficit equity     (55,351 )     47,005  

  

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Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

References in this Annual Report to “we,” “us” or the “Company” refer to Borqs Technologies, Inc. References to our “management” or our “management team” refer to our officers and directors. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Annual Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

 

Special Note Regarding Forward-Looking Statements

 

This Annual Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Annual Report including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of this Annual Report. The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov . 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.

 

Overview

 

Borqs Technologies, Inc. (“we”, “the Company” or “Borqs”) are a company focused on software, development services and products providing customizable, differentiated and scalable Android-based smart connected devices and cloud service solutions. We are 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, we have been awarded significant business contracts from Intel and Qualcomm, leading global chipset manufacturers.

 

Pursuant to the Company’s acquisition of Borqs International Holding Corp (“Borqs International”) by way of merger, which completed on August 18, 2017, Borqs International became a wholly-owned subsidiary of the Company, with the Company adopting the business of Borqs International and its consolidated subsidiaries going forward and reporting the historical consolidated financial statements of Borqs International on future SEC filings as those of the Company, which was renamed Borqs Technologies, Inc.

 

Our Connected Solutions business unit 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. We provide 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 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.

 

Our MVNO business unit 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, and acts as a sales and promotion channel for the products developed by the Connected Solutions BU.

 

The Connected Solutions business unit represented 73.4%, 70.9% and 79.2% of our net revenues in the year ended December 31, 2015, 2016 and 2017, respectively. In the year ended December 31, 2015, 2016 and 2017, Borqs generated 85%, 93% and 86% of its net revenues from customers headquartered outside of China and 15%, 7% and 14% of its net revenues from customers headquartered within China. As of December 31, 2017, Borqs had 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 12.3 million units worldwide.

 

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We have dedicated significant resources to research and development, and has research and development centers in Beijing, China and Bangalore, India. As of December 31, 2017, 352 of our 612 employees were technical professionals dedicated to platform research and development and product specific customization.

 

On January 8, 2018, we entered into a letter of intent to acquire a 60% equity interest in Shanghai KADI Machinery Technology Co., Ltd (“KADI”), a Chinese company that develops software and hardware solutions for electric vehicle control modules, such as charging, battery management and vehicle controls. We are currently negotiating a definitive agreement to acquire such equity interest for an aggregate of $11.7 million in cash to be paid to KADI and ordinary shares with an agreed-upon value of $3.3 million to be issued to selling shareholders of KADI. KADI is not a customer or a supplier of Borqs. In accordance with the letter of intent, we have made three of four scheduled cash advances to KADI due of $150,000, with the fourth payment due in April 2018. These advances will be deducted from our initial cash payments to KADI under the definitive agreement to be negotiated. If this transaction is not consummated within nine months after signing of the letter of intent, the advance payments will be converted into shares representing five percent of the outstanding capital stokc of KADI. There are no termination fees or penalties under the letter of intent.

 

We have achieved significant growth since inception in 2007. Net revenues increased from $75.1 million in 2015 to $120.6 million in 2016 and $154.3 million to 2017. We recorded net income of $0.8 million and $2.6 million in the years 2015 and 2016, respectively. For the year ended December 31, 2017, we had a net loss of $12.4 million, which included non-cash merger related costs of $14.5 million.

 

Key Factors Affecting Results of Operations

 

The Connected Solutions business unit represented 73.4%, 70.9% and 79.2% of our net revenues for the year ended December 31, 2015, 2016 and 2017, respectively. For the year ended December 31, 2015, 2016 and 2017, we generated 85%, 93% and 86% of our net revenues from customers headquartered outside of China and 15%, 7% and 14% of our net revenues from customers headquartered within China. As of December 31, 2017, we had 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 12 million units worldwide.

 

Revenue mix impacts our 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. 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.

 

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 our solutions and materially adversely affect our revenues and results of operations.

 

Revenues and gross profit in the Connected Solutions BU are 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 mobile chipset manufacturer 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 was 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.

 

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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 . Gross margin of the MVNO BU is affected by the wholesale rates t obtained from the incumbent operator, as well as the competition in the market. Over time, we expect wholesale rates generally decline due to competition and newer technologies (e.g. 4G, 4.5G, and 4.75G).

 

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 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 wholesale rates 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.

 

The aggregate amount of cash and cash equivalent and restricted cash are not materially affected by currency fluctuations because the majority of our 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 December 31, 2017, we held $12 million outside of China and our entities held RMB3.6 million and $0.5 million in China, totaling $13 million on a consolidated basis.

 

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 Annual 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, 2015, 2016 and 2017

    Fiscal Years Ended December 31,  
Consolidated Statement of Operations Data:   2015     2016     2017  
    ($ in thousands)  
Net revenues     75,072       120,586       154,307  
Cost of revenues     (58,005 )     (95,436 )     (127,141 )
Gross profit     17,067       25,150       27,166  
                         
Operating expenses     (19,448 )     (21,670 )     (35,348 )
Other operating income     3,094       1,760       272  
Operating income (loss)     713       5,240       (7,910 )
                         
Other income (expense)     933       15       (2,130 )
Profit (loss) before income taxes     1,646       5,255       (10,040 )
                         
Income tax expense     (851 )     (2,659 )     (2,319 )
Net income (loss)     795       2,596       (12,359 )
                         
Less: net (loss) income attributable to noncontrolling interests     (1,316 )     (632 )     210  
Net income (loss) attributable to Borqs Technologies, Inc.     2,111       3,228       (12,569 )

   

We experienced a net profit of $0.8 million in 2015 and a net profit of $2.6 million in 2016. For 2017, we had a net loss of $12.4 million before deduction for noncontrolling interests, which included non-cash merger related costs of $14.5 million.

 

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Net Revenues

 

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

 

For 2015, Connected Solutions BU net revenues was $55.1 million and MVNO BU net revenues was $19.9 million.

 

For 2016, Connected Solutions BU net revenues was $85.4 million and MVNO BU net revenues was $35.1 million, compared to $55.1 million and $20.0 million in 2015, respectively. Connected Solutions BU net revenues increased 55.0% from 2015 to 2016. MVNO BU net revenue increased 76.1% from 2015 to 2016.

 

For 2017, Connected Solutions BU net revenues was $122.2 million, an increase of 43.0% over 2016, and MVNO BU net revenues was $32.1 million, a decrease of 8.7% from 2016.

 

The following table presents the percentage of total net revenues from Connected Solutions BU and the MVNO BU, respectively, for the years indicated.

 

    For the year ended December 31,  
    2015     2016     2017  
    $     %     $     %     $     %  
    ($ in thousands)  
Connected Solutions BU     55,115       73.4 %     85,448       70.9 %     122,233       79.2 %
MVNO BU     19,957       26.6 %     35,138       29.1 %     32,074       20.8 %
Net revenues     75,072       100.0 %     120,586       100.0 %     154,307       100.0 %

 

Net Revenues — Connected Solutions BU

 

Connected Solutions BU net revenues consist 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 our 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,  
    2015     2016     2017  
    $     %     $     %     $     %  
    ($ in thousands)  
Software     22,468       40.8 %     14,912       17.5 %     11,212       9.2 %
Hardware     32,647       59.2 %     70,536       82.5 %     111,021       90.8 %
Connected Solutions BU net revenues     55,115       100.0 %     85,448       100.0 %     122,233       100 %

 

Software

 

Software net revenues were $22.5 million, $14.9 million and $11.2 million in 2015, 2016 and 2017, respectively, representing 40.8%, 17.5% and 9.2% of Connected Solutions BU net revenues. The $7.6 million decrease in 2016 over 2015 mainly reflected decreases in software engineering activities completed for customers in 2015 as well as the recognition of PCS delivered during 2016 for projects completed in 2015. 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 $3.7 million decline in software net revenues in 2017 from 2016 was mainly attributable to an overall decrease in software engineering project sales.

 

Hardware

 

Hardware net revenues were $32.6 million, $70.5 million and $111.0 million in 2015, 2016 and 2017, respectively, representing 59.2%, 82.5% and 90.8% of Connected Solutions BU net revenues. The $37.9 million increase in 2016 and the $40.5 million increase in 2017 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,  
    2015     2016     2017  
    $     %     $     %     $     %  
    ($ in thousands)  
Mobile device OEMs     38,622       70.1 %     70,536       82.5 %     111,021       90.8 %
Mobile Chipset Vendors     14,491       26.3 %     14,912       17.5 %     11,212       9.2 %
Mobile Operators     2,002       3.6 %     -       0.0 %     -       0.0 %
Connected Solutions BU Net Revenues     55,115       100.0 %     85,448       100.0 %     122,233       100 %

 

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 our 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,  
    2015     2016     2017  
    $     %     $     %     $     %  
    ($ in thousands)  
China     8,485       15.4 %     6,076       7.1 %     17,687       14.5 %
India     7,949       14.4 %     25,126       29.4 %     70,421       57.6 %
United States     14,978       27.2 %     34,526       40.4 %     23,312       19.1 %
Rest of the world     23,703       43.0 %     19,720       23.1 %     10,813       8.8 %
Net revenues     55,115       100.0 %     85,448       100.0 %     122,233       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 2017, revenues from customers with headquarters in China declined slightly, and we engaged a significant new customer in India during the second half of 2016 and this customer continued to place orders with us in 2017.

 

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,  
    2015     2016     2017  
    $     %     $     %     $     %  
    ($ in thousands)  
MVNO     16,007       80.2 %     29,309       83.4 %     30,118       93.9 %
Other     3,950       19.8 %     5,829       16.6 %     1,956       6.1 %
MVNO BU net revenues     19,957       100.0 %     35,138       100.0 %     32,074       100 %

 

We started the MVNO services in late 2014 and experienced significant growth in our MVNO BU net revenues from 2015 to 2016, reflecting increasing sales of bundled services, the minor decrease of net revenue in 2017 as we expect sales of MVNO services to growth 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,  
    2015     2016     2017  
    $     %     $     %     $     %  
    ($ in thousands)  
Connected Solutions BU     38,800       66.9 %     64,943       68.0 %     103,494       81.4 %
MVNO BU     19,205       33.1 %     30,493       32.0 %     23,647       18.6 %
Total cost of revenues     58,005       100.0 %     95,436       100.0 %     127,141       100.0 %

 

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Connected Solutions BU cost of revenues increased from $38.8 million in 2015 to $64.9 million in 2016 and $103.5 million in 2017. 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 $19.2 million in 2015 to $30.5 million in 2016 and decrease to $23.6 million in 2017, 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. MVNO BU revenue decreased to $23.6 million in 2017 due to increased security requirements at the point of sales of signing up new mobile customers as stipulated by the Ministry of Industry and Information Technology (“MIIT”) of China.

 

Gross Profit and Gross Margin

 

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

 

Our gross profits were $17.1 million in 2015, $25.2 million in 2016 and $27.2 million in 2017, with the breakdown between the Connected Solutions BU and MVNO BU as follows:

 

    For the year ended December 31,  
    2015     2016     2017  
    $     %     $     %     $     %  
    (Gross Profit in thousands, Gross Margin in %)  
Connected Solutions BU     16,315       29.6 %     20,505       24.0 %     18,739       15.3 %
MVNO BU     752       3.8 %     4,645       13.2 %     8,427       26.3 %
Total     17,067       22.7 %     25,150       20.9 %     27,166       17.6 %

 

Connected Solutions BU gross margin was 29.6%, 24.0% and 15.3% for 2015, 2016 and 2017, respectively, while MVNO BU gross margin was 3.8%, 13.2% and 26.3% for 2015, 2016 and 2017, respectively. MVNO BU gross margin was on an upward trend through 2017 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 2015 through 2017, while hardware gross profits increased as customers increasingly demanded a comprehensive solution including software design through final commercial product.

 

    For the year ended December 31,  
    2015     2016     2017  
    $     %     $     %     $     %  
    (Gross Profit in thousands, Gross Margin in %)  
Software     9,769       43.5 %     7,421       49.8 %     3,965       35.4 %
Hardware     6,546       20.1 %     13,084       18.5 %     14,774       13.3 %
Total     16,315       29.7 %     20,505       24.0 %     18,739       15.3 %

 

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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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,  
    2015     2016     2017  
    $     As % of Revenue     $     As % of Revenue     $     As % of Revenue  
    ($ in thousands)  
Research and development expenses     (7,206 )     9.6 %     (5,742 )     4.8 %     (6,443 )     4.2 %
Sales and marketing expenses     (7,359 )     9.8 %     (5,874 )     4.9 %     (7,952 )     5.2 %
General and administrative expenses     (4,883 )     6.5 %     (10,042 )     8.3 %     (20,753 )     13.4 %
Changes in fair value of warrant     -       0.0 %     (12 )     0.0 %     (200 )     0.1 %
Total     (19,448 )     25.9 %     (21,670 )     18.0 %     (35,348 )     22.9 %

 

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.

 

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 decreased from 2015 to 2016 mainly because of the franchisees commission of the MVNO BU. In 2016 and 2017, selling and marketing expenses increased from 4.9% to 5.2% 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.

 

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 increased from 2015 to 2016 due to expenses to support the huge growth in MVNO BU. In 2016 and 2017, general and administrative expenses slightly decreased due to expenses associated with decreased headcount to support the MVNO BU, and professional fees. From 2016 to 2017, these expenses increased from 8.3% to 13.4% 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 $3.1 million, $1.8 million, and $0.3 million of other operating income in 2015, 2016 and 2017, 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 2018 due to its involvement in on-going government subsidized technology projects.

 

Income Tax Expense

 

Our effective tax rate was 52%, 51% and 32% for 2015, 2016 and 2017, respectively. The fluctuation from 2016 to 2017 was primarily due to the fact that the loss experienced by certain of our subsidiaries in 2015 and 2016 could not be used to offset gains in other subsidiaries within the same jurisdiction.

 

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Transaction-related Expenses

 

Advisory, financing, integration and other transaction costs directly related to our acquisition of Borqs International by way of merger totaled $15.3 million, including $8.8 million in share-based compensation expense related to ordinary shares issued to the financial advisors. Share-based compensation charges related to the Borqs International stock option plan were also reported in the three months ended September 30, 2017 because that plan did not allow for exercising of options until Borqs International became a public traded entity. When our acquisition of Borqs International by way of merger was completed, all vested options under the Borqs International stock option plan were valued and expensed at the closing price per share of our ordinary shares on The Nasdaq Stock Market on the day of the merger.

 

Liquidity and Capital Resources

 

Cash used in operating activities for the year ended December 31, 2017 was $15.0 million and primarily consisted of net loss of $12.4 million but adding back non-cash items including non-recurring share-based compensation due to historical option charges and merger related share-based expenses of $14.7 million and amortization of intangible assets of $3.9 million, together with depreciation of property and equipment of $0.7 million. Cash used in operating assets and liabilities included cash used by increase in restricted cash of $2.3 million, increase in accounts receivable of $37.5 million, increase in prepaid expenses of $12.1 million, decrease in deferred revenue of $5.1 million, and increase in inventory of $4.3 million. Cash was provided by the increase in accounts payable of $27.0 million, increase of $5.2 million in accrued expenses, increase in advance from customers of $3.6 million, and increase in deferred income tax benefit of $0.9 million.

 

Cash used in investing activities for the year ended December 31, 2017 was $8.1 million, which included $7.2 million used in software engineering costs that were capitalized.

 

Cash provided by financing activities for the year ended December 31, 2017 was $31.9 million, which included short-term borrowings of $10.5 million, less repayment of short-term borrowings of $4.8 million, increase in long-term borrowings of $2.0 million, less repayment of long-term borrowings of $2.6 million, plus the issuance of Series E convertible redeemable preferred shares and Series E-1 convertible preferred shares of $9.0 million and cash received from the merger with Pacific Special Acquisition Corp. of $18.0 million.

 

We believe that our current cash level and anticipated cash flows from operations may not be sufficient to meet anticipated cash needs for at least the next 12 months. We plan to raise funds in the coming months by way of a public offering of shares for which we have filed a registration statement on Form S-1 on February 14, 2018. In recent periods, our accounts receivable balances have generally fallen in the range of 60 to 90 days.

 

Cash transfers from our subsidiaries inside China to our subsidiaries outside of China are subject to PRC government control of foreign exchange. Restrictions on the availability of foreign currency may affect the ability of our subsidiaries inside China to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their obligations. See “Item 1A. 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 “Item 1A. Risk Factors — Risks Related to Doing Business in China —Restrictions on foreign currency may limit our ability to receive and use our revenue effectively.”

 

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.

 

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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 for revenue from project-based software 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 post-contract support where customers have the right to receive unspecified upgrades and enhancements on a when-and-if-available basis. Pursuant to ACS 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 Company accounts for the contracts in conformity with the relevant guidance in ASC 605-35, Revenue Recognition: Contract Accounting , applying the complete contract method.

 

The Company is unable to establish vendor specific objective evidence of the fair value of post-contract support, and support is the only undelivered element upon completion of software projects, so revenue is recognized ratably over the longest expected delivery period of undelivered elements of the arrangement, which is typically the support term, which ranges from six to 36 months but is generally 12 months, beginning at the completion of final acceptance test. Costs incurred to complete the software projects are deferred to match revenue recognition.

 

When the Company is entitled to receive on-going usage-based royalties determined based on sales of chips or mobile devices, the royalties are recognized according to the customers’ usage reports, generally on a quarterly basis.

 

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 as the services are delivered.

 

Connected Devices Sales Contracts

 

The Company accounts for revenue from sales of connected devices as “Hardware” revenue. Revenue is recognized when sale of each final hardware product to the customers are delivered.

 

Warranty is provided to all connected device customers as an integral part of the product sales. The Company has determined that the likelihood of claims arising from warranties is remote, based on historical experience. The basis for the warranty accrual is reviewed periodically based on actual experience.

 

MVNO Subscriber Usage Payment

 

The Company’s MVNO subscribers pay a fee based on the actual minutes of voice call made, megabytes of data consumed, number of SMS/MMS sent and supplementary services (e.g. caller-ID display) subscribed. These are considered as “MVNO” revenue. The Company is the principal in providing the bundled voice and data services to Chinese consumers, thus revenue is recognized on a gross basis. Revenue is recognized when the services are actually used.

 

Traditional Telecom Services

 

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

 

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.

 

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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 Annual 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.

 

Recent Accounting Pronouncements

 

Refer to Note 2, Summary of Significant Accounting Policies - Recent accounting pronouncements, of the notes to our consolidated financial statements included in this Annual Report for information regarding the effect of newly adopted accounting pronouncements on our financial statements.

 

Off-Balance Sheet Arrangements

 

With the exception of items discussed under “Contractual Obligations and Commitments” above we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources that are material to investors.

 

  48  

 

 

Related Party Transactions

 

(a) Related parties

 

Names of related parties   Relationship
Intel Capital Corporation (“Intel”) and its affiliates   Intel was a shareholder *
Qualcomm Global Trading PTE. Ltd (“Qualcomm”) and its affiliates   Qualcomm was a shareholder *

 

(b) Other than disclosed elsewhere, The Group had the following significant related party transactions for the years ended December 31, 2015, 2016 and 2017:

 

    For the years ended December 31,  
    2015     2016     2017  
    US$     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 Group had the following related party balances as of December 31, 2015, 2016 and 2017:

 

    As of December 31,  
    2016     2017  
    US$     US$  
Accounts receivable from related parties:                
Current:                
Intel Corporation     481       *
Intel (China) Co., Ltd.     -       *  
Intel Asia-Pacific Research and Development Ltd.     9       *  

 

All balances with the related parties as of December 31, 2016 and 2017 were unsecured, interest-free and have no fixed terms of repayment.

  

  Upon the consummation of the Merger, both entities ceased to be shareholders of the Group.

 

 

  49  

 

 

Item 7A.     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.

 

Our accounts receivable with the following customer accounted for greater than 20% of our total outstanding accounts receivable for the years indicated:

 

  2017 Reliance Retail Limited  47%

 

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 Renminbi, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China (“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 Renminbi is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the foreign exchange markets.

 

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

 

  50  

 

 

Item 8.     Consolidated Financial Statements and Supplementary Data

 

BORQS TECHNOLOGIES, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
   
Consolidated Financial Statements for the Years Ended December 31, 2016 and 2017  
   
Report of Independent Registered Public Accounting Firm 52
   
Consolidated Balance Sheets as of December 31, 2016 and 2017 53-54
   
Consolidated Statements of Operations for the Years Ended December 31, 2015, 2016 and 2017 57
   
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2015, 2016 and 2017 58
   
Consolidated Statements of Shareholders’ (Deficit) Equity for the Years Ended December 31, 2015, 2016 and 2017 5 9-61
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015,  2016 and 2017 62-63
   
Notes to the Consolidated Financial Statements 64-107

 

  51  

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and the Board of Directors of

Borqs Technologies, Inc. (Formerly known as Pacific Special Acquisition Corp.):

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Borqs Technologies, Inc. (Formerly known as Pacific Special Acquisition Corp.) (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income (loss), shareholders’ (deficit) equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

 

The Company’s Ability to Continue as a Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations, has a working capital deficiency, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Ernst & Young Hua Ming LLP

 

We have served as the Company’s auditor since 2016.

 

Shanghai, the People’s Republic of China

 

April 2, 2018

 

  52  

 

 

BORQS TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of US dollars (“US$”))

 

        As of December 31,  
    Note   2016     2017  
        US$     US$  
ASSETS                
Current assets:                    
Cash and cash equivalents         3,610       13,060  
Restricted cash         1,153       3,459  
Accounts receivable         28,257       65,720  
Accounts receivable from related parties   (17)     490       -  
Receivable from Mobile Virtual Network Operator (“MVNO”) franchisees         4,319       3,514  
Inventories   (5)     12,682       17,031  
Deferred cost of revenues         969       507  
Prepaid expenses and other current assets   (6)     6,599       16,240  
                     
Total current assets         58,079       119,531  
                     
Non-current assets:                    
Property and equipment, net   (7)     1,488       1,362  
Intangible assets, net   (8)     15,498       20,004  
Goodwill   (9)     693       736  
Deferred tax assets   (16)     1,054       1,463  
Deferred cost of revenues         689       2,642  
Other non-current assets         529       2,994  
                     
Total non-current assets         19,951       29,201  
                     
Total assets         78,030       148,732  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  53  

 

 

BORQS TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), except for number of shares and per share data)

 

        As of December 31,  
    Note   2016     2017  
        US$     US$  
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY                    
Current liabilities:                    
Accounts payable (including accounts payable of the Consolidated VIEs without recourse to the primary beneficiary of US$4,598 and US$4,143 as of December 31, 2016 and 2017, respectively)         22,691       49,690  
Accrued expenses and other payables (including accrued expenses and other payables of the Consolidated VIEs without recourse to the primary beneficiary of US$2,778 and US$4,038 as of December 31, 2016 and 2017, respectively)   (11)     7,634       12,163  
Advances from customers (including advances from customers of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2016 and 2017, respectively)         -       3,623  
Deferred revenue (including deferred revenue of the Consolidated VIEs without recourse to the primary beneficiary of US$9,134 and US$5,904 as of December 31, 2016 and 2017, respectively)         11,995       7,960  
Income tax payable (including income tax payable of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2016 and 2017, respectively)         216       1,232  
Short-term bank and other borrowings (including short-term bank   borrowings of the Consolidated VIEs without recourse to the primary beneficiary of US$721 and nil as of December 31, 2016 and 2017, respectively)   (10)     6,306       12,648  
Long-term bank borrowings - current portion (including long-term bank borrowings - current portion of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2016 and 2017, respectively)   (10)     1,381       5,432  
Deferred government grants (including deferred government grants of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2016 and 2017, respectively)   (12)     264       -  
                     
Total current liabilities         50,487       92,748  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  54  

 

 

BORQS TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), except for number of shares and per share data)

 

        As of December 31,  
    Note   2016     2017  
        US$     US$  
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY                    
Non-current liabilities:                    
Unrecognized tax benefits (including unrecognized tax benefits of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2016 and 2017, respectively)   (16)     1,755       2,121  
Warrant liabilities (including warrant liabilities grants of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2016 and 2017, respectively)   (10)     1,344       -  
Deferred tax liabilities (including deferred tax liabilities of the Consolidated VIEs without recourse to the primary beneficiary of US$1,539 and US$1,550 as of December 31, 2016 and 2017, respectively)   (16)     2,170       3,555  
Deferred revenue (including deferred revenue of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2016 and 2017, respectively)         2,428       1,346  
Long-term bank borrowings (including long-term bank borrowings of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2016 and 2017, respectively)   (10)     4,491       -  
Deferred government grants (including deferred government grants of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2016 and 2017, respectively)   (12)     1,844       1,957  
                     
Total non-current liabilities         14,032       8,979  
                     
Total liabilities         64,519       101,727  
                     
Commitments and contingencies   (22)                

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  55  

 

 

BORQS TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), except for number of shares and per share data)

 

        As of December 31,  
    Note   2016     2017  
        US$     US$  
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY                    
Mezzanine equity:                    
Series A convertible redeemable preferred shares (US$0.001 par value; 39,900,000 and nil shares authorized; 39,900,000 and nil issued and outstanding as of December 31, 2016 and 2017, respectively)   (19)     11,970       -  
Series B convertible redeemable preferred shares (US$0.001 par value; 82,857,143 and nil shares authorized; 82,857,143 and nil issued and outstanding as of December 31, 2016 and 2017, respectively)   (19)     26,126       -  
Series C convertible redeemable preferred shares (US$0.001 par value; 50,909,089 and nil shares authorized; 50,909,089 and nil issued and outstanding as of December 31, 2016 and 2017, respectively)   (19)     21,069       -  
Series D convertible redeemable preferred shares (US$0.001 par value; 23,721,443 and nil shares authorized; 23,721,443 and nil issued and outstanding as of December 31, 2016 and 2017, respectively)   (19)     9,697       -  
Series E convertible redeemable preferred shares (US$0.001 par value; nil and 13,275,162 shares authorized; nil and nil issued and outstanding as of December 31, 2016 and 2017, respectively)   (19)     -       -  
                     
Total mezzanine equity         68,862       -  
                     
Shareholders’ (deficit) equity :                    
Ordinary shares (no par value; unlimited shares authorized; 4,224,725 shares and 30,804,635 shares issued and outstanding as of December 31, 2016 and 2017, respectively)         -       -  
Additional paid-in capital         1,178       120,642  
Statutory reserve         1,898       1,898  
Accumulated deficit         (54,706 )     (74,231 )
Accumulated other comprehensive loss   (13)     (2,626 )     (507 )
                     
Total Borqs Technologies, Inc. shareholders’ (deficit) equity         (54,256 )     47,802  
                     
Noncontrolling interest         (1,095 )     (797 )
                     
Total shareholders’ (deficit) equity         (55,351 )     47,005  
                     
Total liabilities, mezzanine equity, noncontrolling interest and shareholders’ (deficit) equity         78,030       148,732  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  56  

 

 

BORQS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(Amounts in thousands of US dollars (“US$”), except for number of shares and per share data)

 

        For the years ended December 31,  
    Note   2015     2016     2017  
        US$     US$     US$  
Net Revenues:                            
Software         22,468       14,912       11,212  
Hardware         32,647       70,536       111,021  
MVNO         16,007       29,309       30,118  
Others         3,950       5,829       1,956  
                             
Total net revenues         75,072       120,586       154,307  
                             
Software         (12,699 )     (7,491 )     (7,247 )
Hardware         (26,101 )     (57,452 )     (96,247 )
MVNO         (16,225 )     (28,784 )     (22,836 )
Others         (2,980 )     (1,709 )     (811 )
                             
Total cost of revenues         (58,005 )     (95,436 )     (127,141 )
                             
Total gross profit         17,067       25,150       27,166  
                             
Operating expenses:                            
Sales and marketing expenses         (7,359 )     (5,874 )     (7,952 )
General and administrative expenses         (4,883 )     (10,042 )     (20,753 )
Research and development expenses         (7,206 )     (5,742 )     (6,443 )
Changes in the fair value of warrant liabilities         -       (12 )     (200 )
                             
Total operating expenses         (19,448 )     (21,670 )     (35,348 )
                             
Other operating income         3,094       1,760       272  
                             
Operating income (loss)         713       5,240       (7,910 )
                             
Interest income         61       65       14  
Interest expense         (156 )     (797 )     (1,877 )
Other income         208       114       633  
Other expense         (35 )     (59 )     (121 )
Foreign exchange gain (loss)         855       692       (779 )
                             
Profit (loss) before income taxes         1,646       5,255       (10,040 )
Income tax expense   (16)     (851 )     (2,659 )     (2,319 )
                             
Net income (loss)         795       2,596       (12,359 )
                             
Less: net (loss) income attributable to noncontrolling interests         (1,316 )     (632 )     210  
                             
Net income (loss) attributable to Borqs Technologies, Inc.         2,111       3,228       (12,569 )
Add:                            
Accretion to redemption value of Convertible Redeemable Preferred Shares         (2,417 )     (976 )     (6,956 )
Allocation to holders of Convertible Redeemable Preferred Shares         -       (2,252 )     -  
                             
Net loss attributable to ordinary shareholders         (306 )     -       (19,525 )
                             
Loss per share:                            
Basic         (0.07 )     0.00       (1.52 )
Diluted         (0.07 )     0.00       (1.52 )
Number of ordinary shares used in loss per share computation:                            
Basic         4,224,090       4,224,725       12,842,671  
Diluted         4,224,090       4,224,725       12,842,671  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  57  

 

 

BORQS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands of US dollars (“US$”))

  

        For the years ended December 31,  
    Note   2015     2016     2017  
        US$     US$     US$  
Net income (loss)         795       2,596       (12,359 )
Other comprehensive (loss) income, net of tax of nil:                            
Foreign currency translation adjustments, net of tax of nil         (1,491 )     (1,575 )     2,207  
Other comprehensive (loss) income, net of tax of nil   (13)     (1,491 )     (1,575 )     2,207  
Comprehensive (loss) income         (696 )     1,021       (10,152 )
Less: comprehensive (loss) income attributable to noncontrolling interest         (1,519 )     (730 )     298  
Comprehensive income (loss) attributable to Borqs Technologies, Inc.         823       1,751       (10,450 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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BORQS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY

(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 Technologies, Inc. shareholders’ deficit     Noncontrolling interest    

Total shareholders’

deficit

 
                                                           
Balance as of January 1, 2015       4,222,120       -       1,174       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         2,605       -       4       -       -       -       4       -       4  
                                                                             
Balance as of December 31, 2015         4,224,725       -       1,178       1,270       (1,149 )     (56,330 )     (55,031 )     (365 )     (55,396 )

  

The accompanying notes are an integral part of these consolidated financial statements.

 

  59  

 

 

BORQS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY

(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 Technologies, Inc. shareholders’ deficit     Noncontrolling interest    

Total shareholders’

deficit

 
                                                           
Balance as of January 1, 2016       4,224,725       -       1,178       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         4,224,725       -       1,178       1,898       (2,626 )     (54,706 )     (54,256 )     (1,095 )     (55,351 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  60  

 

 

BORQS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY (CONTINUED)

(Amounts in thousands of US dollars (“US$”), except for number of shares and per share data)

 

    Number of ordinary shares     Ordinary shares     Series E-1 Preferred Shares     Additional paid-in capital     Accumulated statutory reserves    

Accumulated

other comprehensive loss

    Accumulated deficit    

Total Borqs Technologies Inc. shareholders’
(deficit)

equity

    Noncontrolling interest    

Total

(deficit)

equity

 
                                                             
Balance as of January 1, 2017     4,224,725       -       -       1,178       1,898       (2,626 )     (54,706 )     (54,256 )     (1,095 )     (55,351 )
Consolidated net loss     -       -       -       -       -       -       (12,569 )     (12,569 )     210       (12,359 )
Foreign exchange difference     -       -       -       -       -       2,119       -       2,119       88       2,207  
Issuance of ordinary shares     35,173       -       -       386       -       -       -       386       -       386  
Issuance of Series E-1 Preferred Shares     -       -       2,708       -       -       -       -       2,708       -       2,708  
Beneficiary conversion feature of Series E Preferred Shares     -       -       -       3,258       -       -       -       3,258       -       3,258  
Reclassification of warrants upon the consummation of the Merger     -       -       -       1,544       -       -       -       1,544       -       1,544  
Conversion of Convertible Redeemable Preferred Shares into ordinary shares upon the consummation of the Merger     16,622,491       -       -       78,860       -       -       (6,956 )     71,904       -       71,904  
Conversion of Series E-1 Preferred Shares into ordinary shares upon the consummation of the Merger     558,725       -       (2,708 )     2,708       -       -       -       -       -       -  
Change in equity due to the Merger     9,363,521       -       -       26,818       -       -       -       26,818       -       26,818  
Share-based compensation     -       -       -       5,890       -       -       -       5,890       -       5,890  
                                                                                 
Balance as of December 31, 2017     30,804,635       -       -       120,642       1,898       (507 )     (74,231 )     47,802       (797 )     47,005  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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BORQS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands of US dollars (“US$”))

 

      For the years ended December 31,  
  Note   2015     2016     2017  
      US$     US$     US$  
                     
CASH FLOWS FROM OPERATING ACTIVITIES                          
Net income (loss)       795       2,596       (12,359 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:                        
Foreign exchange (gain) loss       (855 )     (692 )     779  
(Loss) gain on disposal of property and equipment       (350 )     1       -  
Depreciation of property and equipment       1,371       1,011       744  
Amortization of intangible assets       1,109       2,146       3,935  
Deferred income tax (benefits)       (1,044 )     402       937  
Interest expense       -       352       661  
Share-based compensation expenses       -       -       14,667  
Changes in the fair value of warrant liabilities       -       12       200  
                           
Changes in operating assets and liabilities, net of the effects of an acquisition:                          
Restricted cash       211       (383 )     (2,306 )
Accounts receivable       6,830       (22,189 )     (37,463 )
Accounts receivable from related parties       (5,866 )     5,508       490  
Receivable from MVNO franchisees       (3,295 )     (1,024 )     805  
Inventories       (4,074 )     (6,418 )     (4,349 )
Deferred cost of revenues       2,469       (497 )     (1,491 )
Prepaid expenses and other current assets       579       (3,175 )     (12,140 )
Accounts payable       (742 )     15,740       26,999  
Accrued expenses and other payables       2,100       1,371       5,215  
Unrecognized tax benefits       645       1,064       366
Advances from customers       -       -       3,623  
Deferred revenue       4,888       (3,351 )     (5,117 )
Income tax payable       165       51       1,016  
Deferred government grants       (3,302 )     (1,906 )     (151 )
                           
Net cash generated from (used in) operating activities       1,634       (9,381 )     (14,939 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  62  

 

 

BORQS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Amounts in thousands of US dollars (“US$”))

 

    For the years ended December 31,  
    2015     2016     2017  
    US$     US$     US$  
CASH FLOWS FROM INVESTING ACTIVITIES                        
Purchases of property and equipment     (798 )     (494 )     (842 )
Purchases of intangible assets     (5,175 )     (5,230 )     (7,650 )
Proceeds from disposal of property and equipment     14       1       1  
Loan to a third party     (1,482 )     -       -  
Repayments of a loan to a third party     75       457       371  
                         
Net cash used in investing activities     (7,366 )     (5,266 )     (8,120 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES                        
Proceeds from issuance of ordinary shares     -       -       62  
Cash received from the Merger     -       -       18,034  
Proceeds from issuance of Series E Preferred Shares     -       -       9,000  
Proceeds from exercise of warrants for Series E-1 Preferred Shares (“Series E-1 Warrants”)     -       -       8  
Payment of issuance costs for Series E Preferred Shares     -       -       (312 )
Proceeds from short-term bank and other borrowings     -       6,776       10,456  
Repayments of short-term bank and other borrowings     (817 )     (2,000 )     (4,756 )
Proceeds from long-term bank borrowings     999       6,000       2,000  
Repayments of long-term bank borrowings     (47 )     (571 )     (2,631 )
Net cash generated from financing activities     135       10,205       31,861  
                         
Effect of foreign exchange rate changes on cash and cash equivalents     (34 )     265       648  
                         
Net (decrease) increase in cash and cash equivalents     (5,631 )     (4,177 )     9,450  
Cash and cash equivalents at beginning of year     13,418       7,787       3,610  
                         
Cash and cash equivalents at end of year     7,787       3,610       13,060  

 

    For the years ended December 31,  
    2015     2016     2017  
    US$     US$     US$  
Supplemental disclosures of cash flow information:      
Income taxes paid     (620 )     (554 )     -  
Interest paid     (156 )     (797 )     (1,877 )
Interest received     61       65       14  
                         
Supplemental schedule of non-cash activities:                        
Acquisition of fixed assets included in account payable, accrued expenses and other liabilities     462       432       52  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  63  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION

 

Borqs Technologies, Inc. (formerly known as “Pacific Special Acquisition Corp.”, the “Company” or “Borqs Technologies”) was incorporated in the British Virgin Islands on July 1, 2015. The Company was 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.

 

On August 18, 2017, the Company acquired 100% equity interest of BORQS International Holding Corp. (“Borqs International”) and its subsidiaries, variable interest entities (the “VIE”) and the VIE’s subsidiaries (collectively referred to as “Borqs Group” hereinafter) (the Company and Borqs Group collectively referred to as the “Group”) in an all-stock transaction (the “Merger”) as described in Note 4. Concurrent with the completion of the acquisition of Borqs International, the Company changed its name from Pacific Special Acquisition Corp.”, to Borqs Technologies, Inc.      

 

Borqs 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 the date of report, 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 International   July 27, 2007   Cayman   100%   Holding company
  BORQS Hong Kong Limited
(“Borqs HK”)
  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”)   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, Borqs International through Big Cloud Network acquired controlling interest in Yuantel Investment and its subsidiary.

 

  64  

 

 

BORQS TECHNOLOGIES, INC.

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 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.

 

The following is a summary of the key terms of the latest VIE Agreements:

 

Loan agreements

 

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 Borqs International.

 

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.

 

  65  

 

 

BORQS TECHNOLOGIES, INC.

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, Borqs International, 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 Borqs   International. Furthermore, pursuant to the exclusive option agreement and share pledge agreement, Borqs International, 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, Borqs International 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, Borqs International consolidates Big Cloud Network and its subsidiaries under ASC 810-10 Consolidation Overall.

 

In the opinion of the Group’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 Borqs International, 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, Borqs International 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.

 

  66  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

1. ORGANIZATION (CONTINUED)

 

(c) VIE disclosures

 

The consolidated VIEs contributed 27%, 29% and 21% of the Group’s consolidated revenues for the years ended December 31, 2015, 2016 and 2017. As of December 31, 2016 and 2017, the Consolidated VIEs accounted for an aggregate of 23% and 17%, respectively, of the consolidated total assets, and 41% and 37%, 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 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 Group 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 Group 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, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017 before eliminating the intercompany balances and transactions between the Consolidated VIEs and other entities within the Group:

 

  67  

 

  

BORQS TECHNOLOGIES, INC.

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,  
      2016     2017  
      US$     US$  
               
  ASSETS            
  Current assets:            
 

Cash and cash equivalents

    414       51  
  Restricted cash     1,153       3,459  
  Accounts receivable     129       2,565  
  Receivable from MVNO franchisees     4,319       3,514  
  Inventories     67       221  
  Prepaid expenses and other current assets     926       423  
                   
  Total current assets     7,008       10,233  
                   
  Non-current assets:                
  Property and equipment, net     987       897  
  Intangible assets, net     8,609       8,393  
  Goodwill     693       736  
  Deferred tax assets     1,054       940  
  Other non-current assets     58       81  
                   
  Total non-current assets     11,401       11,047  
                   
  Total assets     18,409       21,280  

 

  68  

 

 

BORQS TECHNOLOGIES, INC.

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,  
      2016     2017  
      US$     US$  
  Current liabilities:            
  Accounts payable     4,598       4,143  
  Accrued expenses and other payables     2,778       4,038  
  Deferred revenue     9,134       5,904  
  Short-term bank borrowings     721       -  
  Intercompany payables     7,923       14,279  
  Total current liabilities     25,154       28,364  
                   
  Non-current liabilities                
  Deferred tax liabilities     1,539       1,500  
                   
  Total non-current liabilities     1,539       1,500  
                   
  Total liabilities     26,693       29,864  

 

      For the Years Ended December 31,  
      2015     2016     2017  
      US$     US$     US$  
  Net revenues     19,957       35,138       32,074  
  Net (loss) income     (5,029 )     (3,381 )     347  

 

      For the Years Ended December 31,  
      2015     2016     2017  
      US$     US$     US$  
  Net cash provided by (used in) operating activities     2,413       (2,128 )     683  
  Net cash used in investing activities     (1,622 )     (634 )     (281 )
  Net cash (used in) provided by financing activities     (770 )     721       (765 )
  Net increase (decrease) in cash and cash equivalents     21       (2,041 )     (363 )

  

  69  

 

 

BORQS TECHNOLOGIES, INC.

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) Liquidity

 

As of December 31, 2017, the company has accumulated deficit of US$74,231 and has suffered net loss of US$12,359 and negative cash flow from operating of US$14,939 for the year then ended. These condition raises substantial doubt about the Group’s ability to continue as a going concern.

 

When preparing the consolidated financial statements as of December 31, 2017 and for the year then ended, the Group’s management concluded that a going concern basis of preparation was appropriate after analyzing the forecasted cash flows for the next twelve months, which indicates that the Group will have sufficient liquidity through March 2019. In preparing the forecasted cash flow analysis, management took into account of the expected net cash inflows to be funded by the public offering and short term debt of approximately US$32,000. As a result, management prepared the consolidated financial statements assuming the Group will continue as a going concern. However, there is no assurance that the public offering can be completed in a timely manner or at all, and there is no assurance that any short term debt is available at acceptable terms. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

(c) Principles of consolidation

 

The consolidated financial statements include the financial statements of the Group, its subsidiaries and Consolidated VIEs, for which, the Group is the primary beneficiary. All significant inter-company transactions and balances between the Group, 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 Group.

 

(d) 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 year. 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, beneficiary conversion feature for Series E 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.

 

(e) Foreign currency

 

The functional currency of the Group 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 Group’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 Group 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 Group’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) income in the consolidated statements of comprehensive income (loss).

 

(f) 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.

 

  70  

 

 

BORQS TECHNOLOGIES, INC.

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) 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.

 

(h) 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, 2016 and 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.

 

(i) 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$1,038 and US$918 was recorded as of December 31, 2016 and 2017, respectively.   

 

(j) 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.

 

(k) 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 the 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 follows:

 

  Purchased software   5.8 years
  MVNO license   10 years
  Capitalized software development costs   3 years
  Internal-use software   5 years

 

  71  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(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, 2016 and 2017 was related to its acquisition of Yuantel Investment. 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 Group 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.   

 

(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, 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.

 

  72  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

  (n) Fair value of financial instruments (continued)

 

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, 2016 and 2017, there was no financial instrument measured at fair value. The warrants for Series D convertible redeemable preferred shares were classified as level 3 and fair valued using the binomial option pricing model as of December 31, 2016. The carrying amounts of long-term bank borrowings approximated 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 on the closing date, at the issuance price, net of issuance cost.

 

(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.

 

  73  

 

 

BORQS TECHNOLOGIES, INC.

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)

 

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.

 

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 Group’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.

 

  74  

 

 

BORQS TECHNOLOGIES, INC.

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$1,658 and US$3,149 for the years ended December 31, 2016 and 2017.

 

(q) Advertising expenditures

 

Advertising expenditures are expensed as incurred and are included in sales and marketing expenses, which amounted to US$46, US$78 and US$45 for the years ended December 31, 2015, 2016 and 2017, 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, 2016 and 2017.

 

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.

 

  75  

 

 

BORQS TECHNOLOGIES, INC.

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. 2016-16, 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 account for forfeitures as they occur.

 

  76  

 

 

BORQS TECHNOLOGIES, INC.

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 (decrease) increase 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 Group 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) (Loss) earnings per share

 

(Loss) earnings per share is computed by dividing net (loss)/income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period using the two-class method. Under the two-class method, net income (loss) is allocated between ordinary shares and other participating securities based on their participating rights. The Group’s Convertible Redeemable Preferred Shares (Note 19) were participating securities. As the participating securities do not share the losses of the Group, the computation of basic earnings per share using two-class method is not applicable when the Group is at a net loss position. Diluted (loss) earnings per share is calculated by dividing net (loss) income attributable to ordinary shareholders by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of shares issuable upon the exercise of share options using the treasury stock method and shares issuable upon the conversion of the Group’s Convertible Redeemable Preferred Shares using the if-converted method. Ordinary equivalent shares are not included in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti-dilutive.

 

  77  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(bb) Recent accounting pronouncements

 

In August 2015, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-14 (“ASU 2015-14”), Revenue from Contracts with Customers-Deferral of the effective date . The amendments in ASU 2015-14 defer the effective date of ASU No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers , issued in May 2014. As a result, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period for public entities; and, annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019 for all other entities. Early adoption is permitted to the original effective date. In March 2016, the FASB issued ASU No. 2016-08 (“ASU 2016-08”), Revenue from Contracts with Customers—Principal versus Agent Considerations , which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10 (“ASU 2016-10”), Revenue from Contracts with Customers—Identifying Performance Obligations and Licensing , which clarify guidance related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016, the FASB issued ASU No. 2016-12 (“ASU 2016-12”), Revenue from Contracts with Customers— Narrow-Scope Improvements and Practical Expedients , which addresses narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition and provides practical expedients for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The effective date for the amendment in ASU 2016-08, ASU 2016-10 and ASU 2016-12 are the same as the effective date of ASU No 2014-09. The Group is in the process of developing a plan for evaluating the impact of adoption of this guidance on its consolidated financial statement including the selection of the adoption method, the identification of differences, if any, from the application of the standard and the impact of such differences, if any, on its consolidated financial statements.

 

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, and, annual reporting periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020 for all other entities. Early adoption is permitted. The Group is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.

 

  78  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(cc) Recent accounting pronouncements(Continued)

 

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, and annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021 for all other entities. Early adoption is permitted. The Group is evaluating the effect that this guidance will have on its consolidated financial statements.

 

In August 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. The standard is effective for public business entities for annual periods beginning after December 15, 2017, and interim periods therein, and annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019 for all other entities, 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. The standard is effective for public business entities for annual periods beginning after December 15, 2017, and interim periods therein, and annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019 for all other entities, 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 . 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 for public entities; and, annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019 for all other entities. The Group is evaluating the effect that this guidance will have on its consolidated financial statements.

 

  79  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(cc) Recent accounting pronouncements(Continued)

 

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 for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020 and for all other entities for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. Early adoption is permitted. The Group is currently evaluating the impact of adopting this standard on its consolidated financial statements.

 

In February 2017, the FASB issued ASU 2017-05 (“ASU 2017-05”), Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets . ASU 2017-05 defines an in-substance nonfinancial asset and clarifies guidance related to partial sales of nonfinancial assets. The update is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period; and, annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019 for all other entities with early adoption permitted. The Group is evaluating the effect that this guidance will have on its consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-09 (“ASU 2017-09”), Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. This standard provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The updated guidance is effective for interim and annual periods beginning after December 15, 2017 for all entities, and early adoption is permitted. The Group is evaluating the effect that this guidance will have on its consolidated financial statements.

 

3. CONCENTRATION OF RISKS

 

(a) Credit risk

 

Financial instruments that potentially subject the Group to significant concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, accounts receivable, accounts receivable from related parties and receivable from MVNO franchisees. As of December 31, 2016 and 2017, the aggregate amount of cash and cash equivalents and restricted cash of US$2,563 and US$4,545, respectively, were held at major financial institutions located in the PRC, and US$2,200 and US$11,974, 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 Group has deposits has increased. In the event of bankruptcy of one of the banks which holds the Group’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.

 

  80  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

3. CONCENTRATION OF RISKS (CONTINUED)

 

(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%, customer B accounted for 23% and customer C accounted for 41% of the Group’s total net revenues for the three years ended December 31, 2015, 2016 and 2017, respectively, and the accounts receivable from the largest single customer B accounted for 25% and customer C accounted for 47% of the Group’s total accounts receivable and accounts receivable from related parties for the years ended December 31, 2016 and 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 appreciation / (depreciation) of the US$ against RMB was approximately 6.1%, 6.8% and (5.8%) in the years ended December 31, 2015, 2016 and 2017, respectively. The appreciation / (depreciation) of the US$ against Rupee was approximately 4.7%, 3.3% and (5.9%) in the years ended December 31, 2015, 2016 and 2017, respectively.

 

  81  

 

  

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

4. ACQUISITIONS

 

Reverse Acquisition

 

The Company was a NASDAQ listed special purpose acquisition company formed for the purpose of effecting a merger, acquisition, or similar business combination. On August 18, 2017, the Company completed the acquisition of Borqs International in an all-stock transaction (the “Merger”). The Company issued 25,913,950 of its ordinary shares (“Merger Consideration Shares”) to Borqs International’s shareholders in exchange for the transfer of 100% equity interest in Borqs International to the Company and Borqs International became the Company’s wholly own subsidiary.

 

Of the Merger Consideration Shares, a total of 25,913,950 ordinary shares were issued to Borqs International’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 from July 1, 2017 to June 30, 2018 (“Earnout Period”) and 1,178,084 ordinary shares were issued to a financial advisor engaged by Borqs International in connection with the Merger. As transfers between the shareholders of the Company, the Escrow Shares did not have any impact on the Company’s financial statements.

 

Additionally at the effective time of the Merger, the holders of Borqs International issued and outstanding warrants (Note 10) received replacement warrants to acquire an aggregate of 417,166 Borqs Technologies’ ordinary shares (“Replacement Warrants”), and the holders of Borqs International issued and outstanding options (Note 15) had their options assumed by Borqs Technologies to hold options to acquire Borqs Technologies’ ordinary shares upon the exercise of those options (“Assumed Options”).

 

Equity classified instruments including (i) an option to purchase up to 400,000 units at $10.00 per unit (“Unit Purchase Option”), (ii) 5,750,000 public warrants and (iii) 531,875 private warrants issued by the Company prior to the Merger remain outstanding. Each unit consists of one ordinary share of the Company, one right (convertible into one tenth of an ordinary share) and one warrant to purchase one half of one ordinary share at $12. Each public and private warrant also entitles the holder to purchase one half of one ordinary share at $12.00 per whole share.

 

Borqs International was determined as the accounting acquirer in the Merger in accordance with ASC 805, Business Combinations . This determination was primarily based on the Group comprising the ongoing operations, with its senior management operating the business going forward, and Borqs International’s shareholders having the majority voting power of the combined entity. Consequently, in the transaction with a special purpose acquisition company whereby the operating company, Borqs International was identified as the accounting acquirer, the Merger was treated as a capital transaction involving the issuance of the Company’s ordinary shares. The historical consolidated financial statements for all periods prior to the consummation of the Merger only reflect the historical consolidated financial statements of Borqs International. Subsequent to the Merger, the consolidated financial statements reflect the results of the combined entity. The historically issued and outstanding Borqs International’s ordinary shares have been recasted to retrospectively reflect the number of ordinary shares issued in the Merger in all periods presented.

 

As the Merger occurred between public accounting acquiree and a private accounting acquirer, the determination of consideration is based on the fair value of the legal acquirer’s stock. Difference between purchase consideration of US$45,734 transferred and net assets of US$18,059 acquired, which was predominately cash, was recorded in additional paid-in capital.

 

Transaction Expenses

 

Advisory, financing, integration and other transaction costs directly related to the Merger totaled US$15.3 million for the year ended December 31, 2017, including US$8.8 million in share-based compensation expense recorded for the ordinary shares issued to the financial advisors.

 

  82  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

5. INVENTORIES

 

Inventories consisted of the following as of December 31, 2016 and 2017:

 

      As of December 31,  
      2016     2017  
      US$     US$  
               
  Raw materials     5,406       11,588  
  Goods in transit     7,164       4,643  
  Work in process     1,023       977  
  Finished goods     127       741  
                   
  Less: Provision     (1,038 )     (918 )
                   
  Inventories, net     12,682       17,031  

 

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

      As of December 31,  
      2016     2017  
      US$     US$  
               
  Staff advances     293       312  
  Prepayment for products     -       1,008  
  Advance to OEM     3,739       3,662  
  Rental and other deposits     1,048       1,203  
  VAT recoverable     963       2,189  
  Loan to third parties     519       1,469  
  Receivable from an agent     -       6,318  
  Others     37       79  
                   
        6,599       16,240  

 

  83  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

7. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

      As of December 31,  
      2016     2017  
      US$     US$  
  At cost:            
  Leasehold improvements     837       933  
  Computer and network equipment     5,801       6,458  
  Office equipment     763       918  
  Motor vehicles     220       233  
        7,621       8,542  
  Less: accumulated depreciation     (6,133 )     (7,180 )
                   
        1,488       1,362  

 

Depreciation expense was US$1,371, US$1,011 and US$501 for the years ended December 31, 2015, 2016 and 2017, respectively, and were included in the following captions:

 

      For the years ended December 31,  
      2015     2016     2017  
      US$     US$     US$  
                     
  Cost of revenues     472       347       140  
  Sales and marketing expenses     54       15       13  
  General and administrative expenses     144       277       190  
  Research and development expenses     701       372       158  
                           
        1,371       1,011       501  


  84  

 

 

BORQS TECHNOLOGIES, INC.

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     License     Total  
      US$     US$     US$     US$  
                           
  Balance as of January 1, 2016     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  
  Additions     348       7,248       54       7,650  
  Amortization expense     (253 )     (2,784 )     (898 )     (3,935 )
  Foreign currency translation difference     140       262       389       791  
                                   
  Balance as of December 31, 2017     2,529       11,600       5,875       20,004  

 

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 US$1,109, US$2,146 and US$3,935 for the years ended December 31, 2015, 2016 and 2017, respectively.

 

The annual estimated amortization expenses for the intangible assets for each of the next five years are as follows:

 

      US$  
         
  2018     6,407  
  2019     5,272  
  2020     3,322  
  2021     1,114  
  2022     1,090  
           
        17,205  

 

9. GOODWILL

 

The changes in the carrying amount of goodwill were as follows:

 

      As of December 31,  
      2016     2017  
      US$     US$  
               
  Balance as of January 1     741       693  
  Foreign currency translation difference     (48 )     43  
                   
  Balance as of December 31     693       736  

 

No impairment charge was recorded in any of the three years ended December 31, 2016 and 2017.

 

  85  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

10. BANK AND OTHER BORROWINGS

 

Bank and other borrowings are as follows as of the respective balance sheet dates:

 

      As of December 31,  
      2016     2017  
      US$     US$  
               
  Short-term bank and other borrowings     6,306       12,648  
  Long-term bank borrowings, current portion     1,381       5,432  
        7,687       18,080  
                   
  Long-term bank borrowings, non-current portion     4,491       -  
                   
  Total borrowings     12,178       18,080  

 

The short-term bank borrowings outstanding as of December 31, 2016 and 2017 bore a weighted average interest rate of 6.89% and 6.73% per annum, respectively, and were denominated in RMB and US$. These borrowings were obtained from financial institutions and have term of one year.

 

The long-term bank borrowings, current portion outstanding as of December 31, 2017 bore a weighted average interest rate of 7.97%, and were denominated in US$. These borrowings were obtained from financial institutions located in USA, and have terms of three years.

 

On November 28, 2017, the Company entered into short-term loan agreements with HHMC Microelectronic Co., Limited of US$5,000,000 with an interest rate of 14.6% per annum and a maturity term of three months, for working capital.

 

Bank borrowings as of December 31, 2017 were pledged by the account receivable amounted to US$43,135.

 

As of December 31, 2017, the Company was in breach of two of the financial covenants under a long-term bank borrowing with an outstanding balance of US$1,515. The breach would result in acceleration of the repayment according to the contract term. Therefore, the outstanding balance was reclassified as current liability as of December 31, 2017.

 

In August 2016, the Group 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 entitled 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. The 2016 Warrants were replaced by Replacement Warrants to acquire an aggregate of 417,166 the Group’s ordinary shares at the consummation date of the Merger.

 

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 were recognized over the lives of the term loans as financing cost, using the effective interest rate method. Given the 2016 Warrants were convertible into Series D convertible redeemable preferred shares classified as mezzanine equity, the 2016 Warrants were 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.

 

As part of the Merger, the 2016 Warrants were replaced by Replacement Warrants to acquire an aggregate of 417,166 the Group’s ordinary shares classified as permanent equity. As the modification of the 2016 Warrants term resulted in the reclassification of the 2016 Warrants from liability to equity, the 2016 Warrants amounted to US$1,544 were re-measured at fair value upon Merger and reclassified to additional paid in capital as of December 31, 2017.

 

  86  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

11. ACCRUED EXPENSES AND OTHER PAYABLES

 

The components of accrued expenses and other payables are as follows:

 

      As of December 31,  
      2016     2017  
      US$     US$  
               
  Payroll and welfare payable     3,235       2,030  
  Accrued liability     50       -  
  VAT, and other taxes payable     831       2,473  
  Payables for office supply and utilities     743       711  
  Payables for purchase of property and equipment     432       52  
  Professional service fees     -       3,161  
  Deposits from agents     2,315       3,509  
  Others     28       227  
        7,634       12,163  

 

12. 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 over the life of the related assets as other operating income.

 

      For the years ended December 31,  
      2015     2016     2017  
      US$     US$     US$  
                     
  Balance at beginning of the year     7,316       4,014       2,108  
  Recognized as other operating income     (2,880 )     (1,650 )     (281 )
  Foreign currency translation difference     (422 )     (256 )     130  
  Balance at ending of the year     4,014       2,108       1,957  

 

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 )
  Current year other comprehensive income     2,119       2,119  
  Balance as of December 31, 2017     (507 )     (507 )

 

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, US$2,362 and US$2,527, respectively, for the years ended December 31, 2015, 2016 and 2017.

 

  87  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

15. SHARE BASED COMPENSATION

 

Share-based awards under the 2007 Plan

 

In order to provide additional incentives to employees and to promote the success of the Group’s business, the Group adopted a share incentive plan in (the “2007 Plan”) December 2007, which was last amended in February 2011. The 2007 Plan allows the Group 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 Group. 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.

 

During the years ended December 31, 2015, December 31, 2016 and the period ended August 18, 2017, the Group granted 6,525,190, 610,000 and 9,085,000 shares of options, respectively, to purchase ordinary shares to employees, officers, and directors with the exercise price of $0.459, $0.56 and $0.678 ~ $0.859 per share, respectively.

 

The following table summarizes the Group’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 expected to vest at December 31, 2016     27,456,943     0.30   5.26   308
                       
  Outstanding, January 1, 2017     27,456,943     0.30   5.26   308
  Granted     9,085,000     0.70        
  Forfeited     (8,007,606 )   0.04        
                       
  Outstanding, August 18, 2017     28,534,337     0.48   6.99   -
                       
  Vested and expected to vest at August 18, 2017     28,534,337     0.48   6.99   -

 

As of August 18, 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 did not recognized any compensation cost under the 2007 Plan.

 

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 Group’s shares.

 

  88  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

15. SHARE BASED COMPENSATION (CONTINUED)

 

As of December 31, 2015, 2016 and August 18, 2017, the Group had options outstanding to purchase an aggregate of 5,500,000 shares, 5,500,000 shares and nil with an exercise price below the fair value of the Group’s shares, resulting in an aggregate intrinsic value of US$308, US$308 and nil, respectively.

 

Consummation of reverse acquisition in 2017

 

Upon the consummation of the Merger, 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 2,695,194 of the Company’s ordinary shares upon exercise of those options. In addition, the performance condition whereby vesting will commence upon the earlier to occur of an initial public offering or a change in control (collectively, “IPO condition”) as defined in the 2007 Plan was removed.

 

Pursuant to ASC 718, the cancellation of the terms or conditions of an equity award under original award in exchange for a new award should be treated as modification. As the IPO condition was not expected to be satisfied as of the modification date, the original grant-date fair value is no longer used to measure compensation cost for the awards. As a result, the compensation cost recognized for the replacement awards would be based on the modification date fair value of the awards. For those awards that were fully vested at the time of the modification, the Group recognized a one-time catch up of US$5,658 in share-based compensation expense upon the Merger.

 

On November 18, 2017, the Group granted 180,000 share of options to purchase ordinary shares to directors with the exercise price of $5.30 share.

 

      Number of options    

Weighted average

exercise

price

    Weighted average remaining contractual term     Aggregate intrinsic value  
            (US$)     (Years)     (US$)  
                           
  Converted under Assumed Options:                        
  Outstanding, August 18, 2017     2,695,194       5.08       6.99       6,561  
  Granted     180,000       5.30                  
  Forfeited     (49,804 )     6.58                  
                                   
  Outstanding, December 31, 2017     2,825,390       5.38       6.43       6,860  
                                   
  Vested and expected to vest at December 31, 2017     2,825,390       5.38       6.43       6,860  

 

As of August 18, 2017 and December 31, 2017, the Group had options outstanding to purchase an aggregate of 2,583,250 and 2,735,174 shares with an exercise price below the fair value of the Group’s shares, resulting in an aggregate intrinsic value of US$6,561 and US$6,860, respectively.

 

The Group 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     Year 2017  
                     
  Risk-free interest rates     1.95%-2.28 %     1.58%-2.60 %     1.06%-2.32 %
  Expected life (years)     10 years       10 years       10 years  
  Expected volatility     40%-45 %     45%-46 %     31.9%-43.9 %
  Expected dividend yield     0 %     0 %     0 %
  Exercise multiple     2.20       2.20       2.20  
  Post-vesting forfeit rate     10 %     10 %     10 %
  Fair value of underlying ordinary shares     US$0.158-US$0.231       US$0.615-US$0.697       US$7.45  
  Fair value of share option     US$0.026-US$0.096       US$0.309-US$0.315       US$2.34-US$7.45  

 

  89  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

15. SHARE BASED COMPENSATION (CONTINUED)

 

Total compensation expense relating to share options granted to employees recognized for the year ended December 31, 2017 is as follows:

 

     

For the year ended December 31, 2017

 
         
  Cost of revenues     -  
  Sales and marketing expenses     1,470  
  General and administrative expenses     1,277  
  Research and development expenses     3,143  
           
        5,890  

 

Ordinary shares issued in 2017

 

On March 17, 2017, the Group 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 Group was immediately recognized as compensation expense which amounted to US$324. The 450,000 ordinary shares were fully vested as of December 31, 2017.

 

  90  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

16. TAXATION

 

Enterprise income tax (“EIT”)

 

British Virgin Islands

 

The Company is incorporated in the British Virgin 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 British Virgin Islands, the Company is not subject to tax on income or capital gains.

 

Cayman Islands

 

Borqs International 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, Borqs International 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, 2016 and 2017. No provision for Borqs HK profits tax has been made in the consolidated financial statements as the entity had losses in the years ended December 31, 2015, 2016 and 2017.

 

India

 

Borqs India is subject to income tax rate of 32.45% for the years ended December 31, 2015, 2016 and 2017. Amounts of US$1,158, US$1,684 and US$2,024 are included as income tax expense for the years ended December 31, 2015, 2016 and 2017, respectively.

 

The PRC

 

The Group’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. For the years ended December 31, 2015, 2016 and 2017, 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 expired in October 2017. Yuantel Telecom has successfully renewed the HNTE certificate in December 2017 with effective term of three years. 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, 2016 and 2017, Yuantel Telecom enjoyed a preferential tax rate of 15%.

 

The Group’s other PRC subsidiaries were subject to EIT at a rate of 25% for the years ended December 31, 2015, 2016 and 2017.

 

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, 2017, no detailed interpretation or guidance has been issued to define “place of effective management”. Furthermore, as of December 31, 2017, the administrative practice associated with interpreting and applying the concept of “place of effective management” is unclear. If the Group is deemed as a PRC tax resident, it would be subject to PRC tax under the New CIT Law. The Group will continue to monitor changes in the interpretation or guidance of this law.

 

  91  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

16. TAXATION (CONTINUED)

 

Profit (loss) before income taxes consists of:

 

      For the years ended December 31,  
      2015     2016     2017  
      US$     US$     US$  
                     
  Non-PRC     3,241       2,777       (7,138 )
  PRC     (1,595 )     2,478       (2,902 )
                           
        1,646       5,255       (10,040 )

 

Income tax expense comprises of:

 

      For the years ended December 31,  
      2015     2016     2017  
      US$     US$     US$  
                     
  Current     (1,895 )     (2,257 )     (1,382 )
  Deferred     1,044       (402 )     (937 )
                           
        (851 )     (2,659 )     (2,319 )

 

The reconciliation of tax computed by applying the statutory income tax rate of 25% for the years ended December 31, 2015, 2016 and 2017 applicable to the PRC operations to income tax expense is as follows:

 

      For the years ended December 31,  
      2015     2016     2017  
      US$     US$     US$  
                     
  Profit (loss) before income taxes     1,646       5,255       (10,040 )
                           
  Income tax (expense) income computed at the statutory income tax rate at 25%     (412 )     (1,314 )     2,510  
  Non-deductible expenses     (166 )     (491 )     (2,698 )
  Non-taxation income     1,300       414       68  
  Preferential rate     (423 )     400       (324 )
  Current and deferred tax rate differences     790       310       55  
  Foreign rate differences     (292 )     560       (426 )
  Change of valuation allowance     (1,643 )     (2,529 )     (1,039 )
  Taxable income     -       -       (215 )
  Deferred tax     -       74       -  
  Interest expense     (5 )     (83 )     (250 )
                           
  Income tax expense     (851 )     (2,659 )     (2,319 )

 

  92  

 

 

BORQS TECHNOLOGIES, INC.

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,  
      2016     2017  
      US$     US$  
  Deferred tax assets                
  Inventories provision     156       229  
  Accrued salary and welfare payable     274       165  
  Property and equipment     20       14  
  Tax losses     13,279       14,769  
  Valuation allowance     (12,675 )     (13,714 )
  Total deferred tax assets     1,054       1,463  

 

  Deferred tax liabilities            
  Intangible assets     2,146       2,004  
  Deferred cost of revenue     24       1,551  
                   
  Total deferred tax liabilities     2,170       3,555  

 

As of December 31, 2017, the Group had net tax operating losses from its PRC subsidiaries and its Consolidated VIEs, as per filed tax returns, of US$38,503, which will expire from 2018 to 2022. The Group has net tax operating loss from its HK subsidiary of US$15,500, which will not expire.

 

As of December 31, 2017, the Group 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.

 

  93  

 

 

BORQS TECHNOLOGIES, INC.

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, 2016 and 2017, the Group recorded an unrecognized tax benefits of US$4,053 and US$4,547, respectively, of which, US$2,381 and US$2,764, 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, 2016 and 2017, unrecognized tax benefits of US$1,681 and US$2,043, if ultimately recognized, will impact the effective tax rate.

 

A roll-forward of unrecognized tax benefits is as follows:

 

      For the years ended December 31,  
      2015     2016     2017  
      US$     US$     US$  
                     
  Balance at beginning of year     620       2,177       4,053  
  Additions based on tax positions related to the current year     1,557       1,876       217  
  Foreign currency translation difference     -       -       277  
                           
  Balance at end of year     2,177       4,053       4,547  

 

In the years ended December 31, 2016 and 2017, the Group recorded interest expense accrued in relation to the unrecognized tax benefit of US$83 and US$250 in income tax expense, respectively. Accumulated interest expense recorded by the Group was US$88 and US$338 as of December 31, 2016 and 2017, respectively. As of December 31, 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.

 

  94  

 

 

BORQS TECHNOLOGIES, INC.

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 Group
  Intel Capital Corporation (“Intel”) and its affiliates   Intel was a shareholder *
  Qualcomm Global Trading PTE. Ltd (“Qualcomm”) and its affiliates   Qualcomm was a shareholder *

 

(b) Other than disclosed elsewhere, the Group had the following significant related party transactions for the years ended December 31, 2015, 2016 and 2017:

 

      For the years ended December 31,  
      2015     2016     2017  
      US$     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 Group had the following related party balances as of December 31, 2016 and 2017:

 

      As of December 31,  
      2016     2017  
      US$     US$  
  Accounts receivable from related parties:                
  Current:                
  Intel Corporation     481       *
  Intel (China) Co., Ltd.     -       *  
  Intel Asia-Pacific Research and Development Ltd.     9       *  

 

All balances with the related parties as of December 31, 2016 were unsecured, interest-free and have no fixed terms of repayment.

 

* Upon the consummation of the Merger, both entities ceased to be shareholders of the Group.

 

  95  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

18. RESTRICTED NET ASSETS

 

The Group’s ability to pay dividends is primarily dependent on the Group receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by the VIE and subsidiaries of the VIE incorporated in PRC only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The consolidated 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 Group’s subsidiaries.

 

Under PRC law, the Group’s subsidiaries, VIE and the subsidiaries of the VIE located in the PRC (collectively referred as the “PRC subsidiaries”) are required to provide for certain statutory reserves, namely a general reserve, an enterprise expansion fund and a staff welfare and bonus fund. The PRC subsidiaries are required to allocate at least 10% of their after tax profits on an individual company basis as determined under PRC accounting standards to the statutory reserve and has the right to discontinue allocations to the statutory reserve if such reserve has reached 50% of registered capital on an individual company basis. In addition, the registered capital of the PRC subsidiaries is also restricted.

 

Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the Board of Directors of the subsidiary. The PRC subsidiaries are also subject to similar statutory reserve requirements. These reserves can only be used for specific purposes and are not transferable to the Group in the form of loans, advances or cash dividends. As of December 31, 2016 and December 31, 2017, the Group’s PRC subsidiaries had appropriated US$1,898 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 Group’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Group. Amounts restricted include paid-in capital and statutory reserve funds of the Group’s PRC subsidiaries and the equity of the Consolidated VIEs, as determined pursuant to PRC generally accepted accounting principles, totaling an aggregate of US$1,898 as of December 31, 2017.

 

  96  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

19. CONVERTIBLE REDEEMABLE PREFERRED SHARES

 

On December 27, 2007, March 17, 2008, September 26, 2008 and October 8, 2008, the Group issued 19,800,000, 3,100,000, 12,000,000 and 5,000,000 Series A convertible redeemable preferred shares (the “Series A Preferred 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 Group issued 64,285,715,15,000,000 and 3,571,428 Series B convertible redeemable preferred shares (the “Series B Preferred 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 Group issued 38,181,817 and 5,454,545 Series C convertible redeemable preferred shares (the “Series C Preferred 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 Group issued 23,721,443 Series D convertible redeemable preferred shares (the “Series D Preferred 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.

 

On February 8, 2017 and March 2, 2017, the Group closed the issuances of 10,325,126 and 2,950,036 Series E convertible redeemable 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 have neither redemption rights nor any other rights preferential to the ordinary shares and therefore Series E-1 Preferred Shares are classified as permanent equity.

 

The significant terms of the Series A, Series B, Series C, Series D, and Series E convertible redeemable preferred shares (together “Convertible Redeemable Preferred Shares”) are summarized as follows.

 

Conversion

 

Convertible Redeemable Preferred 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 Convertible Redeemable Preferred Shares into each ordinary share shall be one-for-one.

 

Convertible Redeemable Preferred Shares shall automatically be converted into ordinary shares at the then-effective conversion rate applicable to the relevant series of Preferred Shares: (a) in the event of the closing of a Qualified IPO; or (b) in relation only to Series A and Series B Preferred Shares, upon the approval and written consent of a majority of the outstanding Series A and Series B Preferred Shares holders to convert their respective Preferred Shares into ordinary shares.

 

The conversion price is subject to additional adjustments if the Group makes certain dilutive issuances of shares.

 

Dividends

 

Series D and Series E Preferred 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 Preferred Shares and ordinary shares. Dividends on Series D and Series E Preferred Shares shall be cumulative whether declared by the Board of Directors or not.  

 

Each holder of Series A, Series B and Series C Preferred Shares is entitled to receive non-cumulative dividends when and if declared by the Board of Directors of the Group in preference and priority to any dividends on ordinary shares, after all accumulated dividends on the Series D and Series E Preferred shares have been paid or set aside for payment to the holders of Series D and Series E Preferred Shares in a calendar year.

 

Any additional dividends declared, after all accumulated dividends and declared dividends on the Preferred Shares have been paid or set aside for payment to the holders of Preferred Shares in a calendar year, shall be distributed among all holders of ordinary shares and Preferred Shares.

 

  97  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

19. CONVERTIBLE REDEEMABLE PREFERRED SHARES (CONTINUED)

 

Redemption

 

All outstanding Convertible Redeemable Preferred Shares can be redeemed at the election of the majority holders at any time after the fifth anniversary of the first issuance date of Series E Preferred Shares.

 

Prior to the fifth anniversary of the first issuance date of Series E Preferred Shares, all outstanding Series C Preferred Shares held by Intel can be redeemed at any time of the holder’s election to redeem for investigation or for breach as defined in the Memorandum of Association and Articles of Association.

 

Prior to the fifth anniversary of the first issuance date of Series E Preferred Shares, all outstanding Series D and Series E Preferred Shares can be redeemed at any time of a holder of Series D and a holder of Series E Preferred Shares’ election to redeem for breach event or to redeem for investigation and failure to obtain MVNO license event as defined in the Memorandum of Association and Articles of Association.

 

Convertible Redeemable Preferred Shares are redeemed at a price equal to 150% the original purchase price plus any unpaid declared dividends. The redemption price for Preferred Shares under the event of the election of Intel, a holder of Series D Preferred Shares or a holder of Series E Preferred Shares to redeem for investigation is set to be 100% of the original purchase price.

 

The redemption price for Convertible Redeemable Preferred Shares under the event of the election of Intel, a holder of Series D Preferred Shares or a holder of Series E Preferred Shares to redeem for breach is set to be 150% of the original purchase price.

 

Winding up / Liquidation

 

In the event of any liquidation, dissolution, or winding up of the Group, either voluntary or involuntary, distributions to the shareholders of the Group shall be made as stated below.

 

The holders of Series E Preferred Shares then outstanding are entitled to be paid first out of the assets of the Group available for distribution a liquidation preference in an amount per Preferred 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 Preferred Shares or ordinary shares.

 

Upon full payment of the Series E Preferred Shares liquidation preference, the holders of Series D Preferred Shares are entitled to be paid first out of the assets of the Group available for distribution a liquidation preference in an amount per Preferred 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 Preferred Shares or ordinary shares.

 

Upon full payment of the Series D and Series E Preferred Shares liquidation preference Series A, Series B and Series C Preferred Shares then outstanding shall be entitled to be paid first out of the assets of the Group 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 Preferred Shares equal to the sum of (i) the original purchase price applicable to such Preferred Share as adjusted and (ii) all unpaid declared dividends. The holders of Series C Preferred Shares shall receive their liquidation preference amount in preference to holders of Series A and Series B Preferred Shares. Subject to the prior payment of all amounts due to the holders of Preferred 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 Preferred Shares on an as–converted basis.

 

Voting

 

Each share of Convertible Redeemable Preferred Shares 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 Group’s board of directors are elected by the holders of the outstanding ordinary shares and the Preferred Shares, voting together as a single class on an as-converted basis.

 

  98  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

19. CONVERTIBLE REDEEMABLE PREFERRED SHARES (CONTINUED)

 

Accounting for Convertible Redeemable Preferred Shares

 

The Convertible Redeemable Preferred Shares have been classified as mezzanine equity as they can be redeemed at the option of the holders. The initial carrying values of the Preferred Shares are the total consideration received at their respective dates of issuance net of issuance costs. There were no embedded features except for Series E Preferred Shares that qualified for bifurcation and separate accounting in accordance with ASC 815-10 Derivatives and Hedging .

 

At the respective closing dates 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. 

 

As of December 31, 2016 and August 18, 2017, no dividend was declared by the Group. US$1,120 and US$1,709 of dividend was accumulated to the holders of the Series D and Series E Preferred Shares as of December 31, 2016 and August 18, 2017.  

 

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. Upon the consummation of the Merger, all Convertible Redeemable Preferred Shares and Series E-1 Preferred Shares were converted to ordinary shares. Upon conversion, all unamortized discounts, including any original issue discounts and discounts from allocation of proceeds for beneficiary conversion feature, are recognized immediately as deemed dividend and deducted from income available to ordinary shareholders.

 

The following is the roll-forward of the carrying amounts of Convertible Redeemable Preferred Shares   for the years ended December 31, 2015, 2016 and 2017:

 

      For the years ended December 31,  
      2015     2016     2017  
        US$       US$       US$  
  Balance at beginning of the year     65,469       67,886       68,862  
  Issuance of Series E Preferred Shares     -       -       6,300  
  Beneficiary conversion feature of Series E Preferred Shares     -       -       (3,258 )
  Change in redemption value     2,417       976       6,956  
  Conversion to ordinary shares     -       -       (78,860 )
                           
  Balance at end of the year     67,886       68,862       -  

 

Series E-1 Preferred Shares of US$2,708 were converted to ordinary shares as of December 31, 2017.

 

  99  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

20. LOSS PER SHARE

 

Basic and diluted loss per share for each of the years presented are calculated as follows:

 

      For the years ended December 31,  
      2015     2016     2017  
      US$     US$     US$  
  Numerator:                        
  Net income (loss)     795       2,596       (12,359 )
  Less: net (loss) income attributable to noncontrolling interests     (1,316 )     (632 )     210  
  Net income (loss) attributable to Borqs Technologies, Inc.     2,111       3,228       (12,569 )
  Accretion to redemption value of Convertible Redeemable Preferred Shares     (2,417 )     (976 )     (6,956 )
  Allocation to holders of Convertible Redeemable Preferred Shares     -       (2,252 )     -  
  Net loss attributable to Borqs Technologies, Inc.’s ordinary shareholders     (306 )     -       (19,525 )
                           
  Denominator:                        
  Weighted-average number of ordinary shares outstanding—basic     4,224,090       4,224,725       12,842,671  
  Weighted-average number of ordinary shares outstanding—diluted     4,224,090       4,224,725       12,842,671  
                           
  Loss per share—Basic:     (0.07 )     0.00       (1.52 )
  Loss per share—Diluted:     (0.07 )     0.00       (1.52 )

 

For the year ended December 31, 2017, share options and Replacement Warrants to purchase ordinary shares, Unit Purchase Option, public warrants and private warrants were anti-dilutive and excluded from the calculation of diluted net loss per share.

 

21. FAIR VALUE MEASUREMENTS

 

The Group 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.

 

 

  100  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

21. FAIR VALUE MEASUREMENTS (CONTINUED)

 

2016 Warrants are classified within Level 3. We estimated the fair value of these warrants as of December 31, 2016 and August 18, 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 2016 Warrants are then reclassified to equity following the Merger (Note 4). The assumptions used, including the market value of the underlying Series D convertible redeemable 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  

 

There are no assets and liabilities measured at fair value on a recurring basis as of December 31, 2017.

 

      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  
  Changes in the fair value     200  
  Fair value at August 18, 2017     1,544  
  Transfer to permanent equity     (1,544 )
  Fair value at December 31, 2017     -  

 

  101  

 

 

BORQS TECHNOLOGIES, INC.

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 Group leases buildings in the PRC and India under non-cancelable operating leases expiring on different dates. For the years ended December 31, 2015, 2016 and 2017, total rental expenses for all operating leases amounted to US$1,368, US$1,340 and US$1,418, respectively.

 

As of December 31, 2017, the Group 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$  
         
  2018     1,138  
  2019     721  
  2020     654  
  2021     1,171  
  2022 and thereafter     -  
           
        3,684  

 

Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases.

 

Income Taxes

 

As of December 31, 2017, the Group recognized an accrual of US$2,121 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, 2017, the Group classified the accrual for unrecognized tax benefits as a non-current liability.

 

  102  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

23. SEGMENT REPORTING

 

The operations of the Group 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 (loss). The table below provides a summary of the Group’s operating segment results for the years ended December 31, 2015, 2016 and 2017:

 

  FY2017   Yuantel     Connected Solution     Total segments     Eliminations     Consolidated  
                                 
  Net revenue                              
  -External customers     32,074       122,233       154,307       -       154,307  
  -Inter-segment     -       1,879       1,879       (1,879 )     -  
  Total net revenue     32,074       124,112       156,186       (1,879 )     154,307  
                                           
  Operating loss     331       (8,241 )     (7,910 )     -       (7,910 )

 

  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 years ended December 31,  
      2015     2016     2017  
      US$     US$     US$  
                     
  PRC     28,442       41,214       49,761  
  Outside PRC:                        
  United States     14,978       34,526       23,312  
  India     7,949       25,126       70,421  
  Rest of the world     23,703       19,720       10,813  
  Total net revenue     75,072       120,586       154,307  

 

  103  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

24. SUBSEQUENT EVENTS  

 

(a) Repurchase of Shares from Zhengqi International Holding Ltd.

   

On January 10, 2018, we entered into a stock repurchase agreement (“Stock Repurchase Agreement”) with Zhengqi International Holding Limited (“Zhengqi”), pursuant to which we agreed to repurchase 966,136 of our ordinary shares that were originally issued and sold to Zhengqi on August 18, 2017, at an aggregate purchase price of approximately US$10 million, or US$10.40 per share. In addition, Zhengqi agreed to forfeit all of its rights to 1,278,776 shares that had been held in escrow and which will instead be treated as part of the merger consideration shares under the merger agreement pursuant to which the Company acquired Borqs International. The Stock Repurchase Agreement provides that those shares will be treated in the following manner: 51,151 shares (4% of the total) became additional shares placed in an indemnity escrow account; and 1,227,625 shares were distributed to the former Borqs International shareholders based on their respective proportionate interests in the merger consideration. The funds used in the repurchase were the same amount of funds provided by Zhengqi when the shares were sold to Zhengqi on August 18, 2017 under the Backstop and Subscription Agreement between the Company, Zhengqi and EarlyBirdCapital. The Company and Zhengqi are currently making arrangements for the completion of this transaction.

 

(b) Investment into Crave and Colmei.

 

On January 18, 2018, the Company entered into an agreement with Colmei Technology International Ltd (“Colmei”) and its affiliate Shenzhen Crave Communication Co., Ltd (“Crave”), along with the shareholders of Crave and Colmei (“Selling Shareholders”), pursuant to which the Selling Shareholders agreed to sell to the Company and the Company agreed to acquire 13.8% of the outstanding shares of Crave and 13.8% of the outstanding shares of Colmei from the Selling Shareholders, which will not result in the Company’s significant influence in either Colmei or Crave. Under the agreement, the Company will pay purchase consideration consisting of Company shares and cash. The Company shares will consist of 473,717 ordinary shares to be issued to the Selling Shareholders at closing and cash in the amount of US$10.0 million to be paid to the Selling Shareholders over a period of 36 months. If approved by the Company’s board of directors, the Company will also issue additional shares to the Selling Shareholders if the aggregate value of the Company shares initially issued to the Selling Shareholders under this agreement is less than US$3.0 million on August 18, 2018. This transaction was completed on March 22, 2018.

 

(c) Share Purchase by Employees of our Subsidiary in India.

 

In effort to gain compliance with Nasdaq’s requirement for the Company to have at least 300 round lot shareholders by April 10, 2018, the Company initiated a restricted ordinary shares purchase program through which eligible employees of our wholly owned subsidiary in India, Borqs Software Solutions Private Ltd, were allowed to voluntarily participate in the purchase of between 100 to 250 restricted ordinary shares of the Company pursuant to the terms and conditions of the Company’s 2017 Equity Incentive Plan. The purchase price was set at $9.40 per share which was the closing price of the Company’s ordinary shares as traded on Nasdaq on March 19, 2018, the day immediately prior to the date of the transaction. The participants of the program paid for the shares by having the purchase amount deducted from their payroll on March 23, 2018. A total of 222 employees participated and purchased a total of 29,170 ordinary shares.

 

(d) Public Offering of Ordinary Shares

 

For financing of the Company’s working capital needs and intended acquisitions, the Company is contemplating a public offering of its ordinary shares to be underwritten by the Maxim Group. A registration statement on form S-1 was filed on February 14, 2018 and the Company received a round of comments from the SEC on March 13, 2018. After the filing of this annual report, the Company will immediately respond to those SEC comments and file an amended S-1 incorporating the Company’s 2017 audited financial statements.

 

(e) Acquisition of Shanghai KADI Machinery Technology Co., Ltd. (“KADI”)

 

On January 8, 2018, the Company entered into a letter of intent to acquire a 60% equity interest in KADI, a Chinese company that develops software and hardware solutions for electric vehicle control modules, such as charging, battery management and vehicle controls. We are currently negotiating a definitive agreement to acquire such equity interest for an aggregate of $11.7 million in cash to be paid to KADI and ordinary shares with an agreed-upon value of $3.3 million to be issued to selling shareholders of KADI. KADI is not a customer or a supplier of Borqs.

 

  104  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

25. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

 

Condensed balance sheets

 

          As of December 31,  
      Note   2016     2017  
          US$     US$  
  ASSETS                
  Current assets                    
  Cash and cash equivalents         15       2  
  Prepaid expenses and other current assets         2       164  
  Amount due from subsidiaries   (b)     50,107       68,643  
                       
  Total current assets         50,124       68,809  
                       
  Non-current assets                    
  Investments in subsidiaries         (35,247 )     (13,197 )
                       
  Total non-current assets         (35,247 )     (13,197 )
                       
  Total assets         14,877       55,612  
                       
  LIABILITIES AND SHAREHOLDERS’ EQUITY                    
  Current liabilities                    
  Accrued expenses and other payables         271       2,810  
  Short-term bank and other borrowings         -       5,000  
                       
  Total current liabilities         271       7,810  
                       
  Total liabilities         271       7,810  
                       
  Mezzanine equity         68,862       -  
                       
  Total mezzanine equity         68,862       -  
                       
  Shareholders’ (deficit) equity                    
  Additional paid-in capital         1,178       120,642  
  Accumulated deficit         (52,808 )     (72,333 )
  Accumulated other comprehensive loss         (2,626 )     (507 )
                       
  Total shareholders’ (deficit) equity         (54,256 )     47,802  
                       
  Total liabilities, mezzanine equity and shareholders’ equity         14,877       55,612  

 

  105  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

25. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)

 

Condensed statements of operations

 

      For the years ended December 31,  
      2015     2016     2017  
        US$       US$       US$  
                           
  Revenues     -       -       -  
                           
  Cost of revenues     -       -       -  
                           
  Gross Profit     -       -       -  
                           
  Operating Expenses                        
  General and administrative expenses     (123 )     (383 )     (856 )
                           
  Operating loss     (123 )     (383 )     (856 )
                           
  Investment (loss) income     (183 )     383       (18,669 )
                           
  Loss before income taxes     (306 )     -       (19,525 )
                           
  Net loss     (306 )     -       (19,525 )

 

Condensed statements of comprehensive loss

 

      For the years ended December 31,  
      2015     2016     2017  
        US$       US$       US$  
                           
  Net profit (loss)     2,111       3,228       (12,569 )
  Other comprehensive income (loss), net of tax of nil:                        
  Foreign currency translation adjustments, net of tax of nil     (1,288 )     (1,477 )     2,119  
  Other comprehensive loss, net of tax of nil:                        
  Comprehensive income (loss)     823       1,751       (10,450 )
  Comprehensive income (loss) attributable to the Company’s ordinary shareholders     823       1,751       (10,450 )

 

 

Condensed statements of cash flows

 

      For the years ended December 31,  
      2015     2016     2017  
      US$     US$     US$  
                           
  Net cash generated from operating activities     156       5       4,118  
  Net cash used in investing activities     (3,466 )     -       (17,117 )
  Net cash generated from financing activities     -       -       12,986  
                           
  Net (decrease) increase in cash     (3,310 )     5       (13 )
  Cash at beginning of the year     3,320       10       15  
                           
  Cash at end of the year     10       15       2  

 

  106  

 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts in thousands of US dollars (“US$”), unless otherwise stated)

 

25. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)

 

  (a) Basis of presentation

 

In the Company-only financial statements, the Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since inception.

 

The Company records its investment in its subsidiary under the equity method of accounting as prescribed in ASC 323-10, Investment-Equity Method and Joint Ventures , and such investment is presented on the balance sheet as “Investment in subsidiaries” and the share of the subsidiaries’ profit or loss is presented as “Share of profits (losses) of subsidiaries and Consolidated VIEs” on the statements of operations.

 

The subsidiaries did not pay any dividends to the Company for the years presented.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted and as such, these Company-only financial statements should be read in conjunction with the Group’s consolidated financial statements.

 

  (b) Intercompany transactions

 

The Company had the following related party balances as of December 31, 2016 and 2017:

 

      As of December 31,  
      2016     2017  
      US$     US$  
  Amount due from subsidiaries                
  - Borqs HK     50,107       68,643  

 

  107  

 

 

Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.     Controls and Procedures

 

(a)   Disclosure Controls and Procedures

 

Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this Annual Report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

 

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

 

(b)   Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

 

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used the framework set forth in the report Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication and (v) monitoring.

 

Based on that evaluation, our management concluded that these controls were not effective at December 31, 2017. We did not maintain sufficient controls over financial reporting processes due to an insufficient complement of internal personnel with a level of accounting knowledge, experience and training in the application of U.S. GAAP to ensure that the consolidated financial statements were prepared in compliance with U.S. GAAP and SEC requirements properly. This deficiency constitutes as a material weakness of our internal control over financial reporting.

 

(c)   Changes in Internal Control over Financial Reporting

 

We identified four material weaknesses in internal control over financial reporting during our preparation of the financial statements for the year ended December 31, 2016: lack of accounting personnel and other resources with which to address its internal control and procedures over financial reporting. Since then, we have implemented the following measures to remediate these material weakness.

 

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 vice president of finance with proper qualifications and experience and (ii) implementing regular U.S. GAAP accounting and financial reporting programs, both internal and external, for the Company’s existing accounting and reporting personnel. 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.

  

We plan to take additional measures to further improve our 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, (iii) providing proper training to our accounting personnel. In addition, we are considering the engagement of an external service provider prior to December 31, 2018 to assist management in evaluating our 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 our internal control over financial reporting. See “Item 1A. Risk Factors — Risks Related to our Business and Industry.” 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.” In the course of preparing our consolidated financial statements, control deficiencies, including material weaknesses and significant deficiencies, shall be brought to the attention of management of the Company and also to our independent auditors if such are identified. If we fail to maintain an effective system of internal control over financial reporting, we 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.

 

Item 9B.     Other Information

 

None.

 

  108  

 

 

PART III

 

Item 10.     Directors, Executive Officers, and Corporate Governance

 

Directors and Executive Officers

 

The following table provides information regarding our executive officers and directors as of March 27, 2018:

 

Name   Age   Position   Class
Board of Directors            
Pat Sek Yuen Chan   53   Founder, Chairman of the Board, Chief Executive Officer and President   III
Honghui Deng   48   Director   I
Yaqi Feng   35   Director   III
Bill Huang   55   Director   I
Jason Zexian Shen   63   Director   II
Eric Tao   40   Director   III
Joseph Wai Leung Wong   62   Director   II
             
Executive Officers            
Bob Xiao Bo Li, Ph.D.   55   Founder, Executive Vice President of Corporate Affairs and China Sales    
Anthony K. Chan   63   Chief Financial Officer, Executive Vice President of Corporate Finance    
Simon Sun   51   Executive Vice President and Co-General Manager of Connected Solutions Business Unit    
Hareesh Ramanna   56   Executive Vice President and Co-General Manager of Connected Solutions Business Unit    
George Thangadurai   55   Executive Vice President and President of International Business    
Gene Wuu, Ph.D.   62   Executive Vice President and General Manager of MVNO Business Unit    

 

The principal occupation and business experience of our executive officers and directors is as follows:

 

Pat Sek Yuen Chan, 53, is the Chairman of our board of directors, as well as our Chief Executive Officer and President. He was the founder and Chairman of the board of directors of Borqs International, and since 2007 he served as Borqs International’s 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, 48, has served as one of our directors since October 2015. 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, 35, served as one of our directors since July 2015, and was our Chief Operating Officer and Secretary from July 2015 until August 2018. 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 , 55, 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, 66, served as one of our directors since July 2015. 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. , 40, is a founding member of Keytone 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 , 62, has served as one of our directors since August 2017, and was a member of the Borqs International board of directors from 2012 to 2017. 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.

 

Bob Li, 55, is the founder of Borqs and has served as its Executive Vice President, Corporate Affairs and China Sales since the founding of the company in 2007. Dr. Li has over 20 years of experience in research and development and management in the wireless communications, semiconductor and mobile internet industries. He was the Co-founder and served as Executive Vice President and Chief Technology Officer of Cellon International, a handset design company, from Oct 1999 to June 2007. Dr. Li received his bachelor’s degree from National University of Defense Technology, his master’s degree from University of Electronic Science and Technology of China, both in electrical engineering, and his Ph.D. in electrical and computer engineering from MacMaster University.

 

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Anthony Chan, 63, is Borqs’s Chief Financial Officer and Executive Vice President, Corporate Finance and joined the company in April 2015. Mr. Chan has over 30 years of experience in U.S. and China cross border investments and business operations. From July 2013 until March 2015, Mr. Chan served as the President of Asia Sourcing for Portables Unlimited in New York, a distributor of T-Mobile USA. From March 2009 until July 2013, he served as the CFO for Tianjin Tong Guang Digital Broadcasting Co. Ltd, a mobile communications products company. For the 20 years prior to that, he was involved in multiple investment and technology transfer projects between China, the U.S and Europe, in the areas of communication products, chemical fibers, textile machinery and medical equipment. Mr. Chan received both his bachelor’s and MBA degrees from the University of California at Berkeley.

 

Simon Sun, 51, is the Executive Vice President, Co-General Manager of Borqs’s Connected Solutions Business Unit and has served the company since November 2013. Mr. Sun has over 20 years of experience in research and development and product engineering in the mobile industry. He served as the Co-Founder and Chief Executive Officer of Nollec Wireless, Ltd., a mobile handset design house, from July 2007 to October 2013. He was the VP of engineering for CEC Wireless, another mobile handset design house in China from September 2006 to June 2007. Mr. Sun received his bachelor’s degree in Industrial Engineering from Tianjin University of China.

 

Hareesh Ramanna, 56, is our Executive Vice President, Co-General Manager of Connected Solutions Business Unit, Managing Director of India Operations and Head of Software Development, and has served our company since July 2009. Mr. Ramanna has over 20 years of experience in the mobile industry. Prior to joining us, he served as a Senior Director and Head of Mobile Devices Software in Global Software Group, Motorola India Electronic Limited from May 1992 to November 2008. Mr. Ramanna received his bachelor’s degree in Electronics and Communication from National Institute of Engineering in 1983, Post-Graduation Certification from Indian Institute of Science and an advanced leadership Certification from McGill University in collaboration with Lancaster University of UK and Indian Institute of Management in Bangalore.

 

George Thangadurai, 55, is our Executive Vice President, President of International Business and has served our company since November 2014. Previously, Mr. Thangadurai worked for Intel more than two decades in various senior technical and management roles including GM of Strategy & Product Management for the Mobile PC business and GM of Client Services business. He was part of the founding team that established the Center for Development for Telematics (C-DOT) in India. Mr. Thangadurai received his MSEE in Computer Engineering from the University of Rhode Island, USA, his B.E. degree in Electronics and Communication from Madurai University, India and has 7 issued patents and 3 research publications.

 

Gene Wuu, 62, is our Executive Vice President, General Manager of our MVNO Business Unit and has served our company since the beginning of 2009 when he was our Vice President of Product Management. Prior to joining us, he served as a Senior Vice President and Chief Technology Officer of UTStarcom, a telecommunications equipment company, from 2003 to 2009. He had overseen the product and business development of UTStarcom core network during the growing period of the company. Before his tenure at UTStarcom, Dr. Wuu had worked for Telcordia Technologies (formerly Bellcore, now Ericson) and the Bell system for 17 years focusing on Core network and OSS products Dr. Wuu received his bachelor’s degree in electronics engineering from the National Taiwan Institute of Technology in 1980 and his Ph.D. in computer science from the State University of New York at Stony Brook.

 

Executive Officers

 

Our executive officers are designated by, and serve at the discretion of, our board of directors. There are no family relationships among any of our directors or executive officers.

 

Board of Directors and Corporate Governance

 

In accordance with our memorandum and articles of association, our Board is divided into three classes, with the number of directors in each class to be as nearly equal as possible. Our existing Class I directors will serve until our 2018 annual general meeting, our existing Class II directors will serve until our 2019 annual general meeting, and our existing Class III directors will serve until our 2020 annual general meeting. Commencing at our 2018 annual general meeting, and at each following annual general meeting, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third annual general meeting following their election.

 

Our board of directors, which is elected by our shareholders, is responsible for directing and overseeing our business and affairs. In carrying out its responsibilities, the board selects and monitors our top management, provides oversight of our financial reporting processes, and determines and implements our corporate governance policies.

 

Our board of directors and management are committed to good corporate governance to ensure that we are managed for the long-term benefit of our stockholders, and we have a variety of policies and procedures to promote such goals. To that end, during the past year, our board and management periodically reviewed our corporate governance policies and practices to ensure that they remain consistent with the requirements of the U.S. securities laws, SEC rules, and the listing standards of The Nasdaq Stock Market (“Nasdaq”).

 

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Meetings of the Board of Directors

 

Our board of directors held 7 regular meetings in 2017. Each director attended at least 50% of the aggregate number of meetings of the board and committees on which such director served that were held during 2017.

 

Code of Business Conduct and Ethics

 

Our Code of Business Conduct and Ethics for Employees (“Code of Ethics”) applies to all of our employees, including our chief executive officer, chief financial officer and principal accounting officer. Our Code of Ethics is available on our corporate website, www.borqs.com . 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.

 

Stockholder Communications with the Board of Directors

 

Stockholders and other parties interested in communicating directly with the board of directors may do so by writing to: Board of Directors, c/o Borqs Technologies, Inc., Building B23-A, Universal Business Park, No. 10 Jiuxianqiao Road, Chaoyang District, Beijing 100015, China, or by e-mail to sandra.dou@borqs.net. Stockholders and others may direct their correspondence to our Secretary.

 

Independence of the Board of Directors

 

Nasdaq listing standards require that a majority of our Board be independent directors. An “independent director” is a person, other than an officer or employee of the Company or its subsidiaries, who has no 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 has determined that Mr. Wong, Mr. Shen, Dr. Deng, Mr. Tao and Mr. Huang are “independent directors” as defined in the Nasdaq listing standards and applicable SEC rules. Our independent directors will hold regularly scheduled meetings at which only independent directors are present.

 

Board Leadership Structure and Role in Risk Oversight

 

The Board does not have a lead independent director. Pat Chan is our Chief Executive Officer and Chairman of the Board.

 

Committees of the Board of Directors

 

Audit Committee

 

The members of our Audit Committee are Mr. Huang, Mr. Shen and Mr. Wong (chairman of the committee), each of whom is an independent director. Each member of the Audit Committee is financially literate and our Board determined Mr. Wong qualifies as our “audit committee financial expert,” as such term is defined in Item 401(h) of Regulation S-K. Our Audit Committee charter 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;

 

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.

 

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Compensation Committee

 

The members of our Compensation Committee are Mr. Huang, Mr. Shen (chairman of the committee), and Mr. Wong, each of whom is an independent director. Our Compensation Committee charter 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.

 

Section 16(a) Beneficial Ownership and Reporting Compliance

 

Our directors and officers, and any persons who own more than 10% of our ordinary shares, are required under Section 16(a) of the Exchange Act to file initial reports of beneficial ownership and reports of changes in beneficial ownership with the SEC (“Section 16(a) filings”). Specific due dates have been established by the SEC, and we are required to disclose in this report any failure to file by those dates. Based solely upon our review of the copies of such reports for fiscal 2017 as furnished to us, we believe that all directors, officers, and greater-than-10% beneficial owners have made all required Section 16(a) filings on a timely basis for 2017.

 

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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Item 11. Executive Compensation

 

Compensation Tables

 

Summary Compensation Table

 

The Company has opted to comply with the executive compensation disclosure rules applicable to emerging growth companies. The scaled down disclosure rules 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 2017 exceeded $100,000. Pat Chan is our principal executive officer. During 2017, 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 Chan, Chief Financial Officer. Pat Chan, Bob Li, and Anthony Chan are referred to in this Annual Report as our named executive officers.

 

The following table provides information regarding the compensation awarded to, or earned by, the named executive officers for the past two fiscal years.

 

Summary Compensation Table

 

Name and principal position    

Fiscal
Year

     

Salary
($)

     

Bonus
($)

     

Stock awards
($)

     

Option awards
($)

     

Non-equity incentive plan compensation ($)

     

Nonqualified deferred compensation earnings
($)

     

All other compensation ($)

     

Total
($)

 
Pat Sek Yuen Chan,
    2017       369,793       70,345       -       813.092       -       -       -       1,253,230  
Chief Executive Officer     2016       303,143       -                                               303,143  
                                                                         
Bob Xiao Bo Li,
    2017       259,400       1,202       -       -       -       -       -       260,642  
EVP Corporate Affairs & China Sales     2016       252,486       -                                               252,486  
                                                                         
Anthony K. Chan,
    2017       218,000       35,844       -       536,581       -       -       -       790,425  
Chief Financial Officer     2016       150,000       -                                               150,000  

 

The options and bonus were granted pursuant to agreement between the executives and the Company. The values of the option awards represent grant-date fair values without regard to forfeitures.

 

Outstanding Equity Awards at 2017 Year-End

 

The following table provides information regarding each unexercised stock option held by the named executive officers as of December 31, 2017.

 

Name   Grant date  

Vesting Start date (1)

  Number of securities underlying unexercised options vested
(#)
    Number of securities underlying unexercised options unvested (#)    

Options exercise
price
($) (2)

    Option Expiration date
Pat Sek Yuen Chan   10/24/2009   10/24/2009     47,234       -     $ 2.230     12/3/2019
    7/23/2011   7/23/2011     30,060       -     $ 2.920     7/23/2021
    5/26/2012   5/26/2012     1,719       -     $ 2.920     5/26/2022
    4/27/2013   4/27/2013     3,211       -     $ 4.860     4/27/2023
    5/30/2015   5/30/2015     1,281       702     $ 4.860     5/30/2025
    2/12/2017   1/1/2017     212,555       70,851     $ 7.180     1/1/2027
Bob Xiao Bo Li   10/24/2009   10/24/2009     28,340       -     $ 2.230     12/3/2019
    7/23/2011   7/23/2011     30,239       -     $ 2.920     7/23/2021
    5/26/2012   5/26/2012     675       -     $ 2.920     5/26/2022
    4/27/2013   4/27/2013     1,818       -     $ 4.860     4/27/2023
    8/16/2014   5/24/2014     779       -     $ 4.860     8/16/2024
    5/30/2015   5/30/2015     503       276     $ 4.860     5/30/2025
Anthony K. Chan   2/12/2017   1/1/2017     129,894       59,043     $ 7.180     1/1/2027

 

 

(1) 25% of the options vest on the first anniversary of the vesting start date and 1/48 of the options 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, 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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Borqs Technologies, Inc. Equity Incentive Plan

 

In connection with our acquisition of Borqs International by way of merger, we assumed the obligations under outstanding stock options issued under the Borqs International 2007 Global Share Plan, as adjusted to give effect to the merger. Those outstanding options to purchase shares of Borqs International were converted into options to purchase 2,825,273 of our ordinary shares, with exercise prices ranging from $2.12 to $9.10 per share.

 

Effective August 18, 2017, we adopted the Borqs Technologies, Inc. 2017 Equity Incentive Plan (“Equity Incentive Plan”), with five million ordinary shares issuable pursuant to equity awards under the plan. The number of ordinary shares reserved for issuance under the Equity Incentive Plan will increase automatically on January 1 of each of 2018 through 2027 by a number of shares that is equal to 5% of the aggregate number of outstanding ordinary shares as of the immediately preceding December 31. Our Board may reduce the size of this increase in any particular year. Outstanding awards under the 2007 Global Share Plan were assumed under the Equity Incentive Plan as of our acquisition of Borqs International by way of merger on August 18, 2017. At December 31, 2017, 2,825,273 shares were issuable pursuant to options outstanding under the Equity Incentive Plan, with a weighted average exercise price of $5.07 per share.

 

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

 

shares subject to options or share appreciation rights granted under our Equity 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 Equity Incentive Plan that are subsequently forfeited or repurchased by us at the original issue price;

 

shares subject to awards granted under our Equity 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 Equity 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 Equity Incentive Plan. In addition, no participant in the 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 Equity Incentive Plan is administered by the Board or by our Compensation Committee; in this plan description we refer to the Board or Compensation Committee as the plan administrator. The plan administrator determines the terms of all awards.

 

Types of Awards. The Equity 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 Equity 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 Equity Incentive Plan.

 

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

 

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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 Equity 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 Equity 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 Equity 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 Equity 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.

 

Governing Law and Compliance with Law. The Equity Incentive Plan and awards granted under it are 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 Equity Incentive Plan terminates ten years from the date it was approved by our shareholders, unless it is terminated earlier by our Board. Our Board may amend or terminate our Equity Incentive Plan at any time. Our Board generally may amend the plan without shareholder approval unless required by applicable law.

 

Employment Agreements and Other Arrangements with Named Executive Officers

 

Under our employment agreement with Pat Sek Yuen Chan, Mr. Chan serves as our President and Chief Executive Officer at a base salary of $303,143, In the event Mr. Chan’s employment is terminated upon the occurrence of a merger with another company that has been in a loss position for three years or declared bankruptcy, dissolved or liquidated, or if changes in the law result in the company or Mr. Chan unable to legally perform the contract, 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 also agreed not to hold any appointment for any other entity that has a competitive relationship with the Company during, and for one year following the termination of, his employment arrangement with us.

 

Under our employment agreement with Anthony Chan, Mr. Chan serves as our Chief Financial Officer and receives monthly compensation in the amount of $21,000 per month, subject to periodic review and adjustment. The term of Mr. Chan’s employment agreement is two years unless both parties mutually agree to extend the term. We may terminate the agreement without any reason by giving Mr. Chan not less than two months’ prior notice in writing or salary in lieu thereof. We may also terminate this agreement without any notice period or termination payment under limited circumstances set forth in Mr. Chan’s employment agreement.

 

Under our employment agreement with Bob Li, Mr. Li serves as Senior Vice President for Commercial Affairs at a base salary of $252,486, subject to review and adjustment. The contract will be terminated upon expiration of the term, if it is terminated in the probationary period, by mutual agreement or in the case of investigation of Mr. Chan for criminal liability. We may also voluntarily terminate the agreement in certain circumstance, as described in the agreement. In the event Mr. Chan’s employment is terminated upon the occurrence of a merger with another company, when the company has been in a loss position for three years, when the company has declared bankruptcy, dissolution or liquidation, or if changes in the law result in the company or Mr. Chan unable to legally perform the contract, 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.

 

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Director Compensation

 

During 2017, our nonemployee directors were entitled to receive cash compensation and an option to purchase ordinary shares. All nonemployee directors receive an annual fee of $30,000, and the chairperson of the Audit Committee receives an additional $18,000 per year and the chairperson of the Compensation Committee receives an additional $5,000 per year. Directors are entitled to be reimbursed for their reasonable expenses incurred in attending meetings of the Board and committees of the Board. The following table sets forth the compensation paid to each person who served as a member of our Board in 2017. Pat Chan, our Chief Executive Officer and Chairman of the Board, did not receive any additional compensation for his service as a director, and his compensation is detailed in the Summary Compensation Table and related disclosures.

 

Director Compensation Table

 

The table below shows the compensation received by each of our non-employee directors during 2017. Our non-employee directors do not receive fringe or other benefits.

 

Name   Fees
earned or paid in cash
($)
    Stock
awards
($)
    Option
awards
($)
    Non-equity incentive plan compensation
($)
    Nonqualified deferred compensation earnings
($)
    All other compensation
($)
    Total
($)
 
Pat Sek Yuen Chan     -           -       -          -           -           -       -  
Honghui Deng     30,000       -       82,410       -       -       -       112,410  
Yaqi Feng     30,000       -       82,410       -       -       -       112,410  
Bill Huang     30,000       -       82,410       -       -       -       112,410  
Jason Zexian Shen     35,000       -       82,410       -       -       -       117,410  
Eric Tao     30,000       -       82,410       -       -       -       112,410  
Joseph Wai Leung
Wong
    48,000       -       82,410       -       -       -       130,410  

 

Name

 

Grant Date

 

Option
Awards:
Number of
Securities
Underlying
Options
(#)

   

Option Exercise
Price
($)

   

Grant Date
Fair
Value of
Option
Awards
($)

 
Honghui Deng   11/18/2017     30,000       5.30     $ 82,410  
Yaqi Feng   11/18/2017     30,000       5.30     $ 82,410  
Bill Huang   11/18/2017     30,000       5.30     $ 82,410  
Jason Zexian Shen   11/18/2017     30,000       5.30     $ 82,410  
Eric Tao   11/18/2017     30,000       5.30     $ 82,410  
                             
Joseph Wai Leung Wong   11/18/2017     30,000       5.30     $ 82,410  

 

The values of the option awards represent grant-date fair values without regard to forfeitures.

 

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2017 Equity Awards for Directors

 

Our director compensation policy provides for annual grants of stock options to the nonemployee directors as follows:

 

annual grant of an option to purchase 30,000 ordinary shares, commencing on October 15, 2017;

 

options to vest 25% on the first anniversary of the grant date, and 1/48th each of the next 36 months thereafter; and

 

exercise price equal to the closing price of the ordinary shares as traded on Nasdaq on the day immediately before the grant date.

 

The following table provides options held by our nonemployee directors as of December 31, 2017.

 

Name   Grant
date
  Vesting
Start
date
  Number of securities underlying unexercised options vested
(#)
    Number of securities underlying unexercised options unvested (#)     Option exercise price
($)
    Option Expiration date
Honghui Deng   11/18/2017   10/15/2017     -       30,000     $ 5.30     10/15/2027
Yaqi Feng   11/18/2017   10/15/2017     -       30,000     $ 5.30     10/15/2027
Bill Huang   11/18/2017   10/15/2017     -       30,000     $ 5.30     10/15/2027
Jason Zexian Shen   11/18/2017   10/15/2017     -       30,000     $ 5.30     10/15/2027
Eric Tao   11/18/2017   10/15/2017     -       30,000     $ 5.30     10/15/2027
Joseph Wai Leung Wong   11/18/2017   10/15/2017     -       30,000     $ 5.30     10/15/2027

 

Compensation Committee Interlocks and Insider Participation

 

As of the date of this Annual Report, no officer or employee serves as a member of the Compensation Committee. None of our executive officers serves as a member of the Board or Compensation Committee of any entity that has one or more executive officers serving on our Board or Compensation Committee.

 

Limitation of Liability and Indemnification of Directors and Officers

 

Our memorandum and articles of association, the BVI Business Companies Act, (as amended), and the common law of the British Virgin Islands allow us to indemnify our officers and directors from certain liabilities. Our memorandum and articles of association provides that we 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 our company; or (b) is or was, at the request of our company, serving as a director of, or in any other capacity is or was acting for, another Enterprise.

 

We 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 our company and, in the case of criminal proceedings, the indemnitee had no reasonable cause to believe that his conduct was unlawful. The decision of our directors as to whether an indemnitee acted honestly and in good faith and with a view to the best interests of our 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 our company or that such indemnitee had reasonable cause to believe that his conduct was unlawful.

 

We 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 our request 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 we have or would have had the power to indemnify him against the liability as provided in our memorandum and articles of association.

 

We have insurance policies under which, subject to the limitations of the policies, coverage is provided to our directors and officers against loss arising from claims made by reason of breach of fiduciary duty or other wrongful acts as a director or officer, including claims relating to public securities matters, and to us with respect to payments that may be made by us to these officers and directors pursuant to our indemnification obligations or otherwise as a matter of law.

 

We have entered into indemnification agreements with each of our directors and executive officers that may be broader than the specific indemnification provisions contained in the BVI Companies Act, 2004 or our charter. These indemnification agreements require us, among other things, to indemnify our directors and executive officers against liabilities that may arise by reason of their status or service. These indemnification agreements also require us to advance all expenses incurred by the directors and executive officers in investigating or defending any such action, suit or proceeding. We believe that these agreements are necessary to attract and retain qualified individuals to serve as directors and executive officers.

 

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At present, we are not aware of any pending litigation or proceeding involving any person who is or was one of our directors, officers, employees or other agents or is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, for which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matter

 

The following table presents information as to the beneficial ownership of our ordinary shares as of March 27, 2018, and as adjusted to reflect the sale of ordinary shares in this offering, by:

 

each shareholder known by us to be the beneficial owner of more than 5% of our ordinary shares;

 

each of our directors;

 

each of our named executive officers; and

 

all of our directors and executive officers as a group.

 

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and thus represents voting or investment power with respect to our securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Ordinary shares subject to options that are currently exercisable or exercisable within 60 days of March 27, 2018 are deemed to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 

Percentage ownership of our ordinary shares is based on 31,307,522 ordinary shares outstanding on March 27, 2018. Unless otherwise indicated, the address of each of the individuals and entities named below is c/o Borqs Technologies, Inc., Building B23-A, Universal Business Park No. 10, Jiuxianqiao Road, Chaoyang District, Beijing, 100015 China.

 

   

Shares Beneficially

Owned

 
    Number of Shares     %  
Name and Address of Beneficial Owners (1)            
5% Holders            
Zhengqi International Holding Ltd.     4,789,850       15.3  
Intel Capital Corporation (5)     3,799,172       12.1  
Norwest Venture Partners (6)     3,342,126       10.7  
Asset Horizon International Limited (2)     3,282,859       10.5  
GSR Entities (4)     2,598,811       8.2  
Keytone Ventures, L.P. (3)     3,025,627       9.7  
                 
Directors and Executive Officers                
Pat Sek Yuen Chan (7)(10)     1,038,264       3.4  
Honghui Deng     30,000       *  
Yaqi Feng     60,000       *  
Bill Huang     -       -  
Jason Zexian Shen     30,000       *  
Joseph Wai Leung Wong     -       -  
Bob Li, Ph.D. (8)(10)     528,490       1.7  
Anthony K. Chan (9)(10)     -       -  
Eric Tao     -       -  
Simon Sun     -       -  
Hareesh Ramanna     -       -  
George Thangadurai     -       -  
Gene Wuu, Ph.D.     -       -  
All directors and officers as a group (13 persons) (10)     1,686,754       5.1  

 

 

* Less than one percent

 

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

 

(2)  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.

 

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(3)  The general partner of Keytone Ventures, L.P. is Keytone Capital Partners, L.P. (“Keytone Partners”), and Keytone Partners and Keytone Investment Group, Ltd. (“Keytone Ltd”), the general partner of Keytone Partners, may be deemed to have sole voting power, and Joe Zhou, the sole member and director of Keytone Ltd, may be deemed to have sole voting power with respect to such shares 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 P.O. Box 309, Ugland House, Grand Cayman, KY-1104, Cayman Islands.

 

(4)  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.

 

(5)  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, CA 95054.

 

(6)  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.

 

(7)  Includes 687,361 ordinary shares and 239,973 ordinary shares subject to options.

 

(8)  Includes 335,626 ordinary shares and 51,446 ordinary shares subject to options.

 

(9)  Includes 11,724 ordinary shares and 97,704 ordinary shares subject to options.

 

(10)  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.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table summarizes information about ordinary shares that may be issued upon the exercise of options, warrants and rights under all of our equity compensation plans as of March 27, 2018.

 

Plan Category  

Number of
Securities to be
Issued upon
Exercise of
Outstanding
Options,
Warrants
and Rights

   

Weighted-Average
Exercise Price of
Outstanding
Options,
Warrants
and Rights

   

Number of Securities Remaining
Available for Future Issuance
Under Equity Compensation
Plans (Excluding Securities
Reflected in the First Column)

 
Equity compensation plans approved by stockholders (1)
    2,825,273     $ 5.075       3,714,958  
Equity compensation plans not approved by stockholders
    -       -       -  
Total
    2,825,273     $ 5.075       3,714,958  

 

 

(1) The number of ordinary shares reserved for issuance under the Equity Incentive Plan will increase automatically on January 1 of each of 2018 through 2027 by a number of shares that is equal to 5% of the aggregate number of outstanding ordinary shares as of the immediately preceding December 31.

 

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Item 13. Certain Relationship and Related Transactions, and Director Independence

 

Policies and Procedures for the Review and Approval of Related-Person Transactions

 

Our Board 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. No related person transaction will be entered into without the approval or ratification of our Audit Committee or another independent body of our Board. 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 in determining whether or not to approve or ratify a related person transaction, although such determinations will be made in accordance with BVI law.

 

Related-Person Transactions

 

Repurchase of Shares from Zhengqi International.

 

On January 10, 2018, we entered into a stock repurchase agreement (“Stock Repurchase Agreement”) with Zhengqi International Holding Limited (“Zhengqi”), pursuant to which we agreed to repurchase 966,136 of our ordinary shares that were originally issued and sold to Zhengqi on August 18, 2017, at an aggregate purchase price of approximately $10 million, or $10.40 per share. In addition, Zhengqi will forfeit all of its rights to 1,278,776 shares that had been held in escrow and which will instead be treated as part of the merger consideration shares under the merger agreement pursuant to which the Company acquired Borqs International. The Stock Repurchase Agreement provides that those shares will be treated in the following manner: 51,151 shares (4% of the total) became additional shares placed in an indemnity escrow account; and 1,227,625 shares were distributed to the former Borqs International shareholders based on their respective proportionate interests in the merger consideration. The funds used to repurchase the shares from Zhengqi were the same amount of funds Zhengqi provided to the Company when the shares were sold to Zhengqi on August 18, 2017 under the Backstop and Subscription Agreement between the Company, Zhengqi and EarlyBirdCapital. The repurchase transaction is not yet completed, though funds have been transferred to Zhengqi in anticipation of satisfaction of closing conditions and the 966,136 repurchase shares currently remain outstanding.

 

Pursuant to the Stock Repurchase Agreement, the Company and Zhengqi also agreed to use their best efforts to amend the Company’s charter to provide that until August 18, 2018, if any Board member not appointed by Zhengqi is absent from a meeting, then an equal number of Board members appointed by Zhengqi shall also be absent or otherwise not participate in or influence voting of our Board in such meeting.

 

Pacific Related Person Transactions

 

In this section, reference to “Pacific” means “Pacific Special Acquisition Corp.,” the public company whose securities were traded on The Nasdaq Stock Market prior to our acquisition of Borqs International by way of merger.

 

In July 2015, Pacific issued an aggregate of 1,437,500 ordinary shares (“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, Zhengqi 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 initial public offering.

 

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Pacific’s initial shareholders have agreed not to transfer, assign or sell any of their founder shares (except to certain permitted transferees) until, (i) 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 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 August 18, 2017, and (ii) with respect to the remaining 50% of the founder shares, upon August 18, 2018. one year after the date of the consummation of our initial business combination, or earlier, in either case, the transfer restrictions may be lifted earlier upon our consummation of, subsequent to our initial business combination, we consummated a subsequent liquidation, merger, stock exchange or other similar transaction that which results in all of our shareholders having the right to exchange their ordinary shares for cash, securities or other property.

 

In a private placement that closed simultaneously with the closing of Pacific’s initial public offering, including the closing of the over-allotment option, Zhengqi purchased an aggregate of 497,671 units at a price of $10.40 per share.

 

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. Zhengqi paid Mr. Boris, one of Pacific’s directors, a $50,000 consulting fee as compensation for advisory services provided by Mr. Boris to Zhengqi 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 our acquisition of Borqs International by way of merger. 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, Zhengqi sold Mr. Boris 80,000 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 to Mr. Boris following the consummation of our acquisition of Borqs International by way of merger.

 

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

 

On November 9, 2016, Zhengqi 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 August 18, 2017. The convertible promissory note was convertible, in whole or in part, at the election of Zhengqi, upon the consummation of an initial business combination, into units at a price of $10.00 per unit. The promissory note was repaid in full in cash on August 18, 2017.

 

Members of Pacific’s management 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 repaid on August 18, 2017.

 

In connection with Pacific’s April 18, 2017 meeting of shareholders Zhengqi loaned an aggregate of $612,000 to Pacific ($0.03 for each public share not redeemed for each month between April 20, 2017 until August 21, 2017). As a result, the pro rata portion of the funds available in the trust account for ordinary shares that were not redeemed increased from approximately $10.40 per share to approximately $10.52 per share. Zhengqi’s loan was repaid in full 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 described below, Zhengqi and its assignees were entitled to receive 2,352,285 ordinary shares if Company performance targets were not achieved; if those targets were achieved, those shares (to the extent earned) would be delivered to the former shareholders of Borqs International. These shares were issued on August 18, 2017 in the name of Zhengqi and deposited in escrow, with Zhengqi entitled to all voting rights and dividend rights (other than equity securities paid as dividends). Any portion of these shares are earned by the former shareholders of Borqs International will be forfeited by Zhengqi and the Company will issue new equivalent shares to the former shareholders of Borqs International, with four percent of these shares deposited in escrow to support indemnification obligations under the Merger Agreement. In connection with our acquisition of Borqs International by way of merger, we amended our charter amended to require, for future acquisitions by the Company prior to September 30, 2018 having a value in excess of $60 million, the approval of at least two-thirds of the members of our then-serving board of directors, to grant Zhengqi information rights relating to such acquisitions, and, if requested by Zhengqi, to provide a fairness opinion in respect of such acquisitions.

 

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On May 11, 2017, Pacific and Zhengqi entered into a Backstop and Subscription Agreement, pursuant to which Zhengqi agreed to purchase up to $24.0 million of our 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 our acquisition of Borqs International by way of merger or (iii) a combination thereof, in order to ensure that there was at least $24.0 million in the trust account together with proceeds from any private placement to be conducted prior to the closing of our acquisition of Borqs International by way of merger. Zhengqi was entitled, at its sole election, to purchase additional ordinary shares in excess of such $24.0 million 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 obligations of Zhengqi to purchase Pacific ordinary shares in the private placement under the Backstop and Subscription Agreement were assigned to EarlyBirdCapital. In connection with our merger with Borqs International and as consideration for the Backstop and Subscription Agreement, Pacific sold 1,038,251 ordinary shares for an aggregate consideration of approximately $10.8 million; we plan to repurchase 966,136 of these ordinary shares, as described under “— Repurchase of Shares from Zhengqi International.”

 

Pursuant to a registration rights agreement entered into on October 14, 2015, Pacific’s initial shareholders and EarlyBirdCapital, and their permitted transferees, can demand that we register the offer and sale of ordinary shares that they acquired on or prior to our initial public offering. The holders of the majority of those founder shares are entitled to demand that we register these ordinary shares at any time commencing May 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, those holders have “piggy-back” registration rights on registration statements filed after August 18, 2017. At the closing of our acquisition of Borqs International by way of merger, the Company, Zhengqi, EarlyBirdCapital and certain other investors amended and restated the registration rights agreement to include similar registration rights with respect to ordinary shares issued as merger consideration in that merger, and the ordinary shares acquired by Zhengqi and EarlyBirdCapital in connection with the Backstop and Subscription Agreement.

 

Independence of the Board of Directors

 

The independence of the members of our board of directors and committees is discussed in the sections above entitled “ Independence of the Board of Directors ” and “ Committees of the Board of Directors .”

 

Item 14. Principal Accounting Fees and Services

 

The following table sets forth the aggregate fees for audit and other services provided by our independent registered public accounting firm, Ernst and Young Hua Ming LLP (“EY”), for the years ended December 31, 2016 and 2017:

 

    2016     2017  
Audit fees (1)   $ 685     $ 741  
Tax service fee (2)     -     $ 30  
Total fees   $ 685     $ 771  

  

 

(1) The audit services relate to the audit of our annual financial statements, the review of the financial statements included in our quarterly reports, statutory audits and review of documents provided in connection with statutory or regulatory filings.

 

(2) The tax service relates to a tax study regarding the merger in August 2017.

  

In accordance with its charter, the audit committee is required to pre-approve all audit and non-audit services to be performed by the independent auditors and the related fees for such services other than prohibited non-auditing services as promulgated under rules and regulations of the SEC (subject to the inadvertent de minimus exceptions set forth in the Sarbanes-Oxley Act of 2002 and the SEC rules). Subsequent to the merger in August 2017, all services performed by EY for our benefit were pre-approved by the audit committee in accordance with its charter and all applicable laws, rules and regulations.

 

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PART IV

 

Item 15.     Exhibits and Financial Statement Schedules

 

(a)   Consolidated financial statements, consolidated financial statements schedule and exhibits

 

1.     Consolidated financial statements. The consolidated financial statements as listed in the accompanying “Index to Consolidated Financial Information” are filed as part of this Annual Report on Form 10-K.

 

2.     All schedules not listed in the accompanying index have been omitted as they are either not required or not applicable, or the required information is included in the consolidated financial statements or the notes thereto.

 

3.     Exhibits. The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Annual Report on Form 10-K.

 

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EXHIBIT INDEX

 

    Incorporated by Reference

Exhibit

Number

  Exhibit Title   Form   File No.   Exhibit   Filing Date  

Filed

Herewith

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, Zhengqi (incorporated by reference from Annex A to the Registrant’s Definitive Proxy Statement, filed with the SEC on July 14, 2017)   8-K   001-37593   2.1   8/24/17    
3.1   Amended and Restated Memorandum and Articles of Association   8-K   001-37593   3.1   8/24/17    
10.1   Registration Rights Agreement, dated August 18, 2017, by and among each of Selling Shareholders and the Purchaser Representative   8-K   001-37593   10.1   8/24/17    
10.2   Form of Lock-Up Agreement, by and among each of the Selling Shareholders, Pacific and the Purchaser Representative   8-K   001-37593   10.2   8/24/17    
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   8-K   001-37593   10.3   8/24/17    
10.4   Escrow Agreement, dated August 18, 2017, by and among the Registrant, the Purchaser Representative, Seller Representative and the Escrow Agent   8-K   001-37593   10.4   8/24/17    
10.5   Form of Letter of Transmittal   8-K   001-37593   10.5   8/24/17    
10.6   Backstop and Subscription Agreement, dated May 11, 2017, by and among Pacific and Zhengqi   8-K   001-37593   10.6   8/24/17    
10.7+   Employment Contract, dated July 1, 2013, by and between Borqs International and Pat Sek Yuen Chan   8-K   001-37593   10.7   8/24/17    
10.8+   Employment Contract, dated July 1, 2013, by and between Borqs International and Bob Xiao Bo Li   8-K   001-37593   10.8   8/24/17    
10.9+   Employment Agreement, dated January 1, 2018, by and between Borqs Hong Kong Limited and Anthony K. Chan   8-K   001-37593   99.1   3/26/18    
10.10+   Borqs Technologies, Inc. 2017 Equity Incentive Plan, as amended   8-K   001-37593   10.10   8/24/17    
10.11   Form of Warrant, dated August 18, 2017, by and between the Company and each of Warrant Holders   8-K   001-37593   10.11   8/24/17    
10.12   Partial Assignment and Amendment of Backstop and Subscription Agreement, dated August 18, 2017, by and between Zhengqi, EarlyBirdCapital, Pacific and Borqs International   8-K   001-37593   10.12   8/24/17    

 

  125  

 

 

    Incorporated by Reference

Exhibit

Number

  Exhibit Title   Form   File No.   Exhibit   Filing Date  

Filed

Herewith

10.13   Amended and Restated Registration Rights Agreement, dated August 18, 2017, by and among Pacific and certain shareholders of Pacific   8-K   001-37593   10.13   8/24/17    
10.14   Letter of Intent, dated January 8, 2018, by and between Borqs Technologies, Inc. and Shanghai KADI Technologies Co., Ltd.                   X
10.15   Share Purchase Agreement, dated January 18, 2018, by and among with Borqs Technologies, Inc. and Colmei Technology International Limited, Shenzhen Crave Communication Company, Limited, and their respective shareholders.   8-K   001-37593   99.1   1/22/18    
10.16   Alpha Network Ltd. Manufacturing & Service Agreement and Form of Purchase Order, dated September 1, 2015                   X
10.17   Colmei Technology International Limited Master Manufacturing Agreement and Form of Purchase Order, dated March 6, 2017.                   X
10.18   Reliance Retail Limited Form of Purchase Order, dated November 23, 2015                   X
10.19+   Form of Indemnification Agreement, dated August 18, 2017, by and Borqs Technologies, Inc. and each of its directors and executive officers                   X
21.1   List of subsidiaries   S-1  

001-37593

 

21.1

 

2/14/18

   
31.1   Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted by Section 302 of the of the Sarbanes-Oxley Act of 2002                   X
31.2   Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted by Section 302 of the of the Sarbanes-Oxley Act of 2002                    
32.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002                   X
32.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002                   X

 

 

+       Management contract or compensatory plan or arrangement

 

  126  

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on April 2, 2018.

 

  BORQS TECHNOLOGIES, INC.
     
  By: /s/ Anthony K. Chan
   

Anthony K. Chan

Chief Financial Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated below.

 

Signature   Title   Date
         
/s/ Pat Sek Yuen Chan       April 2, 2018
Pat Sek Yuen Chan   Chief Executive Officer and Director (Principal Executive Officer)    
         
/s/ Anthony K. Chan       April 2, 2018
Anthony K. Chan   Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer)    
         
/s/ Honghui Deng       April 2, 2018
Honghui Deng   Director    
         
/s/ Yaqi Feng       April 2, 2018
Yaqi Feng   Director    
         
/s/ Bill Huang       April 2, 2018
Bill Huang   Director    
         
/s/ Jason Zexian Shen       April 2, 2018
Jason Zexian Shen   Director    
         
/s/ Eric Tao       April 2, 2018
Eric Tao   Director    
         
/s/ Joseph Wai Leung Wong       April 2, 2018
Joseph Wai Leung Wong   Director    

 

 

127

 

Exhibit 10.14

 

BORQS Technologies, Inc.

 

Tower A, Building B23, Universal Business Park

No.10 Jiuxianqiao Road, Chaoyang District

Beijing 100015

China

 

5201 Great America Parkway, Suite 320

Santa Clara, California 95054

U.S.A.

  

January 8, 2018

 

Shanghai KADI Technologies Co., Ltd.

No.156 Chang Ji Road, Building 10

Anting Town, Jiading District

Shanghai, China

 

Gentlemen:

 

This Letter of Intent (“Letter of Intent”) outlines the general terms and conditions pursuant to which Borqs Technologies, Inc. a British Virgin Island Corporation (“BORQS” or the “Company”), proposes to acquire 60% of the issued and outstanding shares of Shanghai KADI Technologies Co., Ltd. and all of its subsidiaries or affiliated companies, if any, (together known as “KADI”) as contemplated hereunder (the “Proposed Transaction”), with proposed terms and conditions in Exhibit A attached hereto (the “Term Sheet”). BORQS and KADI together are known as the Parties. This Letter of Intent and the accompanying Term Sheet is subject to change and further negotiations until the final terms and conditions are mutually accepted and fully described in a definitive agreement governing the Proposed Transaction (the “Definitive Agreement”).

 

The terms of this Letter of Intent, although subject to change and further defined, are intended to provide a framework of the Proposed Transaction and obligate the Parties particularly on (a) following items “Items” set forth in Exhibit A: Exclusivity and Termination, Advance Payments, Confirmatory Due Diligence, Transaction Costs, Governing Law & Jurisdiction, and Confidentiality, and (b) the second, third and fourth paragraphs hereof. Final binding agreement by the Parties shall be provided in a Definitive Agreement mutually agreed upon and executed by the Parties. It is not the intention of the Parties hereto to be bound by any statements or tentative commitments, which might be made during the negotiation of the Proposed Transaction.

 

This Letter of Intent may be executed in any number of counterparts and any party hereto may execute any such counterpart, each of which when executed and delivered will be deemed to be an original and all of which counterparts taken together will constitute but one and the same instrument. In the event that any signature is delivered by facsimile transmission or other electronic transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or other electronic signature page were an original thereof.

   

This Letter of Intent, the rights and obligations of the Parties hereto, and any claims or disputes relating thereto, will be governed by and construed under and in accordance with the laws of Hong Kong SAR, without regard to conflicts of law principles that would result in the application of any law other than the laws of Hong Kong SAR. Each party to this Letter of Intent hereby irrevocably and unconditionally submits, for itself and its property, in any action or proceeding arising out of or relating to this Letter of Intent or for recognition or enforcement of any judgment relating thereto, and each of the Parties hereby irrevocably and unconditionally (a) agrees not to commence any such action or proceeding except in the court of the said jurisdiction, (b) agrees that any claim in respect of any such action or proceeding may be heard and determined in such court, (c) waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any such action or proceeding in any such court, and (d) waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. Each of the Parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.

 

This Letter of Intent is executed by the Parties on the condition that KADI has provided evidence satisfactory to BORQS that previously signed financing agreements KADI had made with other parties, particularly two such agreements with investment funds from Nanchang, Jiangxi Province, have been validly cancelled.

 

Please acknowledge your acceptance of and agreement to the foregoing by signing and returning to the undersigned as soon as possible a counterpart of this Letter of Intent.

 

[ Signature page to follow. ]

   

 

 

  

Very Truly Yours,  
BORQS TECHNOLOGIES, INC.  
   
By:    
Name: Pat Chan  
Title: Chairman of the Board and Chief Executive Officer
   
Accepted and Agreed to as of  
   
Date:    
   
SHANGHAI KADI TECHNOLOGIES CO., LTD.  
   
By:    
Name: Lin, Hu  
Title: Chairman of the Board and General Manager

  

  2  

 

 

EXHIBIT A - TERM SHEET (all figures in US$)

  

Acquiring Entity: Borqs Technologies, Inc. (the “Company” or “BORQS”)
Place of Incorporation: British Virgin Islands
Trading Symbol: BRQS
Stock Exchange: Nasdaq Capital Market (“Nasdaq”)
Ordinary Shares Outstanding: 30,804,637 common shares as of December 15, 2017
   
Acquisition Target Company: Shanghai KADI Technologies Co., Ltd. (“KADI”)
   
Resulting Company Structure: Borqs Technologies, Inc. directly or indirectly owning 60% of Shanghai KADI Technologies Co., Ltd., with an exclusive option, valid until 12/31/2021 to purchase the remainder 40% with a 9% premium to the consideration paid for the first 60%.
   
Total Consideration to be Paid by BORQS to KADI Owners: For owning 60% of KADI, BORQS shall pay an amount of $15.0 million in total, consisting of:
  $11.7 million in cash; and
  $3.3 million in BORQS ordinary shares.
   
Additional Financial Support by BORQS All hardware components shall be subcontracted from KADI to BORQS, with BORQS responsible for the delivery of hardware components, inclusive of all materials and supply chain management, to KADI for final assembly.
   
Schedule of Payments and Conditions: Closing of the Proposed Transaction shall be subject to the completion of fundraising solely to be determined by BORQS.  The payment of the consideration shall be paid according to of the following schedule:
   
  a.     At Closing, which is anticipated but not guaranteed to be within the 1st quarter of 2018, $5m in cash will be paid to KADI which includes $1.0m for operational purposes and $4.0m for set up of manufacturing facilities in Nanchang, Jiangxi Province;
   
  b.     In the 2nd half of 2018, $2.7m in cash will be paid to KADI for operational purposes;
   
  c.     At Closing, $0.2m in ordinary shares of Borqs shall be issued to the owners of KADI. After the completion of accounting audit of KADI’s financial results for the year ending 12/31/2018, $1m in ordinary shares of BORQS shall be issued to the owners of KADI based on (i) achieving at least 70% of the forecasted revenue target of $7.7m, and (ii) in direct proportion to the 2018 after-tax net income target of $1.0m on pro-rata basis, with a maximum ceiling at 120%;

  

  3  

 

 

  d.    In the 1st half of 2019, $2.0m in cash will be paid to KADI for operational purposes; and in the 2nd half of 2019, $2.0m in cash will be paid to KADI for operational purposes;
   
  e.     After the completion of accounting audit of KADI’s financial results for the year ending 12/31/2019, $1.1m in ordinary shares of BORQS shall be issued to the owners of KADI based on (i) achieving at least 70% of the forecasted revenue target of $20.4m, and (ii) in direct proportion to the 2019 after-tax net income target of $3.0m on pro-rata basis, with a maximum ceiling at 120%;
   
  f.     After the completion of accounting audit of KADI’s financial results for the year ending 12/31/2020, $1.0m in ordinary shares of BORQS shall be issued to the owners of KADI based on (i) achieving at least 70% of the forecasted revenue target of $20.4m, and (ii) in direct proportion to the 2020 after-tax net income target of $3.0m on pro-rata basis, with a maximum ceiling at 120%;
   
  g.    The amount of ordinary shares of BORQS issued to the owner of KADI shall be calculated based on the volume weighted average closing price of the shares as traded on NASDAQ for the 20 preceding trading days immediately prior to the date of issuance; and
   
  h.    All ordinary shares of BORQS issued to the owner of KADI shall be subject to lock-up from sale until after 06/30/2021.

 

  4  

 

 

Covenants of KADI: Prior to the execution of the Definitive Agreement, KADI shall submit to BORQS, a legal opinion from a top tier law firm in China acceptable to BORQS, regarding KADI that:
   
  a.     It is duly organized under the laws of the People’s Republic of China;
   
  b.     It is free from any outstanding debt from private individuals or financial institutions;
   
  c.     It is free from any final or pending court judgement;
   
  d.     It is free from any unpaid taxes of any type or from any jurisdiction;
   
  e.    There is no final or pending, commercial or criminal, court judgement against any of KADI’s owners;
   
  f.     KADI’s intellectual properties are not known to be encumbered by any potential claims;
   
  g.     KADI’s current technologies are not known to have infringed on any domestic or international rights, and that the owners of KADI personally guarantees that to the best of their knowledge there is no known infringement on intellectual property rights of any party in the world;
   
  h.     A complete list of unpaid outstanding invoices, and unpaid salaries if any, as of the date of this Letter of Intend to be provided to include name of the beneficiary, the amount, and a short description of each item;
   
  i.     Includes copies of all product liability and/or quality inspection reports on KADI’s technology or sample products;
   
  j.     Any derogatory matter that in the opinion of the law firm providing the legal opinion should be made known to BORQS for the purpose of BORQS making the final decision in the acquisition of ownership of KADI; and
   
  k.     An official statement from ESPIRIT that the commercial contracts signed with KADI shall remain in effect upon the investment from BORQS into KADI as contemplated hereof.

  

  5  

 

 

Exclusivity and Termination: Until the earlier of (i) 9 months after the execution of this Letter of Intent, (ii) the time BORQS has indicated in writing that it no longer desires to pursue the Proposed Transaction, or (iii) execution of a Definitive Agreement (the “Exclusivity Period”), KADI shall not be engaged in discussion with any other party except BORQS regarding a merger, acquisition, equity financing, business combination or any transaction that would cause the ownership and/or outstanding shares of KADI to change.
   
Advance Payments: Upon the execution of this Letter of Intent, BORQS shall pay to KADI, US$150,000 as working capital for KADI and shall continue to pay the same amount each month thereafter for up to a maximum of 3 additional months, or until the Closing of the Proposed Transaction if so happens sooner than 4 months from signing of this Letter of Intent. The first payment shall be made within 3 business days from the signing of this Letter of Intent.  It shall be entirely in the discretion of BORQS to discontinue making such monthly Advance Payment in the event that BORQS discovers derogatory matters previously unknown to BORQS.
   
  Advance Payments made shall be deducted from the first payment to KADI for working capital as described in the above section of “Schedule of Payments”.
   
  In the event that the Proposed Transaction cannot be closed after 9 months from this Letter of Intent, the total of Advanced Payments made shall become converted into 5% ownership of KADI.
   
Additional Closing Conditions: The Proposed Transaction is subject to customary conditions appropriate for a similar share exchange transaction or merger, including:
   
  a.    No material adverse change in the business, subsidiaries, operations, prospects or financial condition of the Parties, unless waived by the non-offending party;
   
  b.    The representations and warranties of both Parties being true and correct at signing of the Definitive Documents and closing of the Proposed Transaction;
   
  c.     Receipt of all equity holder, governmental, regulatory and third-party requisite approvals and consents, including the completion of the SEC process and the required fundraising as contemplated by BORQS;
   
  d.    The terms and conditions of the Proposed Transaction must be acceptable to both Parties and approved by each of their respective Board of Directors;
   
  e.    There is no relationship of partnership, agency, employment, or joint venture between the Parties.  No party has the authority to bind the other or incur any obligation on its behalf;

  

  6  

 

 

  f.    KADI shall accept and cooperate with an accountant assigned by BORQS within KADI’s operation;
   
  g.    KADI agrees to provide BORQS with any information relating to the any government filings contemplated by the Proposed Transaction, and consents to the disclosure of such if and when required under US securities law; and
   
  h.    Subject to such customary additional terms not inconsistent with the above as agreed between the Parties.
   
Confirmatory Due Diligence: Upon acceptance of the Letter of Intent, KADI will cause its current legal counsel, accountants, agents and representatives to cooperate with BORQS in order for BORQS to conduct due diligence, including getting access to KADI’s legal and accounting records, visiting and inspecting the location(s) of KADI and meeting with KADI’s management, suppliers and customers.  
   
Transaction Costs: Each Party shall be responsible for its own costs and expenses in negotiating the transaction, preparing and negotiating the Definitive Documents and preparing all required disclosure relating to documents required to be filed with the Securities and Exchange Commission and other regulatory authorities in connection with the Proposed transaction.
   
Governing Law & Jurisdiction: Hong Kong SAR
   
Confidentiality: The Parties to this Letter of Intent acknowledge and agree that the existence and terms of this Letter of Intent and the Term Sheet are strictly confidential and further agree that they and their respective representatives, including without limitation, shareholders, directors, officers, employees or advisors, shall not disclose to the public or to any third party the existence or terms of this Letter of Intent or the Proposed Transaction other than with the express prior written consent of the other party, except as may be required by applicable law, rule or regulation, or at the request of any governmental, judicial, regulatory or supervisory authority having jurisdiction over a party or any of its representatives, control persons or affiliates (including, without limitation, the rules or regulations of the SEC or FINRA), or as may be required to defend any action brought against such party in connection with the transaction.  If a party is so required to make such a disclosure, it must first provide to the other party the content of the proposed disclosure, the reasons that the disclosure is required, and the time and place that the disclosure will be made.  In such event, the Parties will work together to draft a disclosure which is acceptable to both Parties.

 

7

 

 

Exhibit 10.16

 

Manufacturing & Service Agreement

 

This Manufacturing & Service Agreement (the “Agreement”) is effective as of September 1 st , 2015 (the Effective Date”) and entered into by and among Alpha Network Ltd. (“ALPHA”) and Borqs Hong Kong Ltd. (“BORQS”), collectively referred to as the “Parties” and individually as a “Party”.

 

Pursuant to the terms of this Agreement, ALPHA will purchase certain products (the “Products”), as described in Schedule A, from BORQS who will provide customization of embedded software, and will cause to manufacture compatible hardware from available original equipment manufacturers (“OEM”), including Quanta Computer, Inc.

 

In consideration of the mutual covenants, terms and conditions set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

 

1. Assignment and Sale

 

1.1 Assignment . BORQS hereby sells, assigns, grants, conveys, and transfers to ALPHA all of BORQS’ rights, title, claims to intellectual properties and interest (but none of BORQS’ obligations) in and to the Products in perpetuity.

 

1.2 ALPHA’s Rights Upon Sale . Upon completion of the transaction, ALPHA is transferred BORQS’ ownership and all rights with respect to the Products and may receive, take, endorse, assign, deliver and accept payment for further resale of the Products to ALPHA’s customers.

 

1.3 Payment . All payments for purchase of any batch and all of the Products, whether delivered to ALPHA from BORQS or directly from BORQS’ contracted OEM, shall be made in 120 days from the date of delivery. Payment shall be made to BORQS or its assignee solely in BORQS discretion.

 

2. Representations and Warranties

 

BORQS represents and warrants to ALPHA that:

 

(a) BORQS is the sole and absolute owner of the customized software that BORQS will cause to embed into the Products for ALPHA, with full legal rights to sell, transfer, and assign such to ALPHA;

 

(b) The amounts of the Products together with pricing included as shown on Schedule A are agreed to, undisputed and valid therein, and can be altered in full or in part only in writing by the Parties;

 

(c) The Products have not been previously sold, assigned, transferred, or pledged, and are free of any liens, security interests, and encumbrances; and

  

 

 

 

(d) BORQS will require its contract OEM and/or affiliates to comply with all applicable laws, rules, regulations, and government restrictions, decrees, directives and orders that apply to the manufacturing of the Products under this Agreement, including any anti-bribery laws, anti-money laundering laws and/or anti-terrorist financing laws.

 

3. Delivery

 

BORQS shall, within 30 days of receipt of the purchase order from ALPHA, deliver the Products to ALPHA and provide invoice to ALPHA .

 

4. General Provisions

 

4.1 Governing Law and Jurisdiction . This Agreement shall be governed by and construed under the laws of the State of California, without reference to conflict of law principles. Any legal suit, action, or proceeding arising out of or relating to this Agreement shall be commenced in a federal or state court in Santa Clara County, California, and each party hereto irrevocably submits to the exclusive jurisdiction and venue of any such court in any such suit, action, or proceeding.

 

4.2 Integration . This Agreement, including the attached schedules or exhibits, constitutes the entire Agreement between the Parties concerning this transaction, and replaces all previous communications, representations, understandings, and agreements, whether verbal or written, with respect to the specific subject matter hereof.

 

4.3 Amendment . No waiver, amendment, or modification of any provisions of this Agreement shall be effective unless in writing and signed by a duly authorized representative of the Party against whom such waiver, amendment, or modification is sought to be enforced. Furthermore, no provisions in the purchase orders, or in any other business forms employed by any of the Parties will supersede the terms and conditions of this Agreement unless agreed to in writing by the Parties.

 

4.4 Notices . All notices required or permitted to be given under this Agreement shall be in writing and deemed given (a) when personally delivered, (b) one (1) day after delivered to an overnight courier guarantying next day delivery, (c) the date upon which the read-receipt was received for electronic mail. All notices shall be· addressed to the parties at the addresses specified below:

 

  ALPHA: Alpha Network Ltd.
    Offshore Chambers, P.O.  Box 217,
    Apia Samoa
   
  BORQS: Borqs Hong Kong Ltd
    B, 21/F., Legend Tower,
    7 Shing Yip Street, Kwun Tong,
    Kowloon, Hong Kong
    Attn: Amanda Li
    Email: amanda.li@borqs.com

  

  2  

 

 

4.5 Attorney’s Fees . In the event any action is brought to enforce this Agreement, the prevailing party shall be entitled to recover its costs of enforcement, including, without limitation, reasonable attorneys’ fees and costs.

 

4.6 Waiver . No failure or delay by either party in exercising any right, power, or remedy under this Agreement, except as specifically provided in this Agreement, shall operate as a waiver of any such right, power, or remedy.

 

4.7 Non-Assignability & Binding Effect . Except as otherwise provided for within this Agreement, neither party may transfer or assign any of its rights or delegate any of its obligations under this Agreement to any third party without the express written consent of the other party, whose consent shall not be unreasonably withheld. Any assignment in breach of this provision shall be deemed null and void.

 

4.8 Severability . If any provisions of this Agreement are held by a court of competent jurisdiction to be invalid under any applicable statute or rule of law, they are to that extent to be deemed omitted and the remaining provisions of this Agreement shall remain in full force and effect.

 

4.9 Headings . The titles and headings of the various sections and sections in this Agreement are intended solely for convenience of reference and are not intended for any other purpose whatsoever, or to explain, modify, or place any construction upon or on any of the provisions of this Agreement.

 

4.10 Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed to be one and the same agreement. A signed copy of this Agreement delivered by facsimile, email, or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.

 

[Signature Page Follows]

  

  3  

 

 

IN WITNESS WHEREOF this Agreement was signed by the parties hereto as of the day and year first above written.

 

ALPHA NETWORK LTD.  
   
By:    
   
Name:    
   
Title:   Director  
   
BORQS HONG KONG LTD  
   
By:    
   
Name:     
   
Title:   CFO  

  

  4  

 

 

Schedule A

 

Products, Pricing and Schedule

 

Project NKS: Customization of Tablet Device Equivalent to Quanta’s NKS

  

Purchase price: USDI 104.90 per unit
   
Estimated delivery: September through December 2015
   
Quantity: Approximately 150,000 units

 

Project NKJ: Customization of Tablet Device Equivalent to Quanta’s NKJ

  

Purchase price: USD 136.00 per unit
   
Estimated delivery: October through December 2015
   
Quantity: Approximately 27,000 units

 

5

 

Exhibit 10.17

 

COLMEI TECHNOLOGY INTERNATIONAL LIMITED

-AND-

BORQS HONG KONG LIMITED

 

MASTER MANUFACTURING AGREEMENT

 

This Manufacturing Agreement is made on this 6th of March, 2017 between COLMEI TECHNOLOGY INTERNATIONAL LIMITED (“ Colmei ”), a company incorporated under the Laws of Hong Kong, having its office at 2nd Floor, Wing Yee Commercial Building, 5 Wing Kut Street, Central, Hong Kong, and, BORQS HONG KONG LIMITED (“ Vendor ”), a company incorporated under the Laws of Hong Kong, having its main office at B, 21/F., Legend Tower, 7 Shing Yip Street, Kwun Tong, Kowloon, Hong Kong.

 

Whereas VENDOR is inter-alia in the business of, developing, manufacturing, marketing and distributing various Mobile Phone, Tablet & Data Module products, and related products.

 

Whereas COLMEI is a leading Telecom & IT Technology Company which has a large network of Channel partners/Dealers, besides having in house capability to do marketing research, marketing and distribution of telecom & IT products.

 

An understanding has been reached between COLMEI and Vendor for cooperation with each other in the area of manufacturing and supply and support of Telecom and consumer electronic devices.

 

NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS :

 

1.  GENERAL TERMS & CONDITIONS.

 

1.1  COLMEI and VENDOR shall work together towards supply and distribution of telecom devices in worldwide. VENDOR shall manufacture these products on QOM basis for supply in various markets.

 

1.2  This Agreement sets forth the terms that apply to any Purchase Order that COLMEI may issue to VENDOR for Deliverables. Each Purchase Order will be governed by the terms and conditions of this Agreement.

 

1.3  VENDOR shall ensure that all products are strongly and adequately packed for protecting the consignment to avoid damage in the transit to destination under normal handling. The packing shall withstand air / rail/ road transport hazards under normal condition as per standards and guidelines provided by COLMEI to Vendor for labeling and packaging.

 

1.4  Technical Compliance . The product supplied under this agreement shall meet the specifications and features as mentioned in the technical specifications compliance sheet given by COLMEI from time to time. “The Vendor represents that the Products supplied under this agreement do not infringe in any manner, Intellectual Property (IP), which may subsist in mobile nucleus system, ZI input solution, WAP, Java, product ID or otherwise; and wherever applicable the relevant licenses have been obtained which are valid and shall continue to be so during the term of the agreement and due care has been taken to comply with the license terms, if any.

 

 

 

 

1.5  Training . VENDOR shall provide sufficient training to the employees of COLMEI. The training shall be imparted with a vision that the COLMEI employees understand the product very well. Proper training notes and training material for the same to be provided by VENDOR. Vendor shall also include any necessary documentation, and related materials such as presentations, audio-visual material necessary to explain the products listed in the Purchase Order.

 

1.6  VENDOR shall not reverse, de-compile, dis-assemble, modify, adapt, translate or use for derivative works in any manufacturing process & Product that may be provided by COLMEI to it for its use.

 

2.  PURCHASE ORDERS.

 

2.1  Process : Vendor shall from time to time provide COLMEI with different models at different prices and within a range of Bill of Materials (BoM). COLMEI shall provide the Vendor with its comments regarding the models provided and may at its discretion, issue a Purchase Order. The Vendor shall confirm the Purchase Order by providing a most likely schedule of (a) mass production; and (b) likely shipment schedule for the Purchase Order.

 

2.2  COLMEI at the beginning of each month will deliver a written Purchase Order to the Vendor. While a sample Purchase Order is given as Annex 1 to this Manufacturing Agreement, a Purchase Order will have the following commercial terms:

 

2.2.1  Date of the Purchase Order

 

2.2.2  Model of Mobile Phone / Tablet / Data Module / Consumer Electronics product being bought

 

2.2.3  Model Description

 

2.2.4  Quantities of the Model being bought

 

2.2.5  Credit Period / Payment terms governing the purchases under the Purchase Order

 

2.2.6  Delivery Performance . Unless otherwise specified in the applicable Purchase Order or as otherwise agreed by COLMEI in writing in advance, Vendor shall deliver Product compliant to the specified purchase order (including part numbers and quantities) to the COLMEI Forwarder Dock location specified in the Purchase Order no earlier than two (2) days prior to the delivery date specified by the applicable Purchase Order and no later than such specified delivery date. Vendor will inform COLMEI promptly after becoming aware of any issue that may affect Vendor’s ability to deliver Products in accordance with the delivery date or any other requirement of the Purchase Orders. In the event Vendor is unable to meet the required delivery date and a mode of expedited shipping is required in order for COLMEI to meet its marketing and delivery requirements.

 

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3.  ITEM DESCRIPTION.

 

3.1  All VENDOR Model will be supplied under this contract. Technical specifications and feature will be provided from time to time for different handset projects decided mutually.

 

4.  PRICES AND PAYMENT.

 

4.1  Prices shall be discussed from time to time based on different models. Prices shall be in United States Dollars (USD).

 

4.2  No escalation of unit price shall be allowed for whatever reason during the validity of this contract unless COLMEI approves / makes specification changes. COLMEI shall make best efforts to review the contract prices in view of the competitive landscape and affordability for various markets under COLMEI’s discretion.

 

5.  TERM AND TERMINATION.

 

5.1  This Agreement shall become effective upon its execution and shall be in force and effect for a 1 year period from the date of execution of the agreement, unless sooner terminated as provided below (the “ Initial Term ”). Thereafter, this Agreement shall be renewed automatically for periods of one (1) year each (each period, a “ Renewal Term ”), unless either party has given the other party written notice of termination, at least ninety (90) days prior to the end of the Initial Term or the applicable Renewal Term.

 

5.2  Termination for a cause . Without derogating from any of the parties’ remedies available under applicable law, each party may terminate this Agreement immediately upon giving written notice to the other party, in any of the following events: (i) if one party breaches this Agreement and fails to remedy such breach within twenty one (21) days of receipt of a written notice from the other party; (ii) if a liquidator or any official receiver or a trustee has been appointed to the other party’s assets and such appointment is not cancelled within sixty (60) days thereafter; or (iii) if a substantial change occurs in the nature, ownership or control of either party’s business, whether voluntary or by operation of law.

 

6.  NON-COMPETITION/EXCLUSIVITY.

 

6.1  In the event that this Agreement shall be terminated: (i) by COLMEI or (ii) by VENDOR - as a result of VENDOR’s breach, VENDOR shall not, during a period of twelve (12) months after the termination of this Agreement, offer, sell, license, promote or advertise, whether directly or indirectly, any products similar to or competitive with the Products, to clients in the Territory which purchased or were offered to purchase Products during the term of this Agreement.

 

6.2  VENDOR undertakes that it will not replicate or produce a variant of any product manufactured for COLMEI in any form whatsoever and supply to anyone else except COLMEI. Any concept provided by COLMEI shall be kept confidential and VENDOR will not be allowed to sell products using that same concept which is been given by COLMEI.

 

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7.  FORCE MAJEURE.

 

7.1  In the event of Force Majeure, as herein defined, each party will immediately give notice to the other. In such event, any breach arising therefore, shall not prejudice the rights of such party. The term “ Force Majeure ”, for the purpose of this Agreement, shall include expropriation and confiscation of property, orders of any government or authority, acts of terror or war (whether declared or not), rebellion or sabotage, fire, floods, earthquake or other acts of nature, strikes and labor disputes in general and in ports in particular.

 

8.  INTELLECTUAL PROPERTY RIGHTS.

 

8.1  Nothing herein shall confer any proprietary rights on VENDOR, and title in or to the Intellectual Property pertaining to the Products or other rights related to the Product or any Component thereof, including but not limited to, all copyright, patent and trade secret rights shall remain in and with COLMEI. VENDOR shall promptly notify COLMEI of any infringement or alleged infringement of any of COLMEI’s Intellectual Property Rights by any third party of which it becomes aware, and shall assist COLMEI in protecting its rights in connection therewith.

 

8.1.1  VENDOR confirm that they do not infringe copyright or any other intellectual property right of any entity in respect aforesaid telecom products or any other phone launched in future. VENDOR further confirms that they would indemnify COLMEI in case of any loss or damages suffered by COLMEI on account of any third party action or claim with respect to the telecom products referred above.

 

8.1.2  The Vendor undertakes that all IP issues in relation to the telecom Products shall be the responsibility of the Vendor. COLMEI agrees to refer all and any notices/ claims etc. received by it alleging any type of infringement to IP of any third party due to use / sale of the Products, for onward action. The Vendor agrees that COLMEI in no event, shall be held responsible or liable for any IP issues or claims in any manner whatsoever. In any case, the Vendor hereby indemnifies COLMEI from all and any action, claim, demand, damages, costs and expenses (including Attorney fees) subsisting or arising under or in connection with the alleged infringement of the IP rights of any other party due to use /sale of the Products.

 

9.  MISCELLANEOUS.

 

9.1  No Agency . VENDOR is an independent contractor, and is not an agent or legal representative of COLMEI. VENDOR has no right or authority to assume, impose on or create any obligation or liability of any kind whatsoever on behalf of COLMEI, including, without limitation, sign any commercial paper, contract, undertaking or other instruments or incur any debt on COLMEI’s behalf.

 

9.2  No Lien . It is specifically agreed that VENDOR shall not have any lien or any other similar right upon any materials, equipment or documents that are provided by COLMEI to VENDOR for the purposes of this Agreement including without limitation, documentation containing Intellectual Property Rights, and VENDOR hereby expressly waives any claim or demand to that effect.

 

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9.3  No Assignment . VENDOR shall not assign any of its rights or obligations under this Agreement without COLMEI’s prior written consent. Any assignment for which consent was not obtained will be void.

 

9.4  Entire Agreement . This Agreement constitutes the entire Agreement between the parties with respect to its subject matter, and supersedes and cancels all prior agreements to the subject hereof, if any, between the parties. No amendment to this Agreement shall be effective unless it is in writing and signed by a duly authorized representative of each party.

 

9.5  Exhibits, Headings . The Exhibits to this Agreement constitute an integral part hereof. Headings used in this Agreement are for reference only and shall not be deemed a part of this Agreement.

 

9.6  Notices . All notices shall be in writing and deemed given and received when delivered in person, by telefax, or by commercial air courier service. Notices shall be addressed to each party at its address set forth above, or such other address as the recipient may have specified by earlier notice to the sender.

 

10.  CONFIDENTIALITY.

 

10.1  Confidential Information will not include information that VENDOR can prove by documentary evidence that: (i) is or becomes generally known or available by publication, or otherwise through no fault of VENDOR (ii) is independently developed by VENDOR without access to or use of the Confidential Information; or (iii) is lawfully obtained with no obligation of confidentiality from a third party who has the right to make such disclosure.

 

10.2  VENDOR agrees to hold the Confidential Information in strict confidence and not to make any use of it, except as specifically authorized under this Agreement. VENDOR further agrees not to disclose the Confidential Information, except as expressly permitted in this Agreement, to anyone other than its employees and Authorized Contractors with a bona fide need to know, which employees and Authorized Contractors shall be subject to confidentiality undertakings with respect to the Confidential Information of equal force as set forth herein, provided, however, that VENDOR shall remain fully responsible and liable for damages caused to COLMEI by any breach of the confidentiality obligations under this Agreement by any of such employees or Authorized Contractors. Additionally, VENDOR agrees to use at least that degree of care, which it uses to protect its own information of a similar proprietary nature, but in no event less than reasonable protection.

 

10.3  VENDOR acknowledges that the unauthorized disclosure of the Confidential Information could cause irreparable harm and significant injury to COLMEI, which may be difficult to ascertain. Accordingly, VENDOR shall indemnify COLMEI against any losses arising due to such unauthorized disclosure. Furthermore, VENDOR agrees that COLMEI shall have the right to obtain an immediate injunction, without bond, enjoining any such unauthorized disclosure.

 

10.4  The confidentiality undertakings under this Section shall survive the termination, expiration or cancellation of this Agreement for any reason whatsoever and shall remain in full force and effect as long as COLMEI considers and treats its Confidential Information as proprietary and confidential.

 

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11.  IMEI / DUPLICATE IMEI CONTROLS.

 

11.1  VENDOR will separately provide to MIL the usage of International Mobile Equipment Identification (IMEI) numbers for COLMEI products including the Type Allocation Code (TAC) Identification (ID) and serial numbers. Vendor undertakes not to sell or use COLMEI IMEI series numbers to any other third party. Non-compliance of IMEI Control Policy is a cause for termination of this Agreement. Vendor shall ensure that IMEI series will not be duplicated for any part or complete shipment. In case, COLMEI receives a shipment or part thereof under any purchase order from the Vendor with duplicate IMEI, then Vendor shall be liable to penalties as reasonably imposed by COLMEI.

 

12.  VENDOR MANUFACTURING PROCESS CONTROLS AND VENDOR QUALITY AUDITS.

 

12.1  Quality Assurance .

 

12.1.1  Quality Assurance Requirements . Vendor will maintain quality assurance systems for the control of material quality, processing, assembly, testing, packaging and shipping in accordance with leading industry practices. Vendor confirms that all facilities in which COLMEI’s Products are manufactured under the terms hereof are and shall remain ISO 9001:2008 (or the most current successor standard) registered and compliant and that all facilities owned or leased by Vendor in which Customer’s Products are manufactured are ISO 14001:2004 (or the most current successor standard) registered and compliant. The workmanship standard to be used in manufacturing the Products is and shall remain IPC A-610 E or equivalent as published by the Institute for Interconnecting and Packaging Electronic Circuits (or the most current successor standard). In addition Vendor confirms that it is and shall remain TL 9000 (or the most current successor standard) certified. In the event COLMEI requires Vendor to obtain other industry standard certifications or registrations, Vendor agrees to use commercially reasonable efforts to obtain such registrations.

 

12.1.2  Change Control . The Vendor shall have a documented and effective change control system in place and is required to provide advanced notification to the COLMEI of any significant changes to the process, specifications and analytical methods (Product, intermediates and raw materials), storage, labelling and primary packaging, and equipment, which may have an impact on the quality of the PRODUCT, and/or on any regulatory applications related to the PRODUCT, if possible at least 30 days in advance, to allow COLMEI to assess the impact of the change upon the PRODUCT supplied or its use by COLMEI.

 

12.1.3  Service Standard . Vendor will perform the services under this Agreement using careful, efficient, and qualified workers, and in a professional and workmanlike manner in accordance with the requirements of this Agreement including the applicable Purchase Order.

 

12.1.4  Other Certifications/ standards . In the event the manufacturing process used by Vendor is included as part of any regulatory or industry approvals, which are not industry standard certifications, Vendor shall use best efforts to ensure its processes comply with such requirements and Vendor will thereafter assume the costs of maintaining such certifications.

 

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12.1.5  Audits and Inspections . COLMEI and its auditors/inspectors may during normal business hours, in agreement with the Vendor (unless misconduct is suspected in which case, no prior intimation to Vendor would be required) audit the Vendor and, review the Vendor’s facilities, manufacturing processes and quality and environmental management system control procedures and associated documentation as reasonably necessary for the COLMEI and its auditors/inspectors to satisfy themselves as to the Vendor’s compliance with its relevant obligations under this Agreement. Without limiting the foregoing, COLMEI may perform quality and environmental management system audits of Vendor’s production lines for the Products and such production lines of Vendor’s subcontractors, upon five (5) days written notice to Vendor. The purpose of such audits will be to assess Vendor’s quality management and environmental management systems, as well as ensuring that Vendor’s manufacturing processes are capable of consistently providing the Products in accordance with Vendor’s warranties and obligations as set forth in this Agreement. If any deficiencies, including process defects, which may materially adversely effect Vendor’s performance of its applicable obligations as set forth in this Agreement are identified by any such auditor or inspector, the parties will confer about such deficiencies and defects and a plan will be generated and agreed upon pursuant to which Vendor shall promptly correct any such deficiencies at Vendor’s cost.

 

12.1.6  Deviations . VENDOR will notify COLMEI promptly in the event of any critical deviation(s) that can potentially affect the integrity of the product(s). Any advice by COLMEI on the handling of the deviation or the affected material (e.g., on root cause analysis or corrective actions) shall be given promptly so that further production is not unreasonably hindered.

 

12.1.7  No third party installation of applications and software on devices without prior written of COLMEI. Vendor agrees not to install or bundle any additional software without prior written approval from COLMEI. Vendor specifies that no adware, spyware, malware or other types of shareware or freeware has been installed on a device.

 

13.  INDEMNIFICATION; LIABILITY LIMITATION.

 

13.1  Indemnification by Vendor . Vendor agrees to defend, indemnify and hold harmless, COLMEI and its affiliates and their directors, officers, employees, and agents (each, a “ COLMEI Indemnitee ”) from and against all claims, actions, losses, expenses, damages or other liabilities, including reasonable attorneys’ fees (collectively, “ Damages ”) incurred by or assessed against any of the foregoing, but solely to the extent the same arise out of third-party claims relating to:

 

(a)  any actual or threatened injury or damage to any person or property caused, or alleged to be caused, by a Product sold by Vendor to COLMEI hereunder, but solely to the extent such injury or damage has been caused by negligence or willful misconduct of Vendor or a breach by Vendor of this Agreement or the applicable Purchase Order where such injury or damage is a reasonably foreseeable consequence of such breach;

 

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(b)  any infringement of the intellectual property rights of any third party but solely to the extent that such infringement is caused by a process that Vendor uses to manufacture, assemble and/or test the Products or by Vendor Supplied Materials; provided that, Vendor shall not have any obligation to indemnify COLMEI, if such claim would not have arisen but for Vendor’s manufacture, assembly or test of the Product in accordance with the specific instructions provided by COLMEI but not the method selected by Vendor to carry out such instructions; or

 

(c)  non-compliance with any Environmental Regulations but solely to the extent that such non-compliance is caused by or in connection with a process that Vendor uses to manufacture the Products or by Production Materials or Vendor Supplied Materials; provided that, Vendor shall not have any obligation to indemnify COLMEI if such claim would not have arisen but for COLMEI’s manufacture, assembly or test of the Product in accordance with the Specifications or specific instructions provided by COLMEI but not the method selected by Vendor to meet such Specifications or carry out such instructions.

 

13.2  Indemnification by COLMEI . COLMEI agrees to defend, indemnify and hold harmless, Vendor and its affiliates, and all directors, officers, employees and agents (each, a “ Vendor Indemnitee ”) from and against all Damages incurred by or assessed against any of the foregoing but solely to the extent the same arise out of, are in connection with, are caused by or are related to third-party claims relating to:

 

(a)  any failure of any Product (excluding Vendor Supplied Materials, Vendor Controlled Materials or Production Materials, contained therein) sold by Vendor hereunder to comply with any safety standards and/or Environmental Regulations to the extent that such failure has not been caused by a Vendor Indemnitee’s negligence, willful misconduct or breach of this Agreement including mistaken purchase of non-compliant Materials

 

(b)  any actual or threatened injury or damage to any person or property caused, or alleged to be caused, by a Product, except to the extent such injury or damage is the responsibility of Vendor’s pursuant to Section 13.1(a) above; or

 

(c)  any infringement of the intellectual property rights of any third party by any Product except to the extent such infringement is (i) the responsibility of Vendor pursuant to Section 13.1(b) above or (ii) caused by Vendor Supplied Materials, Vendor Controlled Materials or Production Materials unless, in the case of Vendor Controlled Materials, the infringement claim results from the application of Vendor Controlled Materials in a manner that was not intended or reasonably foreseeable by the vendor of such Vendor Controlled Materials.

 

13.3  Procedures for Indemnification . With respect to any third-party claims, either party shall give the other party prompt notice of any third-party claim and cooperate with the indemnifying party at its expense. The indemnifying party shall assume the defense (at its own expense) of any such claim through counsel of its own choosing by so notifying the party seeking indemnification within thirty (30) calendar days of the first receipt of such notice. The party seeking indemnification shall have the right to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by the indemnifying party. The indemnifying party shall not, without the prior written consent of the indemnified party, agree to the settlement, compromise or discharge of such third-party claim.

 

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13.4  Limitation of Liability . EXCEPT WITH REGARD TO A BREACH OF SECTIONS 13.1 (INDEMNIFICATION BY VENDOR), 13.2 (INDEMNIFICATION BY COLMEI) AND THE CONFIDENTIALITY, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY “ CAPPED ” DAMAGES (INCLUDING INTERNAL COVER DAMAGES WHICH THE PARTIES AGREE MAY NOT BE CONSIDERED “ DIRECT ” DAMAGES AND EXCEPT FOR ANY SUCH COVER DAMAGES WHICH MAY BE AWARDED WITH RESPECT TO AFFECTED PURCHASE ORDERS OR FOR PURCHASES MADE BY COLMEI FOR A PERIOD OF SIX (6) MONTHS AFTER AN EFFECTIVE TERMINATION OF THIS AGREEMENT BY COLMEI. ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES OF ANY KIND OR NATURE ARISING OUT OF THIS AGREEMENT OR THE SALE OF PRODUCTS, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT, TORT (INCLUDING THE POSSIBILITY OF NEGLIGENCE OR STRICT LIABILITY), OR OTHERWISE, EVEN IF THE PARTY HAS BEEN WARNED OF THE POSSIBILITY OF ANY SUCH LOSS OR DAMAGE, AND EVEN IF ANY OF THE LIMITED REMEDIES IN THIS AGREEMENT FAIL OF THEIR ESSENTIAL PURPOSE.

 

14.   GOVERNING LAW AND JURISDICTION. This Agreement shall be governed and construed in all respects in accordance with the domestic laws and regulations of HONG KONG, without regard to its conflicts of laws provisions. The parties acknowledge and confirm that they have selected the laws of Hong Kong as the governing law for this Agreement. The parties further acknowledge and confirm that the selection of the governing law is a material term of this Agreement. The Parties shall submit all disputes, which arise under this Agreement to courts located in HONG KONG for resolution. Notwithstanding any other provision in this Agreement.

 

15.  MISCELLANEOUS.

 

15.1  Entire Agreement; Severability . This Agreement constitutes the entire agreement between the Parties with respect to the transactions contemplated hereby and supersedes all prior agreements and understandings between the parties relating to such transactions. If any provision of this Agreement is held invalid or unenforceable for any reason: (i) such invalidity shall not affect the validity of the remaining provisions of this Agreement, (ii) the invalid provision shall be enforced to the maximum extent permitted by law, and (iii) the parties hereto consent and agree that the scope of such provision may be judicially modified accordingly and that the whole of such provisions of this Agreement shall not thereby fail, but that the scope of such provisions shall be curtailed only to the extent necessary to conform to law.

 

15.2  Amendments; Waiver . This Agreement may be amended only by written consent of both parties. The failure by either party to enforce any provision of this Agreement will not constitute a waiver of future enforcement of that or any other provision. Neither party will not be deemed to have waived any rights or remedies hereunder unless such waiver is in writing and signed by a duly authorized representative of the party against which such waiver is asserted.

 

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15.3  Independent Contractor . Neither party shall, for any purpose, be deemed to be an agent of the other party and the relationship between the parties shall only be that of independent contractors. Neither party shall have any right or authority to assume or create any obligations or to make any representations or warranties on behalf of the other party, whether express or implied, or to bind the other party in any respect whatsoever.

 

15.4  Force Majeure . In the event that either party is prevented from performing or is unable to perform any of its obligations under this Agreement (other than a payment obligation) due to any act of God, acts or decrees of governmental or military bodies, fire, casualty, flood, earthquake, war, strike, lockout, epidemic, destruction of production facilities, riot, insurrection, Materials unavailability or any other cause beyond the reasonable control of the party invoking this section (collectively, a “ Force Majeure ”), and if such party shall have used its commercially reasonable efforts to avoid and to mitigate its effects (including, in the case of Vendor performing its responsibilities in respect of business continuity and disaster recovery), such party shall have given prompt written notice to the other party, its performance shall be excused, and the time for the performance shall be extended for the period of delay or inability to perform due to such occurrences.

 

15.5  Successors, Assignment . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, permitted assigns and legal representatives. Neither party shall have the right to assign or otherwise transfer its rights or obligations under this Agreement except with the prior written consent of the other party, not to be unreasonably withheld. Notwithstanding the foregoing, either party may, upon written notice to the other party, assign some or all of its rights and obligations under this Agreement to an affiliated entity.

 

15.6  Notices . All notices required or permitted under this Agreement will be in writing and will be deemed received (a) when delivered personally; (b) when sent by confirmed facsimile; (c) five (5) days after having been sent by registered or certified mail, acknowledgment receipt requested, postage prepaid; or (d) one (1) day after deposit with a commercial overnight carrier. All communications will be sent to the addresses set forth above or to such other address as may be designated by a party by giving written notice to the other party pursuant to this section. Notwithstanding the foregoing, purchase orders, sales acknowledgments, forecasts, and other day-to-day communications may be sent by EDI, e-mail or facsimile in a manner to be mutually determined by the parties.

 

15.7  Controlling Language . This Agreement is in English only, which language shall be controlling in all respects. All documents exchanged under this Agreement shall be in English.

 

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IN WITNESS WHEREOF, THE PARTIES HERETO HAVE THIS AGREEMENT SIGNED BY THEIR RESPECTIVE AUTHORIZED SIGNATORIES.

 

   

BORQS HONG KONG LIMITED
     
  Signature:             
  Name:  
  Title:  
     
  COLMEI TECHNOLOGY INTERATIONAL LIMITED
     
  Signature:  
  Name:  
  Title:  

 

[Signature Page to Master Manufacturing Agreement]

 

 

 

 

Exhibit 10.18

 

RELIANCE RETAIL LIMITED

Reliance Corporate Park, Building No. 4, Ground Floor, ‘C’ W
Thane-Belapur Road, Ghansoli, Navi Mumbai-400701 INDIA
Telephone : 022 -6767116
Fax : 022 -67671065

 

   

SELLER PURCHASE ORDER

 

10000857

Borqs Hong Kong Limited (Hk)

 

Borgs International Holding Corp
Office B, 21/F. Legend Tower
7 Shing Yip Street, Kwun Tong,
Kowloon HONG KONG ISLAND
Pin Code       : 111111 HONG KONG
PHONE        :
FAX              : 852-21140183
E-mail           : subodh.sachan@borqs.com
Attention       :

Purchase Order : J102/4600004572

 

 

 

Date : 23.11.2015

 

Port of Origin:

 

Port of Discharge:

 

Shipment Date :

 

 

RRL NDC MH KURKUMBH

 

In accepting this PURCHASE ORDER, SELLER agrees to furnish the GOODS specified in full accordance with all conditions set forth herein and /I or attachments hereto. All drawings, designs, specifications and other data prepared by OWNER and related thereto are the property of the OWNER and must be returned to OWNER upon completion by SELLER of the obligations under this PURCHASE ORDER. The information contained herein is not to be released or disclosed for any other use or purpose other than for the execution of this PURCHASE ORDER.  This formal PURCHASE ORDER constitutes the entire agreement and only written changes by way of an amendment to this PURCHASE ORDER will be legally binding.  It is important that SELLER signs and returns the PURCHASE ORDER copy within three (3) days of receipt. No other form of acceptance will be accepted Failure to return the acceptance does not diminish the responsibilities as set forth herein, but may result in a delay to any payments that may be due and may be cause for termination of this PURCHASE ORDER.

Delivery Address: Reliance Retail Limited

Distribution Centre

 

D1 Durkumbh

MIDC Industrial Area Pune Solapur Highway

Pune – 413802, Maharashtra

Tel:/Fax:

 

Total Base Value                   USD                   21,000,000.00

 

                                                  USD

 

Email:
  TOTAL ORDER VALUE:      USD                   21,000,000.00

DELIVERY DATE: 31.03.2016                   Delivery Term: FOB Hong Kong

  Payment Terms:   See Page inside. 

 
BUYER : Chetan R. Mehta

For RRL NDC W MH KURKUMBH.

Reliance Retail Limited

SELLER’s Acceptance

 

 

 

Signature          Title Date  

       

REGISTERED OFFICE: 3 rd Floor, Court House Lokmanya Tilak Marg, Dhobi Talao, Mumbia MUMBAI 400002

 

 

 

  

  PURCHASE ORDER Number JI02/4600004572      Dt.        23.11.2015
    Page No: 1

 

No Article No. Vendor Article Number Material Description HTS Code Color   Quantity UOM Base Cost Total Base MRP (INR)Value(USD)
1 581107912   Smartphone LS-5505)Black) LS-5505     150,000 EA 140.00 21,000,000.00
      Grand Total =   150,000            
        Total Basic value   USD       21,000,000.00
      Total Order Value     USD       21,000,000.00

 

Terms of payment:

Payment 90 days as agreed as per LC Terms(Suppliers Credit LC)

2. Buyer may elect extension of credit for goods / services covered under this PO whereupon the seller may extend the due date up to 180 days against irrevocable letter of credit issued by any Indian bank of repute which the seller may at his option negotiate/discount with mutually acceptable bank 180 days after bill of lading/AWB date. All resulting interest and banking charges shall be for buyers account.

 

Unless Vendor makes goods and if any short supply within agreed period, Reliance Retail reserves the right to deduct payment for any short supply attributable to Vendor. Shortage shall exclude damages after handover to the Reliance Freight forwarder, transit damages and damages during handing at Reliance side in India.

 

3. The above unit price includes 1.5% spares as FOC.

 

NOTES

It is understood and agreed that the supplier has received BIS certification/ registration for its products as prescribed by Govt of India under BIS Act, 1986 vide Public Notice- 5/2013 dtd. 14-03-2013 issued from the office of Commissioner of Customs, New Delhi. In case of non-compliance of above public notice. Customs Authorities may seize/ delay the clearance which would result in demurrage and detention charges. This shall be borne by the supplier.

 

MRP to be printed for supplies. However before printing final MRP label, supplier needs to take approval from respective buyer for completeness and correctness of the label for each supply.

 

Bill to address

Reliance Retail Limited

D1, KurKumbh Industrial Area,

Pune Solapur Highway,

Kurkumbh, Taluka-Daund,

Pune - 413105

 

Ship to address:-

Reliance Retail Limited

D1, Kurkumbh Industrial Area,

Pune Solapure Highway,

Kurkumbh, Taluka-Daund,

Pune - 413105

 

 

 

  

  PURCHASE ORDER Number JI02/4600004572      Dt.        23.11.2015
    Page No: 2

 

Note(s):

 

1. It is essential that seller shall mention item No.& Item code along with corresponding Material Description and P.O. No as mentioned above, in the Delivery Challan(On-Shore Order) / Packing List (Off-shore Order) and invoice for ease of material Inwarding and Bill Processing. It is also essential that the Seller attaches a Tag / Sticker with each item indicating item Code & PO No. Faliure to do so may be the grounds for the rejection(s) or delay in release of payments(s).

   

  2  

 

 

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

 

TERMS AND CONDITIONS FOR PURCHASE OF GOODS

 

These Terms and Conditions For Purchase of Goods (“Terms and Conditions” / “Terms”) are made and shall be effective from the date of the Purchase Order, by and between the Person purchasing the Goods and issuing the Purchase Order (hereinafter described as “Buyer”/ “Owner” which term shall mean and include its successors and assigns) and the Person selling the Goods and accepting the Purchase Order (hereinafter described as “Supplier” / “Seller “ which term shall mean and include its successors and permitted assigns). Each a “Party” and collectively as “Parties”.

 

1. DEFINITIONS : Capitalized terms used herein shall have the meaning ascribed herein or elsewhere in the Terms:

 

1.1 “Acceptance” shall mean the successful completion of all Acceptance Tests and Buyer’s determination that the Goods fully comply with all requirements and functionalities as set forth in the Purchase Order and/or any document containing Acceptance Test criteria, as evidenced by Buyer’s issuance of a signed Acceptance Certificate.

 

1.2 “Acceptance Certificate” shall mean and include a signed certificate issued by Buyer confirming Buyer’s Acceptance of the Goods.

 

1.3 “Acceptance Test(s)” shall mean the tests undertaken by Buyer or third party on its behalf, with or without the help or presence of Supplier, for determining whether or not the Deliverables delivered by the Supplier confirms to all Documentation, specifications, standards, quality and requirements of the Buyer.

 

1.4 “Affiliate” shall mean with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person through one or more intermediaries.

 

1.5 “Applicable Law” shall mean any applicable legislative enactment or statutes, declaration, decree, ordinances, rules and regulations, or any policy or directive of or by, any governmental authority or rulings of the courts, or any license, permit, or other authorization of governmental authority under such Applicable Laws and conditions of such license, permit, or other authorization, in each case as in effect from time to time and shall include Applicable Law that applies to Buyers or its Affiliates for the due, proper and timely compliance of which Buyer or its Affiliates are wholly or partially dependent upon Supplier’s performances under these Terms.

 

1.6 “Back Charges” shall mean all the costs (including reasonable appropriation of cost of internal resources or Buyer and its Affiliates), additional prices, expenses, charges, taxes, duties, interests and penalties and shall include the following:

 

(a) price (at net delivered cost) difference between the price of goods same or similar to the Goods procured by Buyer from an alternate supplier and the Price of the Goods hereunder;

  

  3  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

  

(b) any labour hired by Buyer at the rates paid by Buyer plus 50% of such rates to cover payroll additives;

 

(c) equipment and tools rented at rates paid by Buyer; and

  

(d) a margin of 100% of items (a) and (b) above in order to cover Buyer’s indirect costs, overhead, and supervision and administration costs.

 

1.7 Buyer Indemnified Parties” shall mean the Buyer, Buyer’s past, present and future Affiliates and their respective past, present and future shareholders, directors, officers, contractors, agents, representatives and employees and Persons using Goods through Buyer and its Affiliates.

 

1.8 “Confidential Information” shall mean and include any information obtained by a Party (the “Receiving Party”) from or on behalf of the other Party (the “Disclosing Party”) that relates to past, present, or future business activities of the Disclosing Party or its subsidiaries or Affiliates, or their respective employees, customers or third party Suppliers, suppliers or contractors, including the Goods, Prices and specifications and other terms and conditions, information exchanged in the course of negotiating the Purchase Order and any information relating to the applicable Party’s plans, pricing, methods, methodologies, processes, financial data, lists, Intellectual Property Rights, customer information, apparatus, statistics, programs, research, development, trade secrets and/or information technology.

 

1.9 “Dead on Arrival” shall mean Goods that are defective or found damaged during first inspection or fails during initial power-on, initial installation or self-test.

 

1.10 “Defect” means any defect, deficiency, error, failure, flaw, omission, non-conformance, damage, fault, inadequacy or discrepancy in the Goods.

 

1.11 “Deliverables” means any combination of Goods, Services and Documentation as described in the Purchase Order and/or in the Annexure(s) to the Purchase Order.

 

1.12 “Delivery Point” means the place or location identified for delivery of the Goods as set forth in the Purchase Order.

 

1.13 “Delivery Schedule” means the schedule and/or the delivery dates for delivery of the Goods and Deliverables as set out in the Purchase Order.

 

1.14 “Delivery Terms” means the terms for the delivery of the Goods, including the Delivery Schedule, Delivery Points and shipping terms, as set out in the Purchase Order. Except as otherwise specified in the Purchase Order, terms for the delivery of the Goods shall incorporate the INCOTERMS 2010.

  

  4  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

   

1.15 “Documentation” means any and all documents including, data, certificates, specifications, drawings, manufacturing record books, manuals, pre-dispatch inspection certificates, quality test certificates, those related to invoicing, taxation, imports and such other documents as may be required to be furnished by Supplier in accordance with or pursuant to a Purchase Order, and further includes in case of:

 

Hardware elements in the Goods: standard user manuals, training materials and/or any other material Supplier provides to Buyer, either in printed or machine-readable form, which describes the capabilities and functionality of the Goods supplied and services to be performed by Supplier. Documentation may include technical, operational and other requirements, examples, proposals, literature and/or other documents to be furnished to Buyer.

 

Software elements in the Goods: standard documents (both in printed and electronic form) such as documents for storing, loading, installing, executing, displaying, analysis, design, customization, configuration, training of or in relation to Deliverables, knowledge transfer during and post implementation of the Deliverables, business process flow maps and diagrams of Deliverables, documents required for enhancement, development, implementation, interfacing, interoperability, compatibility and/or integration purposes. Documentation shall also include all e-learning materials related to the Deliverables;

 

1.16 “Epidemic Failure” means failure of Goods resulting from Defects in material, workmanship, manufacturing process and/or design deficiencies attributable to Supplier, including but not limited to use of components with inherent or latent Defects, or consistent mis-adjustments during manufacture. Epidemic Failure shall include any known problem which, in Buyer’s reasonable opinion, creates a risk to the health or safety of natural persons, living beings and tangible or real property. Epidemic Failures also includes: (a) product failure(s) attributable to a single root cause; or (b) a product failure attributable to multiple root causes; (c) any other criteria laid down in the Purchase Order;

 

1.17 “Goods” shall mean the goods, items, materials, equipment, supplies, Documentation and the likes to be supplied by Supplier and shall include all items listed in Purchase Order (including Bill of Material), spare parts, raw materials, processed or fabricated materials, equipment, equipment components and any Software;

 

1.18 “Incoterms” unless otherwise specified in the Purchase Order, shall mean the International Chamber of Commerce’s official rules for the interpretation of trade terms 2010 edition;

 

1.19 “Intellectual Property Rights” means all intellectual property rights including, but not limited to, patents, trade secrets, trademarks, service marks, trade names, copyrights and other rights in works of authorship (including rights in computer software), rights in logos and get up, inventions, moral and artists’ rights, mask work rights, design rights, trade or business names, domain names, know-how, trade secrets, database rights and semi-conductor topography rights and all intangible rights and privileges of a similar nature analogous or allied to any of the above in every case whether or not registered or unregistered and all rights or forms of protection of a similar nature in any country;

  

  5  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

  

1.20 “Person” shall mean any individual, firm, corporation, association of persons, limited liability company, voluntary association, partnership, joint venture, trust, limited organization, society, unincorporated organization, governmental authority or other legal entity or organization holding legal recognition;

 

1.21 “Purchase Order” shall (i) mean a purchase order together with all annexures, attachments or amendments thereof issued by Buyer and/or its Affiliates to Supplier and (ii) deem to include the terms and condition contained herein;

 

1.22 “Software” means any software embedded or required for the use or operation of the Goods including in accordance with Documentation and further includes, without limitation, all versions and all Updates and Upgrades and all component tools, diagnostic tools interfaces, libraries, plug ins, adaptors, elements and functionalities to the Software, Updates and Upgrades;

    

1.23 “Updates” shall mean updates, error corrections and modifications or enhancements to the Software not introducing new material functionality to be installed and delivered to Buyer free of cost, as and when released;

 

1.24 “Upgrades” shall mean new Software releases (including point releases), revisions , version changes or enhancements to the Software introducing new material functionality, furnished, installed and delivered to Buyer, as and when released and shall include any software which comes into existence after the issue of Purchase Order as a result of renaming or rebranding of the Software or any successor software.

 

2. ORDER AND ACCEPTANCE

 

2.1 Supplier shall accept the Purchase Order in writing within five (5) days (or such other time period as may be mentioned in the Purchase Order) of receipt of the Purchase Order, however if the acceptance is not provided within ten (10) days of receipt of the Purchase Order or upon Supplier’s commencement of performance, the Purchase Order, at Buyer’s discretion, may be deemed to have been accepted and shall be binding on and irrevocable by the Supplier. Any additional or different terms in Supplier’s acceptance, invoice or other document shall be construed as non-binding and shall not become part of the Purchase Order or agreement between the Parties, unless Buyer agrees in writing to the additional terms and in absence of the same the Purchase Order and these Terms shall govern the transaction between the Parties.

 

2.2 If there is a conflict between the provisions of this Terms and Conditions and Purchase Order the following order of priority will control: (a) Purchase Order; and (b) these Terms and Conditions.

 

  6  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

   

3. CHANGES TO THE PURCHASE ORDER

 

3.1 Buyer reserves the right to change product, technical, Delivery Point, Delivery Schedule, Delivery Terms, or other specifications for the Deliverables at any time, upon reasonable advance written notice to Supplier.

  

3.2 In case of any changes required by the Buyer for the Deliverables has any material impact on the specifications, rates or Delivery Dates, the Supplier shall prepare a proposal and submit to Buyer with respect to such change as required, no later than 15 (fifteen) days after receipt of Buyer’s request failing which the changes proposed by the Buyer shall become binding and irrevocable on Supplier without any change to the rates, Delivery Date, Delivery Point or Delivery Terms. In the proposal the Supplier may propose an equitable adjustment in the Price or Delivery Schedule and the Buyer on receipt of the proposal, may at its sole discretion, accept or reject the proposal, and issue a supplementary or revised Purchase Order.

 

4. INSPECTION AND DELIVERY OF GOODS

 

4.1 Prior to delivery by Supplier, Buyer reserves the right to inspect and test the Goods (either itself or through a third party appointed by the Buyer) and to reject any of the Goods which are found to be faulty, or which do not meet the requirements, or specifications of the Buyer. Supplier shall inform Buyer when the Goods are manufactured and before packing the same and also prior to delivery of the Goods. The costs for such inspections shall be as specified in the Purchase Order.

 

Notwithstanding any other inspections or testing’s as may be required towards Acceptance, the Buyer may, at its discretion, require the following inspections:

 

Pre-Dispatch Inspections: Buyer shall have the right to inspect, examine and test the Goods at Supplier’s premises or factory. Buyer’s authorized representative shall be provided necessary tools, equipment’s and free access during working hours to Supplier’s plants, and Supplier agrees to procure a similar right for Buyer as regards the premises of any subcontractor.

 

Post-Delivery Inspections: Buyer shall have the right to inspect, examine and test the Goods at the Delivery Point or any other location.

 

4.2 Inspection by government or statutory bodies: Supplier shall permit and provide all reasonable co-operation to allow any government or statutory body having jurisdiction over the Buyer to inspect or audit the Goods, packing material, manufacturing facility, storage or warehouse facility, delivery vessel etc.

 

4.3 Delivery Date: Time is of the essence of these Terms and Conditions. On time delivery is defined as plus three days early or minus zero days late from the Delivery Schedule to the Delivery Point specified on the Purchase Order. If Goods are delivered more than three days prior to the Delivery Schedule, the Buyer may, in its discretion, return Goods at Supplier’s expense or accept the delivery and recover the cost of storage from the Supplier or delay processing the corresponding invoice until the actual Delivery Schedule. If Supplier makes a shipment that is in excess of the quantity specified in the Purchase Order, Buyer may return excess Goods at Supplier’s expense. Supplier shall be responsible for all risk and expenses to return the over shipments and early shipments to Supplier.

  

  7  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

   

4.4 Delays: The Supplier shall immediately notify the Buyer in writing of any actual or anticipated delays in the manufacturing or delivery of the Goods and in any event no later than five (5) days upon becoming aware of the same. Such notice shall include all details regarding the cause of any delay, an estimate of the period of delay, and corrective actions being taken or to be taken by the Supplier and the sub-sellers. Without prejudice to any other rights and remedies of the Buyer for any delayed delivery, if Buyer considers that corrective actions being taken by Supplier are insufficient or, if within a reasonable period as determined by Buyer, Supplier does not improve its performance to meet requirements, Buyer may require and Supplier shall promptly implement, specific additional measures such as an increase in Supplier’s management, staff and work forces, overtime operations, additional days of work per week or the like. No increase of the Price shall be payable for Supplier’s efforts arising from such measures.

 

4.5 Consequence of delay: If delivery of Goods are not completed by the Delivery Schedule, Buyer reserves the right at its sole discretion, without liability and in addition to all its other rights and remedies to (1) terminate the Purchase Order by written notice and to purchase substitute items elsewhere and charge Supplier with any excess cost, damages or loss incurred, or (2) request that Supplier at its expense, ship by expedited means. Acceptance of late deliveries shall not be deemed a waiver of Buyer’s right to hold Supplier liable for any loss or damage resulting therefrom, nor shall it act as a modification of Supplier’s obligation to make future shipments in accordance with the agreed Delivery Schedule.

  

4.6 Packing and protection of Goods. Unless provided in the Purchase Order, Supplier is responsible for packing and transporting the Goods to the Delivery Point. Supplier shall preserve, package, handle, and pack Goods so as to protect Goods from loss or damage in transit and in conformance with (i) good commercial practice according to the nature of the Goods and in a manner appropriate for safe and secure transit according to the distance and destination, (ii) any specific Buyer’s specifications, (iii) in compliance with Applicable Laws, (iv) comply with requirements of common carriers; (v) clearly mark items specially packed for any reason (e.g. climatic exposure, contamination, expiration or end use date, etc.); and (vi) comply with such other conditions as may be specified in the Purchase Order. Regardless of when title and/or risk of loss passes from Supplier to Buyer, Supplier shall be responsible for any loss or damage due to its failure to properly preserve, package , handle, or pack Goods and the Buyer shall not be required to assert any claims for such loss or damage against the carrier involved. Unless otherwise agreed in writing by the Buyer, all packing cases and materials are non-returnable and shall become the property of the Buyer.

 

4.7 Packing List. Each delivery of Goods to the Buyer shall include a packing list that contains at least: (i) the Purchase Order number; (ii) the description of the Goods; (iii) the quantity shipped; (iv) the date of shipment; and (v) such other information or documents as mentioned in the Purchase Order. The packing list must correspond with the information on the invoice.

 

  8  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

  

4.8 Dead on Arrival. In the event of Goods which are Dead on Arrival, then the Supplier shall replace such Goods within one (1) day from the date of notification of Dead on Arrival by the Buyer to Supplier and delivery of such Goods shall be made at Delivery Point, and if required the Supplier shall accelerate its production schedule for replacement of such products in order to achieve the original “on time” delivery at no additional cost to Buyer. Supplier shall bear all costs, taxes, duties, loss of any tax/duty benefits, cost of transportation, storage and documentation involved in re-shipment of Goods which are Dead on Arrival and shipment of correct Goods. Deliveries which are Dead on Arrival shall not excuse Supplier from its other obligations and liabilities herein for delayed delivery or breach of these Terms and Conditions and/or Purchase Order. Including payment of liquidated damages or Buyer’s encashment or invocation of any securities.

 

4.9 Import Requirements: In the event the Goods are imported by the Buyer, the Supplier shall additionally ensure the following:

 

(i) To notify Buyer when Goods are ready for shipment, but shall not ship such Goods unless the Buyer informs the SCN (Shipment Control Number) to the Supplier in writing.

    

(ii) To provide all Documentations required for clearance of Goods and Documentations at the ports located in the country of the Delivery Point.

 

(iii) Not to dispatch part shipments unless specifically agreed by the Buyer in writing.

 

(iv) In case of high sea sales, the Parties shall mutually agree the process for imports and shall execute additional documentations to effect the sales.

 

(v) In order to comply with Indian customs circular (CBEC Circular No.- 26 dated 19th July, 2013), Supplier shall ensure that there is no difference in the unit of measurement between the unit of measurement mentioned in Harmonic Code under the customs tariff of India and all shipping Documentations as well as invoice.

 

(vi) If applicable as per the public notice, the requirement is for only specified Goods, the Goods shall be Bureau of Indian Standards certified/ registered as prescribed by Government of India under Bureau of Indian Standards Act, 1986 vide Public Notice- 5/2013 dated 14-03-2013 issued from the office of Commissioner of Customs, New Delhi.

 

5. ACCEPTANCE, TESTING AND REJECTION OF DELIVERABLE

 

5.1 Goods shall be considered or deemed accepted only upon issuance of a written and physically signed Acceptance Certificate by Buyer. Any inspection, pre-delivery or pre-order testing or evaluation or any payment for the Goods delivered, or failure or delay to do so, shall not constitute Acceptance of such Goods. Goods required by Buyer to be corrected or replaced shall be subject to the same inspection and warranty provisions as per these Terms and Conditions and the Purchase Order. Buyer reserves the right to charge Supplier for expenses of inspection for Goods which do not conform to the specifications.

 

  9  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

 

5.2 If during the Acceptance Testing the Goods fails to pass Acceptance Tests despite Supplier’s efforts of correction, Buyer may at its sole option and discretion and without prejudice to any other rights Buyer may have against Supplier including encashment or invocation of any or all securities, cancel the Purchase Order and/or be entitled to refund of any and all amounts paid by Buyer to Supplier towards the Goods along with the Back Charges and all other charges with respect to transportation, storage etc.

 

5.3 If in the opinion of Buyer, the recall of any Goods is warranted or is necessitated, due to any Defects or any non-compliance or likely non-compliance of any Goods with Applicable Laws at the time of the initial time of sale of the Goods or for safety concerns, all costs of the recall of the Goods shall be borne by Supplier alone, including but not limited to cost related to logistics, repair or replacement of recalled Goods.

 

5.4 The provisions of this Section shall not in any manner impair, reduce or restrict the warranty obligations of Supplier under these Terms and Conditions and Purchase Order.

 

6. TRANSFER OF TITLE AND RISK OF LOSS

 

6.1 Passage of Title: Unless otherwise stated in the Purchase Order, all Goods supplied by Supplier shall become the property of Buyer upon (a) delivery; (b) when the Buyer has made any payment in respect of the Goods, whichever is earlier. In the event of high sea sales, the title in the Goods shall transfer from Supplier to Buyer upon transfer or endorsement of necessary shipping documents (including airway bill or bill of lading, as applicable) from Supplier to Buyer.

 

6.2 Risk of Loss: Notwithstanding the foregoing, Supplier shall be responsible for and shall bear any and all risk of loss or damage to the Goods until delivery; provided that, any loss or damage, whenever occurring, which results from Supplier’s non-conformance with the terms of this Terms and Conditions, shall be borne by Supplier. In any event, the Supplier shall not divert Goods or any part thereof to another purchase order which is placed on the Supplier by the Buyer, without the Buyer’ s prior written consent.

 

7. LIQUIDATED DAMAGES

 

7.1 The Parties agree that damages for delay in delivery of whole or part of Deliverables are difficult to calculate accurately and cannot be reasonably determined at the time of issuance of the Purchase Order, and therefore the Parties agree that Buyer shall be entitled to charge or recover liquidated damages as set forth in this Section. The Parties agree that liquidated damages are intended to compensate Buyer for the delayed performance by Supplier and are not a penalty and are in addition to all other rights and remedies of the Buyer under this contract (including, equity and under any Applicable Laws.

  

  10  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

 

7.2 In the event Supplier delays to timely supply Deliverables as per the Delivery Schedule set forth in the Purchase Order, Buyer may impose liquidated damages at the rate of two per cent (2%) of the value of the Deliverables delayed (“Goods Delayed”) for each week of delay or part thereof subject to a maximum liquidated damages in the amount of ten per cent (10%) of the Price in relation to the Deliverables delayed.

 

7.3 If any Deliverables that are delivered as per the Delivery Schedule set forth in the applicable Purchase Order cannot be put to use by Buyer because of any delay in delivery of the balance of the Deliverables and/or any third party software or other materials cannot be put to the desired use by Buyer due to delay in delivery of Deliverables or any part thereof (“Items Affected by Delay”), then Buyer may impose liquidated damages at the rate of two percent (2%) of the combined value of the Goods Delayed and the Items Affected by Delay (“Combined Value”) for each week of delay or part thereof subject to a maximum liquidated damages in the amount of ten percent (10%) of the Combined Value.

 

7.4 Buyer may set-off liquidated damages due to Buyer from any sum due and payable to Supplier, or that may become due and payable to Supplier. If funds due to Supplier are insufficient to completely set-off the liquidated damages, Supplier shall within fifteen (15) days of written demand from Buyer pay the deficient amount.

 

8. SOFTWARE LICENSE

 

8.1 Supplier hereby grants to Buyer and its Affiliates, and to all third parties operating for or under Buyer and its Affiliates, an unlimited, non-exclusive, transferable, worldwide, irrevocable and perpetual license to use, modify and create derivatives of the Software and to use Supplier’s Intellectual Property Rights whether or not embodied in such Software for the purpose of using, testing, diagnosis or maintenance or modification of the Goods.

  

8.2 Supplier shall supply, license (under the above terms) and install all Updates and Upgrades the Software simultaneous to the release of the same to any other customer of Supplier or any of its Affiliates.

 

8.3 Without prejudice to the Supplier’s representations, warranties and indemnities herein, should any Software contain or access open source code or libraries or other free wares, the Supplier shall disclose details of such use or access writing prior to acceptance of the Purchase Order and shall provide all the support in relation thereto. Supplier shall, at all times keep such open source software and free wares updated.

 

8.4 The license granted hereunder, shall not be modified by any click-wrap or shrink-wrap or similar contract/ agreement and such similar agreements and Supplier agrees this Terms and Conditions shall explicitly exclude all conflicting terms in any such click-wrap or shrink-wrap or similar contracts/ agreements notwithstanding any manifestation of assent that may be caused or implied through Buyer or its Affiliates use or installation of the Software.

 

  11  

 

   

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

   

9. REPRESENTATIONS AND WARRANTIES

 

9.1 General warranties: Supplier represents and warrants to Buyer that its execution, delivery, and performance of this Terms and Conditions and Purchase Order will not constitute (i) a violation of any Applicable Laws; (ii) a default under any material contract by which it or any of its material assets are bound; or (iii) an event that would, with notice or lapse of time, or both, constitute such a default as described in (ii) above. Further, Supplier represents and warrants that: (i) it has the requisite power and authority to accept and perform these Terms and Conditions and the Purchase Order and to carry out the transactions contemplated herein; and (ii) the execution, delivery and performance and the consummation of the transactions contemplated by these Terms and Conditions and the Purchase Order have been duly authorized by the requisite action on the part of Supplier.

 

9.2 Goods Warranties: Supplier warrants that the Deliverables or any part thereof shall:

 

a) be free from actual or latent defects and deficiencies in design, material, workmanship, and performance under standard operating conditions;

 

b) be of merchantable quality and be fit for the purpose for which they were ordered by Buyer;

 

c) be new and of the quality as specified in the applicable standards (if no quality is specified) and in the Documentation and samples, if any, provided by Supplier and approved by Buyer;

 

d) operate without error and strictly conform to and comply with in all respects to the terms of the Purchase Order, Documentation, specifications, drawings, samples and descriptions;

 

e) be free from any and all liens, claims, encumbrances and other restrictions;

 

f) the Software shall be free from any computer virus, worms, trojans, spyware, malware, disabling code or devices or malicious, destructive or corrupting code; program, or macro and shall be free of any hardware / software locks or otherwise hostile, damaging or disabling to Buyer’s or Buyers’ customers’ existing information systems or components thereof or breach national security of India, in any manner;

 

g) the Deliverables shall not violate or infringe any third party Intellectual Property Rights and no claim of such infringement been threatened or asserted, nor is such a claim pending against Supplier or any of Supplier’s Affiliates;

 

h) any third party software provided by Supplier or included in Software shall be supported and be the sole responsibility of the Supplier;

 

i) are provided with and accompanied by all information and instructions necessary for maintenance and proper and safe use;

  

  12  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

 

j) shall not degrade documented functionality of existing Software being used by Buyer;

 

k) shall be free from any Hazardous Substance where the term “Hazardous Substance” means any material, emissions, discharges, substance, chemical, element, compound, mixture, pollutant, contaminant or toxic or hazardous material, substance or waste that is designated, defined, listed, classified or regulated by any Applicable Law; and

 

1) have been designed, manufactured and delivered in compliance with all Applicable Laws, including environmental, industrial health and safety regulations and accident prevention regulations, labor law and good industry practice.

 

9.3 Supplier additionally agree that:

 

a) The above representations and warranties shall survive any delivery, inspection, Acceptance or payments for any Deliverables.

 

b) Reasonably co-operate with third party service providers as directed by Buyer to the extent necessary for the implementation of Buyer’s systems subject to suitable confidentiality agreements with such third party service providers.

 

9.4 Warranty service for certain breaches of the foregoing warranties shall be provided by Supplier to Buyer for such as may be provided in the Purchase Order or for a period starting delivery of the Goods and for a period of sixty (60) months from the date of Acceptance, whichever higher (“Warranty Period”). Supplier shall, at its sole costs, immediately following notification by Buyer during the applicable warranty period and within such time as may be specified by Buyer, take all actions necessary to replace, correct any Defect, error or any other failure in the Goods which cause a breach of the warranties set out herein. In case required by the Buyer, Supplier shall provide a standby Goods till the original Goods is successfully repaired or replaced. The Goods shall be redelivered within a reasonable period as allowed by the Buyer. Any failure by Buyer to identify any such non-compliance or deficiencies shall in no way relieve Supplier of its responsibility during the term of the applicable warranty period, to promptly make such modifications, repairs, replacement or corrections as required. In case the Supplier is not able to replace the Goods which caused or may cause breach of warranty, the Supplier shall refund any Price paid by the Buyer and taxes, duties, fees etc. that may have been paid or incurred by the Buyer for such Goods to the Supplier and shall pay Back Charges and in addition to this the Buyer may pursue any other remedy available in Applicable Law or in the contract.

 

9.5 Supplier shall maintain sufficient stock of spares for a minimum period of ten (10) years from the date of declaration of end of life of the Goods by the Supplier. Supplier further warrants that the spare parts in relation to the Goods shall also have same warranties as those provided in respect of the Goods.

  

  13  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

 

9.6 Epidemic Failure:

 

9.6.1 Unless otherwise provided in the Purchase Order, an “Epidemic Failure” shall be deemed to have occurred if, (i) more than five percent [5%] of any Goods sold and delivered to Buyer under the Purchase Order or (ii) two percent (2%) of the total Goods delivered to Buyer, whichever is lower, fails to operate or perform in full compliance with applicable Documentation during a period starting from the date of delivery and up to five (5) years after Acceptance (“Epidemic Failure Period”), and/or in accordance with the Warranties and/or such other criteria as specified in the Purchase Order. Epidemic Failure shall further include any problem which, in Buyer’s reasonable opinion, creates a risk to the health or safety of natural persons, living beings and tangible or real property.

 

9.6.2 Buyer shall promptly notify Supplier of an Epidemic Failure experienced by it (“Buyer’s Notification”). Upon receipt of Buyer’s Notification , Supplier shall determine the cause of the Epidemic Failure and shall at its sole cost (including any direct costs associated with the de-installation and re-installation of the Goods), repair or replace the Goods diligently and promptly to eliminate the Defect within a period of fifteen (15) days from the receipt of Buyer’s Notification (“Epidemic Failure Cure Period”) in such lot, batch or shipment of the Goods and any other lot, batch or shipment of the Goods including the Goods in Buyer’ s inventory. Buyer will, upon request by Supplier, provide all necessary assistance as reasonably required by Supplier in this regard at Supplier’s costs and expense including determining the root cause of such Epidemic Failure and shall promptly provide the results of its root cause analysis and Supplier’s proposed remedial plan.

 

9.6.3 Upon the occurrence of an Epidemic Failure, Buyer may, at its option, either suspend or cancel all outstanding Purchase Orders or part thereof, including those Purchase Orders under which Supplier has shipped, but not delivered to Buyer, the Goods affected by the Epidemic Failure. Additionally, without prejudice to any other rights and remedy that Buyer may have, Supplier shall in respect of each occurrence of Epidemic Failure be liable to pay Buyer, an amount equal to 200% of the aggregate value of all delivered Goods by way of non-conformance compensation and Buyer shall be entitled to adjust or set-off the same against any amounts payable by Buyer to Supplier.

  

9.6.4 If such Epidemic Failure is not remedied within the Epidemic Failure Cure Period, then in addition to all other rights and remedies of Buyer, Buyer will have the right to resell to Supplier for cash payment at original cost all the Goods sold to the Buyer through the date of such termination plus 100% of the original cost of all such Goods (the original cost of all the Goods shall be the Price, duties, transportation, clearing and forwarding costs, storage and insurance costs, and payments for any direct costs associated with the de-installation and re-installation of similar products) including the Goods (i) in Buyer’s inventory and (ii) in Buyer’s distribution channels and in addition to the aforesaid claim for Back Charges from the Supplier.

 

9.6.5 Supplier shall at all times defend, indemnify Buyer Indemnified Parties and hold Buyer Indemnified Parties harmless against all direct and consequential losses, damages, costs and claims made or accrued against Buyer as a consequence of any Epidemic Failure. If in the opinion of Buyer, the recall of any Goods is warranted or is necessitated, due to any Defects or any non-compliance or likely non-compliance of any Goods with Applicable Law or for safety concerns, all costs of the recall of the Goods shall be borne by Supplier alone, including but not limited to cost related to logistics, repair or replacement of recalled Goods.

 

  14  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

   

10. COMPLIANCE WITH APPLICABLE LAWS

 

Supplier shall comply with all the Applicable Laws while performing under this Terms and Conditions including without limitation all laws that apply to the Buyer for the compliance of which Buyer depends upon Supplier’s performances under the Purchase Order.

 

11. CONSIDERATION

 

11.1 The prices set forth in the Purchase Order for the Goods (“Price”) are firm and not subject to escalation or adjustment on any account and such price shall include any increase in the cost of production, raw materials, labour, taxes, duties or any fluctuations in exchange rate. The Price shall include without limitation:

 

a) All duties, statutory levies and taxes referred to in “Taxes and Duties” below;

  

b) Any costs relating to the packing and handling, transfer and delivery and insurance of Goods up to the Delivery Point, subject to INCOTERMS 2010 stated in Purchase Order;

 

c) Any license fees including, without limitation, Software license fees whether separate or as part of the Deliverables, royalties, levies or other charges for use of Intellectual Property Rights of Supplier and any third parties relating to the Goods; and

 

d) Any costs and expenses to supply, test and achieve Acceptance of the Deliverables including, without limitation, charges for legal and regulatory compliance, performance bonds, escrow accounts, telephone, utilities, testing, inspection and Supplier resources as applicable, and including the cost of Supplier’s accommodations, travel and subsistence expenses.

 

12. TAXES AND DUTIES

 

12.1 Supplier shall promptly pay all taxes, duties and charges levied against Purchase Order by governmental authorities in Supplier’s jurisdiction. Buyer may, at any time, require Supplier to submit to Buyer satisfactory evidence of payment of all such taxes, duties and charges as agreed in the Purchase Order.

 

12.2 The Price shall be exclusive of all taxes, duties and statutory levies on the purchase of Goods as applicable in India and such taxes, duties and statutory levies shall include but not limited to customs duty, excise duty, service tax, sales tax and value added tax or similar tax. In case of Goods imported by Buyer into India, Price will be exclusive of all indirect taxes in India, wherein the Buyer shall be the importer on record in India and shall pay the applicable taxes, duties and statutory levies directly to the relevant statutory authorities in India.

 

  15  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

 

12.3 Supplier shall be liable for any increase in the customs duties during or post clearance and also for any fines, penalties, interest, ground rent, demurrages, seizures or any other liability imposed by authorities on Buyer in terms of the Customs Act, 1962 or any other succeeding enactment which are due to delayed delivery, errors and/or omissions in Documentations provided by the Supplier that result in any non-compliance with any statutory requirements or public notices.

 

12.4 In case of domestic purchase, Buyer will pay indirect taxes to the Supplier which are mentioned in duly issued Purchase Order by the Buyer provided that Buyer is in receipt of invoice which complies with all the requirements prescribed by statutory authorities. However any payment of invoice by buyer shall not be considered as a waiver of Buyer’s rights and remedies with respect to any invoice.

 

12.5 If the payment under any invoice to the Supplier is subject to withholding tax / tax deducted at source as per the Income Tax Act, 1961 as amended or substituted from time to time (“ITA”), the Buyer shall deduct such tax from the corresponding payments and shall deposit such tax with the appropriate governmental authorities and provide the Supplier the tax deduction certificate within the time period prescribed under the ITA.

 

12.6 Unless Supplier provides Buyer with all required Supporting Documents (as defined hereunder), verifying that Supplier is not taxable in India, then before making any payment to Supplier, Buyer shall have the right to deduct and withhold applicable taxes on the income of the Supplier in accordance with the ITA. Buyer shall be entitled in its sole discretion to determine the applicable rate and amount of such taxes to be deducted and withheld in accordance with ITA, and the Supplier shall not dispute the same. For the avoidance of doubt, it is clarified that Supplier shall be responsible for all income taxes (including withholding taxes in India, if applicable) arising from Supplier’s income accrued or arising or deemed to accrue or arising in India under or in relation to these Terms and Conditions and Purchase Order.

 

12.7 If any taxes, duties and statutory levies are chargeable to the Buyer as provided in Purchase Order, the Supplier shall ensure that the invoice should include only the aforesaid taxes, duties and statutory levies in separate itemized manner and further the invoice shall meet all requirements imposed by the relevant taxation authorities and shall meet all further conditions necessary for Buyer to obtain CENVAT, VAT or any other applicable credit of taxes, duties and statutory levies. Provided Buyer is in receipt of a correct invoice meeting all the aforesaid requirements, Buyer will pay to the Supplier such taxes, duties and statutory levies properly chargeable in respect of that invoice and in accordance with the payment terms. Buyer reserves the right to withhold payment of any invoice to the Supplier until the Supplier has provided Buyer with a proper and correct invoice meeting the aforesaid requirement and all other requirements based on Applicable Laws from time to time.

  

  16  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

 

12.8 Supplier shall not be entitled to recover any additional taxes and duties applicable on the Price due to Supplier by Buyer wherein any invoice / supplementary invoice raised by Supplier for such additional taxes and duties and same is ineligible for being claimed as input tax credit by Buyer on account of provisions of Rule 9 (1) (bb) of CENVAT Credit Rules, 2004 or any other relevant provision in any other similar legislation.

 

12.9 Tax Indemnities: Supplier shall at its sole cost and expense indemnify, defend and hold Buyer Indemnified Parties harmless from any and all liabilities, claims, taxes, duties, assessments, fees, levies, withholding taxes, charges, penalties, fines and/or interests of any kind and nature whatsoever and any cost relating or in relation thereto (including attorneys’ fees, cost of obtaining legal opinions, court fees etc.) howsoever incurred by, imposed upon or asserted against or brought against, Buyer Indemnified Parties by any statutory or governmental body or agency either in India or in any other country or province, upon or with respect to the purchase of the Goods and/or otherwise in relation to this Terms and Conditions and any document, instrument, agreement or contract entered into in relation hereto or otherwise in relation to the Goods, including for any short or no deduction of withholding tax by Buyer in India on the income of Supplier arising out of or relying on the Supporting Documents provided by the Supplier. This tax indemnity shall survive expiry or any early termination of the Purchase Order and this Terms and Conditions.

 

13. INVOICING AND PAYMENTS FOR DELIVERABLES AND SET OFF

 

13.1 Full invoice for Goods shall be done along with supply of Goods. Each correct, complete and undisputed invoice shall be provided along with (i) one copy of Supplier’ s certificate of incorporation (in English language); (ii) one copy of the certificate of tax residency issued by Supplier’s local authorities; (iii) certificate for no permanent establishment in India, if applicable; (iv) an authorizing letter from Supplier to make an application to the income tax department in India seeking tax clearance for remittance of Price to Supplier; (v) Supplier’s Permanent Account Number (PAN) number as issued by the Indian income tax department; (vi) written confirmation from Buyer as to completion of the corresponding payment milestone and any other necessary documents required by Buyer, such as payment certification documents, necessary shipping documents required for clearance of Goods; and (vii) any other documents as required by the Buyer (individually and collectively “Supporting Documents”). Invoices shall in all cases bear details required by Buyer including the Purchase Order number, information which may be required by Buyer for making payment such as name of the bank, account number, RTGS/NEFT code, and swift codes, in addition to Supporting Documents (“Invoice Payment Details”). Buyer shall be entitled to reject any incorrect invoice, or if Supplier fails to include any Invoice Payment Details or attach any of the Supporting Documents, and Buyer shall not be liable or responsible and Buyer shall not be in breach of this Terms and Conditions for any resulting delay in payment and the same shall be solely Supplier’s responsibility and liability.

 

13.2 Payment remittances shall, unless otherwise agreed by Buyer, shall either be made by bank transfer or by cheque. The payment shall be made only to the entity to whom the Purchase Order has been issued by Buyer and shall be on the basis of details provided by the Supplier in Invoice Payment Details and Supporting Documents. The Supplier shall indemnify and hold the Buyer harmless of any claims as regards to incorrect or improper Invoice Payment Details or Supporting Documents.

 

  17  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

   

13.3 Seller may not assign its payment receivables from the Buyer to any third party without the prior written consent of Buyer.

 

13.4 Unless otherwise stated in the Purchase Order, each undisputed invoice is due and payable by Buyer 90 (ninety) business days following the later of: (a) Buyer’s receipt of the correct invoice, all Supporting Documents and Invoice Payment Details, or (b) Buyer’s Acceptance of Goods.

 

13.5 Set-off. Buyer may suspend or reduce the payment of the invoice or any portion thereof in order to retain or set off the following: (i) Liquidated Damages; (ii) Back Charges; or (iii) any and all amounts owing from Supplier to Buyer or its Affiliate under this Terms and Conditions or otherwise. Payment of the balance of such invoice, after such set-off, shall be deemed to be payment in full by Buyer under the invoice.

 

14. SECURITIES AND CORPORATE GUARANTEE

 

14.1 If agreed between the Parties, Supplier shall, for securing any (a) advance payments extended by Buyer, or (b) to ensure timely and full performance of Suppliers obligations under these Terms and Conditions and the Purchase Order; submit one or more securities in the form of irrevocable and unconditional standby letter of credit (in a format provided by or approved by the Buyer) from a reputed bank having operations in India acceptable to Buyer for an amount equal to (i) such percentage of the value of the Purchase Order as specified in the Purchase Order for security under sub-clause (b) above however if amount has not been specified or agreed then not less than 10% of the value of the Purchase Order and (ii) amount of advance extended or performance security agreed. The securities provided herein shall be valid for the period as specified in the Purchase Order or for a period equal to sixty (60) months from the date of Acceptance and a claim period of (12) months beyond the expiry of the validity period.

  

14.2 In the event, Buyer issues a Purchase Order before receipt of the performance security as provided herein above, then Buyer shall be entitled to terminate and/or suspend the Purchase Order or any payments therein at any time unless Supplier submits the Performance Security to Buyer. Buyer shall be entitled to draw amounts or invoke the securities provided herein in the event of failure of delivery, installation and commissioning or Acceptance of Goods, or upon any breach of the Terms and Conditions or the Purchase Order by Supplier which Supplier is not able to cure in accordance with these Terms and Conditions. Buyer’s right to invoke or en-cash the securities, in whole or parts, shall not be restricted or prejudiced if Supplier’s proceeds for any dispute resolution to resolve any dispute including in accordance with this Terms and Conditions or upon any termination of this Terms and Conditions or Purchase Order for cause by the Buyer. Supplier shall take all necessary steps to ensure that the value of each security is immediately restored to the extent of any amount drawn or invoked by Buyer under such security.

 

14.3 If agreed by the Parties, the Buyer, shall be entitled to retain a portion of the amount payable to the Supplier as way of retention money. The retention money shall be returned to the Supplier upon completion of the Warranty period.

  

  18  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

 

14.4 Without prejudice to it rights for being furnished the securities specified above, the Buyer may require the Supplier to furnish a corporate guarantee in the format provided by the Buyer from Supplier’s parent (including ultimate parent) or Affiliate for Supplier’s the due and timely performances of these Terms and Conditions and Purchase Order. However, in case the Purchase Order is issued prior to receipt of the corporate guarantee then the Buyer shall have the right (to be exercised in its sole discretion) to either refuse to accept delivery of the Deliverables or refuse to make any payments herein to the Supplier unless Supplier provides the required corporate guarantee.

 

15. EVENT OF DEFAULT OF SUPPLIER

 

15.1 Without prejudice to any other rights available to Buyer under this contract, equity and under Applicable Laws, Buyer may terminate this Terms and Conditions or Purchase Order, of part thereof, when:

 

(a) Supplier is in breach of any provision of this Terms and Conditions or Purchase Order which breach, if capable of being cured, is not cured by the Supplier within thirty (30) days of being notified by Buyer; or

 

(b) Supplier or any of its Affiliates is / are blacklisted by government of India or by any government authority which has jurisdiction on any operations of Buyer and/or its Affiliates; or

 

(c) Supplier becomes insolvent, or is the subject of bankruptcy or winding up proceedings, which proceedings are not dismissed within (90) days of the institution of such proceedings.

 

15.2 Termination for Convenience by Buyer. Buyer may terminate this Terms and Conditions or Purchase Order of any part thereof for Buyer’s convenience and without assigning any reasons thereto at any time by giving a prior written notice of not less than fifteen (15) days to Supplier specifying such termination and the date upon which such termination shall become effective.

 

15.3 Consequences of Termination. Supplier shall return to Buyer any materials provided by Buyer to Supplier upon termination of this Terms and Conditions or Purchase Order. Upon request from Buyer, Supplier shall co-operate in good faith with Buyer for smooth transition of the obligations or duties of Supplier so terminated. Provided, always, that, Supplier shall (i) at all times continue with the performance of its obligations under the Purchase Order to the extent not terminated under this Section; and (ii) mitigate any loss, cost or damage which Buyer may incur as a result of termination of the Purchase Order. Termination for any reason whatsoever shall not affect or prejudice any rights, claims or liabilities which may have accrued to either Party prior to the date and time of such termination.

 

15.4 Unless and to the extent provided in the Terms and Conditions, no party can terminate or suspend the Terms and Conditions or Purchase Order or any part thereof.

  

  19  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

 

16. FORCE MAJEURE

 

If a party is prevented from performing any or all of its obligations of the Purchase Order or this Terms and Conditions by any act of God, any act, event, omission or condition beyond a Party’s control (a “Force Majeure Event”), the affected Party shall give written notice to the other Party within two (2) business days of the occurrence of the Force Majeure Event and the affected Party shall be excused from such performance during, but not longer than, the continuance of such Force Majeure Event. Each Party shall bear their own costs arising from the Force Majeure Event and shall take all reasonable steps to find ways to perform their obligations despite the Force Majeure Event. If the Force Majeure Event for any Party continues for more than 30 consecutive days, Parties shall mutually discuss in good faith the next steps.

 

17. INSURANCE

 

In addition to the insurance required as per the INCOTERMS specified in the Purchase Order, the Supplier warrants that, it has taken out and undertakes to maintain appropriate insurance cover, including but not limited to health, death, disability and professional indemnity insurance with a reputable insurance company against all its Liabilities and Indemnities that may arise under this Terms and Conditions and include a waiver of subrogation against the Buyer. This obligation shall not limit Supplier’s indemnities, nor shall it change any limitation on Supplier’s liability. Upon Buyer’s request, Supplier shall provide to Buyer certificates from Supplier insurers stating the amount of insurance coverage, nature of such coverage, and expiration date of each applicable policy.

 

18. INDEMNIFICATION

 

18.1 Supplier shall, at its own cost and expense, defend, indemnify and hold Buyer Indemnified Parties, harmless from and against any and all actions, suits, claims (third party as well as counter-party), demands, orders, judgments, decrees, liabilities, losses, damages, penalties, settlements, costs, expenses and fees (including court costs and reasonable fees and expenses of counsel and other experts) (collectively “Liabilities”) which are brought against or incurred or suffered by Buyer Indemnified Parties and any and all expenses due to (A) any claim by any third party that the Deliverables (or any part thereof) infringe or misappropriate any third party’s intellectual property rights or trade secrets (“Supplier Infringement Claim”); (B) violations of representation, warranties or Applicable Law by Supplier; and (C) any other Liability, loss and expenses that shall have resulted from any fraud, negligent act or omission, willful misconduct or default of Supplier.

  

18.2 Remediation of Supplier Infringement Claim. In addition to its indemnification obligation hereunder, in the event of any Supplier Infringement Claim, Supplier shall use its best efforts to (i) provide to Buyer without any additional cost or expense to Buyer, the unrestricted right to continue to use the Software (ii) modify the Software to eliminate the infringement, without any loss of functionality and performances.

 

  20  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

   

18.3 Any indemnification claim shall be paid by Supplier within thirty (30) days of receipt of an indemnification notice. The limitations and exclusions of liability contained in Section 19 (Limitation of Liabilities) do not apply to this Section.

 

19. LIMITATION OF LIABILITIES

 

19.1 Notwithstanding anything contrary contained in the Purchase Order and this Terms and Conditions, in no event shall the aggregate liability of either Party in respect of all claims for Liabilities and expenses arising under this Terms and Conditions exceed the value of the Purchase Order. The foregoing limitations shall not apply to Liabilities or expenses caused due to: (i) breach obligations with respect to Confidential information; (ii) an act for which Supplier is obligated to indemnify hereunder; (iii) any misrepresentation or fraud; or (iv) any act or omission by either Party causing death or bodily injury or loss or damage to tangible property.

 

19.2 Consequential Damages: Neither party shall be liable to the other for any indirect, consequential, punitive or exemplary damages.

 

19.3 Third Party Claims and Damages: Supplier hereby acknowledges and agrees that claims from and Liabilities sustained and expenses incurred hereunder by any Affiliate or third parties (including subscribers or users) of Buyer and/or its Affiliates shall not be deemed consequential, or indirect damages vis-a-vis Buyer because the Buyer’s Affiliate’s and/or aforesaid third parties claims, Liabilities and expenses are claimed through Buyer.

   

20. GOVERNING LAW AND SETTLEMENT OF DISPUTES

 

20.1 Governing Law and Jurisdiction: The Purchase Order and Terms and Conditions shall be governed by and construed in accordance with the laws of the Republic of India excluding its conflict-of-laws provisions which would refer construction hereof to the laws of another jurisdiction. The application of the United Nations Convention on Contracts for the International Sale of Goods is expressly excluded. Save and except for the remedies of equitable relief, interim relief, or interim measures, the Parties shall be bound to refer the disputes or differences arising under or in relation to these Terms and Conditions and/or Purchase Order to the binding arbitration in accordance with the provisions of this Terms and Conditions, and subject to arbitration, each Party hereby irrevocably submits to the exclusive jurisdiction of the Courts at Mumbai for the purpose of seeking equitable relief, interim relief, or interim measures.

 

20.2 Settlement of Disputes: The Parties shall be bound to refer the disputes or differences arising out of or in relation to the Purchase Order or this Terms and Conditions to a binding arbitration in accordance with the provisions of the Arbitration and Conciliation Act, 1996 including any amendments or re-enactments thereto by three arbitrators. Each Party shall appoint one independent arbitrator, and the two appointed arbitrators shall appoint a third independent arbitrator who shall act as the presiding arbitrator. All three arbitrators shall constitute an arbitration tribunal. The arbitration proceedings shall be held and the seat of arbitration shall be in Mumbai. It is hereby clarified that the Parties shall have the discretion to seek equitable relief, interim relief or interim measures in any court of competent jurisdiction (a) before commencement of arbitral proceedings as per the provisions in this Terms and Conditions, or (b) during arbitral proceedings, or (c) at any time after the making of the arbitral award by the arbitral tribunal but before it is enforced. Buyer can enforce the arbitral award or any judgment, order or decree of court against Supplier and/or its assets at any court of competent jurisdiction; however, Supplier can only enforce the arbitral award or any judgment, order or decree of court against Buyer and/or its assets in the Republic of India.

 

Supplier cannot suspend or terminate its performances, deliveries and licenses during any dispute resolution or judicial / quasi-judicial process.

  

  21  

 

  

  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

  

21. NOTICES

 

Any notice required to be given under or in relation to the Purchase Order shall be in writing in the English language. Any notice to the Supplier shall be to the addresses specified in the Purchase Order and shall be delivered by fax, e-mail or overnight courier, in which case it shall be deemed to have delivered in the next three business days.

 

All notices and other communication to the Buyer shall be addressed as follows:

 

1st Floor, Building No.2 A, 

Reliance Corporate Park, Ghansoli, 

Thane Belapur Road Navi Mumbai 400701 

Attn: Procurement and Commercial Team

 

With copy to:

 

The Legal Department

 

22. CONFIDENTIALITY ANO NO PUBLICITY

 

22.1 Confidentiality: Except as required for Supplier’s fulfilment of a Purchase Order, Supplier shall not use or disclose any Confidential Information obtained from the Buyer or from Buyer’s Affiliates or third parties, and shall protect the Confidential Information with the same degree of care as Supplier uses for its own similar information, but no less than reasonable care. Confidential Information includes, without limitation, all information designated by Buyer as confidential (either in writing or verbally) or information that a reasonable person would believe to be confidential given the nature of the information or circumstances of disclosure.

 

22.2 No Publicity: Without prior written approval of Buyer, Supplier agrees not to make public disclosures relating to the Purchase Order, this Terms and Conditions, including its existence, the terms and any reference to Buyer (including marks, logo, copyrights etc.) to publicize the fact that Buyer is, or was, in a business relationship with the Supplier or to utilize Buyer’s name in any mode of publicity in this respect, except for internal announcements or disclosures required to meet legal or regulatory requirements beyond the reasonable control of Supplier, provided that for any legal or regulatory requirements where such requirements permit redaction of certain clauses of this Terms and Conditions (i.e. filings with Securities Exchange Commission), Parties shall mutually discuss in good faith the nature and extent of such redactions.

  

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  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

 

23. ECA FINANCING {Applicable only for Foreign Supplier} :

 

In the event that the Buyer desires to apply for export credit financing, guarantees or insurance coverage (collectively, #ECA Financing”) through an Export Credit Agency (an ECA), with respect to this Purchase Order, Supplier shall render all assistance reasonably requested by Buyer in connection with such ECA Financing.

 

24. MISCELL ANEOUS PROVISIONS

 

24.1 Entire Agreement: Except for any fraud or misrepresentation of Supplier or on Supplier’s behalf, this Terms and Conditions together with the Purchase Order and each document or agreement as attached to the Purchase Order or referenced herein, embodies the entire agreement between Buyer and Supplier with respect to the supply of Deliverables as set forth therein and supersedes all prior oral or written statements, representations, promises, negotiations or understandings with respect to the subject matter hereof. Nothing contained in the acknowledgement or confirmation of a Purchase Order by Supplier or any communication of acknowledgement or confirmation thereof has any effect of amendment or variation upon the Purchase Order unless such amendment or variation is specifically accepted by Buyer and incorporated in writing into such Purchase Order.

 

24.2 Survival: The terms and conditions, which by implication or by express stipulation of the Parties, survive the termination or expiry of the Purchase Order, shall be adhered to and complied with by the Parties. In addition to and without limiting the generality of the foregoing, Sections related to consequences of termination, securities and corporate guarantee, warranties, indemnities, Software License, confidentiality shall survive termination or expiration.

 

24.3 Best Prices and terms: Supplier warrants that the terms agreed herein and in the Purchase Order are the best and the Prices/rates are the lowest charged by Supplier to other similarly-situated customers for similar quantities of same or similar Deliverables.

 

24.4 Assignment and Sub-Contracting: The Purchase Order or these Terms and Conditions shall not be assigned, transferred or novated either in full or in part by Supplier to any third party without the prior written consent of the Buyer, and only upon such terms as are mutually agreed by both Parties hereto. Buyer may, in whole or in part, assign, novate or otherwise transfer its rights and obligations under the Purchase Order or this Terms and Conditions to any of its Affiliates or to any third party (including its financiers or lenders, in which case Supplier shall provide full co-operation to the Buyer and such financiers or lenders), without the prior written consent of Supplier. All Deliverables to be sold/ provided to Buyer pursuant to the Purchase Order and this Terms and Conditions shall be manufactured by or performed by Supplier; provided, however, that Supplier may sub-contract the manufacture or performance of any Deliverables to a manufacturer with Buyer’s prior written consent, provided that any such sub-contracting shall not relieve Supplier of its obligations here under and the Supplier shall be liable for the due performance of the sub-contractor’s obligations.

  

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  PURCHASE ORDER
   
RELIANCE RETAIL LIMITED Number : J01/4600004572
Reliance Corporate Park, Building No. 4, Ground Date : 23.11.2015
Floor, ‘C’ W  
Thane-Belapur Road, Ghansoli, Navi  
Mumbai-400701 INDIA  
Telephone : 022 -6767116  
Fax : 022 -67671065  

 

Terms and Conditions for Purchase of Goods Confidential

   

24.5 Non Waiver: No waiver shall be valid unless given in writing and signed by the authorised representative of a party making the waiver. The termination of the Purchase Order and/or these Terms and Conditions by Buyer shall not operate as a waiver of any breach of their respective terms by Supplier.

 

24.6 Cumulative Remedies: The rights and remedies available to Buyer under this Terms and Conditions are cumulative and in addition to, and are not to be construed in any way as a limitation of, any rights and remedies available to Buyer, including but not limited to any equitable relief available to it under Applicable Law.

 

24.7 No Liens: In order to assure Buyer of the prompt and unrestricted use of the Deliverables Supplier hereby irrevocably waives any and all liens or security interests against such Deliverables which it might otherwise assert in the resolution of disputes arising under or in relation to the Purchase Order or these Terms and Conditions.

 

24.8 Severability: If any provision of these Terms and Conditions or Purchase Order is declared by a competent court to be unenforceable or void being contrary to law, the remaining provisions of such Terms and Conditions or Purchase Order, as the case may be not materially affected by such a declaration shall be valid and enforced to the extent permitted by law. The Parties shall negotiate in good faith and substitute a provision that is legal and enforceable and is as nearly as possible consistent with the intentions underlying the original provision declared to be contrary to law.

   

24.9 Independent Contractor: The performance by Supplier of its duties and obligations under the Purchase Order is that of an independent contractor and nothing contained in the Purchase Order or these Terms and Conditions implies an agency relationship or constitutes a joint venture or partnership between Buyer and Supplier. Supplier shall have no right or authority to, and shall not do any act, enter into any contract, make any representation, give any warranty, incur any liability or assume any obligation (express or implied) of any kind on behalf of Buyer or bind Buyer in any way.

 

24.10 Further Assurance Supplier, upon the reasonable request from time to time of Buyer and without further consideration, shall do each and every act and thing as may be necessary or reasonably desirable to fully and effectively consummate, evidence and confirm the transactions contemplated hereby, including: (a) executing, acknowledging and delivering assurances, assignments, powers of attorney and other documents and instruments; (b) furnishing information and copies of documents, books and records; and (c) assisting in good faith in any litigation, threatened litigation or claim and cooperating therein with Buyer and its Affiliates and their advisors and representatives, including providing relevant documents and evidence and maintaining confidentiality in connection with such litigation or threatened litigation or claims, in each case.

 

24.11 Counterparts: The Purchase Order along with these Terms and Conditions may be executed or acknowledged by one or more of the Parties on any number of separate counterparts, and all of said counter parts taken together shall be deemed to constitute one and the same instrument.

 

[End of the document]

 

24

 

Exhibit 10.19

 

INDEMNITY AGREEMENT

 

This Indemnity Agreement, dated as of             , 2017 is made by and between ___________, a company incorporated in the British Virgin Islands , the registered office of which is at [ ](the “ Company ”), and             , a director, officer or key employee of the Company or one of the Company’s subsidiaries or other service provider who satisfies the definition of Indemnifiable Person set forth below (“ Indemnitee ”).

 

RECITALS

 

A. The Company is aware that competent and experienced persons are increasingly reluctant to serve as representatives of corporations unless they are protected by comprehensive liability insurance and indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no relationship to the compensation of such representatives;

 

B. The members of the Board of Directors of the Company (the “ Board ”) have concluded that to retain and attract talented and experienced individuals to serve as representatives of the Company and its Subsidiaries and Affiliates and to encourage such individuals to take the business risks necessary for the success of the Company and its Subsidiaries and Affiliates, it is necessary for the Company to contractually indemnify certain of its representatives and the representatives of its Subsidiaries and Affiliates, and to assume for itself maximum liability for Expenses and Other Liabilities in connection with claims against such representatives in connection with their service to the Company and its Subsidiaries and Affiliates;

 

C. Section 145 of the Delaware General Corporation Law (“ Section 145 ”), empowers the Company to indemnify by agreement its officers, directors, employees and agents, and persons who serve, at the request of the Company, as directors, officers, employees or agents of other corporations, partnerships, joint ventures, trusts or other enterprises, and expressly provides that the indemnification provided thereby is not exclusive; and

 

D. The Company desires and has requested Indemnitee to serve or continue to serve as a representative of the Company and/or the Subsidiaries or Affiliates of the Company free from undue concern about inappropriate claims for damages arising out of or related to such services to the Company and/or the Subsidiaries or Affiliates of the Company.

 

[E. The Company and Indemnitee previously entered into an Indemnification Agreement, dated as of [            ] (the “ Prior Agreement ”), and the Company and Indemnitee desire to amend and restate the Prior Agreement in its entirety to set forth their agreements and understandings with respect to indemnification matters, all on the terms and conditions as set forth in this Agreement.]

 

AGREEMENT

 

NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:

 

1. Definitions .

 

(a) Affiliate . For purposes of this Agreement, “ Affiliate ” of the Company means any corporation, partnership, limited liability company, joint venture, trust or other enterprise in respect of which Indemnitee is or was or will be serving as a director, officer, trustee, manager, member, partner, employee, agent, attorney, consultant, member of the entity’s governing body (whether constituted as a board of directors, board of managers, general partner or otherwise), fiduciary, or in any other similar capacity at the request, election or direction of the Company, and including, but not limited to, any employee benefit plan of the Company or a Subsidiary or Affiliate of the Company.

  

 

 

 

(b) Change in Control . For purposes of this Agreement, “ Change in Control ” means (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a Subsidiary or a trustee or other fiduciary holding securities under an employee benefit plan of the Company or Subsidiary, is or becomes the “Beneficial Owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding issued shares, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company’s shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the outstanding issued shares of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into capital stock of the surviving entity) at least 80% of the total voting power represented by the issued shares of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of transactions) of all or substantially all of the Company’s assets.

 

(c) DGCL . For purposes of this Agreement, “ DGCL ” means the Delaware General Corporation Law.

 

(d) Exchange Act . For purposes of this Agreement, “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

 

(e) Expenses . For purposes of this Agreement, “ Expenses ” means all direct and indirect costs of any type or nature whatsoever (including, without limitation, all attorneys’ fees and related disbursements, and other out-of-pocket costs), paid or incurred by Indemnitee in connection with either the investigation, defense, preparation of defense or appeal of, or being a witness in, or otherwise participating in a Proceeding, or establishing or enforcing a right to indemnification under this Agreement, Section 145 or otherwise; provided, however, that Expenses shall not include any judgments, fines, ERISA excise taxes or penalties or amounts paid in settlement of a Proceeding.

 

(f) Indemnifiable Event . For purposes of this Agreement, “ Indemnifiable Event ” means any event or occurrence related to Indemnitee’s service for the Company or any Subsidiary or Affiliate as an Indemnifiable Person (as defined below), or by reason of anything done or not done, or any act or omission, by Indemnitee in any such capacity.

 

(g) Indemnifiable Person . For the purposes of this Agreement, “ Indemnifiable Person ” means any person who is or was a director, officer, trustee, manager, member, partner, employee, attorney, consultant, member of an entity’s governing body (whether constituted as a board of directors, board of managers, general partner or otherwise) or other agent or fiduciary of the Company or a Subsidiary or Affiliate of the Company.

 

(h) Independent Counsel . For purposes of this Agreement, “ Independent Counsel ” means legal counsel experienced in matters of corporate law that has not performed services for the Company or Indemnitee in the five years preceding the time in question and that would not, under applicable standards of professional conduct, have a conflict of interest in representing either the Company or Indemnitee.

 

(i) Independent Director. For purposes of this Agreement, a member of the Board who neither is nor was a party to the Proceeding for which the Indemnitee is making a claim pursuant to this Agreement.

 

(i) Other Liabilities . For purposes of this Agreement, “ Other Liabilities ” means any and all losses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, penalties, ERISA (or other benefit plan related) excise taxes or penalties, and amounts paid in settlement and all interest, taxes, assessments and other charges paid or payable in connection with or in respect of any such judgments, fines, ERISA (or other benefit plan related) excise taxes or penalties, or amounts paid in settlement).

 

(j) Proceeding . For the purposes of this Agreement, “ Proceeding ” means any threatened, pending, or completed action, suit, claim, counterclaim, crossclaim or other proceeding, whether civil, criminal, administrative, investigative, legislative or any other type whatsoever, preliminary, informal or formal, including any arbitration or other alternative dispute resolution and including any appeal of any of the foregoing.

 

(k) Subsidiary . For purposes of this Agreement, “ Subsidiary ” means any entity of which more than 50% of the outstanding voting securities is owned directly or indirectly by the Company.

  

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2. Agreement to Serve . The Indemnitee agrees to serve and/or continue to serve as an Indemnifiable Person in the capacity or capacities in which Indemnitee currently serves the Company as an Indemnifiable Person, and any additional capacity in which Indemnitee may agree to serve, until such time as Indemnitee’s service in a particular capacity shall end according to the terms of an agreement, the Company’s then-current memorandum and articles of association, governing law, or otherwise. Nothing contained in this Agreement is intended to create any right to continued employment or other form of service for the Company or a Subsidiary or Affiliate of the Company by Indemnitee.

 

3. Mandatory Indemnification .

 

(a) Agreement to Indemnify . In the event Indemnitee is a person who was or is a party to or witness in or is threatened to be made a party to or witness in any Proceeding by reason of an Indemnifiable Event, the Company shall indemnify Indemnitee from and against any and all Expenses and Other Liabilities incurred by Indemnitee in connection with (including in preparation for) such Proceeding to the fullest extent permitted by the Company’s memorandum and articles of association and applicable law, as the same exists or may be amended from time to time (but only to the extent that such amendment permits the Company to provide broader indemnification rights than such law permitted the Company to provide prior to the adoption of such amendment).

 

(b) Exception for Amounts Covered by Insurance and Other Sources . Notwithstanding the foregoing, except as provided in Section 3(c), the Company shall not be obligated to indemnify Indemnitee for Expenses or Other Liabilities of any type whatsoever (including, but not limited to judgments, fines, penalties, ERISA excise taxes or penalties and amounts paid in settlement) to the extent such have been paid directly to Indemnitee (or paid directly to a third party on Indemnitee’s behalf) by any directors and officers, or other type, of insurance maintained by the Company or pursuant to other indemnity arrangements with third parties.

 

(c) Company Obligations Primary . The Company hereby acknowledges that an Indemnitee that is a member of the Board may have rights to indemnification for Expenses and Other Liabilities provided by another sponsoring organization (“ Other Indemnitor ”). The Company agrees with such an Indemnitee that the Company is the indemnitor of first resort of such Indemnitee with respect to matters for which indemnification is provided under this Agreement and that the Company will be obligated to make all payments due to or for the benefit of such Indemnitee under this Agreement without regard to any rights that such Indemnitee may have against the Other Indemnitor. The Company hereby waives any equitable rights to contribution or indemnification from the Other Indemnitor in respect of any amounts paid to such Indemnitee hereunder. The Company further agrees that no reimbursement of Other Liabilities or payment of Expenses by the Other Indemnitor to or for the benefit of such Indemnitee shall affect the obligations of the Company hereunder, and that the Company shall be obligated to repay the Other Indemnitor for all amounts so paid or reimbursed to the extent that the Company has an obligation to indemnify such Indemnitee for such Expenses or Other Liabilities hereunder.

 

4. Partial Indemnification . If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Expenses or Other Liabilities but not entitled, however, to indemnification for the total amount of such Expenses or Other Liabilities, the Company shall nevertheless indemnify Indemnitee for such total amount except as to the portion thereof for which indemnification is prohibited by the provisions of the Company’s memorandum and articles of association or applicable law. In any review or Proceeding to determine the extent of indemnification, the Company shall bear the burden to establish, by clear and convincing evidence, the lack of a successful resolution of a particular claim, issue or matter and which amounts sought in indemnity are allocable to claims, issues or matters which were not successfully resolved.

 

5. Liability Insurance . So long as Indemnitee shall continue to serve the Company or a Subsidiary or Affiliate of the Company as an Indemnifiable Person and thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed Proceeding as a result of an Indemnifiable Event, the Company shall use reasonable efforts to maintain in full force and effect for the benefit of Indemnitee as an insured (a) liability insurance issued by one or more reputable insurers and having the policy amount and deductible deemed appropriate by the Board and providing in all respects coverage at least comparable to and in the same amount as that provided to the Chairman of the Board or the Chief Executive Officer of the Company and (b) any replacement or substitute policies issued by one or more reputable insurers providing in all respects coverage at least comparable to and in the same amount as that being provided to the Chairman of the Board or the Chief Executive Officer of the Company. The purchase, establishment and maintenance of any such insurance or other arrangements shall not in any way limit or affect the rights and obligations of the Company or of Indemnitee under this Agreement except as expressly provided herein, and the execution and delivery of this Agreement by the Company and Indemnitee shall not in any way limit or affect the rights and obligations of the Company or the other party or parties thereto under any such insurance or other arrangement.

  

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6. Mandatory Advancement of Expenses .

 

If requested by Indemnitee, the Company shall advance prior to the final disposition of the Proceeding all Expenses reasonably incurred by Indemnitee in connection with (including in preparation for) a Proceeding related to an Indemnifiable Event. Indemnitee hereby undertakes to repay such amounts advanced if, and only if and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company under the provisions of this Agreement, the Company’s memorandum and articles of association or the DGCL, and no other additional form of undertaking with respect to such obligation to repay shall be required. The advances to be made hereunder shall be paid by the Company to Indemnitee or directly to a third party designated by Indemnitee within thirty (30) days following delivery of a written request therefor by Indemnitee to the Company. Indemnitee’s undertaking to repay any Expenses advanced to Indemnitee hereunder shall be unsecured and shall not be subject to the accrual or payment of any interest thereon.

 

7. Notice and Other Indemnification Procedures .

 

(a) Notification . Promptly after receipt by Indemnitee of notice of the commencement of or the threat of commencement of any Proceeding, Indemnitee shall, if Indemnitee believes that indemnification or advancement of Expenses with respect thereto may be sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof. However, a failure so to notify the Company promptly following Indemnitee’s receipt of such notice shall not relieve the Company from any liability that it may have to Indemnitee except to the extent that the Company is materially prejudiced in its defense of such Proceeding as a result of such failure.

 

(b) Insurance and Other Matters . If, at the time of the receipt of a notice of the commencement of a Proceeding pursuant to Section 7(a) above, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such Proceeding to the issuers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all reasonable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such insurance policies.

 

(c) Assumption of Defense . In the event the Company shall be obligated to advance the Expenses for any Proceeding against Indemnitee, the Company, if deemed appropriate by the Company, shall be entitled to assume the defense of such Proceeding as provided herein. Such defense by the Company may include the representation of two or more parties by one attorney or law firm as permitted under the ethical rules and legal requirements related to joint representations. Following delivery of written notice to Indemnitee of the Company’s election to assume the defense of such Proceeding, the approval by Indemnitee (which approval shall not be unreasonably withheld) of counsel designated by the Company and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees and expenses of counsel subsequently incurred by Indemnitee with respect to the same Proceeding. If (i) the employment of counsel by Indemnitee has been previously authorized by the Company, (ii) Indemnitee shall have notified the Board in writing that Indemnitee has reasonably concluded that there is likely to be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (iii) the Company fails to employ counsel to assume the defense of such Proceeding, the fees and expenses of Indemnitee’s counsel shall be subject to indemnification and/or advancement pursuant to the terms of this Agreement. Nothing herein shall prevent Indemnitee from employing counsel for any such Proceeding at Indemnitee’s expense.

  

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(d) Settlement . The Company shall not be liable to indemnify Indemnitee under this Agreement or otherwise for any amounts paid in settlement of any Proceeding effected without the Company’s written consent; provided , however , that if a Change in Control has occurred, the Company shall be liable for indemnification of Indemnitee for amounts paid in settlement if the Independent Counsel has approved the settlement. Neither the Company nor any Subsidiary or Affiliate shall enter into a settlement of any Proceeding that might result in the imposition of any Expense, Other Liability, penalty, limitation or detriment on Indemnitee, whether indemnifiable under this Agreement or otherwise, without Indemnitee’s written consent. Neither the Company nor Indemnitee shall unreasonably withhold consent from any settlement of any Proceeding. With respect to any Proceeding, the settlement of which the consent of Indemnitee would be required hereunder, the Company shall promptly notify Indemnitee upon the Company’s receipt of an offer to settle, or if the Company makes an offer to settle, any Proceeding, and provide Indemnitee with a reasonable amount of time to consider such settlement. The Company shall not, on its own behalf, settle any part of any Proceeding to which Indemnitee is a party, the settlement of which the consent of such Indemnitee would be required hereunder, with respect to other parties (including the Company) without the written consent of Indemnitee if any portion of the settlement is to be funded from insurance proceeds unless approved by a majority of the Independent Directors, provided that this sentence shall cease to be of any force and effect if it has been determined in accordance with this Agreement that Indemnitee is not entitled to indemnification hereunder with respect to such Proceeding or if the Company’s obligations hereunder to Indemnitee with respect to such Proceeding have been fully discharged.

 

8. Determination of Right to Indemnification .

 

(a) Success on the Merits or Otherwise . To the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any Proceeding referred to in Section 3(a) above or in the defense of any claim, issue or matter described therein, the Company shall indemnify Indemnitee against Expenses actually and reasonably incurred in connection therewith.

 

(b) Indemnification in Other Situations . In the event that Section 8(a) is inapplicable, the Company shall also indemnify Indemnitee if Indemnitee has not failed to meet the applicable standard of conduct for indemnification, as determined by the Reviewing Party (as defined below) in accordance with Section 8(d).

 

(c) Forum . Indemnitee shall be entitled to select the forum in which determination of whether or not Indemnitee has met the applicable standard of conduct shall be decided, and such election will be made from among the following:

 

(i) those members of the Board who are Independent Directors even though less than a quorum;

 

(ii) a committee of Independent Directors designated by a majority vote of Independent Directors, even though less than a quorum; or

 

(iii) Independent Counsel selected by Indemnitee and approved by the Board, which approval may not be unreasonably withheld, which counsel shall make such determination in a written opinion.

 

If Indemnitee is an officer or a director of the Company at the time that Indemnitee is selecting the forum, then Indemnitee shall not select Independent Counsel as such forum unless there are no Independent Directors or unless the Independent Directors agree to the selection of Independent Counsel as the forum.

 

The selected forum shall be referred to herein as the “ Reviewing Party .” Notwithstanding the foregoing, following any Change in Control, the Reviewing Party shall be Independent Counsel selected in the manner provided in Section 8(c)(iii) above.

 

(d) Decision Timing and Expenses . As soon as practicable, and in no event later than thirty (30) days after receipt by the Company of written notice of Indemnitee’s choice of forum pursuant to Section 8(c) above, the Company and Indemnitee shall each submit to the Reviewing Party such information as they believe is appropriate for the Reviewing Party to determine whether and to what extent Indemnitee is entitled to indemnification. The Reviewing Party shall arrive at its decision within a reasonable period of time following the receipt of all such information from the Company and Indemnitee, but in no event later than thirty (30) days following the receipt of all such information; provided , that , the time by which the Reviewing Party must reach a decision may be extended by mutual agreement of the Company and Indemnitee. All Expenses associated with the process set forth in this Section 8(d), including but not limited to the Expenses of the Reviewing Party, shall be paid by the Company.

 

(e) Delaware Court of Chancery . Notwithstanding a final determination by any Reviewing Party that Indemnitee is not entitled to indemnification with respect to a specific Proceeding, Indemnitee shall have the right to apply to the Court of Chancery, for the purpose of enforcing Indemnitee’s right to indemnification pursuant to this Agreement.

  

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(f) Expenses . The Company shall indemnify Indemnitee against all Expenses incurred by Indemnitee in connection with any hearing or Proceeding under this Section 8 involving Indemnitee and against all Expenses and Other Liabilities incurred by Indemnitee in connection with any other Proceeding between the Company and Indemnitee involving the interpretation or enforcement of the rights of Indemnitee under this Agreement unless a court of competent jurisdiction finds that each of the material claims of Indemnitee in any such Proceeding was frivolous or made in bad faith.

 

9. Exceptions . Any other provision herein to the contrary notwithstanding,

 

(a) Claims Initiated by Indemnitee . The Company shall not be obligated pursuant to the terms of this Agreement to indemnify or advance Expenses to Indemnitee with respect to Proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except (i) with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement, any other statute or law, as permitted under Section 145, or otherwise, (ii) where the Board has consented to the initiation of such Proceeding, or (iii) with respect to Proceedings brought to discharge Indemnitee’s fiduciary responsibilities, whether under ERISA or otherwise, but such indemnification or advancement of Expenses may be provided by the Company in specific cases if the Board finds it to be appropriate; or

 

(b) Actions Based on Federal Statutes Regarding Profit Recovery and Return of Bonus Payments . The Company shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee on account of (i) any suit in which judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Exchange Act and amendments thereto or similar provisions of any federal, state or local statutory law, or (ii) any reimbursement of the Company by the Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by the Indemnitee from the sale of securities of the Company, as required in each case under the Exchange Act (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “ Sarbanes-Oxley Act ”), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act); or

 

(c) Unlawful Indemnification . The Company shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee for Other Liabilities if such indemnification is prohibited by law as determined by a court of competent jurisdiction in a final adjudication not subject to further appeal.

 

10. Non-exclusivity . The provisions for indemnification and advancement of Expenses set forth in this Agreement shall not be deemed exclusive of any other rights which Indemnitee may have under any provision of law, the Company’s Certificate of Incorporation or memorandum and articles of association, the vote of the Company’s shareholders or disinterested directors, other agreements, or otherwise, both as to acts or omissions in his or her official capacity and to acts or omissions in another capacity while serving the Company or a Subsidiary or Affiliate as an Indemnifiable Person and Indemnitee’s rights hereunder shall continue after Indemnitee has ceased serving the Company or a Subsidiary or Affiliate as an Indemnifiable Person and shall inure to the benefit of the heirs, executors and administrators of Indemnitee.

 

11. Severability . If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, (a) the validity, legality and enforceability of the remaining provisions of the Agreement (including, without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

 

12. Supersession, Modification and Waiver . This Agreement supersedes any prior indemnification agreement between the Indemnitee and the Company, its Subsidiaries or its Affiliates[, including, without limitation, the Prior Agreement]. If the Company and Indemnitee have previously entered into an indemnification agreement providing for the indemnification of Indemnitee by the Company, the parties’ entry into this Agreement shall be deemed to amend and restate such prior agreement[, including, without limitation, the Prior Agreement, ]to read in its entirety as, and be superseded by, this Agreement. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) and except as expressly provided herein, no such waiver shall constitute a continuing waiver.

  

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13. Successors and Assigns . The terms of this Agreement shall bind, and shall inure to the benefit of, the successors and assigns of the parties hereto.

 

14. Notice . All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (a) if delivered by hand and a receipt is provided by the party to whom such communication is delivered, (b) if mailed by certified or registered mail with postage prepaid, return receipt requested, on the signing by the recipient of an acknowledgement of receipt form accompanying delivery through the U.S. mail, (c) personal service by a process server, or (d) delivery to the recipient’s address by overnight delivery (e.g., FedEx, UPS or DHL) or other commercial delivery service. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice complying with the provisions of this Section 14. Delivery of communications to the Company with respect to this Agreement shall be sent to the attention of the Company’s General Counsel.

 

15. No Presumptions . For purposes of this Agreement, the termination of any Proceeding, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law or otherwise. In addition, neither the failure of the Company or a Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Company or a Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of Proceedings by Indemnitee to secure a judicial determination by exercising Indemnitee’s rights under Section 8(e) of this Agreement shall be a defense to Indemnitee’s claim or create a presumption that Indemnitee has failed to meet any particular standard of conduct or did not have any particular belief or is not entitled to indemnification under applicable law or otherwise.

 

16. Survival of Rights . The rights conferred on Indemnitee by this Agreement shall continue after Indemnitee has ceased to serve the Company or a Subsidiary or Affiliate of the Company as an Indemnifiable Person and shall inure to the benefit of Indemnitee’s heirs, executors and administrators.

 

17. Subrogation and Contribution .

 

(a) Except as otherwise expressly provided in this Agreement, in the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights.

 

(b) To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by or on behalf of Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).

 

18. Specific Performance, Etc. The parties recognize that if any provision of this Agreement is violated by the Company, Indemnitee may be without an adequate remedy at law. Accordingly, in the event of any such violation, Indemnitee shall be entitled, if Indemnitee so elects, to institute Proceedings, either in law or at equity, to obtain damages, to enforce specific performance, to enjoin such violation, or to obtain any relief or any combination of the foregoing as Indemnitee may elect to pursue.

 

19. Counterparts . This Agreement may be executed in counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.

  

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20. Headings . The headings of the sections and paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction or interpretation thereof.

 

21. Governing Law . This Agreement shall be governed exclusively by and construed according to the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely with Delaware.

 

22. Consent to Jurisdiction . The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any Proceeding which arises out of or relates to this Agreement.

 

23. Effective Date . This Agreement shall become effective on the date set forth in the first paragraph to this Agreement (the “ Effective Date ”).

 

24. Entire Agreement . This Agreement and the documents referred to herein constitute the entire agreement and understanding of the parties with respect to the subject matter of this Agreement, and, upon the Effective Date, this Agreement and the documents referred to herein supersede any and all prior understandings and agreements, whether oral or written, between or among the parties hereto with respect to the specific subject matter hereof[, including, without limitation, the Prior Agreement].

 

[Remainder of Page Intentionally Left Blank]

 

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The parties hereto have entered into this Indemnity Agreement effective as of the date first above written.

 

  COMPANY:
   
  [________________________________]
   
  By:                                            
  Name:  
  Title:  
   
  INDEMNITEE :
   
  Name:  
  Address:  
   

 

 

9

 

Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

 

I, Pat Sek Yuen Chan, certify that:

 

1. I have reviewed this annual report of Borqs Technologies, Inc. on Form 10-K;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

  

Date: April 2, 2018

 

  /s/ Pat Sek Yuen Chan
  Pat Sek Yuen Chan
  Chief Executive Officer
  ( Principal Executive Officer )

Exhibit 31.2

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

 

I, Anthony K. Chan, certify that:

 

1. I have reviewed this annual report of Borqs Technologies, Inc. on Form 10-K;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: April 2, 2018

 

  /s/ Anthony K. Chan
  Anthony K. Chan
  Chief Financial Officer
  ( Principal Financial Officer, Principal
  Accounting Officer )

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

  

In connection with the Annual Report of Borqs Technologies, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

 

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 2, 2018

  

  /s/ Pat Sek Yuen Chan
  Pat Sek Yuen Chan
  Chief Executive Officer
  ( Principal Executive Officer )

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Annual Report of Borqs Technologies, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

 

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

  

Date: April 2, 2018

 

  /s/ Anthony K. Chan
  Anthony K. Chan
  Chief Financial Officer
  ( Principal Financial Officer, Principal
  Accounting Officer )